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 from to . |
OR
| ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report |
Commission file number: 001-34476
BANCO SANTANDER (Brasil) S.A.
(Exact name of Registrant as specified in its charter)
SANTANDER (BRAZIL) BANK, INC.
(Translation of Registrant’s name into English)
Federative Republic of Brazil
(Jurisdiction of incorporation)
Avenida Presidente Juscelino Kubitschek, 2,041 and 2,235 – Bloco A
Vila Olímpia
São Paulo, SP 04543-011
Federative Republic of Brazil
(Address of principal executive offices)
Mercedes Pacheco, Managing Director – Senior Legal Counsel
Banco Santander, S.A.
New York Branch
45 E. 53rd Street
New York, New York 10022
(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 Symbol | Name of each exchange on which registered |
| Units, each composed of 1 common share, no par value, and 1 preferred share, no par value | SANB11 | New York Stock Exchange* |
| Common Shares, no par 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 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 | 3,818,695,031 |
| Preferred shares | 3,679,836,020 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes☒ No☐
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”, “accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ Accelerated Filer ☐ Non-accelerated Filer ☐
| Large Accelerated Filer☒ | Accelerated Filer☐ | Non-accelerated Filer☐ | Emerging growth company☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ☐ | U.S. GAAP |
| ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board |
| ☐ | Other |
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☒
Page
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
General
In this annual report, the terms “Santander Brasil,” the “Bank,” “we,” “us,” “our,” “our company” and “our organization” mean Banco Santander (Brasil) S.A. and its consolidated subsidiaries, unless otherwise indicated. References to “Banco Real” mean Banco ABN AMRO Real S.A. and ABN AMRO Brasil Dois Participações S.A. and their respective consolidated subsidiaries, unless otherwise indicated. References to “Banespa” mean Banco do Estado de São Paulo S.A. – Banespa, one of our predecessor entities. The term “Santander Spain” means Banco Santander, S.A. References to “Santander Group” mean the worldwide operations of the Santander Spain conglomerate, as indirectly controlled by Santander Spain and its consolidated subsidiaries, including Santander Brasil.
All references herein to the “real,” “reais” or “R$” are to the Brazilianreal, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” 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, 2018,2019, which was R$3.87484.0307 to U.S.$1.00, or on the indicated dates (subject, on any applicable date, to rounding adjustments). We make no representation that thereal or U.S. dollar amounts actually represent or could have been or could be converted into U.S. dollars at the rates indicated, at any particular exchange rate or at all.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
Consolidated Financial Statements
We maintain our books and records inreais, our functional currency and the presentation currency for our consolidated financial statements.
This annual report contains our consolidated financial statements as of December 31, 2019, 2018 2017 and 2016,2017, and for the years ended December 31, 2019, 2018 2017 and 2016.2017. Such consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or “IFRS”, as issued by the International Accounting Standards Board, or “IASB” and interpretations issued by the IFRS Interpretation Committee, or“IFRIC”or “IFRIC”. Our consolidated financial statements as of and for the years ended December 31, 2019, 2018 2017 and 20162017 have been audited by PricewaterhouseCoopers Auditores Independentes, or “PwC.” PwC is an independent registered public accounting firm, whose report 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”. IFRS also differs in certain significant aspects in comparison with the Brazilian GAAP (as defined below). Appendix I to our audited consolidated financial statements for the years ended December 31, 2019, 2018 2017 and 2016,2017, included herein, contains information relating to certain differences between IFRS and Brazilian GAAP.
Under Brazilian law, we are required by the Brazilian Central Bank to prepare consolidated financial statements according to IFRS. However, we will also continue to prepare statutory financial statements in accordance with accounting practices established by Law No. 6,404, dated December 15, 1976, as amended by Law 11,638, or the “Brazilian Corporate Law” and standards established by the
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National Monetary Council (Conselho Monetário Nacional), or “CMN,” the Brazilian Central Bank
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and document template provided in the Accounting Chart for National Financial System Institutions (Plano Contábil das Instituições do Sistema Financeiro Nacional), and the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários), or “CVM,” to the extent such practices do not conflict with the rules of the Brazilian Central Bank, the Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis), to the extent approved by the Brazilian Central Bank, the National Council of Private Insurance (Conselho Nacional de Seguros Privados), and the Superintendence of Private Insurance (Superintendência de Seguros Privados), or “SUSEP.” We refer to such Brazilian accounting practices as “Brazilian GAAP.” See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Auditing Requirements.”
Market Share and Other Information
We obtained the market and competitive position data, including market forecasts, used throughout this annual report from internal surveys, market research, publicly available information and industry publications. 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 association of financial and capital markets entities (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) or “ANBIMA”; the Brazilian Central Bank; the Brazilian social and economic development bank (Banco Nacional de Desenvolvimento Econômico e Social) or “BNDES”; the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística) or the “IBGE”; the Brazilian bank federation (Federação Brasileira de Bancos), or “FEBRABAN”; the national federation of private retirement and life insurance (Federação Nacional de Previdência Privada e Vida); the Getúlio Vargas Foundation (Fundação Getúlio Vargas) or “FGV”; the Brazilian Central Bank system (Sistema do Banco Central); the SUSEP; and the CVM, among others.
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This annual report contains estimates and forward-looking statements subject to risks and uncertainties, principally in “Item 3. Key Information—D. Risk Factors,” “Item 5. Operating and Financial Review and Prospects” and “Item 4. Information on the Company—B. Business Overview.” Some of the matters discussed concerning our business operations and financial performance include estimates and forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
Our estimates and forward-looking statements are based mainly on our current expectations and estimates or projections of future events and trends, which affect or may affect our businesses and results of operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to certain risks and uncertainties and are made in light of information currently available to us. Our estimates and forward-looking statements may be influenced by the following factors, among others:
| · | general economic, political, social and business conditions in Brazil, including the impact of the current international economic environment and the macroeconomic conditions in Brazil, and the policies of the |
| · | exposure to various types of inflation and interest rate risks, and Brazilian government efforts to control inflation and interest rates; |
| · | exposure to the sovereign debt of Brazil; |
| · | the effect of interest rate fluctuations on our obligations under employee pension funds; |
| · | exchange rate volatility; |
| · | infrastructure and labor force deficiencies in Brazil; |
| · | economic developments and perception of risk in other countries, including a global downturn; |
| · | the |
| · | 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 nonperforming loans or non-performance by counterparties to other types of financial instruments; |
| · | a decrease in the rate of growth of our loan portfolio; |
| · | potential prepayment of our loan and investment portfolio; |
| · | potential increase in our cost of funding, in particular with relation to short-term deposits; |
| · | a default on, or a ratings downgrade of, the sovereign debt of Brazil or of our controlling shareholder; |
| · | restrictions on the distributions of dividends to holders of our shares and ADSs; |
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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.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
| 2A. | Offer Statistics |
Not applicable.
| 2B. | Method and Expected Timetable |
Not applicable.
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| 3A. | Selected Financial Data |
Financial information for Santander Brasil as of and for the years ended December 31, 2019, 2018, 2017, 2016 2015 and 20142015 has been derived from our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB. See “Item 18. Financial Statements.” This financial information should be read in conjunction with our audited consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere inwithin this annual report.
Income Statement Data
| For the Year Ended December 31, | ||||||
| 2018 | 2018 | 2017 | 2016 | 2015 | 2014 | |
| (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 |
| Interest expense and similar charges | (7,370) | (28,557) | (36,472) | (46,560) | (38,533) | (31,695) |
| Net interest income | 10,819 | 41,921 | 34,946 | 30,586 | 31,337 | 27,229 |
| Income from equity instruments | 8 | 33 | 83 | 259 | 143 | 222 |
| Income from companies accounted for by the equity method | 17 | 66 | 72 | 48 | 116 | 91 |
| Fee and commission income | 4,575 | 17,728 | 15,816 | 13,548 | 11,797 | 11,368 |
| Fee and commission expense | (928) | (3,596) | (3,094) | (2,571) | (2,314) | (2,602) |
| Gains (losses) on financial assets and liabilities (net) | (718) | (2,783) | 969 | 3,016 | (20,002) | 2,748 |
| Exchange differences (net) | (724) | (2,806) | 605 | 4,575 | 10,084 | (3,636) |
| Other operating income (expenses) | (272) | (1,056) | (672) | (625) | (347) | (470) |
| Total income | 12,777 | 49,507 | 48,725 | 48,837 | 30,814 | 34,950 |
| Administrative expenses | (4,334) | (16,792) | (16,121) | (14,920) | (14,515) | (13,942) |
| Depreciation and amortization | (449) | (1,740) | (1,662) | (1,483) | (1,490) | (1,362) |
| Provisions (net)(2) | (516) | (2,000) | (3,309) | (2,725) | (4,001) | (2,036) |
| Impairment losses on financial assets (net)(3) | (3,281) | (12,713) | (12,338) | (13,301) | (13,634) | (11,272) |
| Impairment losses on other assets (net) | (131) | (508) | (457) | (114) | (1,221) | 4 |
| Gains (losses) on disposal of assets not classified as non-current assets held for sale | (7) | (25) | (64) | 4 | 781 | 87 |
| Gains (losses) on non-current assets held for sale not classified as discontinued operations | 47 | 182 | (260) | 87 | 50 | 15 |
| Operating profit before tax | 4,106 | 15,910 | 14,514 | 16,384 | (3,216) | 6,443 |
| Income taxes | (803) | (3,110) | (5,376) | (8,919) | 13,050 | (736) |
| Consolidated Profit for the Year | 3,303 | 12,800 | 9,138 | 7,465 | 9,834 | 5,708 |
| For the Year Ended December 31, | ||||||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||
| (in millions of U.S.$)(1) | (in millions of R$) | |||||||||||||||||||||||
| Interest and similar income | 18,072 | 72,841 | 70,478 | 71,418 | 77,146 | 69,870 | ||||||||||||||||||
| Interest expense and similar charges | (7,076 | ) | (28,520 | ) | (28,557 | ) | (36,472 | ) | (46,560 | ) | (38,533 | ) | ||||||||||||
| Net interest income | 10,996 | 44,321 | 41,921 | 34,946 | 30,586 | 31,337 | ||||||||||||||||||
| Income from equity instruments | 5 | 19 | 33 | 83 | 259 | 143 | ||||||||||||||||||
| Income from companies accounted for by the equity method | 37 | 149 | 66 | 72 | 48 | 116 | ||||||||||||||||||
| Fee and commission income | 5,059 | 20,392 | 17,728 | 15,816 | 13,548 | 11,797 | ||||||||||||||||||
| Fee and commission expense | (1,161 | ) | (4,679 | ) | (3,596 | ) | (3,094 | ) | (2,571 | ) | (2,314 | ) | ||||||||||||
| Gains (losses) on financial assets and liabilities (net) | 611 | 2,463 | (2,783 | ) | 969 | 3,016 | (20,002 | ) | ||||||||||||||||
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| Exchange differences (net) | (692 | ) | (2,789 | ) | (2,806 | ) | 605 | 4,575 | 10,084 | |||||||||||||||
| Other operating income (expenses) | (275 | ) | (1,108 | ) | (1,056 | ) | (672 | ) | (625 | ) | (347 | ) | ||||||||||||
| Total income | 14,580 | 58,769 | 49,507 | 48,725 | 48,837 | 30,814 | ||||||||||||||||||
| Administrative expenses | (4,203 | ) | (16,942 | ) | (16,792 | ) | (16,121 | ) | (14,920 | ) | (14,515 | ) | ||||||||||||
| Depreciation and amortization | (593 | ) | (2,392 | ) | (1,740 | ) | (1,662 | ) | (1,483 | ) | (1,490 | ) | ||||||||||||
| Provisions (net)(2) | (913 | ) | (3,682 | ) | (2,000 | ) | (3,309 | ) | (2,725 | ) | (4,001 | ) | ||||||||||||
| Impairment losses on financial assets (net)(3) | (3,317 | ) | (13,370 | ) | (12,713 | ) | (12,338 | ) | (13,301 | ) | (13,634 | ) | ||||||||||||
| Impairment losses on other assets (net) | (33 | ) | (131 | ) | (508 | ) | (457 | ) | (114 | ) | (1,221 | ) | ||||||||||||
| Gains (losses) on disposal of assets not classified as non-current assets held for sale | 3 | 11 | (25 | ) | (64 | ) | 4 | 781 | ||||||||||||||||
| Gains (losses) on non-current assets held for sale not classified as discontinued operations | 2 | 10 | 182 | (260 | ) | 87 | 50 | |||||||||||||||||
| Operating profit before tax | 5,526 | 22,273 | 15,910 | 14,514 | 16,384 | (3,216 | ) | |||||||||||||||||
| Income taxes | (1,400 | ) | (5,642 | ) | (3,110 | ) | (5,376 | ) | (8,919 | ) | 13,050 | |||||||||||||
| Consolidated Profit for the Year | 4,126 | 16,631 | 12,800 | 9,138 | 7,465 | 9,834 |
| (1) | Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, |
| (2) | Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits. For further discussion, see notes 22 and 23 to our consolidated financial statements. |
| (3) | Net provisions to the credit loss allowance less recovery of loans previously written off. |
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Earnings and Dividend per Share Information
| For the Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Basic and Diluted Earnings per 1,000 shares | ||||||||||||||||||||
| From continuing and discontinued operations(1) | ||||||||||||||||||||
| Basic Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | 2,094.83 | 1,604.34 | 1,133.43 | 929.93 | 1,236.96 | |||||||||||||||
| Preferred Shares | 2,304.32 | 1,764.78 | 1,246.77 | 1,022.92 | 1,360.66 | |||||||||||||||
| Diluted Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | 2,094.83 | 1,604.34 | 1,132.44 | 929.03 | 1,235.79 | |||||||||||||||
| Preferred Shares | 2,304.32 | 1,764.78 | 1,245.69 | 1,021.93 | 1,359.36 | |||||||||||||||
| Basic Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | 519.72 | 414.05 | 342.63 | 285.34 | 316.78 | |||||||||||||||
| Preferred Shares | 571.69 | 455.45 | 376.90 | 313.87 | 348.46 | |||||||||||||||
| Diluted Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | 519.72 | 414.05 | 342.33 | 285.06 | 316.48 | |||||||||||||||
| Preferred Shares | 571.69 | 455.45 | 376.57 | 313.57 | 348.13 | |||||||||||||||
| From continuing operations | ||||||||||||||||||||
| Basic Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | 2,094.83 | 1,604.34 | 1,133.43 | 929.93 | 1,236.96 | |||||||||||||||
| Preferred Shares | 2,304.32 | 1,764.78 | 1,246.77 | 1,022.92 | 1,360.66 | |||||||||||||||
| Diluted Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | 2,094.83 | 1,604.34 | 1,132.44 | 929.03 | 1,235.79 | |||||||||||||||
| Preferred Shares | 2,304.32 | 1,764.78 | 1,245.69 | 1,021.93 | 1,359.36 | |||||||||||||||
| Basic Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | 519.72 | 414.05 | 342.63 | 285.34 | 316.78 | |||||||||||||||
| Preferred Shares | 571.69 | 455.45 | 376.90 | 313.87 | 348.46 | |||||||||||||||
| Diluted Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | 519.72 | 414.05 | 342.33 | 285.06 | 316.48 | |||||||||||||||
| Preferred Shares | 571.69 | 455.45 | 376.57 | 313.57 | 348.13 | |||||||||||||||
| Dividends and interest on capital per 1,000 shares (undiluted) | ||||||||||||||||||||
| 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 | |
12
| Common Shares (reais) | 1,378.87 | 841.68 | 801.63 | 666.21 | 784.90 | |||||||||||||||
| Preferred Shares (reais) | 1,516.76 | 925.85 | 881.80 | 732.83 | 863.39 | |||||||||||||||
| Common Shares (U.S. dollars)(2) | 342.09 | 217.22 | 242.33 | 204.42 | 201.01 | |||||||||||||||
| Preferred Shares (U.S. dollars)(2) | 376.30 | 238.94 | 266.57 | 224.86 | 221.11 | |||||||||||||||
| Weighted average share outstanding (in thousands) – basic | ||||||||||||||||||||
| Common Shares | 3,802,303 | 3,807,386 | 3,822,057 | 3,828,555 | 3,839,159 | |||||||||||||||
| Preferred Shares | 3,663,444 | 3,668,527 | 3,683,145 | 3,689,696 | 3,700,299 | |||||||||||||||
| Weighted average shares outstanding (in thousands) – diluted(3) | ||||||||||||||||||||
| Common Shares | 3,802,303 | 3,807,386 | 3,825,313 | 3,832,211 | 3,842,744 | |||||||||||||||
| Preferred Shares | 3,663,444 | 3,668,527 | 3,686,401 | 3,693,352 | 3,703,884 |
| (1) | Per share amounts reflect the effects of the bonus share issue and reverse share split for each period presented. |
| (2) | Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, |
| (3) | Average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and each of the month-end balances of the 12 subsequent months. |
Balance Sheet Data
| As of December 31, | ||||||||||||||||||||||||
| 2019 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||
| (in millions of U.S.$)(1) | (in millions of R$) | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank(2) | 4,993 | 20,127 | 19,464 | 20,642 | 26,285 | 89,143 | ||||||||||||||||||
| Financial assets held for trading | - | - | - | 86,271 | 131,245 | 50,537 | ||||||||||||||||||
| Financial Assets Measured At Fair Value Through Profit Or Loss | 8,024 | 32,342 | 43,712 | - | - | - | ||||||||||||||||||
| Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading | 14,147 | 57,021 | 68,852 | - | - | - | ||||||||||||||||||
| Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss | 42 | 171 | 917 | - | - | - | ||||||||||||||||||
| Other financial assets at fair value through profit or loss | - | - | - | 1,692 | 1,711 | 2,080 | ||||||||||||||||||
| Available-for-sale financial assets | - | - | - | 85,823 | 57,815 | 68,265 | ||||||||||||||||||
| Financial Assets Measured At Fair Value Through Other Comprehensive Income | 23,847 | 96,120 | 85,437 | - | - | - | ||||||||||||||||||
| Held to maturity investments | - | - | - | 10,214 | 10,048 | 10,098 | ||||||||||||||||||
| Loans and receivables(2) | - | - | - | 368,729 | 333,997 | 306,269 | ||||||||||||||||||
| Financial Assets Measured At Amortized Cost (2) | 117,766 | 474,681 | 429,731 | - | - | - | ||||||||||||||||||
| Hedging derivatives | 84 | 340 | 344 | 193 | 223 | 1,312 | ||||||||||||||||||
| Non-current assets held for sale | 329 | 1,325 | 1,380 | 1,155 | 1,338 | 1,237 | ||||||||||||||||||
| Investments in associates and joint ventures | 266 | 1,071 | 1,053 | 867 | 990 | 1,061 | ||||||||||||||||||
| Tax assets | 8,336 | 33,599 | 31,566 | 28,826 | 28,753 | 34,770 | ||||||||||||||||||
| Other assets | 1,256 | 5,061 | 4,800 | 4,578 | 5,104 | 3,802 | ||||||||||||||||||
| Tangible assets | 2,427 | 9,782 | 6,589 | 6,510 | 6,646 | 7,006 | ||||||||||||||||||
| Intangible assets | 7,591 | 30,596 | 30,019 | 30,202 | 30,237 | 29,814 | ||||||||||||||||||
| Total assets | 189,108 | 762,237 | 723,865 | 645,703 | 634,393 | 605,395 | ||||||||||||||||||
| Average total assets* | 182,476 | 735,507 | 685,531 | 637,511 | 605,646 | 571,918 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Financial liabilities held for trading | - | - | - | 49,323 | 51,620 | 42,388 | ||||||||||||||||||
| Financial Liabilities Measured At Fair Value Through Profit Or Loss Held For Trading | 11,428 | 46,065 | 50,939 | - | - | - | ||||||||||||||||||
| Financial Liabilities Measured At Fair Value Through Profit Or Loss | 1,320 | 5,319 | 1,946 | - | - | - | ||||||||||||||||||
| Financial liabilities at amortized cost | 142,712 | 575,230 | 547,295 | 478,881 | 471,579 | 457,282 | ||||||||||||||||||
1213
Balance Sheet Data
| Deposits from the Brazilian Central Bank and deposits from credit institutions | 24,629 | 99,271 | 99,023 | 79,375 | 78,634 | 69,451 | ||||||||||||||||||
| Customer deposits | 83,488 | 336,515 | 304,198 | 276,042 | 247,445 | 243,043 | ||||||||||||||||||
| Marketable debt securities | 18,285 | 73,702 | 74,626 | 70,247 | 99,843 | 94,658 | ||||||||||||||||||
| Subordinated debts | - | - | 9,886 | 519 | 466 | 8,097 | ||||||||||||||||||
| Debt Instruments Eligible to Compose Capital | 2,525 | 10,176 | 9,780 | 8,437 | 8,312 | 9,959 | ||||||||||||||||||
| Other financial liabilities | 13,786 | 55,566 | 49,783 | 44,261 | 36,879 | 32,073 | ||||||||||||||||||
| Hedging derivatives | 50 | 201 | 224 | 163 | 311 | 2,377 | ||||||||||||||||||
| Provisions(3) | 4,052 | 16,332 | 14,696 | 13,987 | 11,776 | 11,410 | ||||||||||||||||||
| Tax liabilities | 2,719 | 10,960 | 8,075 | 8,248 | 6,095 | 5,253 | ||||||||||||||||||
| Other liabilities | 2,709 | 10,921 | 9,095 | 8,014 | 8,199 | 6,850 | ||||||||||||||||||
| Total liabilities | 164,991 | 665,028 | 632,270 | 558,615 | 549,581 | 525,559 | ||||||||||||||||||
| Stockholders’ equity | 23,994 | 96,711 | 91,882 | 87,425 | 85,435 | 83,532 | ||||||||||||||||||
| Other Comprehensive Income | (21 | ) | (86 | ) | (879 | ) | (774 | ) | (1,348 | ) | (4,132 | ) | ||||||||||||
| Non-controlling interests | 145 | 583 | 593 | 437 | 726 | 435 | ||||||||||||||||||
| Total Stockholders’ Equity | 24,117 | 97,209 | 91,595 | 87,088 | 84,812 | 79,835 | ||||||||||||||||||
| Total liabilities and stockholders’ equity | 189,108 | 762,237 | 723,865 | 645,703 | 634,393 | 605,395 | ||||||||||||||||||
| Average interest-bearing liabilities* | 121,861 | 491,187 | 463,388 | 416,816 | 408,067 | 400,008 | ||||||||||||||||||
| Average total stockholders’ equity* | 23,777 | 95,836 | 89,263 | 87,868 | 84,283 | 81,475 |
| * | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
| (1) | Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2019, forreais into U.S. dollars of R$4.0307 to U.S.$1.00. |
| (2) | In the fiscal year ended December 31, 2019, the balances related to compulsory deposits were reclassified from cash and reserves at the Brazilian Central Bank to the item Loans and other amounts with credit institutions for better presentation and, consequently, the respective comparative balances also have been reclassified. |
| (3) | Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits. |
Selected Consolidated Ratios (*)
| As of and for the Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (%) | ||||||||||||||||||||
| Profitability and performance | ||||||||||||||||||||
| Return on average total assets | 2.3 | 1.9 | 1.4 | 1.2 | 1.7 | |||||||||||||||
| Asset quality | ||||||||||||||||||||
| Impaired assets as a percentage of loans and advances to customers (gross)(1) | 6.7 | 7.0 | 6.7 | 7.0 | 7.0 | |||||||||||||||
| Impaired assets as a percentage of total assets(1) | 3.1 | 3.1 | 3.0 | 3.0 | 3.1 | |||||||||||||||
| Impairment losses to customers as a percentage of impaired assets(1) (4) | 87.8 | 90.3 | 80.5 | 87.0 | 81.9 | |||||||||||||||
| Impairment losses to customers as a percentage of loans and advances to customers (gross) (5) | 5.9 | 6.3 | 5.4 | 6.1 | 5.7 | |||||||||||||||
| Derecognized assets as a percentage of loans and advances to customers (gross) | 4.3 | 3.5 | 4.7 | 4.3 | 4.4 | |||||||||||||||
| Impaired assets as a percentage of stockholders’ equity(1) | 24.3 | 24.5 | 22.0 | 22.3 | 23.3 | |||||||||||||||
| Capital adequacy | ||||||||||||||||||||
| Basel capital adequacy ratio(2) | 15.0 | 15.1 | 15.8 | 16.3 | 15.7 | |||||||||||||||
| Efficiency | ||||||||||||||||||||
| Efficiency ratio(3) | 28.8 | 33.9 | 33.1 | 30.6 | 47.1 | |||||||||||||||
| As of December 31, | ||||||
| 2018 | 2018 | 2017 | 2016 | 2015 | 2014 | |
| (in millions of U.S.$)(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. |
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, |
| (2) | Basel capital adequacy ratio |
14
Supervision—Capital Adequacy and Leverage – Basel.”
| (3) | Efficiency ratio is determined by taking administrative expenses divided by total income. |
14
| (4) | In |
| (5) | In |
Selected Consolidated Ratios, Including Non-GAAP Ratios (*)
| As of and for the Year Ended December 31, | As of and for the Year Ended December 31, | |||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||
| (%) | (%) | |||||||||||||||||||||||||
| Profitability and performance | ||||||||||||||||||||||||||
| Net yield(1) | 6.9 | 6.4 | 6.2 | 6.6 | 6.9 | 6.8 | 6.9 | 6.4 | 6.2 | 6.6 | ||||||||||||||||
| Return on average stockholders’ equity(2) | Return on average stockholders’ equity(2) | 14.3 | 10.4 | 8.9 | 12.1 | 7.3 | 17.4 | 14.3 | 10.4 | 8.9 | 12.1 | |||||||||||||||
| Adjusted return on average stockholders’ equity(2) | Adjusted return on average stockholders’ equity(2) | 21.0 | 15.4 | 13.3 | 18.5 | 11.3 | 24.7 | 21.0 | 15.4 | 13.3 | 18.5 | |||||||||||||||
| Average stockholders’ equity as a percentage of average total assets(2)(*) | Average stockholders’ equity as a percentage of average total assets(2)(*) | 13.0 | 13.8 | 13.9 | 14.2 | 16.4 | 13.0 | 13.0 | 13.8 | 13.9 | 14.2 | |||||||||||||||
| Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(2)(*) | 9.3 | 9.8 | 9.7 | 9.8 | 11.3 | 9.6 | 9.3 | 9.8 | 9.7 | 9.8 | ||||||||||||||||
| Asset quality | ||||||||||||||||||||||||||
| Impaired assets as a percentage of credit risk exposure (3) | Impaired assets as a percentage of credit risk exposure (3) | 6.2 | 5.8 | 6.3 | 6.0 | 4.8 | 6.0 | 6.2 | 5.8 | 6.3 | 6.0 | |||||||||||||||
| Impaired assets as a percentage of stockholders’ equity excluding goodwill(2)(3) | Impaired assets as a percentage of stockholders’ equity excluding goodwill(2)(3) | 35.5 | 32.6 | 33.5 | 36.1 | 27.5 | 34.4 | 35.5 | 32.6 | 33.5 | 36.1 | |||||||||||||||
| Liquidity | ||||||||||||||||||||||||||
| Loans and advances to customers, net as a percentage of total funding(4) | Loans and advances to customers, net as a percentage of total funding(4) | 60.6 | 62.7 | 58.0 | 59.3 | 63.9 | 62.9 | 60.6 | 62.7 | 58.0 | 59.3 | |||||||||||||||
| Efficiency | ||||||||||||||||||||||||||
| Adjusted efficiency ratio(5) | 38.5 | 32.5 | 34.9 | 34.8 | 38.1 | 28.2 | 30.3 | 32.5 | 34.9 | 34.8 | ||||||||||||||||
(*) The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months.
(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”, both in 2014, Banco Olé Bonsucesso Consignado S.A. (current name of Banco Bonsucesso Consignado S.A.) in 2015, and BW Guirapá I S.A. in 2016. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding the substantial impact of the R$27 billion goodwill arising from the acquisition of Banco Real during the year ended December 31, 2008, the R$1.1 billion goodwill arising from the acquisition of GetNet and Super both during 2014, the acquisition of an interest in Banco Olé Bonsucesso Consignado S.A. in 2015. Accordingly, we believe that the non-GAAP financial measures presented are useful to investors. The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill.
(3) Credit risk exposure is the sum of the amortized cost amounts of loans and advances to customers (including impaired assets), guarantees and documentary credits. We include off-balance sheet information in this measure to better demonstrate our total managed credit risk. The reconciliation of the measure to the most comparable IFRS measure is disclosed in the table of non-GAAP financial measures presented immediately after these notes.
(4) Total funding is the sum of financial liabilities at amortized cost, excluding other financial liabilities. For a breakdown of the components of total funding, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Liquidity and Funding.”
(5) Adjusted efficiency ratio excludes the effect of the hedge for investments held abroad. This exclusion affects the income tax, gains (losses) on financial assets and liabilities and exchange rate differences line items but does not affect the “Net profit from continuing operations” line item because the adjustment to gains (losses) on financial assets and liabilities and exchange rate difference is offset by the adjustment to income tax. Our management believes that the adjusted efficiency ratio provides a more consistent framework for evaluating and conducting business, as a result of excluding from our revenues the effect of the volatility caused by possible gains and losses on our hedging strategies for tax purposes. For more details, see the table below.
| For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||
| (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 | 1,264 | 5,867 | 810 | (6,140 | ) | 10,919 | ||||||||||||||
| Efficiency ratio | 33.9% | 33.1% | 30.6% | 47.1% | 39.9% | 28.8 | % | 33.9 | % | 33.1 | % | 30.6 | % | 47.1 | % | |||||||||||
| Adjusted efficiency ratio | 38.5% | 32.5% | 34.9% | 34.8% | 38.1% | 28.2 | % | 30.3 | % | 32.5 | % | 34.9 | % | 34.8 | % | |||||||||||
15
Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures
Reconciliation of Non-GAAP Ratios to Their Most Directly Comparable IFRS Financial Measures
The information in the table below presents the calculation of specified non-GAAP financial measures from each of theirto the most directly comparable IFRS financial measures. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding the substantial impact of the R$1.1 billion goodwill arising from the acquisition of GetNet and Super both during 2014, the acquisition of Banco Olé Bonsucesso Consignado S.A. in 2015 and the significance of other factors affecting stockholders’ equity and the related ratios. See “Item 4. Information on the Company—4A. History and Development of the Company—Important Events.” The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill, as set forth in the above tables. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.
| As of and for the Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (in millions of R$, except as otherwise indicated) | ||||||||||||||||||||
| Return on average stockholders’ equity: | ||||||||||||||||||||
| Consolidated profit for the year | 16,631 | 12,800 | 9,138 | 7,465 | 9,834 | |||||||||||||||
| Average stockholders’ equity (*) | 95,836 | 89,263 | 87,868 | 84,283 | 81,475 | |||||||||||||||
| Return on average stockholders’ equity (*) | 17.4 | % | 14.3 | % | 10.4 | % | 8.9 | % | 12.1 | % | ||||||||||
| Adjusted return on average stockholders’ equity(*): | ||||||||||||||||||||
| Consolidated profit for the year | 16,631 | 12,800 | 9,138 | 7,465 | 9,834 | |||||||||||||||
| Average stockholders’ equity(*) | 95,836 | 89,263 | 87,868 | 84,283 | 81,475 | |||||||||||||||
| Average goodwill(*) | 28,213 | 28,176 | 28,360 | 28,343 | 28,376 | |||||||||||||||
| Average stockholders’ equity excluding goodwill(*) | 67,623 | 61,087 | 59,508 | 55,940 | 53,130 | |||||||||||||||
| Adjusted return on average stockholders’ equity(*)(3) | 24.6 | % | 21.0 | % | 15.4 | % | 13.3 | % | 18.5 | % | ||||||||||
| Average stockholders’ equity as a percentage of average total assets(*): | ||||||||||||||||||||
| Average stockholders’ equity(*) | 95,836 | 89,263 | 87,868 | 84,283 | 81,475 | |||||||||||||||
| Average total assets(*) | 735,507 | 685,531 | 637,511 | 605,646 | 571,918 | |||||||||||||||
| Average stockholders’ equity as a percentage of average total assets(*) | 13.0 | % | 13.0 | % | 13.8 | % | 13.9 | % | 14.2 | % | ||||||||||
| Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*): | ||||||||||||||||||||
| Average stockholders’ equity(*) | 95,836 | 89,263 | 87,868 | 84,283 | 81,475 | |||||||||||||||
| Average goodwill(*) | 28,213 | 28,176 | 28,360 | 28,343 | 28,376 | |||||||||||||||
| Average stockholders’ equity excluding goodwill(*) | 67,623 | 61,087 | 59,508 | 55,940 | 53,130 | |||||||||||||||
| Average total assets(*) | 735,507 | 685,531 | 637,511 | 605,646 | 571,918 | |||||||||||||||
| Average goodwill(*) | 28,213 | 28,176 | 28,360 | 28,343 | 28,376 | |||||||||||||||
| Average total assets excluding goodwill(*) | 707,294 | 657,355 | 609,151 | 577,334 | 543,542 | |||||||||||||||
| Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*) | 9.6 | % | 9.3 | % | 9.8 | % | 9.7 | % | 9.8 | % | ||||||||||
| Impaired assets as a percentage of stockholders’ equity: | ||||||||||||||||||||
| Impaired assets | 23,426 | 22,426 | 19,145 | 18,887 | 18,599 | |||||||||||||||
| Stockholders’ equity | 97,209 | 91,595 | 87,088 | 84,813 | 79,835 | |||||||||||||||
| Impaired assets as a percentage of stockholders’ equity | 24.1 | % | 24.5 | % | 22.0 | % | 22.3 | % | 23.3 | % | ||||||||||
| 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% | |
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| Impaired assets as a percentage of stockholders’ equity excluding goodwill: | ||||||||||||||||||||
| Impaired assets | 23,426 | 22,426 | 19,145 | 18,887 | 18,599 | |||||||||||||||
| Stockholders’ equity | 97,209 | 91,595 | 87,088 | 84,813 | 79,835 | |||||||||||||||
| Goodwill | 28,375 | 28,378 | 28,364 | 28,355 | 28,333 | |||||||||||||||
| Stockholders’ equity excluding goodwill | 68,834 | 63,217 | 58,724 | 56,458 | 51,502 | |||||||||||||||
| Impaired assets as a percentage of stockholders’ equity excluding goodwill | 34.0 | % | 35.5 | % | 32.6 | % | 33.5 | % | 36.1 | % | ||||||||||
| Impaired assets as a percentage of loans and receivables: | ||||||||||||||||||||
| Loans and advances to customers, gross | 347,257 | 321,933 | 287,829 | 268,438 | 267,266 | |||||||||||||||
| Impaired assets | 23,426 | 22,426 | 19,145 | 18,887 | 18,599 | |||||||||||||||
| Impaired assets as a percentage of loans and receivables | 6.7 | % | 7.0 | % | 6.7 | % | 7.0 | % | 7.0 | % | ||||||||||
| Impaired assets as a percentage of credit risk exposure: | ||||||||||||||||||||
| Loans and advances to customers, gross | 347,257 | 321,933 | 287,829 | 268,438 | 267,266 | |||||||||||||||
| Guarantees | 44,313 | 42,260 | 42,645 | 33,265 | 43,611 | |||||||||||||||
| Credit risk exposure | 391,569 | 364,182 | 330,474 | 301,703 | 310,887 | |||||||||||||||
| Impaired assets | 23,426 | 22,426 | 19,145 | 18,887 | 18,599 | |||||||||||||||
| Impaired assets as a percentage of credit risk exposure | 6.0 | % | 6.2 | % | 5.8 | % | 6.3 | % | 6.0 | % | ||||||||||
| Loans and advances to customers, net as a percentage of total funding: | ||||||||||||||||||||
| Loans and advances to customers, gross | 347,257 | 321,933 | 287,829 | 268,438 | 267,266 | |||||||||||||||
| Impairment losses(1) | 20,557 | 20,242 | 15,409 | 16,435 | 15,233 | |||||||||||||||
| Total Funding(2) | 519,664 | 497,513 | 434,620 | 434,502 | 425,209 | |||||||||||||||
| Loans and advances to customers, net as a percentage of total funding(2) | 62.4 | % | 60.6 | % | 62.7 | % | 58.0 | % | 59.3 | % |
| (*) | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
| (1) | Provision for impairment losses of loans and advances to customers. |
| (2) | Total funding is the sum of financial liabilities at amortized cost, excluding the other financial liabilities. |
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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, | As of and for the Year Ended December 31, | |||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||
| (in millions of R$, except as otherwise indicated) | (in millions of R$, except as otherwise indicated) | |||||||||||||||||||||||||
| Efficiency ratio | ||||||||||||||||||||||||||
| Administrative expenses | 16,792 | 16,121 | 14,920 | 14,515 | 13,942 | 16,942 | 16,792 | 16,121 | 14,920 | 14,515 | ||||||||||||||||
| Total income | 49,507 | 48,725 | 48,837 | 30,814 | 34,950 | 58,769 | 49,507 | 48,725 | 48,837 | 30,814 | ||||||||||||||||
| of which: | ||||||||||||||||||||||||||
| Gains (losses) on financial assets and liabilities (net) and exchange differences (net) | Gains (losses) on financial assets and liabilities (net) and exchange differences (net) | (5,589) | 1,574 | 7,591 | (9,918) | (888) | (326 | ) | (5,589 | ) | 1,574 | 7,591 | (9,918 | ) | ||||||||||||
| Efficiency ratio | 33.9% | 33.1% | 30.6% | 47.1% | 39.9% | 28.8 | % | 33.9 | % | 33.1 | % | 30.6 | % | 47.1 | % | |||||||||||
| Total Income | 49,507 | 48,725 | 48,837 | 30,814 | 34,950 | 58,769 | 49,507 | 48,725 | 48,837 | 30,814 | ||||||||||||||||
| 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) | 1,264 | 5,867 | 810 | 6,140 | (10,919 | ) | ||||||||||||||
| Total income excluding effects of the hedge for investments held abroad | Total income excluding effects of the hedge for investments held abroad | 43,640 | 49,535 | 42,697 | 41,733 | 36,618 | 57,505 | 43,640 | 47,915 | 42,697 | 41,733 | |||||||||||||||
| Administrative expenses | 16,792 | 16,121 | 14,920 | 14,515 | 13,942 | 16,942 | 16,792 | 16,121 | 14,920 | 14,515 | ||||||||||||||||
| Efficiency ratio adjusted for effects of the hedge for investments held abroad | 38.5% | 32.5% | 34.9% | 34.8% | 38.1% | 29.5 | % | 38.5 | % | 33.6 | % | 34.9 | % | 34.8 | % | |||||||||||
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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
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of excluding a portion of gains/losses on financial assets and liabilities (net) plus exchange differences (net) line item, which is offset by excluding a portion in the Income tax line item. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.
| 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 | |
| As of and for the year ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (in millions of R$, except as otherwise indicated) | ||||||||||||||||||||
| Gains/losses on financial assets and liabilities (net) plus exchange differences (net) | (326 | ) | (5,589 | ) | 1,574 | 7,591 | (9,918 | ) | ||||||||||||
| Effects on hedge for investment held abroad | 1,264 | 5,867 | 810 | (6,140 | ) | 10,919 | ||||||||||||||
Adjusted Gains/losses on financial assets and liabilities (net) plus exchange differences (net) | (938 | ) | (11,456 | ) | 764 | 1,451 | 1,001 | |||||||||||||
| Total Income | 58,769 | 49,507 | 48,725 | 48,837 | 30,814 | |||||||||||||||
| Effects on hedge for investment held abroad | 1,264 | 5,867 | 810 | 6,140 | (10,919 | ) | ||||||||||||||
| Adjusted Total Income | 57,505 | 43,640 | 47,915 | 42,697 | 41,733 | |||||||||||||||
| Operating profit before tax | 22,273 | 15,910 | 14,514 | 16,384 | (3,216 | ) | ||||||||||||||
| Effects on hedge for investment held abroad | 1,264 | 5,867 | 810 | 6,140 | (10,919 | ) | ||||||||||||||
| Adjusted Operating profit before tax | 21,009 | 10,043 | 13,704 | 10,244 | 7,703 | |||||||||||||||
| Income Tax | (5,642 | ) | (3,110 | ) | (5,376 | ) | (8,919 | ) | 13,050 | |||||||||||
| Effects on hedge for investment held abroad | (1,264 | ) | (5,867 | ) | (810 | ) | 6,140 | (10,919 | ) | |||||||||||
| Adjusted Income tax | (6,906 | ) | (8,977 | ) | (6,186 | ) | (2,779 | ) | 2,130 | |||||||||||
| Operating profit before tax – Commercial Banking | 18,375 | 12,397 | 11,220 | 12,652 | (5,565 | ) | ||||||||||||||
| Effects on hedge for investment held abroad | 1,264 | 5,867 | 810 | 6,140 | (10,919 | ) | ||||||||||||||
| Adjusted Operating Profit before tax – Commercial Banking | 17,111 | 6,530 | 10,411 | 6,512 | 5,354 | |||||||||||||||
Exchange Rates
The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer ofreaisby any person or legal entity, regardless of the amount, subject to certain regulatory procedures.
Since 1999, the Brazilian Central Bank has allowed thereal/U.S. dollar exchange rate to float freely, which resulted in increasing exchange rate volatility. In the past, the Brazilian Central Bank has intervened occasionally to control high volatility in the foreign exchange rates. We cannot predict whether the Brazilian Central Bank or the Brazilian government will continue to permit thereal to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. In the future, thereal may fluctuate substantially against the U.S. dollar.
Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are compelling reasons to foresee a serious imbalance; 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
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distributions we make with respect to our shares, which will be made exclusively inreais. Exchange rate fluctuations may also adversely affect our financial condition. For further information on these risks, see “—D. Risk Factors—Risks Relating to Brazil and Macroeconomic Conditions in Brazil and Globally—Exchange rate volatility may have a material adverse effect on the Brazilian economy and on us.”
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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: | |||||
| 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 | |
| 2019 | 4.03 | 4.11 | 4.02 | 4.22 | |
| Month Ended: | |||||
| August 2019 | 4.15 | 4.03 | 3.84 | 4.17 | |
| September 2019 | 4.16 | 4.12 | 4.06 | 4.19 | |
| October 2019 | 4.02 | 4.09 | 3.99 | 4.18 | |
| November 2019 | 4.24 | 4.16 | 3.99 | 4.26 | |
| December 2019 | 4.03 | 4.11 | 4.02 | 4.22 | |
| January 2020 | 4.28 | 4.15 | 4.02 | 4.28 | |
| February 2020 | 4.50 | 4.34 | 4.24 | 4.50 | |
| March 2020 (through March 5, 2020) | 4.62 | 4.53 | 4.49 | 4.62 | |
Source: Brazilian Central Bank.
| (1) | Represents the average of the exchange rates at the close of each business day during the period. |
Our parent company, Santander Spain, reports its financial condition and results of operations in euros. As of December 31, 2018,2019, the exchange rate foreuro toreal was R$4.43904.4097 per €1.00.
3B. Capitalization and Indebtedness
| 3B. | Capitalization and Indebtedness |
Not applicable.
3C. Reasons for the Offer and Use of Proceeds
| 3C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
| 3D. | Risk Factors |
Our business, financial condition and results of operationsThe below risks could be materially and adversely affected if any of the risks described below occur. As a result, the market pricefinancial and operational state of our unitsCompany, and as result, could impact the American Depositary Receipts, or “ADRs”, could decline, and investors could lose all or partinvestment of their investment.our shareholders.
Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally
The Brazilian government has exercised significant influence over the Brazilian economy. The Brazilian government’s macroeconomic management strategies, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our securities.
The Brazilian government has frequently intervened in the Brazilian economy and has on occasion made significant changes in policy and regulations. In the past, the Brazilian government has adopted measures, including, among others, changes in regulations, price controls, capital controls, changes in the exchange rate regime, and limitations on imports, which have affected Brazilian asset prices. Recently, the Brazilian government has adopted measures, including changes in tax policies, and constraints that have affected Brazilian asset prices and the trading price of our securities.
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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; |
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| · | inflation; |
| · | reserve requirements; |
| · | capital requirements; |
| · | liquidity of capital and lending markets; |
| · | non-performing loans; |
| · | tax policies; |
| · | the regulatory framework governing our industry; |
| · | exchange rate controls and restrictions on remittances abroad; and |
| · | other political, social and economic developments in or affecting Brazil. |
Uncertainty over whether the Brazilian government will implement changes in policy or regulation creates instability in the Brazilian economy, increasing the volatility of the Brazilian securities markets, which may have an adverse effect on us and our securities. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and our securities. The overall trend of the Brazilian political and economic arenas may also affect the business of the Brazilian financial industry.
We are not able to fully estimate the impact of global and Brazilian political and macroeconomic developments and economic regulatory policy changes on our business and lending activity, nor are we able to predict how current or future measures implemented by regulatory policy-makers may impact our business. In addition, due to the current political instability, there exists substantial uncertainty regarding future economic policies and we cannot predict what policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our business or financial performance. Any changes in regulatory capital requirements for lending, reserve requirements, or product and service regulations, among others, or continued political uncertainty may materially adversely affect our business.
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 contributed to a decline in market confidence in the Brazilian economy 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 impacted 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”Lava Jato investigations. Presidential elections were held in Brazil in October 2018. We cannot predict
There are uncertainties regarding the ability of the current government to implement policies and reforms, as well as external perception regarding the Brazilian economy and political environment, all of 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, 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, 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 may contribute to economic instability in Brazil and increase the volatility of securities issued abroad by Brazilian companies, including our securities.
Ongoing investigations relating to corruption and diversion of public funds that are being conducted by the Brazilian federal police as well as other Brazilian and non-Brazilian regulators and law enforcement officials may adversely affect the growth of the Brazilian economy and could have a material adverse effect on us.
Certain Brazilian companies active in the oil and gas, energy, construction, and infrastructure sectors are facing investigations by the CVM, the U.S. Securities and Exchange Commission, (the “SEC”),or the “SEC,” the U.S. Department of Justice, the Brazilian Federal Police and the Brazilian Federal Prosecutor’s Office, the Comptroller General of Brazil, and other relevant governmental authorities, in connection with corruption allegations (the so called “Lava Jato” investigations). The Brazilian Federal Police isins also investigating allegations of improper payments made by Brazilian companies to officials of the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais), or CARF,“CARF”, a tax appeals tribunal (the so-called “Operação Zelotes”). It is alleged that the purpose of such improper payments was to induce those officials to reduce or waive certain tax-related penalties imposed by the Brazilian Federal Revenue Authority, which were under appeal in the CARF. Such investigations involve several companies and individuals, including representatives of various companies, politicians and third parties. Certain of these individuals are being investigated by the Brazilian Federal Police and others were formally charged and are facing criminal proceedings and/or have already been convicted by the Brazilian Federal Courts.
Depending on the duration and outcome of such investigations, the companies involved may face a reduction in their revenues, downgrades from rating agencies or funding restrictions, among other negative effects. Given the significance of the companies cited in these investigations in the Brazilian economy, the investigations and their fallout have had an adverse effect on Brazil’s economic growth prospects in the near short to medium term. Furthermore, the negative effects on such companies and others may also impact the level of investments in infrastructure in Brazil, which may lead to lower economic growth or contraction in the near to medium term (according to data from the IBGE, the Brazilian economy’s gross domestic product, or “GDP”,“GDP,” contracted by 3.5%3.3% in 2016 but increased by 1.0%1.3% in 2017 and 2018 and 1.1% in 2018)2019). In addition, although we have reduced our exposure to companies involved in the “Lava Jato”Lava Jato and other government investigations, we cannot assure that new investigations will not be launched or that additional persons will not become subject to investigation. To the extent that the repayment ability of these companies is hampered by any fines and/or other sanctions that may be imposed upon them or reputational or commercial damage as a result of the “Lava Jato”Lava Jato investigations, we may also be materially adversely affected.
As a result of the allegations under the “Lava Jato”Lava Jato investigations and the economic downturn, Brazil was downgraded to non-investment grade status by S&P in September 2015, by Fitch 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. Brazil’s sovereign rating is currently rated by the three major risk ratingrisk-rating agencies as follows: BB- by S&P and Fitch and Ba2 by Moody’s. Various major Brazilian companies were also downgraded. Such downgrades have further worsened the conditions of the Brazilian economy and the condition of Brazilian companies, especially those relying on foreign investments over 2016 and 2017.investments. In addition, the “Lava Jato” Lava Jatoinvestigations have also reached members of the executive and legislative branches of the Brazilian government, which has caused considerable political instability, and, as a result, persistently poor economic conditions in Brazil could have a material adverse effect on us. It is difficult to predict the effects of such political instability, 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, that have had and may in the future have significant effects on the Brazilian economy and our business.business, and can continue to do so. Tight monetary policies with high interest rates and high compulsory reserve requirements may restrict Brazil’s growth and the availability of credit, reduce our loan volumes, and increase our loan loss provisions. Conversely, less strict government and Brazilian Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our spreads.
In December 2016, the SELIC (basicrate (the basic interest rate)rate in Brazil) was lowered to 13.75%, and in January 2017, the SELIC rate was further lowered to 13.0%, and to 12.25% in February 2017. In May 2017, the Monetary Policy Committee (Comitê(Comitê de Política Monetária)ria) of the Brazilian Central Bank, or COPOM,“COPOM”, decided to lower the SELIC rate to 10.25%, then lowering it to 9.25% in July 2017, and to 7.50% in October 2017 and to 7.0% in December 2017. In February 2018, the COPOM lowered the SELIC rate to 6.75% and then to 6.50% in March 2018 and kept throughout the year 2018. OnIn 2019, the
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COPOM continued this trend for the first half of the year until August 2019, when the rate was lowered to 6.00%, and then successively lowered further to 5.50% in September 2019, 5.00% in October 2019 and 4.50% in December 2019. In February 6, 2019,2020, the COPOM has decided to maintaincut the SELIC rate at 6.50%to 4.25%.
The majority of our income, expenses, assets and liabilities are directly tied to interest rates. Therefore, our results of operations and financial condition are significantly affected by inflation, interest rate fluctuations and related government monetary policies, all of which may materially and adversely affect the growth of the Brazilian economy, our loan portfolios, our cost of funding and our income from credit operations. We estimate that, in 2018,2019, a 1.0% increase or decrease in the basic interest rate would have resulted in a decrease or increase, respectively, in our net interest income of R$419334 million. Any changes in interest rates may negatively impact our business, financial condition and results of operations. In addition, increases in base interest rates may adversely affect us by reducing the demand for our credit and investment products, increasing funding costs, and increasing in the short run the risk of default by our customers.
Inflation adversely affects our personnel and other administrative expenses that are directly or indirectly tied to inflation indexes, generally the consumer price index (Í(Índice de Preços ao Consumidor – Amplo)Amplo), or “IPCA,” and the general index of market prices (Í(Índice Geral de Preços-Mercado)os-Mercado), or “IGPM.” For example, considering the amounts in 2018,2019, each additional percentage point change in inflation would impact our personnel and other administrative expenses by approximately R$9293 million and R$76 million, respectively.
Despite the Brazilian Central Bank’s maintenance of the SELIC rate, inflationInflation has increased during 2018,2019, reaching 3.75%4.31% for the 12-month period ending December 31, 2018, and decreasing2019 (compared to 0.75% for3.75% in 2018), as a result of the period ending February 28, 2019.current market conditions.
Inflation, government measures to curb inflation, and speculation related to possible measures regarding inflation may significantly contribute to uncertainty regarding the Brazilian economy and weaken investors’ confidence in Brazil. Future Brazilian governmental actions, including interest rate increases or decreases, intervention in the foreign exchange market, and actions to adjust or fix the value of thereal, may trigger increases in inflation and adversely affect the performance of the Brazilian economy as a whole. Any of the aforementioned developmentsthese actions may adversely affect our asset quality. Furthermore, Brazil’s high rate of inflation, compounded by high and increasing interest rates, declining consumer spending and increasing unemployment, may have a material adverse impact on the Brazilian economy as a whole, as well as on us.
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Exposure to Brazilian Federal Governmentfederal government debt could have a material adverse effect on us.
We invest in Brazilian Federal Governmentfederal government sovereign bonds. As of December 31, 2018,2019, approximately 16.1%17.8% of our total assets, and 66.4%78.4% 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 our former and current employees, most of which were inherited from Banespa (though we discontinued the use of defined benefit pension plans for our employees in 2005).
In order to determine the funded status of each legacy defined benefit pension plan and, consequently, the carried reserves necessary to pay future beneficiaries, we use certain actuarial techniques and assumptions, which are inherently uncertain and involve the exercise of significant judgment, including with respect to interest rates, which are a key assumption in determining our current obligations under the legacy pension plans as interest rates are used to calculate the present value of such obligations.plans. For further information, seerefer to note 22 to our consolidated financial statements.
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Changes in the present value of our obligations under our legacy defined benefit pension plans could causerequire us to have to increase contributions, to reduce or satisfy the deficits, which would divert resources from use in other areas of our business. Any such increase may be due to factors over which we have no or limited control. Increases in our pension liabilities and obligations could have a material adverse effect on our business, financial condition and results of operations.
Decreases in interest rates can increase the present value of obligations under our legacy defined benefit pension plans, and may materially and adversely affect the funded status of our legacy defined benefit plans and require us to make additional contributions to these plans to meet our pension funding obligations.
As of December 31, 2019, we had provisions for pensions and other obligations in the amount of R$16 million. See more information in note 23 to our audited consolidated financial statements included in this annual report.
Exchange rate volatility may have a material adverse effect on the Brazilian economy and on us.
The Brazilian currency has during past decades, experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. The Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system.
Although long-term depreciation of thereal is generally linked to the rate of inflation in Brazil, depreciation of therealoccurring over shorter periods of time has resulted in significant variations in the exchange rate among thereal, the U.S. dollar and other currencies. From 2013 to 2014, thereal depreciated against the U.S. dollar due to a decrease in commodities prices, reaching R$2.34 per U.S.$1.00 on December 31, 2013 and R$2.65 per U.S.$1.00 on December 31, 2014. During 2015, due to the poor economic conditions in Brazil, including as a result of political instability, thereal devalued at a much higher rate than in previous years. On September 24, 2015, thereal felldepreciated to the lowest level since the introduction of the currency, at R$4.20 per U.S.$1.00. Overall, in 2015, thereal depreciated 47%, against the U.S. dollar, reaching R$3.91 per U.S.$1.00 on December 31, 2015. In 2016, thereal faced continuing fluctuations, primarily as a result of Brazil’s political instability, but had appreciated 17.0% year-over-year against the U.S. dollar as of December 31, 2016 to R$3.26 per U.S.$1.00. In 2017, thereal remained 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, therealcontinued to depreciate against the U.S. dollar with the exchange rate reaching R$3.88 per U.S.$1.00 as of December 31, 2018. In 2019, thereal continued to depreciate against the U.S. dollar, with the exchange rate reaching R$4.03 per U.S.$1.00 as of December 31, 2019. On March 15, 2019,5, 2020, the exchange rate was R$3.834.50 per U.S.$1.00. There can be no assurance that thereal will not substantially depreciate or appreciate further against the U.S. dollar.
In the year ended December 31, 2018,2019, a variation of 1.0% in the exchange rate ofreais to U.S. dollars would have resulted in a variation of income on our net foreign exchange position denominated in U.S. dollars of R$261,264 million.
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Depreciation 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 thereal may also, in the context of an economic slowdown, lead to decreased consumer spending, deflationary pressures and reduced growth of the Brazilian economy as a whole, and thereby harm our asset base, financial condition and results of operations. Additionally, depreciation of thereal could make our foreign currency-linkedforeign-currency-linked obligations and funding more expensive, negatively affect the market price of our securities portfolios, and have similar consequences for our borrowers. Conversely, appreciation of thereal relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian balance of payments, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of thereal could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.
Infrastructure, 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% in 2016 and growth of 1.0% and 1.1% in 2017 and 2018, respectively.respectively, and a growth of 1.0% in 2019. Growth is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, the lack of a qualified labor force, and the lack of private and public investments, resulting in these areas, which limit productivitypotential energy shortages and efficiency.deficient transportation, declining logistics and telecommunication sectors, and a lack of a qualified labor force. In addition, the growth and performance of the Brazilian economy may be impacted by other factors such as nationwide strikes, natural disasters or other disruptive events. Any of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could limit growth, increase delinquency rates and ultimately have a material adverse effect on us.
Developments and the perception of risk in other countries may adversely affect the Brazilian economy and market price of Brazilian issuers’ securities.
The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, European countries (including Spain, where Santander Spain, our controlling shareholder, is based), and in other Latin American and emerging market countries. Although economic conditions in Europe and in the United States may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. In particular, investor perceptions of the risks associated with our securities may be affected by perception of risk conditions in Spain. Additionally, crises in other emerging market countries may diminish investor interest in securities of Brazilian issuers, including our securities. This could adversely affect the market price of our securities, restrict our access to capital markets and compromise our ability to finance our operations in the future on favorable terms, or at all.
In 2019, 2018 2017 and 2016,2017, there was an increase in volatility in all Brazilian markets due to, among other factors, uncertainties about how monetary policy adjustments in the United States would affect the international financial markets and the increasing risk aversion to emerging market countries, and the uncertainties regarding Brazilian macroeconomic and political conditions.countries. These uncertainties adversely affected us and the market value of our securities.
In addition, we continue to be exposed to disruptions and volatility in the global financial markets because of their effects on the financial and economic environment, particularly in Brazil, such as a slowdown in the economy, an increase in the unemployment rate, a decrease in the purchasing power of consumers and the lack of credit availability. We lend primarily to Brazilian borrowers, and these effects could materially and adversely affect our customers and increase our non-performing loans, resulting in increased risk associated with our lending activity and requiring us to make corresponding revisions to our risk management and loan loss reserve models.
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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 and the Eurozone, the end of quantitative easingfunding by the U.S. Federal Reserve, and the uncertain impact of “Brexit.”Brexit and potential adoption of U.S. tariffs on steel imported from Brazil and Argentina. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States. There have been concerns over conflicts, unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in volatility in oil and other markets. The United States and China have recently been involved in controversy over trade barriers in China that threatened a trade war between the countries and have implemented or 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. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term.
Any slowdown or instability in the global economy could impact income, purchasing power and consumption levels in Brazil, among other things, which could limit growth, increase delinquency rates and ultimately have a material adverse effect on us.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 (the “EU”) and the definition of its future relationship with the EU could adversely impact global economic or market conditions.conditions, as well as our operations, financial condition and prospects.
On June 23, 2016,31 January 2020 the UK electorate voted inceased to be a general referendum in favormember of the UK’s exit from the European Union (so-called “Brexit”). On March 29, 2017,EU on withdrawal terms which establish a transition period until 31 December 2020 during which the UK gave formal notice under Article 50will be treated as if it were still a member of the Treaty on European Union of its intention to leave the European Union. The announcement of Brexit caused significant volatility in global stock marketsAlthough the withdrawal agreement foresees the possibility to extend the transition period for one or two more years after the 31 January 2020, this is not automatic and currency exchange rate fluctuations. The ongoing process of negotiations between the UK andhas enshrined the European Union will determine31 December 2020 date in domestic legislation passing the futurewithdrawal agreement as the end of the transition period, signaling a current desire not to extend it. Uncertainly remains around the terms of the UK’sUK's relationship with the European Union, including accessEU at the end of the transition period. If the transition period were to European Union markets, either duringend without a transitional period or more permanently. Althoughcomprehensive trade agreement, the UK is due to leave the EuropeanUK’s and Europe’s
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Unioneconomic growth may be negatively impacted. The uncertainty regarding and terms of the UK’s future relationship with the EU, as well as any adverse effect which it may have on 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,EU and its eventual effects once implemented,the wider global economy could adversely affect global economic or market conditions and investor confidence. This could, in turn, adversely affecthave a material adverse effect on our businessoperations, financial condition and prospects and/or the market value of our securities.
Our operations and results may be negatively impacted by the coronavirus outbreak.
Global or national health concerns, including the outbreak of pandemic or contagious disease, such as the recent coronavirus, may adversely affect us.
Since December 2019, a novel strain of coronavirus has spread in China and other countries. Such events could cause disruption of regional or global economic activity, which could affect our operations and financial results. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Risks Relating to the Brazilian Financial Services Industry and Our BusinessBusiness.
Climate change can create transition risks, physical risks and other risks that could adversely affect us.
Climate change may imply three primary drivers of financial risk that could adversely affect us:
• Transition risks associated with the move to a low-carbon economy, both at idiosyncratic and systemic levels, such as through policy, regulatory and technological changes.
• Physical risks related to extreme weather impacts and longer-term trends, which could result in financial losses that could impair asset values and the creditworthiness of our customers.
• Liability risks derived from parties who may suffer losses from the effects of climate change and may seek compensation from those they hold responsible such as state entities, regulators, investors and lenders.
These primary drivers could materialize, among others, in the following financial risks:
• Credit risks: Physical climate change could lead to increased credit exposure, and companies with business models not aligned with the transition to a low-carbon economy may face a higher risk of reduced corporate earnings and business disruption due to new regulations or market shifts.
• Market risks: Market changes in the most carbon-intensive sectors could affect energy and commodity prices, corporate bonds, equities and certain derivatives contracts. Increasing frequency of severe weather events could affect macroeconomic conditions, weakening fundamental factors such as economic growth, employment and inflation.
• Operational risks: Severe weather events could directly impact business continuity and operations both of customers and ours.
• Reputational risk could also arise from shifting sentiment among customers and increasing attention and scrutiny from other stakeholders (investors, regulators, etc.) on our response to climate change.
Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.
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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-based e-commerce providers, mobile telephone companies and Internet search engines, as well as the increase in the availability of payment services using cryptocurrencies and/orfor blockchain technologies may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing. For more information, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulation of New Financial Institutions That Operate in Online Lending.”
New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business. Furthermore, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies and mobile banking platforms could negatively impact 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 could have an adverse effect on our competitive position.
Increasing competition could also require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limitingprofitability, as well as limit our ability to increase our customer base and expand our operations, and increasing competition for investment opportunities.
In addition, if our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities, or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on us.
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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; |
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| · | reserve and compulsory deposit requirements; |
| · | limits on investments in fixed assets; |
| · | lending limits and other credit restrictions, including compulsory allocations; |
| · | limits and other restrictions on interest rates and fees; |
| · | limits on the amount of interest banks can charge or the period for capitalizing interest; and |
| · | accounting and statistical requirements. |
The regulation governing Brazilian financial institutions is continuously evolving, and the Brazilian Central Bank has reacted actively and extensively to developments in our industry.
Changes in regulations in Brazil and international markets may expose us to increased compliance costs and limitations onlimit our ability to pursue certain business opportunities and provide certain products and services. Brazilian regulators are constantly updating prudential standards in accordance with the recommendations of the Basel Committee on Banking Supervision, in particular with respect to capital and liquidity, which could impose additional significant regulatory burdens on us. For example, future liquidity standards could require us to maintain a greater proportion of our assets in highly liquid but lower-yielding financial instruments, which would negatively affect our net interest margin. There can be no assurance that future changes in regulations or in their interpretation or application will not have a material adverse effect on us.
As some of the banking laws and regulations have been recently issued or become effective, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent that these recently adopted regulations are implemented inconsistently in Brazil, we may face higher compliance costs. The measures of the Brazilian Central Bank and the amendment of existing laws and regulations, or the adoption of new laws or regulations, could adversely affect our ability to provide loans, make investments or render certain financial services. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations. Furthermore, regulatory authorities have substantial discretion in how to regulate banks, and this discretion, and the regulatory mechanisms available to the regulators, have been increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis, and these may especially affect financial institutions such as us thatthose, which may be deemed to be systemically important. In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements require a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands, and we may face supervisory measures as a result.
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 apply to them, is likely to continue. Changes to current legislation and their implementation through regulation (including additional capital, leverage, funding, liquidity and tax requirements), policies (including fiscal and monetary policies established by central banks and financial regulators, and changes to global trade policies), and other legal and regulatory actions may impose additional
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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, 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.
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, that are required to conduct banking and financial services business. These apply to business operations, affect financial returns, and include reserve and reporting requirements, and conduct of businessconduct-of-business regulations.
In their supervisory roles, the Brazilian Central Bank, the CVM, and the CMN seek to maintain the safety and soundness of financial institutions with the aim of strengthening the protection of customers and the financial system. Their continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of prudential returns, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. As a result, we face increased supervisory scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines.
Increases in reserve, compulsory deposit and minimum capital requirements may have a material adverse effect on us.
The Brazilian Central Bank has periodically changed the level of reserves and compulsory deposits that financial institutions in Brazil are required to maintain with the Brazilian Central Bank,, as well as determined compulsory allocation requirements to finance government programs. The Brazilian Central Bankprograms, with these changes continuing to be a potential area of risk as they may increase the reserve and compulsory deposit or allocation requirements in the future or impose new requirements. Increases in reserve and compulsory deposit or allocation requirements, which as a result could reduce our liquidity to fund our loan portfolio and other investments and, as a result, may have a material adverse effect on us.
Compulsory deposits and allocations generally do not yield the same return as other investments and deposits because a portion of compulsory deposits and allocations:
| · | do not bear interest; |
| · | must be held in Brazilian federal government securities; and |
| · | must be used to finance government programs, including a federal housing program and rural sector subsidies. |
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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
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given that the Basel III rules will be adopted, enforced or interpreted in a manner that will not have an adverse effect on us. Furthermore, in January 2017, the CMN issued a new rule by means of which the Brazilian Central Bank established the terms for segmentation for financial institutions, financial institution groups, and other institutions authorized to operate by the Brazilian Central Bank for proportional application of the prudential regulation, considering the size, international activity and risk profile of members of each segment. In February 2017, the Brazilian Central Bank published the initial categorization of financial institutions in the different segments according to the terms set forth in the new resolution. We have been categorized by the Brazilian Central Bank in segment 1, the highest level for application of regulation for banks in Brazil.
For more information on the rules implementing Basel III, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Capital Adequacy and Leverage—Basel” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Management.”
We may not be able to detect or prevent money laundering and other criminal activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.
We are required to comply with applicable anti-money laundering, 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 detailing what is required from those responsible. We are also required to conduct AML training for our employees and to report suspicious transactions and activity to appropriate law enforcement following full investigation by the Special Incidents area.
Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML, anti-bribery, and corruptionanti-corruption and sanctions laws and regulations are increasingly complex and detailed. The Basel Committee is now introducing guidelines to strengthen the interaction and cooperation between prudential and AML/CFT supervisors. Compliance with these laws and regulations requires automated systems, sophisticated monitoring and skilled compliance personnel. 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, 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.
Additionally, in 2015 and in early 2016, pursuant to a new resolution issued by the United Nations Security Council, as well as a recently enacted law and regulations issued by the Brazilian Central Bank for the implementation of the aforementioned resolution in Brazil, additional compliance requirements were imposed on us and other financial institutions operating in Brazil, which relate to the local
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enforcement of sanctions imposed by the United Nations Security Council resulting from certain resolutions. We believe we already have the control and compliance procedures in place to satisfy such additional compliance requirements. However, we continue to evaluate their impact on our control and compliance procedures and whether adjustments will need to be made to our control and compliance procedures as a result.
If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of licenses.
The reputational damage to our business and global brand would be severe if we were found to have breached AML, anti-bribery, and corruptionanti-corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ data and bank products and services from being accessed or used for illegal or improper purposes.
The Brazilian Federal Public Prosecutor’s Office, or “MPF,” has charged one of our officers in connection with the alleged bribery of a Brazilian tax auditor to secure favorable decisions in tax cases resulting in a claimed R$83 million (approximately U.S.$25 million) benefit to us. On October 23, 2018, the officer was formally indicted and asked to present his defense. On November 5, 2018 the officer in question presented his defense. The proceedings is currently in course. We are not a party to these proceedings. We have voluntarily provided information to the Brazilian authorities and have relinquished the benefit of certain tax credits to which the allegations relate in order to show good faith.
In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree we rely upon our relevant counterparties to a large degree to maintain and properlyappropriately apply their own appropriate compliance measures, procedures and internal policies. Such measures procedures and internal policies may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (or our relevant counterparties’) knowledge. If we are associated with, or even accused of 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 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.
As data privacy risks for banking organizations and the broader financial system have significantly increased in recent years, data privacy issues have become the subject of increasing legislative and regulatory focus.
On May 25, 2018, the Regulation (EU) 2016/279 of the European Parliament and of the Council of April 27, 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/no. 13,709/2018), or “GDPA”“LGPD,” was approved in the Federal Official Gazette on August 14, 2018 and, as amended by the Provisional Measure No. 869, issued in December 2018 by the President of Brazil,Law no. 13,853/2019, will take effect in August 2020. Law no. 13,853/2019 also set up the National Data Protection Authority for purposes of monitoring, implementing and supervising compliance with the LGPD in Brazil. The 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.
Although a number of basic existing principles have remained the same, the GDPR has introduced extensive new obligations on data controllers and rights for data subjects, including, among others: (1) accountability and transparency requirements, which require data controllerssubjects. The LGPD applies 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. The GDPA 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.
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 highesthigher 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%) 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-compliance 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.
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, and we cannot state with confidenceaccurately what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. The amount of our reserves in respect ofto these matters is substantially less than the total amount of the claims asserted against us, and, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particularhighly uncertain matter may bebecome material to our operating results. As of December 31, 2019, we had provisions for taxes, other legal contingencies and other provisions for R$11,366 million. See more information in note 23 to our audited consolidated financial statements included in this annual report.
Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.
Disclosure controls and procedures, including internal controls over financial reporting, are designed to provide reasonable assurance that information required to be disclosed by the company in reports filed or submitted under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.
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forms.
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 taxing authorities. We are subject to the income tax laws of Brazil. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, leading to disputes, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material adverse effect on us. The interpretations of Brazilian taxing authorities are unpredictable and frequently involve litigation, which introduces further uncertainty and risk as to tax expense.
Changes in taxes and other fiscal assessments may adversely affect us.
The Brazilian government regularly enacts reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in tax rates and, occasionally, enactment of temporary levies, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business. Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing credit portfolio.
Changes in tax policy, including the creation of new taxes, may occur with relative frequency and such changes could have an adverse effect on our financial position or operating results. For example, in 2011, the Brazilian government established the Tax on Financial Transactions (the “IOF Tax”). It applied at a rate of 1.0% per day on the notional value of increased foreign exchange exposure, but has currently reduced the rate to zero with respect to foreign exchange. The IOF Tax rates applicable to local loans to individuals and legal entities have been frequently adjusted (both increases and decreases) in recent years. The currently applicable IOF Tax rates applicable to local loans are approximately 1.5% for legal entities and 3.0% for individuals, but could change in the future. We cannot estimate the impact that a change in tax laws or tax policy could have on our operations. For example, the IOF Tax is a tool used by the Brazilian government to regulate economic activity, which does not directly impact our results of operations, though changes in the IOF Tax can impact our business volumes generally.
Also, the Brazilian Congress may discuss broad tax reforms in Brazil to improve the efficiency of allocation of the economic resources, as proposed by the executive branch of the Brazilian federal government. Major tax reforms in Brazil have been discussed over the last few years. We cannot predict if tax reforms will be implemented in the future. The effects of these changes, if enacted, and any other changes that could result from the enactment of additional tax reforms, cannot be quantified.
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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 impacted our results of operations and could do so in the future. In particular,as the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future (the credit quality of which may turn out to be worse than we had anticipated), or other factors, including factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Brazil and globally. If we were unable to control the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.
Our provisions for impairment losses are based on our current assessment, of andas well as expectations, concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates, and the legal and regulatory environment. BecauseAs many of these factors are beyond our control and there is no preciseinfallible method for predicting loan and credit losses, we cannot assure you that our current or future provisions for impairment losses will be sufficient to cover actual losses. If our assessment of and expectations concerning the abovementioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, or if the future actual losses exceed our estimates of incurredexpected losses, we may be required to increase our provisions for impairment losses, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.
Economic uncertainty may lead to a contraction in our loan portfolio.
The recent slow growth rate of the Brazilian economy in 2019, 2018 and 2017 and recession in 2016, a slowdown in the growth of customer demand, an increase in market competition, changes in governmental regulation, and an increasea decrease of the SELIC rate in 2016since 2017 have adversely affected the rate of growth of our loan portfolio in recent years. Ongoing economic uncertainty could adversely affect the liquidity, businesses and financial condition of our customers, as well as lead to a general decline in consumer spending, a rise in unemployment and an increase in household indebtedness. All of this could lead to a decrease in demand for borrowings in general, which could have a material adverse effect on our business.
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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 to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific
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factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. Continued constraintsConstraints in the supply of liquidity, including in interbank lending, has affected and maycan materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations, our growth potential and our ability to fulfill regulatory liquidity requirements, as well as limit growth possibilities.requirements.
Our cost of obtaining funds is directly related to prevailing interest rates and to our credit spreads. Increasesspreads, with increases in interest rates and our credit spreads can significantly increasethese factors increasing the cost of our funding. Changes in our credit spreadsCredit spread variations are market-driven and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.
Disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us. If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.
We rely and will continue to rely, primarily on commercialretail deposits as our main source of funding. As of December 31, 2018,2019, 80.6% of our customer deposits had remaining maturities of one year or less, or were payable on demand, while 31.6% of our assets have maturities of one year or more, resulting in a mismatch between the maturities of liabilities and the maturities of assets. The ongoing availability of this type of funding is sensitive to a variety of factors 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 have taken extraordinary measures to increase liquidity in the financial markets as a response to the financial crisis. If current facilities were rapidly removed or significantly reduced, this could have a material adverse effect on our ability to access liquidity and on our funding costs.
Our ability to manage our funding base may also be affected by changes to the regulation on compulsory reserve requirements in Brazil. For more information on the rules on compulsory reserve requirements, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Compulsory Reserve Requirements.”
We cannot assure 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. AtThe observations in this disclosure (exercise with daily balances for October, November and December 31, 2018, our2019) the institution had a LCR ratio was 131%of 126.7%, 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 such that banks maintain a stable funding profile in relation to their activities. The NSFR, which must remain at a minimum of 100% beginning from October 1, 2018 according to CMN rules, stands at over 117.3%112.3% for us as of December 31, 2018.2019.
Our cost of funding is affected by our credit ratings, and any risks may have an adverse effect on our credit ratings and our cost of funds.both variables. Any downgrade in (i) the rating of Brazil’s, (ii) our controlling shareholder’s,shareholders, or (iii) our credit rating would likely increase our cost of funding, requiring us to post additional collateral under some of our derivative and other contracts and adversely affect our interest margins and results of operations.operations results.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our long-term debt are based on a number of factors, including our financial strength, conditions that generally affect the financial services industry and the economic environment in which we operate. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Brazilian sovereign debt and the rating of our controlling shareholders. If Brazil’s sovereign debt or the debt of our controlling shareholder iswere downgraded, our credit rating would also likely be downgraded similarly.to a similar degree.
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Any downgrade in Brazil’s sovereign credit ratings, those of our controlling shareholder, or in our ratings, would likely increase our borrowing costs. For example, a ratings downgrade could adversely affect our ability to sell or market certainsome of our products, such as subordinated securities, engage in certain longer-term and derivatives transactions, and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts and other financial commitments, we may be required to maintain a minimum credit rating or terminaterisk termination of such contracts or require the posting of collateral. Any of these results of a ratings downgrade could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.
While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and 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 stable outlook by Standard & Poor’s Ratings Services, or “S&P”&P,” and A- with a stable outlook by Fitch Ratings Ltd., or “Fitch”. In February 2017, S&P revised the outlook from stable to positive, reflecting the revised funding plans announced by Santander Spain, which give S&P comfort that Santander Spain will build a substantial additional loss-absorbing capacity buffer over the next two years. In June 2017, S&P revised the outlook from positive to stable as a result of the risks associated with the acquisition of Banco Popular Español, S.A. by Santander Spain. Following the upgrade of the Spanish sovereign rating, in April 2018 S&P and Moody’s upgraded their ratings of Santander Spain from A- to A and from A3 to A2, respectively, and in July 2018 Fitch confirmed its rating and outlook.
Santander UK’s long-term debt is currently rated investment grade by the major rating agencies: Aa3 with a positive outlook by Moody’s, A with a stable outlook by S&P and A+ with a stable outlook by Fitch.
Banco Santander (Brasil)’sBrasil’s long-term debt in foreign currency is currently rated BB- with a stable outlook by S&P and Ba1Ba3 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’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. 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
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May 2017 it affirmed the rating at Ba3. On September 10, 2015, S&P lowered our credit rating from BBB- to BB+ (a non-investment gradenon-investment-grade rating), lowering it again on February 17, 2016 to BB and maintaining the rating at BB in August 2017 while changing the outlook to negative. In January 2018, Santander Brasil was downgraded by S&P to BB- with a stable outlook from BB with a negative outlook. In February 2019, Santander Brasil was upgraded by S&P to Ba1BB- with a stable outlook from BBBB- with a negative outlook. We are currently rated as follows: BB-Ba1 by S&P and Ba3 by Moody’s, both with a stable outlook. Any further downgrade in our long-term debt in foreign currency would likely increase our funding costs and adversely affect our interest margins and results of operations.
We cannot assure that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies that have a negative outlook with respect to us or our controlling shareholder, there can be no assurances that such agencies will revise such outlooks upward. Our failure to maintain favorable ratings and outlooks would likely increase our cost of funding and adversely affect our interest margins and results of operations.
The effectiveness of our credit risk management is affected by the quality and scope of information available in Brazil.
In assessing customers’ creditworthiness, we rely largely on the credit information available from our own internal databases, certain publicly available customer credit information, information relating to credit contracted, which is provided by the Brazilian Central Bank and other sources. Due to limitations in the availability of information and the developing information infrastructure in Brazil, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information. In addition, we cannot assure 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.
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
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addition, if we conclude that our reserves and future premiums are insufficient to cover future policy benefits and claims, we will be required to increase our reserves and record these effects in our financial statements, which may have a material adverse effect on us.
Social and environmental risks may have a material adverse effect on us.
As part of the risk analysis we undertake with respect to our customers, we take into account environmental factors (such as soil and water contamination, vegetation suppression, or lack of environmental authorizations) as well as social factors (such as the existence of working conditions akin to slavery). Any failure by us to identify and accurately assess these factors and the potential risks to us before entering into proposed transactions with our customers may result in damage to our image and reputation, as well as have a material adverse effect on our business, results of operations and financial condition.
The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.
The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including, among others, macroeconomic factors globally and in Brazil, as well asforce majeure events. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.
We may face significant challenges in possessing and realizing value from collateral with respect to loans in default.
If all resources applied to recover of secured loans in default through extrajudicial measures are not sufficient, we may enforce the collateral through the courts or extrajudicial measures. However, we may face delays on the realization of value from the collateral due to juridical measures foreseen by Brazilian law such as challenge in the courts, ranking of preferred creditors. As a result, our financial results may be potentially affect by the inability to realize the value of the collateral, in full or at all or, by delay in realizing such collateral
We are subject to market, operational and other related risks associated with our derivative transactions and our investment positions that could have a material adverse effect on us.
We enter into derivative transactions for trading purposes, as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral). We also hold securities in our own portfolio as part of our investment and hedging strategies.
Financial instruments, including derivative instruments and securities represented 87.4%86.7% of our total assets as of December 31, 2018.2019. Any realized or unrealized future gains or losses from these investments or hedging strategies could have a significant impact on our income. These gains and losses,
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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
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financial condition. In addition, any decrease in the value of these securities and derivatives portfolios may result in a decrease in our capital ratios, which could impair our ability to engage in lending activity at the levels we currently anticipate.
The execution and performance of these transactions depend on our ability to maintain adequate control and administration systems. Our ability to adequately monitor, analyze and report derivative transactions continues to depend, largely, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.
We may not effectively manage risks associated with the replacement of benchmark indices.
Interest rate, equity, foreign exchange rate and other types of indices, which are deemed to be “benchmarks” are the subject of increased regulatory scrutiny. For example, regarding the interest rate benchmarks, in 2017, the UK’s Financial Conduct Authority, or the “FCA”,“FCA,” announced that it will no longer persuade or compel banks to submit rates for the calculation of the London interbank offered rate, or “LIBOR”,“LIBOR,” benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Therefore, after 2021 LIBOR may cease to be produced. The Bank of England and it appears likelythe FCA are working with market participants to catalyze a transition to using Sonia. In addition, the European Money Market Institute (“EMMI”) announced the discontinuation of the Euro OverNight Index Average, or “EONIA,” after January 3, 2022 and that LIBORfrom October 2, 2019 until its total discontinuation it will be discontinuedreplaced by the euro short-term rate, or modified by 2021. This“€STR,”) plus a spread of 8.5 basis points. These and other reforms may cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated, which introduces a number of risks for us 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 that the revenues of products linked to LIBOR (in particular those indices that will be replaced) decrease; (iv) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments,instruments; (v) operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes,processes; and (vi) conduct risks arising from the potential impact of communication with customers and engagement during the transition period. The replacement benchmarks and their transition path have been defined, but the 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.
Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.
The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems.systems, among others. We employ a broad and diversified set of risk monitoring and risk mitigation techniques, which may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we may fail to identify or anticipate.
We use certain qualitative tools and metrics for managing market risk, including our use of value at risk, or “VaR,” and statistical modeling tools, which are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be
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significantly greater than the historical measures indicate. In addition, our quantified modeling does not
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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. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human or IT systems errors. In exercising their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.
Some of the models and other analytical and judgment-based estimations we use in managing risks are subject to review by, and require the approval of, our regulators. If 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, and cyber-attacks causing systems degradation or service unavailability that may result in business losses.
We may not be able to successfully protect our information technology systems and platforms against such threats. We have seen in recent years computer systems of companies and organizations being targeted, not only by cyber criminals, but also by activists and rogue states. We have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of our information technology systems used to service our customers.
If we fall victim to successful cyber-attacks or experience cybersecurity incidents in the future, we
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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, the CMN issued regulationSee “Item 4B—Business Overview—Regulation and Supervision—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, regulatory penalties and fines and/or through the loss of assets. Furthermore, upon a failure to comply with applicable law and regulation, we may be ordered to change our business practices, policies or systems in a manner that adversely impacts our operating results.
In addition, we may also be subject to cyber-attacks against critical infrastructures of Brazil. Our information technology systems are dependent on such critical infrastructure, and any cyber-attack against such critical infrastructure could negatively affect our ability to service our customers. As we do not operate such critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack. See “Item 4. Information on the Company—B. Business Overview.”
It is important to highlight that even when a failure of or interruption in our systems or facilities is resolved timely resolved 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.
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%0.9% of our loan portfolio is allocated to our largest debtor and 8.3%6.9% to our next 10 largest debtors.
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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.
41 We face risks related to market concentration.
Concentration risk is an essential factor in the management of Contentscredit risk and is therefore monitored continuously. Aspects such as the economic sector, concentration of risk in certain groups of customers and products, are assessed monthly as part of the Risk Appetite exercise. This risk arises from the imperfect diversification of credit portfolios, which may derive from “name concentration” (incomplete diversification of the borrower's idiosyncratic risk) and “concentration sector ”(existence of multiple systematic risk factors, generally related to sectors of the economy, but also has other sources as origin, such as geographic location or factors macroeconomic conditions).
We acknowledge that any excessive concentration of risk could have a material adverse effect on us if the relevant risk materializes and generates a substantial financial loss.
The financial problems faced by our customers could adversely affect us.
Market turmoil and economic recession could materially and adversely affect the liquidity, credit ratings, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets, and result in decreased demand for borrowings in general. We have credit exposure to borrowers which have entered or may shortly enter into bankruptcy or similar proceedings. We may experience material losses from this exposure.
In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on us.
We engage in transactions with related parties that others may not consider to be on an arm’s- length basis.
We and our affiliates have entered into a number of services agreements pursuant to which we render and/or receive services, such as administrative, accounting, finance, treasury, legal services and others from (or provide such services to) related parties. We are likely to continue to engage in transactions with such related parties (including our controlling shareholder) that others may not consider to be on an arm’s-length basis. Future conflicts of interests may arise between us and any of our affiliates, or among our affiliates, may arise, which conflicts may not be resolved in our favor. See “Item 7. Major Shareholders and Related Party Transactions.”
Changes in accounting standards could impact reported earnings.
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates
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are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets provision, and pension obligation for liabilities.
If the judgment, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.
Our business is highly dependent on the proper functioning of information technology systems.
Our business is highly dependent on the ability of our information technology systems to accurately process a large number of transactions across numerous and diverse markets and products in a timely manner, and on our ability to rely on our digital technologies, computer and email services, software, and networks, as well as on the secure processing, storage and transmission of confidential data and other information in our computer systems and networks. The proper functioning of our financial control, risk management, accounting, customer service and other data processing systems is critical to our business and our ability to compete effectively.
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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 systems effectively or on a timely basis could materially and adversely affect us.
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 to safeguard personal information in our possession, unauthorized disclosures or security breaches could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our operating results, financial condition and prospects. Further, our business is exposed to risk from potential non-compliance with policies, employee misconduct, or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented such that the data we hold is incomplete, not recoverable or not securely stored. In addition, we may be required to report events related to information security issues (including any cyber security issues), events where customer information may be compromised, unauthorized access and other security
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breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our customers with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us. In addition, if we cannot maintain an effective and secure electronic data and information management system or we fail to maintain complete physical and electronic records, this could result in regulatory sanctions and serious reputational and financial harm to us.
For additional information, see also “—We are subject to increasing scrutiny and regulation from data protection laws, including penalties in the event of noncompliance with the terms and conditions of certain new European and Brazilian regulations” and “—Failure to adequately protect ourselves against risks relating to cybersecurity could materially and adversely affect us. We are also subject to increasing scrutiny and regulation governing cybersecurity risks.”
Damage to our reputation could cause harm to us.
Maintaining a positive reputation is critical to protect our brand, attract and retain customers, investors and employees and conduct business transactions with counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, including the possibility of fraud perpetrated by our employees, litigation or regulatory 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 and counterparties.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 clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.
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 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:
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| · | manage efficiently the operations and employees of expanding businesses; |
| · | maintain or grow our existing customer base; |
| · | assess the value, strengths and weaknesses of investment or acquisition candidates, including local regulation that can reduce or eliminate expected synergies; |
| · | finance and integrate strategic investments or acquisitions; |
| · | align our current information technology systems adequately with those of an enlarged group; |
| · | apply our risk management policy effectively to an enlarged group; and |
| · | manage a growing number of entities without over-committing management or losing key personnel. |
Any failure to manage growth effectively could have a material adverse effect on our operating results, financial condition and prospects.
In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.
Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, could have a material adverse effect on us.
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Goodwill impairments may be required in relation to acquired businesses.
We have made business acquisitions in the past and may make further acquisitions in the future. It is possible that the goodwill which has been attributed, or may be attributed, to these businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in their underlying profitability, asset quality and other relevant matters. Impairment testing in respect of goodwill is performed annually, or more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. Goodwill impairment does not, however, affect our regulatory capital. There can be no assurances that we will not have to write down the value attributed to goodwill in the future, which would adversely affect our results and net assets.
We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.
Our continued success depends in part on the continued service of key members of our senior executive team and other key employees. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of our strategy. The successful implementation of our strategy and culture depends on the availability of skilled and appropriate management, both at our head office and in each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately, or loses one or more of its key senior executives or other key employees and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.
In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.
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We rely on third parties and affiliates for important products and services.
Third-party vendors and certain affiliated companies provide key components of our business infrastructure such as loan and deposit servicing systems, back office and business process support, information technology production and support, internet connections, and network access. Relying on these third parties and affiliated companies can be a source of operational and regulatory risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting the vendors and other parties that interact with these service providers. As our interconnectivity with these third parties and affiliated companies increases, we face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs. In addition, certain problems caused by these third parties or affiliated companies could affect our ability to deliver products and services to customers. Replacing these third-party vendors could also entail delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure such arrangements. Restructurings could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, operations and financial condition.
Risks Relating to Our Controlling Shareholder, Our Units and American Depositary Receipts (ADRs)
Our ultimate controlling shareholder has a great deal of influence over our business and its interests could conflict with ours.
Santander Spain, our ultimate controlling shareholder, currently owns, directly and indirectly, approximately 89.5% of our total capital (not including the shares held by Banco Madesant – Sociedade Unipessoal). Due to its share ownership, our controlling shareholder has the power to control us and our subsidiaries, including the power to:
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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 company and subsidiaries; |
| · | influence the appointment of our principal officers; |
| · | declare the payment of any dividends; |
| · | agree to sell or otherwise transfer its controlling stake in our company; and |
| · | determine the outcome of substantially all actions requiring shareholder approval, including amendments of our 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
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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”, limiting the protections afforded to investors.
We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (i) a majority of the board of directors consists of independent directors, (ii) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (iii) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, and (iv) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Although we have similar practices, they do not entirely conform to the NYSE requirements,requirements; therefore, we currently use these exemptions and intend to continue using them. Accordingly, you will not have the same protections affordedprovided to shareholders of companies that are subject to all NYSE corporate governance requirements.
The liquidity and market prices of the units and the ADRs may be adversely affected by the cancelationcancellation of units or substantial sale of units and shares in the market.
Holders of units may present these units or some of these units for cancellation in Brazil in exchange for the common shares and preferred shares underlying these units. If unit holders present a significant number of units for cancellation in exchange for the underlying common shares and preferred shares, the liquidity and price of the units and ADRs may be materially and adversely affected.
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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, 2018,2019, the aggregate market capitalization of the B3 was equivalent to approximately R$3.2 4.8 trillion (U.S.$820.7 billion)1.2 trillion), and the top ten stocks in terms of trading volume accounted for approximately 54.3%36% of all shares traded on B3 in the year ended December 31, 2018.2019. In contrast, as of December 31, 2018,2019, the aggregate market capitalization of the NYSE was approximately U.S.$25.8 24.1 trillion. Although any of the outstanding shares of a listed company may trade on the B3, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, government entities or a principal shareholder. The relative volatility and limited liquidity of the Brazilian securities markets may substantially limit your ability to sell the units or ADRs at the time and price you desire and, as a result, could negatively impact the market price of these securities.
If securities analysts do not publish research or reports about our business or if they downgrade our ADRs or 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
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analysts. Furthermore, if one or more of the analysts who cover us downgrade our ADRs, our shares or our industry, change their views regarding the shares of any of our competitors, or other companies in our sector, or publish inaccurate or unfavorable research about our business, the market price of our ADRs and/or shares could decline. If one or more of these analysts ceases coverage of usstops providing reports or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our ADR and/or share price or trading volume to decline.
The economic value of your investment may be diluted.
We may, from time to time, need additional funds and we may issue additional units or shares. Any additional funds obtained by such a capital increase may dilute your interest in our company.
Discontinuation of the current corporate governance practices may negatively affect the price of our ADRs and units.
After completion of the voluntary exchange offers by Santander Spain in Brazil and in the United States (respectively, the “Brazilian Exchange Offer” and the “U.S. Exchange Offer”) for the acquisition of up to the totalityall of our shares that were not held by the Santander Group at that time, we are no longer subject to the obligations of the special listing segment of B3 known as Corporate Governance Level 2 (the “Level 2 Segment”). Currently, we voluntarily comply with certain of the corporate governance requirements for companies listed on the Level 2 Segment.
Discontinuation, in whole or in part, of our existing corporate governance practices or minimum protections may adversely affect your rights as a security holder and may result in a decrease of the price of our shares, units and ADRs.
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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 availability. We paid R$5.310.8 billion, R$6.6 billion and R$6.3 billion (R$2.90, R$1.77 and R$6.6 billion (R$1.40, R$1.68 and R$1.77 per unit, respectively) as dividends and interest on stockholders’ equity (considering gross value) in 2016,2019, 2018 and 2017, and 2018, respectively, in accordance with our dividend policy, but there can be no assurance that dividends and interest on stockholders’ equity will be paid in the future. We are also subject to Brazilian banking regulations that may limit the payment of dividends or interest on stockholders’ equity. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—History of Payment of Dividends and Interest Attributable to Stockholders’ Equity.”
Holders of ADRs may find it difficult to exercise voting rights at our stockholders’ meetings.
Holders of ADRs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our By-Laws and Brazilian Corporate Law. Holders of ADRs may exercise voting rights with respect to the units represented by ADRs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADR holders. For example, we are required to publish a notice of our 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
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exercise their voting rights, holders of ADRs must instruct the ADR depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of ADRs than for holders of our units or shares. If the ADR depositary fails to receive timely voting instructions for all or part of the ADRs, the depositary will assume that the holders of those ADRs are instructing it to give a discretionary proxy to a person designated by us to vote their ADRs, except in limited circumstances.
Holders of ADRs also may not receive the voting materials in time to instruct the depositary to vote the units underlying their ADRs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADRs or for the manner of carrying out those voting instructions. Accordingly, holders of ADRs may not be able to exercise voting rights, and they will have little, if any, recourse if the units underlying their ADRs are not voted as requested.
Holders of ADRs could be subject to Brazilian income tax on capital gains from sales of ADRs.
Law 10,833 of December 29, 2003 provides that the disposal of assets located in Brazil by a 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 10,833 of December 29, 2003 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADRs between non-residents of Brazil. However, in the event that the disposition of assets is interpreted to include a disposition of our ADRs, this tax law would accordingly impose withholding taxes on the disposition of our ADRs by a 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.
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
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of process in the United States or to the jurisdiction of any U.S. court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.
Judgments of Brazilian courts with respect to our units or ADRs will be payable only in reais.
Our By-Laws provide that we, our shareholders, our directors and officers and the members of our fiscal council shall submit to arbitration any and all disputes or controversies that may arise amongst ourselves relating to, or originating from, the application, validity, effectiveness, interpretation, violations and effects of violations of the provisions of Brazilian Corporate Law, our By-Laws, the rules and regulations of the CMN, the Brazilian Central 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 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.
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ITEM 4. INFORMATION ON THE COMPANY
4A. History and Development of the Company
| 4A. | History and Development of the Company |
General
We are a publicly held corporation (sociedade anônima) of indefinite term, incorporated under Brazilian law on August 9, 1985. Documentation of our incorporation is duly registered with the Commercial Registry of the State of São Paulo (Junta Comercial do Estado de São Paulo or JUCESP)“JUCESP”), under NIRE (Registry Number) 35300332067. Our corporate name is Banco Santander (Brasil) S.A. and our commercial name is Banco Santander. Our headquarters are located in Brazil, in the city of São Paulo, state of São Paulo, at Avenida Presidente Juscelino Kubitschek, 2,041 and 2,235, Bloco A, Vila Olímpia, 04543-011. Our telephone number is 55-11-3553-3300. Our55-11-3553-3300 and the 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
The following figure summarizesWe are currently the key milestonesthird-largest privately owned bank in Brazil and the only international bank with scale in the country. With high value added offers, we operate in both retail and wholesale segments, which allows us to meet the needs of individuals, small and medium enterprises, and large corporate customers.
We are part of Santander Group, a Spanish bank founded in 1857 that has expanded globally through numerous acquisitions. We believe that this give us an advantage over our competitors. Although, under the Santander Group’s business model each major unit is autonomous and required to be self-sufficient in terms of capital and liquidity, our relationship allows us to:
| · | access the Santander Group’s global operations, providing operational synergies with the Santander Group and enhancing our ability to provide global products and services to our customers while reducing technology development costs; |
| · | provide our customers with the benefits of a strong presence in certain markets, predominantly in Latin America and Western Europe; |
| · | take advantage of best practices, with regards to products, services, internal controls and risk management, already implemented in other countries; and |
| · | develop our employees’ skills through local and international training and development, as well as by allow them to gain international experience in other offices of the Santander Group. |
Our history in Brazil.the Brazilian banking industry goes back to the 1970’s as summarized in the following figure:
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The
Santander Group was founded in Spain in 1857 and has expanded globally through a number of acquisitions and the integration of acquired businesses.Brasil Timeline
In 1957, the Santander Group first entered the Brazilian market for the first time through an operating agreement with Banco Intercontinental do Brasil S.A. Since the 1990s, the Santander Group has sought to establish its presence in Latin America, particularly in Brazil. In 1970, the Santander Group opened a representative office in Brazil, followed by its first branch in 1982. We have continuedThe foundation of Santander Brasil was in 1985 through an acquisition of a local bank.
In the 1990s, the Santander Group has sought to pursue this strategy throughestablish its presence in Latin America, particularly in Brazil, by capitalizing on organic growth, as well as acquisitions, among whichpursuing an acquisition strategy, including the following most notable are the following:acquisitions:
| · | In November 2000, the Santander Group acquired Banespa, a bank owned by the State of São Paulo, |
| · | On July 24, 2008, Santander Spain took an indirect share control of Banco Real, which it then absorbed into the Santander Group in order to further consolidate its investments in Brazil. On August 29, 2008, the acquisition |
Since October 7, 2009, our units, and common and preferred shares have been listed and traded on B3 under the B3tickers “SANB11”, “SANB3” and “SANB4”, respectively, while our ADRs representing American Depositary Shares or(or “ADSs”) have been registered with the SEC under the Securities Act have beenand are listed and traded on the NYSE.NYSE under the ticker “BSBR”. For further information, see “Item 9. The Offer and Listing—A. Offering and Listing Details.”
In recent years, we have acquired companies complementary to our business, such as: (i) Getnet Adquirência e Serviços para Meios de Pagamento S.A., 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 the development of our business. For further information, please refer to Note 3 Basis of consolidation of IFRS Financial Statements to our consolidated financial statements included in “Item 18. Financial Statements” of this annual report.
Sale of equity stake in Super Pagamentos e Administração de Meios Eletrônicos S.A.
On December 12, 2014,February 28, 2020, we through Aymoré CFI, acquired shares issuedsold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Super Pagamentos e Administração de Meios Eletrônicos S.A., or “Super”, representing 50% (“Superdigital”). We received consideration of Super’s total and voting capital. Super isR$270 million for our interest in Superdigital. As a Brazilian digital service provider that offers online payment accounts, prepaid cards and access to simplified financial services.result, we are no longer a shareholder of Superdigital.
Put option of the remaining equity interest in Banco Olé Consignado S.A. against Aymoré Crédito, Financiamento e Investimento S.A.
On January 4, 2016,March 14, 2019, the minority shareholder of Banco Olé formalized its interest in exercising the put option right provided in the Investment Agreement executed with Aymoré CFI, informed the sellers ofon July 30, 2014, to sell its decision40% equity interest in Banco Olé to exercise the call option for the shares representing the remaining 50% of Super’s total voting capital owned by the sellers, for a value of approximately R$113 million. The transaction was completed on March 10, 2016, following receipt of approval from the Brazilian Central Bank.
Financial Cooperation and Joint Venture with Banque PSA Finance
On July 24, 2015, and in furtherance of the partnership in Europe between Banque PSA Finance, or “Banque PSA”, and Santander Consumer Finance for the joint operation 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 distributors of PSA brands in Brazil.
After the fulfilment of the applicable conditions precedent, which included obtaining the appropriate regulatory authorizations, the joint venture began its operations on August 1, 2016.
The principal entity under which 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., ana controlled entity of the PSA group dedicated to the distribution of insurance products in Brazil.
The joint venture adds the network of PSA Group’s distributors in Brazil to the distribution channels of Santander Brasil for the offering of financial and insurance products, especially in the vehicle-financing sector.Brasil.
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On January31, 2020, Santander Brasil and the shareholders of Bosan Participações S.A. (holding company whose single asset are the shares representing 40% of the corporate capital of Banco Olé) have entered into the definitive agreements and performed the closing acts related to the purchase and sale of all shares issued by Bosan, upon transferring Bosan’s shares to Santander Brasil and the payment to the sellers of the total price of R$1,608,772,783,47. As a result, Santander Brasil became, directly and indirectly, the holder of all shares issued by Banco Olé.
Establishment of Credit Intelligence Bureau
On January 20, 2016, we entered into a non-binding memorandum of understanding with Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A., for creation of a credit 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. have a 20% ownership stake in the corporation.
The purpose of the CIB is to develop a database that, in conformity with applicable laws, will collect, reconcile and handle the credit information of registered individuals and legal entities that register with the CIB andwho expressly authorize the inclusion of their credit information on the CIB’s database. We believe this initiative will lead to an increased degree of efficiency and improvement of our credit management activities, and will also facilitate the disbursement of long- and medium-term lines of credit to participants in the Brazilian Financial System and to other corporate entities.
On April 14, 2017, the definitive documents were signed by the shareholders. The necessary regulatory authorizations, including by the Brazilian Central Bank and the CADE, have already been granted. We estimate that theThe CIB will becomebecame fully operational in 2019.
Joint Venture with Hyundai Capital Services, Inc.
On April 28, 2016, our wholly-owned subsidiary Aymoré CFI entered into a joint venture with Hyundai Capital Services, Inc., or “Hyundai 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 finance and insurance brokerage services and products to consumers through the Hyundai dealerships in Brazil.
Aymoré CFI holds a 50% equity stake in Banco Hyundai Capital Brasil S.A., while Hyundai Capital holds the remaining 50% equity interest.
On February 21, 2019, the Brazilian Central Bank 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 subject to regulatory approval. We expect to receive this approval during the course ofwas incorporated on July 2, 2019 and began operating in November 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 customers as a result of their daily purchases.
Opening of the branch in Luxembourg
On June 9, 2017, we received authorization from the Brazilian Central Bank to establish a branch in Luxembourg, with capital 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 authorized by the Minister 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”), and Gestora de Investimentos Ipanema S.A., currently named Return Gestão de Recursos S.A. (“Return Asset” and, together with Return Credit Management, the “Return Entities”)
On October 16, 2017, Santander Brasil, through its wholly-owned subsidiary2019, Atual Companhia Securitizadora de Créditos Financeiros, acquired a direct equity interest inor “Atual,” informed the remaining shareholders of the Return Credit Management, and an indirect equity interest in Return Asset, correspondingEntities´ of its decision to 70%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.
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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 responsible for the management of credit funds in which the portfolios of the Return Entities’ customers are concentrated.
We intend to increase our recovery indicators with regards to non-performing loans by using the know-how 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.
Joint Venture with HDI Seguros
On December 20, 2017, we entered into binding agreements with HDI Seguros for the formation
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of a partnership through the creation of a new insurance company called Santander Auto S.A., or “Santander Auto”. Sancap Investimentos e Participações S.A., a company controlled by Santander Brasil, will hold 50% of the issued share capital of Santander Auto with the remaining 50% being held by HDI Seguros. Santander Auto will focus on offering motor insurance policies through a 100%fully digital platform. The transaction closed on October 9, 2018 when the documentation to form Santander Auto S.A. was executed. On January 11, 2019, SUSEP granted Santander Auto thewas granted regulatory authorization to operate.
Sale of BW Guirapá I S.A.
On December 22, 2017, our wholly-owned subsidiary Santander Corretora de Seguros, Investimentos e Serviços S.A., or “Santander Investimentos”, Cia. de Ferro Ligas da Bahia – FERBASA S.A., or “FERBASA” and Brazil Wind S.A., or “Brazil Wind” entered into an agreement for the sale of 100% of the shares issuedbegin operations by BW Guirapá I S.A., or “BW I” and owned by Santander Investimentos and Brazil Wind to FERBASA. 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 Investimentos was R$392 million (an additional payment of up to R$34.8 million may be due if certain future operational milestones set forth in the agreement are achieved). The CADE approved the transaction on January 17, 2018, and the transaction was completed on April 2, 2018.
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., or the Technology Companies, for a price of approximately R$61 million and R$43 million, respectively. The Technology Companies were indirectly controlled by Santander Spain. Additionally, on February 28, 2018, Isban Brasil S.A. was merged into Produban Serviços de Informática S.A. which, on the same date, had 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.SUSEP.
Creation of PI Distribuidora de Títulos e Valores Mobiliários S.A.
On May 3, 2018, our indirectly controlled subsidiary Santander Finance Arrendamento Mercantil S.A. was converted into a securities brokerage company and had its corporate name changed to SI Distribuidora de Títulos e Valores Mobiliários S.A. The conversion was approved by the Brazilian Central Bank on November 21, 2018.
On December 17, 2018, SI Distribuidora de Títulos e Valores Mobiliários S.A. changed its name to PI DTVM. The corporate name change was approved by the Brazilian Central Bank on January 22, 2019.
PI DTVM is a securities brokerage company, with an open digital platform, which will broaden the portfolio of financial products we are able to offer to our clients.
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Formation of BEN Beneficios
On June 11, 2018, we incorporated BEN Beneficios, an entity fully held by Santander Brasil, whose purpose is to create, supply and administer various types of vouchers and tickets used 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 estimate BEN Beneficios will begin operations duringbegan operating in the firstsecond quarter of 2019.
FormationAcquisition of Esfera Fidelidade S.A.residual equity stake in Getnet
On August 14,December 19, 2018, the minority shareholders of Getnet exercised their right to sell all of their shares to Santander Brasil, or the “Put Option”, pursuant to the Shares’ Purchase and Sale Agreement and Other Covenants executed between the parties on April 4, 2014, or “SPA”. On the exercise date of the Put Option, we incorporated Esfera Fidelidadeentered 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$1.431 billion. The acquisition transaction was approved by the Brazilian Central Bank on February 18, 2019 and the transaction closed on February 25, 2019. As a result Santander Brasil currently owns 100% of Getnet’s issued and outstanding share capital.
Sale of equity stake in CIBRASEC – Companhia Brasileira de Securitização
On July 24, 2019, we completed the sale to ISEC Securitizadora S.A. (“ISEC”) of our entire equity interest in CIBRASEC – Companhia Brasileira de Securitização (“Cibrasec”), an entity fully heldcorresponding to 4,000 common shares and 50 Class A preferred shares, representing in the aggregate approximately 9.72% of Cibrasec’s total capital stock. The transaction was effected pursuant to the Shares Purchase and Other Covenants Agreement executed on the same date by Santander Brasil, whose purpose is to developthe other shareholders of Cibrasec, ISEC and manage Santander Brasil’s customer loyalty programs. The company began operationsCibrasec, as intervening party. We received consideration of R$ 9.8 million for our interest in November 2018.Cibrasec. As a result, we are no longer a shareholder of Cibrasec.
Discontinuation of Projections Disclosure
On August 22, 2018,October 8, 2019, we informed the market that we have decided to cease disclosingdisclose projections (guidance), including with regardsrespect to certain of our delinquency ratio, efficiency ratio, statusindicators for the year of commissions, indicators regarding2022. While we believe that the projections, which we intend to disclose, are based on reasonable assumptions made by our basemanagement, such projections are nevertheless subject to significant uncertainties and matters outside of loyal customers andour control, including: the future average growth of our loan portfolio, return on equity indicators.(ROE), cost
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to income (end of term), the future average growth in the number of our active customers and ourProspera (microcredit) customers.
Buyback Program
On November 1, 2018,2019, our board of directors approved, in continuation of the buyback program set to expire on November 5, 2018,2019, a buyback program of units and ADRs issued by us, directly or through our branch in the Cayman Islands, to be held in treasury or subsequently sold. The buyback program will cover the acquisition of up to 37,753,76037,256,072 units or ADRs, representing a combination of 37,753,76037,256,072 common and 37,753,76037,256,072 preferred shares, corresponding to approximately 1% of our share capital. The term of the buyback program is up to 12 months beginning November 6, 2018,5, 2019, and expiring on November 5, 2019.4, 2020.
Issuance of Notes
On November 5, 2018, our board of directors approved the issuance, through our Cayman Islands branch, of debt instruments to form part of our Tier 1 and Tier 2 regulatory capital in the aggregate amount of U.S.$2.5 billion, pursuant to an offering made to non-U.S. Persons under Regulation S of the U.S. Securities Act of 1993, as amended, or the “Notes Offer”.
Our board of directors also approved the redemption of instruments issued to form part of our Tier 1 and Tier 2 regulatory capital, in accordance with the board resolution of January 14, 2014. The redemption were carried out with funds raised through the Notes Offer.
On December 18, 2018, the Brazilian Central Bank authorized the transactions contemplated in the Notes Offer and the redemption, which were completed on January 29, 2019.
Acquisition of residual equity stake in Getnet
On December 19, 2018, the minority shareholders of Getnet exercised their right to sell all of their shares to Santander Brasil, or the “Put Option”, pursuant to the Shares’ Purchase and Sale Agreement and Other Covenants executed between the parties on April 4, 2014, or “SPA”. On the exercise date of the 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$1.431 billion. The acquisition transaction was approved by the Brazilian Central Bank on February 18, 2019 and closing occurred on February 25, 2019. As a result of this transaction, Santander Brasil currently owns 100% of Getnet’s issued and outstanding share capital.
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 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. The closing of the transaction is conditioned to implementation of the proceedings set forth in the Investment Agreement.
Capital Expenditures and Divestitures
Our main capital expenditures include investments in our Information Technology (“IT”) platform. Our IT platform focuses on our customers and supports our business model. In 2019, 2018 2017 and 2016,2017, total investments in IT were R$1,5521,858 million, R$1,1321,276 million and R$8951,132 million, respectively.
In 2018, 2017 and 2016,2019, we continually improved our technology platform by means of investmentsrealized meaningful transformations in our operations and technologic infrastructure, through the implementation of various and modern solutions in the areas of Artificial Intelligence (Machine Learning, AIOPs), Micro Services, BPM, Block Chain, Cybernetic Insurance, Facial Recognition, MultiCloud, among others. The application of these new technologies allowed the renovation of our digital applications, core systemschannels for continually improve the experience of interaction between clients and infrastructure renewal. Over the last 18 months, we have adopted 97 new toolsbank, searching for offer services more and technologiesmore practical and intuitive, besides makes possible the launch of products all digital and innovative in severalthe areas ranging from business servicesof Credit, Consortium, Payments, Agribusiness, Investments, in a way to Antifraud, Cyber Security, AI (Artificial Intelligence), AI Ops (Artificial Intelligence for IT Operations)serve the demands and RPA (Robotic Process Automation).expectations of the modern client.
We have continued our migration towards cloud-based computingIn the physical service’s scope (Branch, PABs and PAEs), applying new functionalities, including: biometry for clients PJ in order to provide improved IT services management, flexibilitytransactions with card, purchase and cost optimization. For example,payment of exchange by digital treasure, administration of single line for a more efficient organization of the service and recognition of preferential clients in 2018 we made the Microsoft Office 365 platform available in cloud formattotem of branches, searching for more than 43,400 users, allowing greater collaboration between teams, increased productivity, simplified internal processessecurity, agility and improved mobility.service’s personalization. For further discussion regardingmore details about our technology infrastructure see “—of Technology, consult the item “ B. Business Overview—Overview - Technology and Infrastructure”.
Our ongoing capital expenditures consist primarily of investments in IT. We expect to fund our ongoing capital expenditures principally from our cash flow from operations.
Our major divestiture in the past three fiscal years and until the date of this annual report was the sale of BW I in 2017.
For more information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting the Comparability of Our Results of Operations and “—Important Events—Sale of BW Guirapá I S.A.”).
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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| 4B. | Business Overview |
Our Strategy
Our goalstrategy is to be the leading financial group in Brazil, by providing the best experience in retail and wholesale banking services to our customers and employees.
We believe that the best wayendeavor to grow in a profitable, recurring and sustainable manner is by providing excellent services with excellence and consistently strive to enhance customer satisfaction levels, expand our customer base and increase the loyalty of our customers.
To accomplish this goal, we have been deeply focused on understanding how the Brazilian market works to address its demands effectively. As a consequence of our initiatives, Santander Brasil has made substantial progress in all key business areas, highlighted by a remarkable ROE evolution in the last five years. We believe we have been able to redirect our efforts toward a customer-centric business model with efficiency and risk model accuracy.
We have sought to identify our different types of customers and their specific consumption needs. Based on that, we have adopted a strategy which relies on serving our customers wherever and whenever they want, through multi-channel (digital and/or physical) solutions that deliver a customized and innovative portfolio of services and products.
We endeavor to seize all the opportunities presented to us by our ecosystem in order to cross-sell and upsell our products and services. For example, our automotive-related ecosystem consisting of Santander Financiamentos, Webmotors and Olé Consignado, has been instrumental in attracting new customers to Santander Brasil. Moreover, we have invested in initiatives that we believe have growth potential, such BEN, Sim, emDia, Santander Auto and PI. We believe that continuing to cross-sell and upsell across our business and investing in initiatives, which we believe to be promising, are key pillars for us to attract new customers and retain existing ones.
Further evidence that we are on the right track is the fact that in 2019 we were recognized by Euromoney Awards for Excellence as the Best Bank in Brazil and the Best Bank in Latin America.
Below we outline the main initiatives we have taken during these last years:
• Net promoter score or NPS. We introduced the NPS as our main customer satisfaction metric in 2017 and in 2018, we were pioneers in disclosing this index to the market. After each interaction with Santander Brasil, our customers are asked randomly to rate their experience following the NPS methodology. Nowadays, we take into account our NPS with respect to our compensation (profit sharing) metrics, affecting virtually every department and position level at the organization, including the administrative and commercial departments. Additionally, and reinforcing our commitment to service excellence, we invited our senior management to become personally involved in enhancing customer satisfaction, by getting in touch with at least three detractors (unsatisfied customers) in order to understand and solve their problems and turn them into promoters (satisfied customers). We ended 2019 with an NPS of 56 points and we believe that this high level in satisfaction translates into an expansion of our loyal customer base.
• Operational excellence.With the goal of fine-tuning the customer journey and boosting efficiency, we have transformed several aspects of our operational model. First, we switched to an industrial approach, which means that we now have an end-to-end view of the customer experience, reducing manual activities and dispersion, as well as enhancing cost transparency. Additionally, this year we launched a new service model in large part of our low-income portfolio, where we have transformed five types of careers into a single business and service manager career, further optimizing our customer service at our branches, generating more business and delivering greater efficiency. With these changes, we have already obtained notable results, such as a decrease in the time needed for customers making them more loyal. Our actionsto finalize the purchase of certain products and an increase in the number of agreements issued.
• Digital strategy.We are in constant digital transformation to better serve our customers. We have implemented a collaborative work system in our organization based on establishing close and long-lasting relationshipsthe “Agile” methodology, commonly used in IT. This new approach consists of multidisciplinary teams, with customers, suppliers and shareholders. To accomplish that goal, our purpose is to help people and businesses prosper by being a Simple, Personal and Fair bank, guided by following strategic priorities:
In addition, we also strive to ensure that our banking activities contribute to 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.employees from
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Recent Business Developments
In recent years, our commercial banking segment has accounted for an increasingly large portion of our net interest incomebusiness and our net feetechnology areas, who are given autonomy to make decisions rapidly. Thanks to that, we have been able to offer products and commissions income, as demonstrated 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 much of the increase in net interest income and net fee and commission income generated by the commercial bank to our customer-centric business model,services, as well as add system updates through all our available channels quickly. These tools include: (i) providing a wide range of services across all channels according to customers' choices and/or needs; (ii) giving customers the ability to meet all their needs through digital channels; and (iii) integrating all service channels to ensure that customers have a homogeneous experience, regardless of the channel chosen.
• Optimization of commercial tools.We have simplified day-to-day operations of branch staff, so that they can spend more time meeting customer needs. As part of this initiative, we provided our employees with new features in our customer relationship tool (CRM) that centralizes all the information they need for their daily commercial and financial activities. We have also implemented time-saving tools, which reduce the amount of information and steps required to perform operational tasks.
• Greater empowerment and incentives for branch staff.We have sought to decentralize the management of branch resources. Branch managers are now responsible for managing the expenses of their branches, and each branch has its own results report. This gives branch employees and managers a higher sense of autonomy and responsibility, as well as the feeling of being part of their own branch's success. Additionally, we have made some adjustments to the improvementcompensation structure of branch employees and managers to ensure that the variable components of their compensation depend on the performance of the branch where they work.
• Culture strengthening. We believe that committed employees make the business sustainable. With that in customer experience and satisfaction. In this vein,mind, we have tailoredestablished clear and horizontal communication of senior management with employees, promoting meritocracy and diversity. In line with this practice, Santander Academy encourages our staff to assume a proactive role in their technical training and has been attended by 75% of total employees, who act as internal multipliers. As a result, in 2019, we were recognized for the fourth consecutive year as one of the Best Companies to Work for in Brazil, according to the GPTW (Great Place to Work) survey.
Finally, aligned with the Santander Group’s responsible growth strategy, Santander Brasil has made several public commitments to society, including: (i) having 30% of our leadership positions held by women by 2024 (today women account for 26% of leading roles at Santander Brasil); (ii) having 100% of our operations powered by renewable energy by 2025; and (iii) eradicating single-use plastic consumption at our facilities by 2020. Another equally important component in fulfilling our responsibilities to society is the “Prospera” microcredit program, through which we help Brazilians in low-income communities to prosper by giving them access to credit and financial products, and services, which allowedcontributed to placing us in the top spot among banks on Fortune magazine’s 2019 “Change the World” list. Finally, we were named Company of the Year on Exame Magazine’s diversity ranking, in addition to gradually expand our customer base. Amongbeing recognized as the initiatives putfinancial institution with the best inclusion and diversity practices in place to achieve this goal, we highlight the following:country.
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Our Business
Overview
We operate along two segments through which we offerprovide our 24.226.3 million active individual, SME and large corporate customers aas of December 31, 2019 with our complete portfolio of products and services:services through the following business divisions:
• Commercial Banking:This includes individuals and companies (except for global corporate customers, managed by our Global Wholesale Banking). Revenue from this segment is rendering of banking and financial products and services to our account holder and non-account holder customers.
The following chart sets forth
• Global Wholesale Banking:We offer a wide range of national and international tailored financial services and structured solutions for our operating segmentsglobal corporate customers, principally local and their main focus.multinational corporations, and it also carries out proprietary trading activities.
|
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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 toWe outline below the benefit of the other. We are able to offer joint solutions to customers inoperating divisions under each of our segments such as for example, offering integrated solutions to (i) large retailers and their respective points of sale and (ii) large companies and their employees.
The following table presentswell as the breakdown of our net interest income and profit before tax by operating segment:
| For the Year Ended December 31, | ||||||
| 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$200 million (except for our Santander Corporate & Investment Banking customers). We focus on fostering a close relationship with our corporate customers by providing them with customer-tailored services.
Global Wholesale Banking
| For the Year Ended December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||
| Net interest income | Operating profit before tax | |||||||||||||||||||||||
| (R$ millions) | ||||||||||||||||||||||||
| Commercial Banking (1) | 42,044 | 39,391 | 32,392 | 18,657 | 12,397 | 11,220 | ||||||||||||||||||
| Global Wholesale Banking | 2,277 | 2,531 | 2,554 | 3,616 | 3,512 | 3,293 | ||||||||||||||||||
| Total | 44,321 | 41,922 | 34,946 | 22,273 | 15,909 | 14,513 | ||||||||||||||||||
| (1) | Profit before tax reported under commercial banking includes the effects of the hedge for investments held abroad (offset in the same amount in the “Income Tax” line). The effect of the hedge for investments held abroad in 2019, 2018 and 2017 amounted to gains of R$1,264 million, gains of R$5,867 million and expenses of R$810 million, respectively. |
The following table shows a managerial breakdown of our loans and advances by customer type at the dates indicated:
| As of December 31, | Change between 2018 | Change between 2017 | ||||||||||||||||||
| 2019 | 2018 | 2017 | and 2019 | and 2018 | ||||||||||||||||
| (R$ millions) | ||||||||||||||||||||
| Individuals | 156,177 | 133,603 | 107,610 | 16.9 | % | 24.2 | % | |||||||||||||
| Consumer Finance | 48,421 | 40,964 | 33,170 | 18.2 | % | 23.5 | % | |||||||||||||
| SMEs | 53,119 | 49,624 | 46,879 | 7.0 | % | 5.9 | % | |||||||||||||
| Corporate(1) | 89,539 | 97,742 | 100,171 | -8.4 | % | -2.4 | % | |||||||||||||
| Total Credit Portfolio | 347,257 | 321,933 | 287,829 | 7.9 | % | 11.8 | % | |||||||||||||
| (1) | For purposes of loan portfolio presentation, “corporate” includes companies with annual gross revenues exceeding R$200 million, including our Global Corporate Banking customers. |
Commercial Banking
1. Retail
Individuals
We have structured this customer segment as follows:
Private Banking– is responsible for select group of customers with at least R$5.0 million in assets available for investment. In this segment, we offer a complete and tailored portfolio of onshore and offshore financial products and services, investment advice, loans and asset management through a dedicated manager for investments and banking services.
• Santander Select– is responsible for customers with a monthly income above R$20,000, or a monthly income above R$10,000 and R$30,000 in investments, or more than R$ 300,000 in
58
investments. The offer here consists of a value proposition with differentiated products and services, exclusive service spaces, relationship managers who serve a small number of customers and provide asset management advisory services.
• Santander Van Gogh– is responsible for customers with a monthly income from R$4,000 to R$10,000, or with investments above R$40,000. Our goal is to understand the needs of our customers at each stage of their life and provide them with financial advice through a multi-channel solution, including financial products and services as well as financial advice.
• Santander Especial- is responsible for customers who earn up to R$4,000 per month. Our business model offers simple and efficient solutions with an attractive cost benefit to the customer, primarily through electronic channels.
It is worth noting that we also support our Select and Van Gogh customers through our Santander Direct channel. Santander Direct is suited to customers who want more flexible service hours, from 8:00 a.m. to 10:00 p.m., and who prefer using a remote method, such as telephone, e-mail or chat, as well as access to digital channels. This service complements our offering and broadens our capillarity by also catering to regions where we do not have a physical presence.
Small and Medium Enterprises (SMEs)
We serve SMEs under the Santander Negócios e Empresas brand, under the following segmentation:
| • | Empresas Núcleos (Core Companies)– is responsible for companies with annual revenues between R$30 million and R$200 million. Our service model is based on dedicated relationship managers, a team of experts for more complex demands and loan managers specializing in risk management. We also provide specialized services to multinational companies and other major corporations in order to meet their specific needs. |
| • | Empresas Polo (Hub Companies)- is responsible for companies with annual revenues of between R$3 million and R$30 million. We offer these customers a comprehensive range of products and services in a user-friendly interface. |
| • | Negócios Agência (Branches Business)- is responsible for companies with annual sales of up to R$3 million. We offer these customers a simple banking solution through an integrated account that combines a corporate account with a point of sale (POS) terminal. This arrangement provides our customers with benefits while they use the Getnet terminal in their credit card sales and receipts in a Santander Brasil current account. |
| • | Empresas MEI (Individual Microentrepreneur)- is responsible for companies with annual revenues up to R$81,000. We offer these customers a simplified and cost-effective option (Santander Conta MEI). |
It is worth noting that we also offer an attendance channel, the Negócios Direct (Direct Business), which is responsible for companies with annual revenues of up to R$1 million. We support these clients through a relationship manager who is available during extended service hours and via remote channels, such as telephone, e-mail or chat, as well as access to digital channels that facilitate a customer’s daily life.
2. Consumer Finance
We provide consumer credit to finance motor vehicles, goods and services directly or through intermediate agencies. Santander Financiamentos is our main service channel but we also operate under multiple brands.
The following table sets forth certain key financial and operating data regarding our credit finance for motor vehicles to individuals for the periods indicated:
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| As of December 31, | Change between 2018 and | Change between 2017 and | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| Consumer finance loan portfolio market share (1) (%) | 25.0 | % | 25.4 | % | 24.0 | % | (0.4) p.p | 1.4 p.p | ||||||||||||
| (1) | Source: Brazilian Central Bank. |
| 1. | Corporate |
Our corporate customer segment caters to large companies that have annual gross revenues greater than R$200 million (except for our Santander Corporate & Investment Banking customers). We focus on fostering a close relationship with our corporate customers through managers and specialists geographically distributed across Brazil, providing customer-tailored services with a complete portfolio of local and global products (including products from Commercial Banking and SCIB as defined below).
Global Wholesale Banking
Santander Corporate & Investment Banking
| 1. | Santander Corporate & Investment Banking |
SCIB is the global business unit that covers those customers, which, due to their size and complexity, require tailored services or high-value-added wholesale products. In this segment, we provide a wide range of domestic and international financial services to large Brazilian and multinational companies. Our customer portfolio consists of a range of industries, including telecommunications, retail, aviation, real estate and logistics, power, construction and infrastructure, natural resources, food, agribusiness and financial institutions.
Our customers in the SCIB segment benefit from the global structure of services provided by the Santander Group with its worldwide-integrated wholesale banking network and global services solutions, combined with its local market expertise and provision of integrated services.
Our product
| 2. | Proprietary Trading |
Our proprietary trading division is responsible for managing our proprietary books and liquidity positions.
Our Portfolio of Products and Services
Payments
| 1. | Credit and |
We operate in the credit and debit card market by issuing these products to our customers (including both account and non-account holders), with the majority of customers being individuals. Our strategy is to offer credit and debit cards compatible with the income level and lifestyle of each of our customers.
We are the exclusive distributors of the AAdvantage® card in Brazil, which is linked to the American Airlines loyalty program, one of the most recognized programs in the market.
We highlight the Crediário, launched in March 2019, which allows our customers to simulate and pay for their purchases in installments directly on a POS device. Merchants receive payments two days after they are effective.
The following table sets forth certain key financial and operating data regarding our credit card business for the periods indicated.
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| As of and For the Year Ended December 31, | Change between 2018 and | Change between 2017 and | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| Credit card portfolio market share(1) | 12.9 | % | 13.3 | % | 12.8 | % | (0.37) p.p | 1.2 p.p | ||||||||||||
| Credit card portfolio (R$ billion) (2) | 36.1 | 30.9 | 25.1 | 16.8 | % | 23.1 | % | |||||||||||||
| Total card turnover (R$ billion) (2) | 236.4 | 201.6 | 168.3 | 17.3 | % | 19.8 | % | |||||||||||||
| Credit card turnover (R$ billion) (2) | 161.0 | 137.1 | 111.9 | 17.4 | % | 22.5 | % | |||||||||||||
| Total card transactions (in millions) (2) | 2,725.4 | 2,338.2 | 1,987.6 | 16.6 | % | 17.6 | % | |||||||||||||
| Credit card transactions (in millions) (2) | 1,450.9 | 1,206.1 | 992.9 | 20.3 | % | 21.5 | % | |||||||||||||
| Participation of credit card in the household consumption – Market overview (2) (%) | 24.5 | % | 23.1 | % | 21.6 | % | 2.94 p.p | 1.4 p.p | ||||||||||||
| (1) | Source: Brazilian Central Bank, as of December, 2018. The data relating to the year ended December 31, 2017 has been revised as a consequence of the restatement of the way to measure the market share data issued by ABECS. |
| (2) | Source ABECS – “Monitor bandeiras”. In 2018 the methodology began to include all acquirings and for better comparison the 2017 and 2016 values were restated. The data relating to the years ended December 31, 2018 and 2017 has been revised as a consequence of the restatement of the methodology of monitoring issued by ABECS. |
| 2. | Santander Way |
SantanderWay an app that allows customers to manage all their Santander Brasil cards through a digital channel and has also become a payment platform, with new features that allow instant transfers peer-to-peer through contact list or QR Code, account sharing between users and payments via QR Code in POS Getnet.
| 3. | Merchant Acquiring Market | Getnet |
Getnet is a technology company that offers physical and digital solutions, to people and businesses. The acquisition of Getnet, which was completed in 2019, gave us more flexibility, and enabled us to create more complete and tailored solutions for our customers, integrating its services with Santander Brasil.
Through Getnet, we are able to offer a wide array of payment solutions to individuals and companies, including: (i) mobile and Wi-Fi point of sale or POS devices; (ii) SuperGet, a mobile POS device that self-employed professionals and small companies can buy or rent from us; (iii) TEF, a solution for establishments with a significant number of transactions, operating in synergy with the establishment’s systems and which offers sales reconciliation through our bank-integrated customer benefits; (iv) Getnet App, which allows its users to track sales details in real time, and anticipate amounts, while also providing business analytics information, such as the best time to make a sale, thus helping business owners better manage their activities based on a richer set of data; (v) Digital POS, a complete solution that can be customized and, when connected to the internet, allows app downloads and the use of integrated management functions; and (vi) Getnet Digital Platform, a tool for all e-commerce environments, with integrated services such as safe boxes, recurrence and anti-fraud systems, which is modeled after the “one-stop shop” concept and provides financial intermediation between a marketplace and its storeowners, as well as several other financial services, such bill generation, and sales conciliation; (vii) Getnet Digital, which is geared towards Small and Medium-sized Enterprises (SME) and allows its users to set up their stores online, in addition to offering a number of services, such as payment platform, alongside visual and fully integrated management.
Getnet also enables us to provide SME customers with a fully integrated offer, including card payment solutions. One of them is “Conta Integrada,” a bundle that combines a current account with an integrated card payment solution, which rewards customers who concentrate their sales on POS devices.
The following table sets forth certain key financial and operating data regarding our merchant acquiring business for the periods indicated.
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| As of and For the Year Ended December 31, | Change between 2018 and | Change between 2017 and | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| (R$ millions, except as otherwise indicated) | ||||||||||||||||||||
| Market share of total turnover(1) | 11.3 | % | 12.3 | % | 11.0 | % | (1.0) p.p. | 1.3 p.p. | ||||||||||||
| Debit turnover | 80.9 | 73.4 | 51.2 | 10.2 | % | 43.4 | % | |||||||||||||
| Credit turnover | 126.6 | 114.1 | 90.9 | 11.0 | % | 25.5 | % | |||||||||||||
| Number of debit transactions (thousand) | 1,415,089 | 1,245,269 | 840,171 | 13.6 | % | 48.2 | % | |||||||||||||
| Number of credit transactions (thousand) | 1,070,717 | 893,519 | 743,263 | 19.8 | % | 20.2 | % | |||||||||||||
| (1) | Source: Data for 2019 is based on ABECS Monitor Bandeiras - Acquirers data for the nine-month period ended September 30, 2019. Data for the year ended December 31, 2019 was not available as of the date of this annual report. For comparison purposes, the difference between September 30, 2019 and September 30, 2018 would be: (0.9) p.p |
| 4. | Superdigital |
Superdigital is a digital pre-paid solution that allows customers to manage their daily financial activities entirely online through a pre-paid account with a user-friendly interface. As mentioned above, on February 28, 2020, we sold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Superdigital.
| 5. | Esfera |
Esfera is our loyalty program, which can be accessed through a dedicated website and mobile app. Our loyalty program enables holders of credit cards issued by Santander Brasil to exchange their reward points for many products, services and travel benefits, with exclusive deals and discounts with partners such as Cinépolis, FastShop and Casas Bahia, among others.
| 6. | BEN Benefícios |
BEN is a benefits company that brings greater freedom, purchasing power and quality of life to the people who use them, in addition to delivering an integrated digital experience, as mentioned above in the “Item 4.A—History and development of the Company—Important Events.”
Payroll Loans
Payroll loans support account holders and non-account holders in the execution of projects and financial organization. Monthly installments are deducted directly from borrowers’ paychecks by their own employers, and are then credited to Santander Brasil, significantly reducing our credit risk. As a result, payroll loan rates are lower than other credit options. We make payroll loans available to our account holders, as well as to non-account holders through Olé Consignado.
Payroll loans are offered through our mobile banking platform and through our branches. Our customers have the possibility of refinancing their payroll loans, as well as choosing from other options to help them manage their debts.
The following table sets forth certain key financial and operating data regarding our payroll loans business as of the dates indicated.
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| As of December 31, | Change between 2018 and | Change between 2017 and | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| Market share in origination (1) | 13.2 | % | 12.2 | % | 12.1 | % | 1.01 p.p | 0.1 p.p | ||||||||||||
| Payroll loan portfolio (R$ billion) | 43.0 | 33.8 | 25.5 | 27.1 | % | 32.5 | % |
| (1) | Source: Brazilian Central Bank, as of December 31, 2019, December 31, 2018 and December 31, 2017, as applicable. |
Mortgages
We offer long-term financing to our customers for the purchase of real estate, secured by deeds of trust, or for customers who wish to obtain a loan using real estate as collateral. We consider mortgages to be a strategic product due to their lower risk (since the acquired property serves as collateral) and ability to increase customer loyalty with the Bank (especially given that we offer customers more attractive rates if they choose to bank with us). 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 make any financing for 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 or other types of revenue, which allows us to evaluate their credit risk profile and (iii) other indebtedness added to the financing cannot exceed 35% of borrowers’ monthly gross income.
To improve practicality for our customers, we have launched our real estate portal, a digital channel that enable customers to obtain mortgages in a 100% digital fashion. We believe we are first bank in Brazil to offer customers the opportunity to obtain a mortgage while only need to be physically present to sign the contract and then return it duly registered. We have established a partnership with the largest real estate portal in Brazil in order to improve our sales network and strengthen our digital presence. In addition, we launched a high-impact marketing campaign, in conjunction with a major retailer in which we offered customers market-leading terms to obtain mortgage financing or transfer their existing mortgage financing to us, while also giving customers the chance to win a refrigerator.
The following table sets forth certain key financial and operating data regarding our mortgage business for the periods indicated.
| As of December 31, | Change between | Change between | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2018 and 2019 | 2017 and 2018 | ||||||||||||||||
| (in R$ billions, except percentages) | ||||||||||||||||||||
| Mortgage loan portfolio | 39.3 | 36.3 | 34.8 | 8.3 | % | 4.3 | % | |||||||||||||
| Individual sector mortgage loans | 37.2 | 31.4 | 28.2 | 18.4 | % | 11.3 | % | |||||||||||||
| Loan to value(1) – Production (% quarterly average) | 62.9 | % | 60.6 | % | 58.6 | % | 2.31 p.p | 2 p.p | ||||||||||||
| Loan to value(2) – Portfolio (%) | 49.4 | % | 48.7 | % | 46.4 | % | 0.73 p.p | 2.3 p.p | ||||||||||||
| (1) | Ratio between loans and the value of the collateral, excluding home equity. |
| (2) | As of 2017, the LTV guarantee is calculated at market value. In the previous years it was calculated based on the value of the collateral registered in the contract. For better comparison, the 2017 value was restated. |
Tailored Products and Services
We have a complete offering 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:
| For the Year Ended December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||
| Net interest income | Operating profit before tax | |||||||||||||||||||||||
| (R$ millions) | ||||||||||||||||||||||||
| Commercial Banking (1) | 42,044 | 39,391 | 32,392 | 18,657 | 12,397 | 11,220 | ||||||||||||||||||
| Global Wholesale Banking | 2,277 | 2,531 | 2,554 | 3,616 | 3,512 | 3,293 | ||||||||||||||||||
| Total | 44,321 | 41,922 | 34,946 | 22,273 | 15,909 | 14,513 | ||||||||||||||||||
| (1) | Profit |
The following table shows a managerial breakdown of our loans and advances by customer type at the dates indicated:
| As of December 31, | Change between 2018 | Change between 2017 | ||||||||||||||||||
| 2019 | 2018 | 2017 | and 2019 | and 2018 | ||||||||||||||||
| (R$ millions) | ||||||||||||||||||||
| Individuals | 156,177 | 133,603 | 107,610 | 16.9 | % | 24.2 | % | |||||||||||||
| Consumer Finance | 48,421 | 40,964 | 33,170 | 18.2 | % | 23.5 | % | |||||||||||||
| SMEs | 53,119 | 49,624 | 46,879 | 7.0 | % | 5.9 | % | |||||||||||||
| Corporate(1) | 89,539 | 97,742 | 100,171 | -8.4 | % | -2.4 | % | |||||||||||||
| Total Credit Portfolio | 347,257 | 321,933 | 287,829 | 7.9 | % | 11.8 | % | |||||||||||||
| (1) | For purposes of loan portfolio presentation, “corporate” includes companies with annual gross revenues exceeding R$200 million, including our Global Corporate Banking customers. |
Commercial Banking
1. Retail
Individuals
We have structured this customer segment as follows:
Private Banking– is responsible for select group of customers with at least R$5.0 million in assets available for investment. In this segment, we offer a complete and tailored portfolio of onshore and offshore financial products and services, investment advice, loans and asset management through a dedicated manager for investments and banking services.
• Santander Select– is responsible for customers with a monthly income above R$20,000, or a monthly income above R$10,000 and R$30,000 in investments, or more than R$ 300,000 in
58
investments. The offer here consists of a value proposition with differentiated products and services, exclusive service spaces, relationship managers who serve a small number of customers and provide asset management advisory services.
• Santander Van Gogh– is responsible for customers with a monthly income from R$4,000 to R$10,000, or with investments above R$40,000. Our goal is to understand the needs of our customers at each stage of their life and provide them with financial advice through a multi-channel solution, including financial products and services as well as financial advice.
• Santander Especial- is responsible for customers who earn up to R$4,000 per month. Our business model offers simple and efficient solutions with an attractive cost benefit to the customer, primarily through electronic channels.
It is worth noting that we also support our Select and Van Gogh customers through our Santander Direct channel. Santander Direct is suited to customers who want more flexible service hours, from 8:00 a.m. to 10:00 p.m., and who prefer using a remote method, such as telephone, e-mail or chat, as well as access to digital channels. This service complements our offering and broadens our capillarity by also catering to regions where we do not have a physical presence.
Small and Medium Enterprises (SMEs)
We serve SMEs under the Santander Negócios e Empresas brand, under the following segmentation:
Operating profit before tax
| • | Empresas Núcleos (Core Companies)– is responsible for companies with annual revenues between R$30 million and R$200 million. Our service model is based on dedicated relationship managers, a team of experts for more complex demands and loan managers specializing in risk management. We also provide specialized services to multinational companies and other major corporations in order to meet their specific needs. |
| • | Empresas Polo (Hub Companies)- is responsible for companies with annual revenues of between R$3 million and R$30 million. We offer these customers a comprehensive range of products and services in a user-friendly interface. |
| • | Negócios Agência (Branches Business)- is responsible for companies with annual sales of up to R$3 million. We offer these customers a simple banking solution through an integrated account that combines a corporate account with a point of sale (POS) terminal. This arrangement provides our customers with benefits while they use the Getnet terminal in their credit card sales and receipts in a Santander Brasil current account. |
| • | Empresas MEI (Individual Microentrepreneur)- is responsible for companies with annual revenues up to R$81,000. We offer these customers a simplified and cost-effective option (Santander Conta MEI). |
It is worth noting that we also offer an attendance channel, the Negócios Direct (Direct Business), which is responsible for companies with annual revenues of up to R$1 million. We support these clients through a relationship manager who is available during extended service hours and via remote channels, such as telephone, e-mail or chat, as well as access to digital channels that facilitate a customer’s daily life.
2. Consumer Finance
We provide consumer credit to finance motor vehicles, goods and services directly or through intermediate agencies. Santander Financiamentos is our main service channel but we also operate under multiple brands.
The following table sets forth certain key financial and operating data regarding our credit finance for motor vehicles to individuals for the periods indicated:
59
| As of December 31, | Change between 2018 and | Change between 2017 and | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| Consumer finance loan portfolio market share (1) (%) | 25.0 | % | 25.4 | % | 24.0 | % | (0.4) p.p | 1.4 p.p | ||||||||||||
| (1) | Source: Brazilian Central Bank. |
| 1. | Corporate |
Our corporate customer segment caters to large companies that have annual gross revenues greater than R$200 million (except for our Santander Corporate & Investment Banking customers). We focus on fostering a close relationship with our corporate customers through managers and specialists geographically distributed across Brazil, providing customer-tailored services with a complete portfolio of local and global products (including products from Commercial Banking and SCIB as defined below).
Global Wholesale Banking
| 1. | Santander Corporate & Investment Banking (SCIB) |
SCIB is the global business unit that covers those customers, which, due to their size and complexity, require tailored services or high-value-added wholesale products. In this segment, we provide a wide range of domestic and international financial services to large Brazilian and multinational companies. Our customer portfolio consists of a range of industries, including telecommunications, retail, aviation, real estate and logistics, power, construction and infrastructure, natural resources, food, agribusiness and financial institutions.
Our customers in the SCIB segment benefit from the global structure of services provided by the Santander Group with its worldwide-integrated wholesale banking network and global services solutions, combined with its local market expertise and provision of integrated services.
| 2. | Proprietary Trading |
Our proprietary trading division is responsible for managing our proprietary books and liquidity positions.
Our Portfolio of Products and Services
Payments
| 1. | Credit and Debit Cards |
We operate in the credit and debit card market by issuing these products to our customers (including both account and non-account holders), with the majority of customers being individuals. Our strategy is to offer credit and debit cards compatible with the income level and lifestyle of each of our customers.
We are the exclusive distributors of the AAdvantage® card in Brazil, which is linked to the American Airlines loyalty program, one of the most recognized programs in the market.
We highlight the Crediário, launched in March 2019, which allows our customers to simulate and pay for their purchases in installments directly on a POS device. Merchants receive payments two days after they are effective.
The following table sets forth certain key financial and operating data regarding our credit card business for the periods indicated.
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| As of and For the Year Ended December 31, | Change between 2018 and | Change between 2017 and | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| Credit card portfolio market share(1) | 12.9 | % | 13.3 | % | 12.8 | % | (0.37) p.p | 1.2 p.p | ||||||||||||
| Credit card portfolio (R$ billion) (2) | 36.1 | 30.9 | 25.1 | 16.8 | % | 23.1 | % | |||||||||||||
| Total card turnover (R$ billion) (2) | 236.4 | 201.6 | 168.3 | 17.3 | % | 19.8 | % | |||||||||||||
| Credit card turnover (R$ billion) (2) | 161.0 | 137.1 | 111.9 | 17.4 | % | 22.5 | % | |||||||||||||
| Total card transactions (in millions) (2) | 2,725.4 | 2,338.2 | 1,987.6 | 16.6 | % | 17.6 | % | |||||||||||||
| Credit card transactions (in millions) (2) | 1,450.9 | 1,206.1 | 992.9 | 20.3 | % | 21.5 | % | |||||||||||||
| Participation of credit card in the household consumption – Market overview (2) (%) | 24.5 | % | 23.1 | % | 21.6 | % | 2.94 p.p | 1.4 p.p | ||||||||||||
| (1) | Source: Brazilian Central Bank, as of December, 2018. The data relating to the year ended December 31, 2017 has been revised as a consequence of the restatement of the way to measure the market share data issued by ABECS. |
| (2) | Source ABECS – “Monitor bandeiras”. In 2018 the methodology began to include all acquirings and for better comparison the 2017 and 2016 values were restated. The data relating to the years ended December 31, 2018 and 2017 has been revised as a consequence of the restatement of the methodology of monitoring issued by ABECS. |
| 2. | Santander Way |
SantanderWay an app that allows customers to manage all their Santander Brasil cards through a digital channel and has also become a payment platform, with new features that allow instant transfers peer-to-peer through contact list or QR Code, account sharing between users and payments via QR Code in POS Getnet.
| 3. | Merchant Acquiring Market | Getnet |
Getnet is a technology company that offers physical and digital solutions, to people and businesses. The acquisition of Getnet, which was completed in 2019, gave us more flexibility, and enabled us to create more complete and tailored solutions for our customers, integrating its services with Santander Brasil.
Through Getnet, we are able to offer a wide array of payment solutions to individuals and companies, including: (i) mobile and Wi-Fi point of sale or POS devices; (ii) SuperGet, a mobile POS device that self-employed professionals and small companies can buy or rent from us; (iii) TEF, a solution for establishments with a significant number of transactions, operating in synergy with the establishment’s systems and which offers sales reconciliation through our bank-integrated customer benefits; (iv) Getnet App, which allows its users to track sales details in real time, and anticipate amounts, while also providing business analytics information, such as the best time to make a sale, thus helping business owners better manage their activities based on a richer set of data; (v) Digital POS, a complete solution that can be customized and, when connected to the internet, allows app downloads and the use of integrated management functions; and (vi) Getnet Digital Platform, a tool for all e-commerce environments, with integrated services such as safe boxes, recurrence and anti-fraud systems, which is modeled after the “one-stop shop” concept and provides financial intermediation between a marketplace and its storeowners, as well as several other financial services, such bill generation, and sales conciliation; (vii) Getnet Digital, which is geared towards Small and Medium-sized Enterprises (SME) and allows its users to set up their stores online, in addition to offering a number of services, such as payment platform, alongside visual and fully integrated management.
Getnet also enables us to provide SME customers with a fully integrated offer, including card payment solutions. One of them is “Conta Integrada,” a bundle that combines a current account with an integrated card payment solution, which rewards customers who concentrate their sales on POS devices.
The following table sets forth certain key financial and operating data regarding our merchant acquiring business for the periods indicated.
61
| As of and For the Year Ended December 31, | Change between 2018 and | Change between 2017 and | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| (R$ millions, except as otherwise indicated) | ||||||||||||||||||||
| Market share of total turnover(1) | 11.3 | % | 12.3 | % | 11.0 | % | (1.0) p.p. | 1.3 p.p. | ||||||||||||
| Debit turnover | 80.9 | 73.4 | 51.2 | 10.2 | % | 43.4 | % | |||||||||||||
| Credit turnover | 126.6 | 114.1 | 90.9 | 11.0 | % | 25.5 | % | |||||||||||||
| Number of debit transactions (thousand) | 1,415,089 | 1,245,269 | 840,171 | 13.6 | % | 48.2 | % | |||||||||||||
| Number of credit transactions (thousand) | 1,070,717 | 893,519 | 743,263 | 19.8 | % | 20.2 | % | |||||||||||||
| (1) | Source: Data for 2019 is based on ABECS Monitor Bandeiras - Acquirers data for the nine-month period ended September 30, 2019. Data for the year ended December 31, 2019 was not available as of the date of this annual report. For comparison purposes, the difference between September 30, 2019 and September 30, 2018 would be: (0.9) p.p |
| 4. | Superdigital |
Superdigital is a digital pre-paid solution that allows customers to manage their daily financial activities entirely online through a pre-paid account with a user-friendly interface. As mentioned above, on February 28, 2020, we sold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Superdigital.
| 5. | Esfera |
Esfera is our loyalty program, which can be accessed through a dedicated website and mobile app. Our loyalty program enables holders of credit cards issued by Santander Brasil to exchange their reward points for many products, services and travel benefits, with exclusive deals and discounts with partners such as Cinépolis, FastShop and Casas Bahia, among others.
| 6. | BEN Benefícios |
BEN is a benefits company that brings greater freedom, purchasing power and quality of life to the people who use them, in addition to delivering an integrated digital experience, as mentioned above in the “Item 4.A—History and development of the Company—Important Events.”
Payroll Loans
Payroll loans support account holders and non-account holders in the execution of projects and financial organization. Monthly installments are deducted directly from borrowers’ paychecks by their own employers, and are then credited to Santander Brasil, significantly reducing our credit risk. As a result, payroll loan rates are lower than other credit options. We make payroll loans available to our account holders, as well as to non-account holders through Olé Consignado.
Payroll loans are offered through our mobile banking platform and through our branches. Our customers have the possibility of refinancing their payroll loans, as well as choosing from other options to help them manage their debts.
The following table sets forth certain key financial and operating data regarding our payroll loans business as of the dates indicated.
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| As of December 31, | Change between 2018 and | Change between 2017 and | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| Market share in origination (1) | 13.2 | % | 12.2 | % | 12.1 | % | 1.01 p.p | 0.1 p.p | ||||||||||||
| Payroll loan portfolio (R$ billion) | 43.0 | 33.8 | 25.5 | 27.1 | % | 32.5 | % |
| (1) | Source: Brazilian Central Bank, as of December 31, 2019, December 31, 2018 and December 31, 2017, as applicable. |
Mortgages
We offer long-term financing to our customers for the purchase of real estate, secured by deeds of trust, or for customers who wish to obtain a loan using real estate as collateral. We consider mortgages to be a strategic product due to their lower risk (since the acquired property serves as collateral) and ability to increase customer loyalty with the Bank (especially given that we offer customers more attractive rates if they choose to bank with us). 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 make any financing for 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 or other types of revenue, which allows us to evaluate their credit risk profile and (iii) other indebtedness added to the financing cannot exceed 35% of borrowers’ monthly gross income.
To improve practicality for our customers, we have launched our real estate portal, a digital channel that enable customers to obtain mortgages in a 100% digital fashion. We believe we are first bank in Brazil to offer customers the opportunity to obtain a mortgage while only need to be physically present to sign the contract and then return it duly registered. We have established a partnership with the largest real estate portal in Brazil in order to improve our sales network and strengthen our digital presence. In addition, we launched a high-impact marketing campaign, in conjunction with a major retailer in which we offered customers market-leading terms to obtain mortgage financing or transfer their existing mortgage financing to us, while also giving customers the chance to win a refrigerator.
The following table sets forth certain key financial and operating data regarding our mortgage business for the periods indicated.
| As of December 31, | Change between | Change between | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2018 and 2019 | 2017 and 2018 | ||||||||||||||||
| (in R$ billions, except percentages) | ||||||||||||||||||||
| Mortgage loan portfolio | 39.3 | 36.3 | 34.8 | 8.3 | % | 4.3 | % | |||||||||||||
| Individual sector mortgage loans | 37.2 | 31.4 | 28.2 | 18.4 | % | 11.3 | % | |||||||||||||
| Loan to value(1) – Production (% quarterly average) | 62.9 | % | 60.6 | % | 58.6 | % | 2.31 p.p | 2 p.p | ||||||||||||
| Loan to value(2) – Portfolio (%) | 49.4 | % | 48.7 | % | 46.4 | % | 0.73 p.p | 2.3 p.p | ||||||||||||
| (1) | Ratio between loans and the value of the collateral, excluding home equity. |
| (2) | As of 2017, the LTV guarantee is calculated at market value. In the previous years it was |
Tailored Products and Services
We have a complete offering 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:
·Global Transaction Banking -which includes the sale and management of local and global transactional banking products, which includes local loans, commercial finance (confirming), transfers of BNDES onlending, trade finance, guarantees, structured loans, cash management solutions and funding from international banks.
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·Global Transactional Services - which is responsible for sales and management of global transactional banking, trade finance, guarantees, structured loans, and funding from international banks;
·Global Debt Financing - which includes funding and financial advisory services related to projects, origination and distribution of fixed-income securities in the debt capital markets, financing of acquisitions and syndicated loans, other structured financing arrangements, subordinated debt and energy efficiency transactions.
·Investment Banking - which includes advisory services in mergers and acquisitions and equity capital markets transactions, including initial public offering and follow-on offerings.
·Equities - which includes stock brokerage and advisory services, equity services for individuals, corporate and financial institutional investors in stocks, derivatives, as well as equity research.
·Treasury Customers - which is responsible for structuring and offering foreign exchange, derivative and investment products for customers from several segments of Santander Brasil, including institutional investors, corporate and retail customers.
·Market Making - which is responsible for the pricing of customer deals originated by our sales force from corporate, institutional, private banking and retail segments.
We are one of the leading banks in capital markets and financial advisory services in the Brazilian and international markets as evidenced by the awards we have received, the principal among which are listed in the table below.
| Area | Acknowledgments |
Global Transaction Banking | 1st place in BNDES Disbursements to Large Companies and 4th place in BNDES Disbursements to Small and Medium Enterprises in the first half of 2017, according to the BNDES |
| Best Trade Bank in Latin America and Deal of the Year Latin America: Seaborn Networks by Global Trade Review in 2016 and 2017 | |
| 1stplace in Trade Finance Bank, according to Febraban |
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| Equities | Ranked as 4th place among Brazilian banks and 6th place among banks in Latin America. Ranked as 1st place in the Energy & Sanitation and Transportation (Latin America), Education (Brazil) and Strategy (Brazil and Latin America) sectors, and several leading positions in Brazil’s Research rankings by U.S. magazine Institutional Investor in 2017 |
Santander Corretora was authorized to use B3’s Agro Broker certificates. It now has all B3 qualification certificates Santander Corretora has ranked 1st place in stock picking since 2012, according to Valor Econômico | |
| Clients Treasury | 1stplace in the Foreign Exchange Rankings by the Brazilian Central Bank since 2014 |
| Best Treasury in Brazil in 2017, according to Euromoney | |
| Global Debt Financing (GDF) | Financial advisory: 1st place in Latam and Brazil ranking in 3Q19 by Dealogic LatinFinance 2017 Awards Best Infrastructure Financing: Brazil Ventos do Araripe III 2nd place in DCM International – Brazilian Bonds by BondRadar ü1st place as Financial Advisor and Structurer (number of projects) ü1st place as Financial Advisor for Auctions (financial volume) 2018: ü1st place - Financial Advisor by Volume ü1st place - Auction Financial Advisor by Volume ü1st place - Arranger by Volume |
Customer Solutions
Agribusiness
Agribusiness remains one of our key areas of expansion, and we believe that expanding our agribusiness network further also helps broadening our reach within the Brazilian countryside to areas in which are not present yet. We provide a full range of products and services focused on the agribusiness sector. Our approach to rural producers differs from the approach we take with our other customers as we offer rural producers a specialized relationship, which we believe to be more agile and efficient through a network of physical stores and digital solutions.
The following table sets forth certain key financial and operating data regarding our agribusiness for the periods indicated.
| As of and For the Year Ended December 31, | Change between | Change between | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2018 and 2019 | 2017 and 2018 | ||||||||||||||||
| Number of agribusiness-focused stores | 34 | 21 | 14 | 13 | 7 | |||||||||||||||
| Agribusiness loan portfolio (R$ billion) | 10.9 | 11.8 | 11.5 | -7.9 | % | 2.6 | % | |||||||||||||
Microfinance
Prospera Santander Microfinance is the largest productive and microcredit-oriented operation among privately owned banks in Brazil, based on market share and portfolio value. It is geared toward supporting formal and informal microentrepreneurs in society with the purpose of generating work and income. With a 100% digitalized service process, in addition to products intended to improve business management skills, we have clients who hire us for services previously not available to them, because they do otherwise have access to financial services, such as property finance, consortium and investment services.
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Webmotors
Webmotors is the first and biggest Brazilian technology company focused on automotive purchase and sale solutions for dealers, original equipment manufacturers and private sellers, holding the biggest online automotive classified in Brazil.
Webmotors received over 30 million visits each month and had an average over 450,000 cars listed. Through the Cockpit, a pioneering and disruptive platform for car dealers, which combines solutions for the entire chain described above, we offer the following solutions: business management/performance, buyer profile (CRM), data intelligence, predictive pricing models and market data (AutoGuru). This hub generated positive results, such as a 25% increase in the volume of contracts by sellers and a 15% decrease in the time of these contracts with end-customers. With that, we experienced a 30% growth in the number of dealerships with a high level of engagement with us.
We have also launched “+Fidelidade,” a loyalty program aimed at providing our intermediate customers with a full value offer through a model of incentives to store owners based on their loyalty and relationship level with Grupo Santander Brasil and Webmotors. We have sought to improve customers’ after-sales experience through several functionalities made available on an online portal.
+ Negócios and + Vezes
In 2017 we launched + Negócios, an innovative digital trading platform designed to be simple and intuitive, which enables faster execution of loan simulations, receipt of credit approval and proposal formalization for vehicle, in addition to providing portfolio management reports. In the same year we introduced “+Vezes”, a digital trading platform which allows retailers to offer installment payment options when they sell goods and services.
Cash Management
We offer cash management solutions to corporate customers and SMEs online through our Internet banking and mobile banking services. Our revenues from cash management include fees from the following products which we offer: (i) collections, in which we assist customers in carrying out commercial transactions using printed or online payment slips; (ii) payments, consisting of simple and automatic management of our customers’ accounts payable activities through individual transactions or via electronic file transfer; (iii) payroll, which is intended to facilitate the management of salary and benefits payments to our customers’ employees via an online tool; (iv) collection of values, which consists of the payment of cash values and checks at the customer’s points of sale; and (v) custody, by which we perform the custody, control and deposit of predated checks up to the date of clearing. In addition, other products generate revenue and are structured and tailored to the customer’s operation.
Customer Funding
Our main sources of liquidity are customer funding through deposits and other bank funding instruments. These deposits, combined with equity and other instruments, enable us to meet most of our liquidity and legal reserve requirements.
For further information, see “Item 5. Review and Operating and Financial Outlook—B. Liquidity and Capital Resources—Liquidity and Funding.”
Investments
Our investment process for retail customers seeks to provide qualified guidance and help them to achieve their financial objectives based on four major pillars:
| · | Client investment profile -We appraise the situation of our costumer to understand their level |
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of financial culture, investment horizons, liquidity needs and the levels of risk they are willing to assume, among other factors. This analysis is reviewed periodically, according to customer’s needs and local regulations.
| · | Investment strategy - Our investment philosophy aims to provide long-term returns through a structured asset allocation process and mitigate market risks from diversification among different asset classes. |
| · | We define strategic portfolios for each customer profile and build our “Model Portfolio” on monthly basis according to market conditions and trends. This tactical view arises from the Asset Allocation Committee, which consists of economists from ours economics department, Santander Asset Management, our Private Banking unit and our brokerage house (Santander Corretora). |
| · | Execution and implementation - To assure a successful execution of investment strategy we provide a complete array of financial products, ranging from banking instruments, bonds, stocks, structured notes, investment funds, with an |
| · | Follow-up- Our advisory team performs, along with the client, a thorough and frequent revision of their profile, objectives and results, seeking to keep the investments within the established parameters and Model Portfolio’s guidance. |
In order to identify possible deviations in the positions from the investment profile, we also rely on automated monitoring systems. These controls warns the costumers of any operations that compromise the suitability of their portfolio and are in line to our commitment to protect our costumer’s interests.
Furthermore, each customer has direct access to its positions through a private access site on the Internet and Mobile App, enabling them to view the evolution of their investment strategies.
Programa Avançar
We also have a non-financial solution aimed at entrepreneurial customers, which we make available a web platform through which SMEs can access content and solutions related to management and innovation, internationalization, team building, and other topics that we believe are relevant to businesses. We see this program as a key component of our offering to Brazilian entrepreneurs.
Service Channels
We offer our financial services and products to our customers through our multichannel distribution network, composed of: (i) physical channels, such as branches, mini-branches and ATMs; (ii) call centers; and (iii) digital channels, such as Internet banking and mobile banking.
Physical Distribution Network
Our distribution network provides integrated financial services and products to our customers. The following table presents our physical distribution network as of the dates indicated.
| As of December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Branches | 2,328 | 2,283 | 2,255 | |||||||||
| Mini-branches | 1,512 | 1,267 | 1,211 | |||||||||
| Own ATMs | 13,296 | 13,641 | 13,522 | |||||||||
| Shared ATMs | 23,780 | 23,049 | 21,195 | |||||||||
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Branch Network
Our branch network offers our customers our entire portfolio of products and services with personal and customized customer service. The table below shows the geographic distribution of our branch network as of the dates indicated.
| As of December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Northeast | 9 | % | 8 | % | 8 | % | ||||||
| North and Midwest | 7 | % | 7 | % | 6 | % | ||||||
| Southeast | 70 | % | 71 | % | 72 | % | ||||||
| South | 13 | % | 13 | % | 13 | % | ||||||
PABs (Mini-branches)
We offer daily banking services to our SME and corporate customers and their employees through our PABs (the acronym stands for Postos de Atendimento Bancário in Portuguese) located on their sites, as well as in hospitals and universities. Our PABs are generally exclusive sale points at customers’ sites. The presence of PABs in our customers’ offices strengthens our relationship and builds loyalty with those customers, who benefit from the convenience of conducting their banking transactions at their workplace.
ATMs
We operate an extensive network of 13,296 ATMs, including those located in our branches and Mini-branches. In addition, our customers have access to the “Banco24Horas” network, which operates 23,780 ATM units. Through this network, our customers are able to access their accounts and conduct banking transactions, as well as purchase most of the products and services available in our portfolio.
Call Centers
Our call centers provide active Santander Brasil customers (account and single product holders) with consultation, financial transactions and product hiring services. This important distribution channel has a variety of customer self-service facilities. Our call centers received over 150 million contacts in 2019.
Digital Channels
Our digital channels include Internet banking, mobile banking and other digital solutions intended to provide our customers a convenient manner in which to access the products and services that we offer. We highlight the following key features:
| · | OnePay – This service is available through the Santander App and enables customers to transfer funds to foreign countries in various currencies. |
• Santander On “Financial control” – This service is also available through Santander App and enables our customers view all of their commitments to us, as well as pending issues with the Brazilian tax authorities (Receita Federal do Brasil), Serasa (a Brazilian credit bureau) and the Brazilian Central Bank and transparency in the credit relationship with Santander Brasil. Its service shows, with easy interface and simple language, credit quality and the use of debt with Santander, allowing income to be updated without the necessity of showing any voucher, as well as relocation of available limits.
The following table provides certain key operating information with regards to our digital channels as of the dates indicated.
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| For the Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in millions) | ||||||||||||
| Number of digital customers(1) | 13.4 | 11.4 | 8.6 | |||||||||
| Number of digital channel transactions(2) | 4,311 | 4,073 | 3,699 |
| (1) | We define digital customers as customers who have used at least one of the digital channels made available by Santander Brasil (i.e., |
| (2) | Refers to |
The following table provides an overview of the weight of each key non-physical distribution channel in our overall distribution system.
| For the Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (%) | ||||||||||||
| Internet banking | 39.7 | 46.1 | 54.0 | |||||||||
| ATMs | 8.9 | 10.4 | 14.4 | |||||||||
| Mobile(1) | 39.0 | 34.5 | 19.9 | |||||||||
| Branch | 4.1 | 5.2 | 5.4 | |||||||||
| Interactive Voice Response (IVR) (2) | 7.4 | 2.3 | 2.7 | |||||||||
| Call Center | 0.9 | 1.4 | 3.5 | |||||||||
| (1) | Includes tablet transactions. Data refers to total transactions (account holder and unique product-holder). |
| (2) | Interactive voice response is an automated telephony system in which a computer interacts with callers (who can use their voice and tones input via a keypad to communicate with the computer), gathers information and routes calls to the appropriate recipient. |
In addition to Internet banking and mobile banking, we have digital solutions that play an important role in providing a better digital experience for our customers and potential customers, including:
| · | Digital account opening - We have made it possible to open an account with Santander Brasil entirely online. |
| · | Santander Corretora App - We provide a digital trading platform for our brokerage customers. |
| · | Autocompara- It allows customers to obtain insurance quotes from six different insurance companies and purchase the best offer through Autocompara’s website. |
| · | Pi– This is a solution that acts as a digital broker, empowering clients to invest through a simple and intuitive digital platform. It also provides market information and financial education tools. Pi was launched in 2019. |
| · | Sim– This is a digital credit solution for non-account holders, with competitive conditions and a better experience and usability. It is a complete credit marketplace, which we believe to be transparent and through which we offer financial guidance. Sim was launched in 2019. |
| · | emDia – This debt renegotiation solution is an evolution of the traditional collection model. It provides a self-service debt management portal to indebted customers and was launched in 2019. |
Technology and Infrastructure
Throughout 2019, we accelerated our investments in technology. Our goal was to deliver an innovative and agile bank, being able to face pertinent challenges to our digital transformation with competitiveness and service quality. Through technology, we aimed to boost our efficiency to grow faster.
In 2019, we launched a program to simplify and digitize our sales network and customer support
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processes by 2022. We have also improved our development and system implementation chain by adopting a more automated, robust and scalable architecture based on micro services and cloud computing as well as by refining our DevSecTestOps practices for application development and infrastructure operations. We have listed below a few initiatives we have delivered this year:
• Corporate Platform:We have redesigned our mobile channel, in order to deliver a simple and safer navigation. We have deployed the QR Code authentication on ATMs, a new chat services platform, registration of favorite contacts for future transactions and digital access to Getnet sales receipt, online access to consolidated receipts within Corporate Internet Banking and payment of municipal, state and federal taxes through bar code, ensuring a more transparent and digital experience to our corporate customers.
| • | Santander Way Transformation:We improved our payment platform by launching version 2.0 of the Santander Way App. We believe that the improved layout emphasizes important functionalities, such as ID Santander, NFC (Near Field Communication) and OPC (“Online Purchase Card”), besides many upgrades to ensure an even better customer experience. Additionally, new features were incorporated to the application, allowing customers to receive, send and charge cash: P2P transfers through contact list or QR Code, purchase split with contacts within mobile’s contact list and payments through QR Code scanning on Getnet POS. |
| • | Investments Platform Evolution –We simplified the customer registration experience on the brokerage platform in order to make it faster and intuitive. We have also increased the number of investment products offered in our investment platform. |
• Multicloud:We have executed our Cloud First global strategy, which focuses on providing an Infrastructure as a Service (IaaS and PaaS), supported by a secure integration architecture between Santander’s Datacenter in Brazil and various local public cloud service providers. This infrastructure allows applications to be balanced between internal environment and the public cloud, ensuring greater flexibility and agility for an accelerated implementation of new business structures with the development of modern, digital and continually monitored applications. This transformation adds more robustness and scalability to our technology solutions, increasing the offer and availability of services provided to our customers and then leveraging the growth of our business while keeping high quality and performance standards.
• Business Process Digitization:In order to improve efficiency and productivity, we digitized over seventeen major processes from our asset, transactional services, manufacture and treasury/cards departments, by developing new business rules in our business process management tool. This reduced the total analysis time for each process, paper printing and increased our overall control over the processes.
• Payroll loans:we have made improvements to the product’s digital journeys, in order to make the customer’s interaction more intuitive and decrease the amount of complaints reported to local regulatory agencies. We have launched new preventive credit products in order to support our customer’s doubts clarification and increase the institution’s capital allocation efficiency. Furthermore, we have improved the point of sales designation, making the post sales experience more transparent to our customers and increasing the accuracy of the point of sales goals control.
• Interactive Voice Response (IVR) Transformation:we have deployed a newly humanized interactive voice response, or IVR for contact center and corporate customers support, with conversation mechanisms and a language closer to human language. The IVR can also predict customer’s actions, enabling a better self-service experience and minimizing the need for intervention from human assistants. Additionally, new features were incorporated into the IVR for individual customers, such as identification of defaulting customers and call transfer to the debt collection department so that customers can renegotiate credit products debts.
• Chatbots:we have implemented a modern chatbot platform to develop and evolve new communication solutions with our customers. These solutions take advantage of artificial intelligence and Natural Language Processing (NLU), to allow our customers to solve their needs with the support of chats and virtual assistants, in a practical and digital way.
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| • | Brazilian General Data Protection Act (Law no. 13,709/2018), or “LGPD”):We have begun taking steps to make our systems comply with the LGPD’s requirements through technical alignment with digital and human channels responsible for meeting holder’s rights, carrying out an assessment to identify the systems that store and use personal identifiable information, adaptation of technical and structural components processes, policies and procedures review. |
• Technology lifecycle management and applications portfolio optimization:In 2019, we updated and renewed over nearly 18% of our software applications, avoiding risks of upcoming obsolescence events, which could lead to high unavailability incidents, security, and data breaches as well as long time to recover on service outages. Additionally, we have strongly optimized our software applications portfolio: almost 8% of our software applications were decommissioned in the means of functional consolidation toward fewer software components holding same business products and services.
Secure Bank (Cyber Security and Antifraud)
•Cyber Security:In order to protect our business and our customers against potential sensitive data leaks or confidential data, we have strengthened our infrastructure and capabilities to detect and prevent cyber attacks in 2019. We integrated our cyber security systems and processes at a global level, expanded the use of artificial intelligence to proactively identify behaviors of potential threats, evolved our security operational centers (SOCs) and expanded our data protection and access control levels.
•Antifraud:On the field of fraud prevention, we have enhanced our biometric platform through the deployment of facial recognition solutions to authenticate online inquiries and payments on checking account or Santander Way applications. On the corporate platform, we have developed a new module to monitor malwares installed in computers that access our Internet Banking, preventing our customers to be redirected to fake websites.
Communications and Marketing
We operate under multiple brands. A key aspect of our brand positioning strategy is to endeavor to fulfill our role as a responsible bank, i.e. one that does not just offer products and services, but also encourages its customers to use these responsibly by offering financial education and by seeking to be transparent in all of our actions.
We use and monitor several communication tools in order to achieve our multiple customer portfolio with a unique approach and visual identity. This include not only the traditional media, such as television, but also internet and mobile advertising.
We had over 7.8 million users connected to us across social media (Facebook, Instagram, Twitter, LinkedIn and Youtube) as of December 31, 2019, which enables us to reach significant audiences. We also carried out important television campaigns, which we believe demonstrated our constant search for democratization in access to information and financial services, in addition to maintaining transparency about all of our actions.
Sustainability
Based on a responsible internal management, a consistent risk culture, ethical values as a basis and technology at the service of people and business we seek to support the Brazilian society in its transformation into the Brazil of the 21st century by fostering the economic growth in a resilient and inclusive manner, stimulating the development of human potential and promoting an efficient and strategic use of natural resources.
In Brazil, sustainability governance is based on global guidelines, locally identified commitments and demands, and our local business strategy. Decision-making goes through the Board of Directors, the Sustainability Committee (responsible for clarifications and recommendations to the Board of Directors regarding the development of guidelines related to sustainability), our executive committee and the Sustainability Executive Superintendence
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Resilient and Inclusive Economy
Our broad commercial activity allows us to advise and support both from large clients and projects as well as informal entrepreneurs. Thus, our role is to be a facilitator and contribute to the generation of jobs, income, improvement of logistics and infrastructure, in order to contribute to the development of Brazil.
Through this pillar, for example, we seek to financially empower people who are unbanked, underbanked or who may be financially vulnerable by offering access to banking services, products and non-financial initiatives. Regarding financial education, in 2019, we trained approximately 28,000 people. This also included providing in-person training at our branches over the weekend, where volunteers taught over 1,961 people.
In addition, we have specific offers supporting microentrepreneurs and small and medium enterprises such as above mentioned Santander ON and Prospera SantanderMicrofinanças.
Development of Potentials
Our commitment to the development of potential begins with our employees. We have been ranked as one of the best companies to work for in the Great Place to Work survey since 2016. Guided by our corporate culture and internal policies, we offer opportunities supporting the development and professional growth, in order to build a culture of delivering results, respect, innovation, inclusion and diversity.
We also contribute to the promotion of the rights of children and adolescents. Through Amigo de Valor Program, Santander Brasil, employees and clients directly donate a part of the due income tax to the Funds for the Rights of Children and Adolescents (Fundo dos Direitos da Criança e do Adolescente). In 2019, this program raised funds R$19 million.
Through the Santander Universities Program, we offer initiatives focused on granting national and international scholarships, programs for the development of entrepreneurs and internship and employment programs. On December 31, 2019, about 6,000 scholarships and entrepreneurships were granted with a total investment of about R$27 million.
Efficient and strategic use of the Natural Resource
In 2019, the total amount of environmental financing with Santander Brasil facilitated across Santander Financiamentos, Responsible Agribusiness, Corporate, Retail (Individual and Corporate clients), Project Finance and Santander Corporate and Investment Banking, including Green Bonds, totaled approximately R$13 billion.
In relation to internal environmental management, in 2019, we announced our decision to eliminate the single-use plastic consumption at Santander Brasil, by launching the #Desplastifique program. The implementation plan started with the administrative buildings, in 2019, and will be present in all branches by the end of 2020.
We also intend to have 100% of our operations powered by renewal energy by 2025. In December 2019, approximately 24% of the electricity we consumed was derived from renewable sources.
Socio-Environmental Responsibility Policy
Our Socio-Environmental Responsibility Policy or PRSA meets the requirements of CMN Resolution n° 4.327/14 and SARB Regulation 14 of FEBRABAN. It defines guidelines and consolidates specific policies for socio-environmental practices in business and relationships with certain parties. These practices include socio-environmental opportunities, impacts and risk management related to subjects,
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such as suitability in granting and using credits, management of suppliers and socio-environmental risk analysis. There is a Senior Group of our PRSA, which consists of our vice-presidents of Risks, Corporate, Human Resources, Finance, and Communication, Marketing, Institutional Relationships and Sustainability, as well as the Agribusiness and the Compliance Officers. This Senior Group is involved in the decision-making related to the PRSA and operates as a connection with our Executive Committee.
Competition and Industry Transformation
Currently, there are five commercial financial institutions at the forefront of the Brazilian financial industry in terms of assets: Santander Brasil, Bradesco, Itaú Unibanco, Banco do Brasil and Caixa Econômica Federal. Together, these financial institutions accounted for 73.3% of the credit and 68.8% of the deposits available in the country in September 2019, according to the Brazilian Central Bank and the financial statements of the aforementioned banks.
The following table shows the total loans and deposits of the five leading financial institutions in Brazil at the dates indicated:
| Santander Brasil | Bradesco | Itaú Unibanco | Banco do Brasil | Caixa Economica Federal | Financial System | |||||||||||||||||||
| December 2019 (R$ billions) | ||||||||||||||||||||||||
| Total loans(1) | 352.0 | 454.0 | 429.4 | 621.3 | 693.7 | 3,478.5 | ||||||||||||||||||
| Total deposits(1) | 268.5 | 367.8 | 402.1 | 330.7 | 433.6 | 2,621.8 | ||||||||||||||||||
(1) According to the Brazilian Central Bank, reported and presented in accordance with Brazilian GAAP (December 2019).
Insurance Coverage
We maintain insurance policies that we renew annually in order to protect our assets. All of our branches, affiliates and administrative buildings are insured against loss caused by fire, lightning, explosions and other risks. Such coverage establishes reimbursement for the asset replacement value.
In addition, we also maintain the following insurance policies:
| · | policies against material and/or bodily damage caused to third parties for which we are held responsible; |
| · | policies against financial losses due to fraud or employee misconduct, among others; |
| · | directors’ and officers’ insurance policy for our management against third-party complaints regarding management acts. There are insurance policies against crimes, employee dishonesty and damages arising out of public offerings; and |
| · | policies against hacker attacks and cyber-crimes. |
Dependence on Patents, Licenses, Contracts and Processes
The major trademarks we use, including, among others, the “Santander” brand, are owned by Santander Investment Bank. Santander Brasil has a license to use this brand. All trademarks of our business are registered with the National Institute of Intellectual Property (Instituto Nacional de Propriedade Industrial, or “INPI”), the agency responsible for registering trademarks, patents and designs in Brazil, or have been submitted to INPI by us or by the Santander Group. After registration,
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the owner has exclusive rights of use of the trademark throughout Brazil for a ten-year period that can be successively renewed for equal periods.
As of the date of this annual report, we own 567 trademarks in Brazil, among them, Santander Brasil owns over 100 trademark registrations in Brazil with the remaining owned by other companies of the Santander Group.
REGULATION AND SUPERVISION
The basic institutional framework of the Brazilian financial system was established by Law 4,595, of December 31, 1964, as amended from time to time, or the “Banking Reform Law”. The Banking Reform Law created the CMN, responsible for establishing the general guidelines of the monetary, foreign currency and credit policies, as well as regulating the institutions of the financial system.
Principal Regulatory Agencies
CMN
The CMN oversees the Brazilian monetary, credit, budgetary, fiscal and public debt policies. The board of the CMN is composed of the president of the Brazilian Central Bank, the Minister of Planning and the Minister of Finance, who also chairs the Board. Pursuant to the Banking Reform Law, the CMN is the highest regulatory entity within the Brazilian financial system, authorized to regulate the credit operations of Brazilian financial institutions, to regulate the Brazilian currency, to supervise Brazil’s reserves of gold and foreign exchange, to determine Brazilian savings and investment policies and to regulate the Brazilian capital markets with the purpose of promoting the economic and social development of Brazil. In this regard, the CMN also oversees the activities of the Brazilian Central Bank and the CVM.
Brazilian Central Bank
The Brazilian Central Bank is responsible for implementation of the CMN policies related to foreign currency and credit, regulation of Brazilian financial institutions, including as regards the minimum capital and compulsory deposit requirements, disclosure of the transactions carried out by financial institutions, as well as their financial information. The Brazilian Central Bank has committees to address specific issues. COPOM, one of these, has the purpose of adopting measures to fulfill the inflation targets defined by the CMN and establishing monetary policy guidelines. The activity of the COPOM in the control of inflation targets includes the definition of the target for the SELIC Rate (the average rate for daily financing, backed by federal instruments, as assessed under the Special Settlement and Custody System) and publication of reports on the Brazilian economic and financial environment and projections for the inflation rate.
CVM
The CVM is responsible for implementation of the policies established by the CMN related to securities, with the purpose of regulating, developing, controlling and inspecting the securities market and its participants (companies with securities traded in the market, investment funds, investors, financial agents, such as custodians of instruments and securities, asset managers, independent auditors, consultants and instruments and securities analysts).
Self-Regulating Entities
The Brazilian financial and capital markets are also subject to the regulation of self-regulating entities that are divided by field of activity. The self-regulating entities include, among others, the National Association of Investment Banks – ANBIMA, the Brazilian Association of Credit Card and Services Companies – ABECS, the Brazilian Banks Federation – FEBRABAN, the Brazilian Association of Publicly-Held Companies – ABRASCA and the B3.
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Principal Limitations and Obligations of Financial Institutions
In line with leading international standards of regulation, Brazilian financial institutions are subject to a series of limitations and obligations. In general, such limitations and obligations concern the offering of credit, the concentration of risk, investments, operating procedures, loans and other transactions in foreign currency, the administration of third-party funds and micro-credit. The restrictions and requirements for banking activities, established by applicable legislation and regulations, include the following:
| · | No financial institution may operate in Brazil without the prior approval of the Brazilian Central Bank. In December 2017, the CMN enacted a new rule establishing that all such requests submitted to the Brazilian Central Bank must be approved within 12 months (subject to suspension of the term in some instances); |
| · | A Brazilian financial institution may not hold direct or indirect equity interests in any company located in Brazil or abroad registered as permanent assets without prior approval of the Brazilian Central Bank. The corporate purpose of such company shall be complementary or subsidiary to the activities carried out by the financial institution; |
| · | Brazilian financial institutions must submit for prior approval by the Brazilian Central Bank the corporate documents that govern their organization and operation, such as capital increases, transfer of headquarters, opening, transfer or closing of branches (whether in Brazil or abroad), election of the members of the statutory bodies and any corporate restructuring or alteration in the composition of their equity control. The requests for change of control submitted to the Brazilian Central Bank must be approved within 12 months and requests for changes to organizational documents be approved within three months (in both cases subject to suspension of the term in some instances); |
| · | Brazilian financial institutions must fulfill minimum capital and compulsory deposit requirements and must comply with certain operational limits; |
| · | A Brazilian financial institution may not own real estate, except for properties it occupies and subject to certain limitations imposed by the CMN. If a financial institution receives real estate, for example, in satisfaction of a debt, such property must be sold within one year, unless otherwise authorized by the Brazilian Central Bank; |
| · | Brazilian financial institutions must comply with the principles of selectivity, guarantee, liquidity and risk diversification; |
| · | A Brazilian financial institution belonging to the S1 segment, as is the case of Santander Brasil, cannot lend more than 25% of its Tier 1 Regulatory Capital (patrimônio de referência) to a single person or group and the maximum exposure to concentrated individual clients or group of connected clients of such Segment 1 financial institution is 600% of its Tier 1 Regulatory Capital (a concentrated individual client would mean, for the purpose of the proposed rule, as any one client to which exposure is equal to or higher than 10% of its Tier 1 Regulatory Capital); |
| · | According to the Banking Reform Law, a Brazilian financial institution cannot carry out credit transactions with (i) its controlling shareholders, directors and members of other statutory bodies (fiscal, advisory and other) and their respective spouses and relatives up to second degree, (ii) with the individuals or legal entities that hold a qualified interest (15% of the capital stock) in their capital, (iii) with the legal entities in which they have qualified interest (direct or indirect), (iv) with the legal entities in which they have effective operational control or preponderance in the deliberations, regardless of the equity interest, and (v) with the legal entities with common directors or members of the board of directors. Such prohibition does not apply, subject to limits and conditions established by the CMN through the enactment ofResolution No. 4,693 in October 2018, to: (i) transactions with a counterparty that has an officer |
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or director in common with the financial institution providing credit, provided that the officer or director is considered an independent member in both entities; (ii) transactions carried out under market-compatible conditions, without additional benefits or different benefits when compared to the operations deferred to the institution to other customers with the same profile, (iii) credit operations that have as counterparty a financial institution that is part of the institution prudential conglomerate, provided that they contain contractual clauses of subordination, except in the case of overnight and loan transactions with other financial institutions specified by the law, (iv) the interbank deposits, according to the law, (v) the obligations assumed by related parties under the compensation and settlement services authorized by the Brazilian Central Bank or by the CVM and their respective counterparties, and (vi) other cases authorized by the CMN; the management of third-party assets must be segregated from other activities and must follow the regulations issued by the CVM.
| · | The total amount of the funds applied in permanent assets of the financial institutions cannot exceed 50% of their adjusted stockholders’ equity; |
| · | Brazilian financial institutions must comply with anti-money laundering and anti-corruption regulations; |
| · | Brazilian financial institutions must implement policies and internal procedures to control their systems of financial, operating and management information, as well as their conformity to all applicable regulations; |
| · | Brazilian financial institutions must implement a policy for remuneration of board members and executive officers that is compatible with their risk management policies; |
| · | The Banking Reform Law and specific regulations enacted by the CMN provide for the imposition of penalties on financial institutions in certain situations where applicable requirements, controls and requisites have not been observed. In addition, the Brazilian Central Bank may cancel the financial institution’s authorization to operate in certain situations. The cancellation of an authorization for operation of a financial institution may only occur upon the establishment and processing of the appropriate administrative proceeding by the Brazilian Central Bank. |
Additionally, as part of the Santander Group and due to the global nature of our organization we are subject to related international rules.
Capital Adequacy and Leverage – Basel
Current Requirements
The Brazilian Central Bank supervises the Brazilian banking system in accordance with the Basel Committee on Banking Supervision, or “Basel Committee” guidelines and other applicable regulations, including the Basel II Accord, or “Basel II”, which was recently implemented in Brazil, and the Basel III Accord, or “Basel III”, which supplements and amends Basel II and is in the process of being implemented. For this purpose, banks provide the Brazilian Central Bank with the information necessary for it to perform its supervisory functions, which include supervising the changes in the solvency and the capital adequacy of banks.
The main principle that guides the directives set forth in Basel II and Basel III is that a bank’s own resources must cover its principal risks, including credit risk, market risk and operational risk.
Brazilian financial institutions are subject to capital measurement and standards based on a risk weighted asset ratio. The parameters of this methodology resemble the international framework for minimum capital measurements adopted by Basel II, except for certain differences (for instance, Basel II requires banks to have a capital to risk weighted assets ratio of at least 8.0%, while current Brazilian rules require minimum capital of 11.0% of risk weighted assets). Brazilian financial institutions’
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Regulatory Capital is composed of two tiers. Tier I capital is represented by stockholders’ equity plus certain reserves, earned income and hybrid debt and capital instruments authorized by the Brazilian Central Bank. Tier II capital is represented by revaluation reserves, contingency reserves, special profit reserves related to mandatory dividends not yet distributed, preferred cumulative stock, certain subordinated debt and hybrid instruments and non-realized earnings related to available-for-sale securities market value adjustments.
Basel III
On December 16, 2010, the Basel Committee issued the Basel III framework, which supplements and amends Basel II. Basel III includes higher minimum capital requirements and new conservation and countercyclical buffer capital requirements, revised risk-based capital measures and the introduction of a new leverage ratio and two liquidity standards. As with other Basel directives, the Basel III framework will not be self-effectuating and will be implemented gradually by each country through legislation or regulation to be imposed upon that country’s home banks. Basel III is currently being implemented in Brazil and its implementation is expected to conclude on January 1, 2022, according to the agreed international time frame.
Regulatory Capital will continue to be composed of two tiers.
Tier I capital will have to reach a minimum index of 6.0% (according to the schedule established by the Brazilian Central Bank), divided into two portions: (i) Principal Capital consisting mainly of corporate capital and profit reserves (shares, units of ownership, reserves and earned income) of at least 4.5%, and (ii) Supplementary Capital consisting mainly of hybrid securities and capital instruments authorized by the Brazilian Central Bank (but excluding amounts relating to funding instruments issued by other local or foreign financial institutions) and any of our own shares purchased by us and the integration of which into the Supplementary Capital is permitted. To improve the quality of the capital of financial institutions, Basel III restricts the acceptance of financial instruments that fail to demonstrate effective capability of absorbing losses and requires the reduction of assets that in certain situations could jeopardize the financial institution’s capital value due to the instruments’ low liquidity, dependence on future profits for realization or difficulty of value measurement.
Current hybrid instruments and subordinated debt approved by the Brazilian Central Bank as additional capital requirements or Tier II are expected to be maintained if they also comply with requirements introduced by Basel III, including the mandatory conversion clauses into equity or write-off upon the occurrence of triggering events provided for in the regulations. The instruments that do not comply with Basel III rules have been gradually reduced since January 1, 2013 and shall continue to be so reduced until they do not consist of any portion of our Regulatory Capital as from January 1, 2022.
In accordance with the Basel III standards, the Brazilian Central Bank created the Premium Principal Capital (Adicional de Capital Principal), which corresponds to additional capitals (buffers) that create additional capital reserves to be used in periods of stress. In accordance with CMN regulation, the Brazilian Central Bank is entitled to establish the percentage of the Premium Principal Capital within certain minimum and maximum limits previously set forth by the CMN, the final minimum and maximum limits being 2.5% and 5%, respectively, of the risk weighted asset ratio.
On December 29, 2014, the Brazilian Central Bank established that the amount of the Premium Principal Capital was to start at 0.625% of the risk weighted asset ratio as of January 1, 2016, increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.
In 2015, the CMN and the Brazilian Central Bank enacted a set of rules which determined that the Premium Principal Capital will be equivalent to the sum of the Capital Conservation Buffer (Adicional de Conservação de Capital Principal), the Countercyclical Buffer (Adicional Contracíclico de Capital Principal), and the Systemic Relevance Premium Principal Capital (Adicional de Importância Sistêmica de Capital Principal). The regulation establishes the minimum requirements and methods to calculate each of them separately. The Conservation Buffer and the Countercyclical Buffer will compose the Premium Principal Capital of all financial institutions and institutions authorized to operate by the
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Brazilian Central Bank (except for those expressly waived from complying with Regulatory Capital requirements). The Systemic Relevance Premium Principal Capital will only apply to multiple banks, commercial banks, investment banks and saving banks (caixas econômicas).
The Basel III minimum capital index increased from the former 11% to a maximum of 13% as from 2019. The total index will be calculated as the sum of two parts: the Regulatory Capital and the Premium Principal Capital.
The Basel III rules also provide for the implementation of a leverage ratio calculated by the division of the Tier I capital by a bank’s total exposure. In early 2015, the Brazilian Central Bank issued a new regulation governing the calculation and reporting of the leverage ratio of Brazilian financial institutions in line with the Basel III rules which became effective in October 2015.
In 2015, the CMN and the Brazilian Central Bank also issued a set of rules for the implementation in Brazil of the liquidity coverage ratio or “LCR,” a short-term liquidity index. The purpose of the LCR is to demonstrate that financial institutions have sufficient liquid assets to make it through a stress scenario lasting one month. According to the recently enacted rules, the largest Brazilian banks have been required to maintain an LCR of at least 60% since October 2015. This ratio will increase 10% annually until it reaches 100% in 2019. The Brazilian Central Bank also released in 2015 the local methodology for calculating the LCR so as to align the existing rules with the guidelines of the document “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” issued by the Bank for International Settlements in January 2013. In January 2017, the Brazilian Central Bank enacted a new rule amending the calculation method and procedures for disclosure of LCR information. The new regulation establishes a new possible stress scenario and for purposes of LCR retail includes spot and forward deposits.
As mentioned above, the LCR is a short-term liquidity ratio for a 30-day stress scenario. It represents the result of the division of the high quality liquidity assets by net outflows. High Quality Liquidity Assets are composed mainly by Brazilian federal government bonds and reserve requirements returns. Net Outflows are mainly composed by losses of deposits, offset in part by Inflows, which are mainly credits. In the months ending on October 31, November 30 and December 31, 2017, Santander Brasil had a surplus (difference between net assets and net cash outflows) of R$14.6 billion, which resulted in an LCR of 123%, above the regulatory requirement of 80%.
In November 2017, the CMN established a minimum limit for the Net Stable Funding Ratio (Índice de Liquidez de Longo Prazo, or “NSFR”) and the Leverage Ratio (Razão de Alavancagem, or “RA”) with which Brazilian financial institutions are required to comply. The NSFR corresponds to the ratio between the Available Stable Funds (Recursos Estáveis Disponíveis, or “ASF”) and the Required Stable Funds (Recursos Estáveis Requeridos, or “RSF”) of the financial institution. The financial institutions classified as “segment 1” for purposes of the application of prudential rules, as we are, and must maintain, as from October 1, 2018, a minimum NSFR of 1.00. The RA consists of the ratio between the sum of the principal capital and the supplementary capital divided by the total liabilities of the financial institution as determined pursuant to applicable regulation. The financial institutions classified as “segment 1,” as we are, or “segment 2” for purposes of the application of prudential rules are required to maintain a minimum RA of 3% as from January 1, 2018.
The following table presents an estimate of the implementation schedule of the main changes related to capital adequacy and leverage expected as a result of Basel III, as established by the Brazilian Central Bank:
| Parameters | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | As from 2020 | |||||||||||||||||||||
| Common equity | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | ||||||||||||||
| Tier I | 5.5 | % | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | ||||||||||||||
| Regulatory Capital | 11.0 | % | 11.0 | % | 9.9 | % | 9.3 | % | 8.6 | % | 8.0 | % | 8.0 | % | ||||||||||||||
| Capital conservation buffer | 0.0 | % | 0.0 | % | 0.6 | % | 1.3 | % | 1.9 | % | 2.5 | % | 2.5 | % | ||||||||||||||
| Countercyclical buffer | up to 0.6 | % | up to 1.3 | % | up to 1.9 | % | up to 2.5 | % | up to 2.5 | % | up to 2.5 | % | up to 2.5 | % |
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In addition, in order to enable the implementation of the Basel III framework in Brazil, certain legislative changes were made. Among others, Law No 12,838 enacted on July 9, 2013, granted powers to the Brazilian Central Bank to limit the payment of dividends by financial institutions in case of non-compliance with the prudential capital requirements defined by the CMN.
Systemically Important Financial Institutions
The assessment of the global systemic importance of financial institutions, or “IAISG” comprises the index of systemic importance, or “ISG” and the aggregate of ancillary indexes established by regulations issued by the Brazilian Central Bank, which take into account, among other things, amounts relating to certain current and long-term liabilities, deposits, financial transactions and revenues. The Brazilian Central Bank adopted the same components set out by the Basel Committee to calculate the ISG, including (i) size; (ii) interconnectedness; (iii) lack of readily available substitute or financial institution infrastructure for the services provided; (iv) global or cross-jurisdictional activity; and (v) complexity, with each of these components receiving an equal weight in the assessment.
This assessment should be carried out by banks with total exposure in excess of R$500 billion, individually or at the consolidated enterprise level (conglomerado prudencial), as the case may be. Our controlling shareholder Santander Spain is considered a global systemically important financial institution in accordance with the Basel Committee rules. In Brazil, we are considered a systemically important financial institution pursuant to regulations issued by the Brazilian Central Bank.
Other Applicable Laws and Regulations
Consolidated Enterprise Level (conglomerado prudencial)
Financial institutions must submit to the Brazilian Central Bank, monthly and semiannually, consolidated financial statements based on the “consolidated enterprise level” (conglomerado prudencial) of which the financial institution is a member, which serve as the basis for calculation of the required Regulatory Capital of the Brazilian institutions. The “consolidated enterprise level” includes data relative to the financial institutions and other institutions authorized to operate by the Brazilian Central Bank, administrators of consortia, payment institutions and credit factoring companies, including real estate credit, or of credit rights, such as mercantile foment companies, securitization companies and specific purpose companies, located in Brazil or abroad, as well as other legal entities headquartered in Brazil that have equity participation in the mentioned entities as their exclusive business purpose.
On January 29, 2020, the CMN published Resolution No. 4,776, which requires financial institutions categorized as S1, S2 and S3 to publish IFRS financial statements. The requirement is already in force for publicly held financial institutions and financial institutions which are leaders of a prudential conglomerate, and will come into effect for all remaining financial institutions on January 1, 2022.
Segmentation for the Proportional Application of Prudential Regulation
In January 2017, the CMN enacted a resolution establishing segmentation for financial institutions, financial institution groups, and other institutions authorized to operate by the Brazilian Central Bank for the purposes of proportional application of the prudential regulation. The segmentation is based on the size, international activity and risk profile of members of each segment. Pursuant to the resolution, the segments are as follows:
(i) Segment 1 comprises multiservice banks, commercial banks, investment banks, foreign exchange banks and savings banks with (a) an asset base equivalent or superior to 10% of Brazil’s GDP;
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or (b) which perform relevant international activities, irrespective of the size of the institution;
(ii) Segment 2 comprises multiservice banks, commercial banks, investment banks, foreign exchange banks and savings banks with (a) an asset base lower than 10% of Brazil’s GDP; and (b) other institutions with an asset base equivalent to or greater than 1% of Brazil’s GDP;
(iii) Segment 3 comprises institutions with an asset base lower than 1% and equivalent to or greater than 0.1% of Brazil’s GDP;
(iv) Segment 4 comprises institutions with an asset base lower than 0.1% of Brazil’s GDP; and
(v) Segment 5 comprises institutions with an asset base lower than 0.1% of Brazil’s GDP that applies a simplified optional method for the verification of reference equity’s minimum requirements, except for multiservice banks, commercial banks, investment banks, foreign exchange banks and savings bank.
We have been categorized by the Brazilian Central Bank in segment 1, the highest level for application of regulation for banks in Brazil.
Regulation of Risk and Capital Management Structure
The rules enacted by the CMN and the Brazilian Central Bank provide that risk management must be conducted through an integrated effort by the relevant entity (i.e., not only must risks be analyzed on an individual basis, but must also control and mitigate the adverse effects caused by the interaction between different risks). The rules set out different structures for risk and capital management, which are applicable for different risk profiles. This means that a financial institution of limited systemic importance can have a simplified structure of management, while institutions of larger complexity have to follow stricter protocols.
Compulsory Reserve Requirements
Currently, the Brazilian Central Bank imposes a series of compulsory reserves requirements. Financial institutions must deposit these reserves with the Brazilian Central Bank. The Brazilian Central Bank uses these reserve requirements as a mechanism to control the liquidity of the Brazilian financial system for both monetary policy and risk mitigation purposes. Reserves imposed on time deposits, demand deposits and saving accounts represent almost the entirety of the amount that must be deposited at the Brazilian Central Bank.
·Time Deposits (CDBs). The Brazilian Central Bank imposes a reserve requirement of 31% in relation to time deposits. Financial institutions must deposit an amount equivalent to the surplus of (i) R$3.6 billion for financial institutions with consolidated Tier 1 capital under R$3 billion; (ii) R$2.4 billion for financial institutions with consolidated Tier 1 capital between R$3 billion and R$10 billion; (iii) R$1.2 billion for financial institutions with consolidated Tier 1 capital between R$10 billion and R$15 billion; and (iv) zero for financial institutions with a Regulatory Capital greater than R$15 billion.
Additionally, since Brazilian Central Bank Circular No. 3,943 of May 23, 2019 was enacted, interbank deposits made by leasing companies are excluded from the assessment base of the compulsory reserve requirement for time deposits of financial institutions of the same conglomerate.
·Demand Deposits. As a general rule, the Brazilian Central Bank imposes a reserve requirement of 21% in relation to demand deposits.
·Savings Deposits. The Brazilian Central Bank imposes a reserve requirement of 20% in relation to general savings deposits and to rural savings deposits.
Asset Composition Requirements
Permanent assets (defined as property and equipment other than commercial leasing operations,
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unconsolidated investments and deferred charges) of Brazilian financial institutions may not exceed 50% of their adjusted net equity, calculated in accordance with the criteria established by the Brazilian Central Bank.
Brazilian financial institutions, as a general rule, may not have more than 25% of their Tier 1 Regulatory Capital allocated to credit and leasing transactions and guarantees extended to the same customer or group of customers acting jointly or representing the same economic interest. In addition, Brazilian financial institutions must comply with an exposure limit of 25% of their Regulatory Capital in connection with underwriting for or investments in securities of the same entity, its affiliates, or controlled or controlling companies. Repurchase transactions executed in Brazil are subject to operational capital limits based on the financial institution’s Regulatory Capital, as adjusted in accordance with Brazilian Central Bank regulations. A financial institution may carry out repurchase transactions in an amount of up to 30 times its Regulatory Capital. Within that limit, repurchase transactions involving private securities may not exceed five times the Regulatory Capital. Limits on repurchase transactions involving securities backed by Brazilian governmental authorities vary in accordance with the type of security involved in the transaction and the perceived risk of the issuer as determined by the Brazilian Central Bank.
The regulation issued by the Brazilian Central Bank with respect to the classification and valuation of securities and derivative financial instruments — including government securities — owned by financial institutions, based on the investment strategy of the financial institution, determined that securities and derivatives are to be classified into three categories: (i) trading; (ii) available for sale; and (iii) held to maturity.
“Trading” and “available for sale” securities are to be marked-to-market with effects in income and stockholders’ equity, respectively. Securities classified as “held to maturity” are recorded at amortized cost. Derivatives are marked-to-market and recorded as assets and liabilities in the balance sheet. Changes in the market value of derivatives are generally recognized in income with certain modifications, if these are designated as hedges and qualify for hedge accounting under the regulations issued by the Brazilian Central Bank. Securities and derivatives in the “held to maturity” portfolio may be hedged for accounting purposes but their increase or decrease in value as derived from the marked-to-market accounting method should not be taken into account.
On June 31, 2018, the CMN enacted a rule providing that financial institutions categorized as “Segment 1” as per the Brazilian Central Bank’s classification system established in 2017 (which is our case) (1) may not have more than 25.0% of their Regulatory Capital allocated to a single legal or natural person, and (2) that the total exposure of such financial institutions to one individual customer may not exceed 600% of their Regulatory Capital allocated to focused exposure, that is 10% of their Regulatory Capital – Tier 1. The rule also subjects financial institutions categorized as segment 2, segment 3 or segment 4 to less restrictive rules.
Centralized Registration and Deposit of Financial Assets and Securities
Law No. 13,476/17 consolidates the provisions on creation of liens over financial assets and securities. CMN Rule No. 4,593/2017, as amended, regulates the registration and deposit of financial instruments and securities by financial institutions as well as the provision of custody services by such institutions.
Resolution 4,734/19 sets out the guidelines applicable to the establishment of liens and encumbrances on credit and debit payment instruments due to credit operations with financial institutions andregulatescredit operations guaranteed by receivables from payment arrangements. The amount of receivables perfected into guarantees for a certain credit transaction be reduced, whenever applicable, so that they are limited to the outstanding balance of the transaction or to the maximum limit extended, in the case of an extension of a non-dischargeable credit facility by a financial institution on an absolute and unilateral basis.
Circular 3,952/19, deals in particular with the procedures for the registration of receivables, and
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requires a convention between market infrastructures to guarantee the uniqueness of the receivables as financial assets that can be registered, interoperability, exchange of information between registration systems and participants in the structure.
Brazilian Payment and Settlement System
The rules for the settlement of payments in Brazil are based on the guidelines adopted by the Bank of International Settlements, or “BIS,” and the current Brazilian Payment and Settlement System (Sistema de Pagamentos Brasileiroor the “SPB”). The Brazilian Central Bank and CVM (in relation to transactions with securities) have the power to regulate and supervise this system. SPB is composed of systems for the clearing of checks, clearing and settlement of debit and credit electronic orders, transfer of funds and other financial assets, clearing and settlement of transactions involving securities, clearing and settlement of transactions carried out in commodities and futures, and others, collectively designated as Financial Market Infrastructures, as well as the payment arrangements and payment institutions.
Within the scope of SPB, the Brazilian Central Bank operates the Reserves Transfer System, or “STR” and the SELIC. STR is a system of transfer of funds with real-time gross settlement, which means that transfers are made at the processing time, one by one, and are subject to the existence of outstanding balance in the account. STR is composed of financial institutions, clearing and settlement houses and the National Treasury Office. SELIC is a system intended for custody of book-entry securities issued by the National Treasury Office and for the registration and settlement of transactions involving such securities.
The Brazilian Central Bank also plans to implement an instant payment ecosystem by November 2020, and is taking steps to launch the ecosystem before the scheduled implementation date, such as studying and testing available technologies, establishing parameters and participants of the system. The settlement of the system will be centralized at the Brazilian Central Bank. In addition to increasing the speed at which payments or transfers are made and received, available 24 hours a day, seven days a week in all days of the year, the ecosystem has the potential to increase market competitiveness and efficiency; lower costs; and enhance customer experience.
On February 18, 2020, the Brazilian Central Bank published Circular No. 3,985, which sets out implementation procedures and participation criteria for the Brazilian Instant Payments System (Sistema de Pagamentos Instantâneos or “SPI”) and the Brazilian Central Bank’s instant payments arrangement. The rule determines that all financial and payment institutions with a license to operate granted by the Central Bank and which have more than 500,000 active client accounts (including checking, savings and payment accounts) will mandatorily participate in the SPI and in the Central Banks instant payments arrangement. Circular No. 3,985 will enter into effect on March 2, 2020.
Treatment of Overdue Debts
The Brazilian Central Bank requires financial institutions to classify credit transactions in accordance with their level of credit risk and to make provisions according to the level attributed to each transaction. Such credit classifications shall be determined in accordance with criteria set forth from time to time by the Brazilian Central Bank, relating to the conditions of the debtor and the guarantor and the transaction terms. Where there are several credit transactions involving the same customer, economic group or group of companies, the credit risk must be determined by analyzing the particular credit transaction of such customer or group that represents the greatest credit risk to the financial institution.
Credit transactions of up to R$50,000 may be classified either by the financial institution’s own evaluation method or according to the number of days such transaction is past due, whichever is the more stringent. Credit classifications are required to be reviewed (i) monthly, in the event of a delay in the payment of any installment of principal or interest, in accordance with the maximum risk classifications; (ii) every six months, in the case of transactions involving the same customer, economic group or group of companies, the amount of which exceeds 5% of the adjusted net worth of the financial
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institution in question; and (iii) once every 12 months, in all circumstances, except in the case of credit transactions with a customer whose total liability is lower than R$50,000, the classification of which may be reviewed as provided above. Such R$50,000 limit may be amended by the Brazilian Central Bank from time to time.
The provisions set forth above are not applicable to our IFRS consolidated financial statements, which are based on the criteria described under “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies—Impairment Losses on Financial Assets.”
Regulation of the Transfer of Customer Data by Financial Institutions to Database Managers
Brazilian law regulates the formation and consultation of databases with information regarding performance, individuals or legal entities, for the formation of credit history. Resolution No. 4,737 determines that the history of the following operations should be provided: (i) credit operations; (ii) leasing operations; (iii) self-financing operations executed upon consortium groups; and (iv) other operations with characteristics of credit granting; and defines the criteria for the registration of database managers, such as the identification of the natural and legal persons that are part of the control group of the database manager.
Collection of Bank Fees
Bank services to individuals are divided into the following four groups: (i) essential services; (ii) priority services; (iii) special services; and (iv) specific or differentiated services.
Banks are not able to collect fees in exchange for supplying essential services to individuals with regard to checking accounts, such as (i) supplying a debit card; (ii) supplying 10 checks per month to account holders who meet the requirements to use checks, as per the applicable rules; (iii) supplying a second debit card (except in cases of loss, theft, damage and other reasons not caused by the bank); (iv) up to four withdrawals per month, which can be made at a branch of the bank, using checks or in ATM terminals; (v) supplying up to two statements describing the transactions during the month, to be obtained through ATM terminals; (vi) inquiries over the Internet; (vii) up to two transfers of funds between accounts held by the same bank, per month, at a branch, through ATM terminals or over the Internet; (viii) clearing checks; and (ix) supplying a consolidated statement describing, on a month-by-month basis, the fees charged over the preceding year with regard to checking accounts and savings accounts.
Certain services rendered to individuals with regard to savings accounts also fall under the category of essential services and therefore are exempt from the payment of fees. CMN prohibits banks from charging fees for supplying essential services in connection with deposit and savings accounts where customers agree to access and use their accounts by electronic means only (being authorized to charge fees for supplying essential services only when the customer voluntarily elects to obtain personal service at the banks’ branches or customer service locations).
Priority services are those rendered to individuals with regard to checking accounts, transfers of funds, credit transactions, leasing, standard credit cards, over-the-counter exchange transactions for the purchase or sale of foreign currency in respect of international travel, and records, and are subject to the collection of fees by the financial institutions only if the service and its nomenclature are listed in its regulations. Commercial banks must also offer to their individual customers a “standardized package” of priority services, whose content is defined, as well as the customers’ option to acquire individual services instead of adhering to the package.
The collection of fees in exchange for the supply of special services (including, among others, services relating to rural credit, currency exchange market and onlending of funds from the real estate financial system) is governed by the specific provisions found in the laws and regulations relating to such services. The regulation authorizes financial institutions to charge fees for the performance of specific services, provided either that the account holder or user is informed of the conditions for use
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and payment or that the fee and charging method are defined in the contract.
It is worth pointing out: (i) the prohibition against charging fees in cases of adhesion contract amendments, except in the cases of asset replacement in leasing transactions, early liquidation or amortization, cancellation or termination; (ii) the prohibition against including services related to credit cards and other services not subject to fees in service packages that include priority, special and/or differentiated services; (iii) the requirement that subscription to service packages must be through a separate contract; (iv) the requirement that information given to the customer with respect to a service package must include the value of each service included in the package, the number of times that each service may be utilized per month, and the total price of the package; (v) the requirement that a customer’s annual banking statement must separately identify default interest, penalties and other costs charged on loans and leasing transactions; (vi) the requirement that registration fees cannot be cumulatively charged; and (vii) the requirement that overdraft fees can be charged, at most, once over the course of 30 days.
In addition, CMN regulations establish that all debits related to the collection of fees must be charged to a bank account only if there are sufficient funds to cover such debits in such account and thus forbid overdrafts caused by the collection of banking fees. Furthermore, a minimum of 30 days’ notice must precede any increase or creation of fees (except if related to credit card services, when a minimum of 45 days’ notice is required), while fees related to priority services and the “standardized package” can be increased only after 180 days from the date of the last increase (except if related to credit card services, when a minimum of 365 days’ notice is required) whereas reductions can take place at any time.
Late Payment Fees
The default payment fees charged by financial institutions, consumer credit companies (financeiras), and leasing companies are expressly limited to compensatory interest per day on the amount that is overdue, interest on arrears and fines on arrears.
Credit Cards
The banking regulations also have specific rules relative to the charging of credit card fees, the publication of information in the card invoices and the obligation to provide a package of basic services upon offering credit cards to customers. Credit card holders must pay monthly at least 15% of outstanding credit card balances. This minimum payment does not apply to credit cards with payment by means of direct payroll deductions.
Revolving credit for financings of credit card bills may only be extended to customers until the due date of the following credit card bill. After this term, financial institutions offer customers another product with conditions more favorable than the ones typically found in the credit card market. Banks are prohibited from offering this type of credit to customers who have already contracted one revolving credit for financing of credit card bills which were not repaid in a timely manner.
Payment Agents and Payment Arrangements
The regulation issued by the Brazilian Central Bank, determines, among other aspects: (i) consumer protection, anti-money laundering compliance and risk prevention systems that should be observed by payment agents and payment arrangers; (ii) the procedures for incorporation, organization, authorization and operation of payment agents, as well as transfer of shareholding control, subject to the Brazilian Central Bank’s prior approval; (iii) capital requirements; (iv) definition of arrangements excluded from the SPB; and (v) rules related to payment accounts, which are divided into prepaid and postpaid accounts and require the allocation of the totality of their balance to a special account at the Brazilian Central Bank or investment in government bonds.
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Portability of Credit Transactions
Financial institutions’ customers can transfer their credit transactions from one institution to another. Such transfers must comply with the specific rules established by the Brazilian Central Bank, including, among others, the requirement that the amount and term of the transaction in the receiving financial institution must not be higher than the amount due and term of the original transaction.
Digitalization of Documents and Record Keeping
Financial institutions and other institutions authorized to operate by the Brazilian Central Bank may keep on their records digital documents instead of physical documents, provided that certain requirements to ensure the documents’ authenticity and validity are met.
Anti-Money Laundering Regulations
Under the Brazilian Anti-Money Laundering Law, it is a crime to conceal or dissimulate the nature, origin, location, availability, transaction or ownership of assets, rights or amounts resulting, directly or indirectly, from any criminal offense, as well as their use in economic or financial activity and to participate in a group, association or office while being aware that its principal or secondary activities are directed toward the practice of such acts.
The Brazilian Anti-Money Laundering Law also created the Financial Intelligence Unit (Unidade de Inteligência Financeiraor “UIF”), which operates under the jurisdiction of the Ministry of Finance. The purpose of the UIF is to investigate, examine, identify and impose administrative sanctions in respect of any suspicious occurrences of illicit activities related to money laundering in Brazil.
The UIF is composed of individuals with recognized competence in this area, appointed by the Minister of Finance, all of whom are nominated by each of the following entities: (i) the Brazilian Central Bank; (ii) the CVM; (iii) the SUSEP; (iv) the National Treasury Attorney-General’s Office; (v) the Brazilian Federal Revenue; (vi) the Federal Intelligence Agency; (vii) the Ministry of Foreign Affairs; (viii) the Ministry of Justice; (ix) the Federal Police Department; (x) the Ministry of Social Security; and (xi) the General Comptroller’s Office, one of whom will be the president, which shall be appointed by the President of Brazil on the basis of recommendations by the Minister of Finance.
Financial institutions must maintain specific records of (i) the transactions in cash (deposit, withdrawal, withdrawal by means of a prepaid card or request of provision for withdrawal) so as to enable the identification of a deposit in cash, withdrawal in cash, withdrawal in cash by means of a prepaid card, or request of provision for withdrawal, of (a) an amount equal to or greater than R$100,000.00 or (b) that presents evidence of concealment or dissimulation of the nature, of the origin, of the location, of the disposal, of the movement or of the ownership of assets, rights and valuables; and (ii) the issuances of cashier’s checks, funds electronic transfers (TED) or of any other instrument of transfer of funds upon payment in cash, for an amount equal to or greater than R$100,000.00.
Financial institutions must maintain records of all operations, products and services contracted, including withdrawals, deposits, contributions, payments, receipts and transfers of funds. Additionally, the institutions must also keep specific records of (i) transactions in cash with an individual value greater than R$2,000.00; (ii) deposit or cash transactions of an individual value equal to or greater than R$50,000.00; and (iii) withdrawal transactions, including those carried out by check or money order, with an individual value equal to or greater than R$50,000.00.
The regulations also impose an obligation on financial institutions to request that both clients and non-clients a providing a withdrawal request at least three working days in advance for withdrawals (including those carried out by check or money order) in an amount equal to or greater than R$50,000.00.
On January 23, 2020, the Brazilian Central Bank published Circular No. 3,978, which improves
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the regulation applicable to financial institutions, by expanding the adoption of a risk-based approach and will enter into effect on July 1, 2020. Regulated institutions must carry out specific internal risk assessments in order to identify and measure the risk of using their products and services in the practice of money laundering and terrorist funding.
In connection with the aforementioned change, the Know-Your-Client procedures were also improved and includes the identification, qualification and classification of the customer, compatible with the risk profile, the nature of the relationship with the AML policy and the institution's internal risk assessment, which must be permanently reassessed, according to the evolution of the business relationship and the risk profile of the client. The procedures must also include the verification of the client's (their representatives, family members or close collaborators) condition as a Politically Exposed Individual, as well consider them in the monitoring, selection and analysis of operations and situations with indications of suspected money laundering or terrorist funding.
On December 5, 2019, the CVM issued CVM Instruction No. 617, which establishes a new framework for the prevention of money laundering and the financing of terrorism in the Brazilian securities market. CVM Instruction No. 617 is in line with the practices currently implemented in the principal global securities markets, including with regard to the recommendations of the Financial Action Group against Money Laundering and the Financing of Terrorism (GAFI/FATF), as well as with the duties arising from Brazilian anti-money laundering laws.
Brazilian Anti-Corruption Law
Law No. 12,846/13 of August 1, 2013, or the “Brazilian Anti-Corruption Law” establishes that legal entities will have strict liability regardless of fault or willful misconduct for acts against the public administration carried out in their interest or for their benefit. The Law encompasses not only performance of acts of corruption but also performance of other injurious acts contrary to the Brazilian or foreign public administration.
Corporations that violate the Brazilian Anti-Corruption Law’s provisions will be subject to heavy penalties, some of which may be imposed through administrative proceedings and others solely through judicial channels. The Brazilian Anti-Corruption Law also creates a leniency program under which self-disclosure of violations and cooperation by corporations might result in the reduction of fines and other sanctions.
Politically Exposed Individuals
Financial institutions and other institutions authorized by the Brazilian Central Bank to operate must take certain actions and have certain controls in order to establish business relationships with and to follow up on the financial transactions of customers who are deemed to be politically exposed individuals (public agents and their immediate family members, spouses, life partners and stepchildren who occupy or have occupied a relevant public office or position over the past five years in Brazil or other countries, territories and foreign jurisdictions). The internal procedures developed and implemented for this purpose by financial institutions must be structured in such a way as to enable the identification of politically exposed individuals, as well as the origin of the funds involved in the transactions of such customers. One option is to verify the compatibility between the customer’s transactions and the net worth stated in such customer’s file.
Bank Secrecy
Brazilian financial and payment institutions shall also maintain the secrecy of their banking operations and services provided to their customers. The only circumstances in which information about customers, services or transactions of Brazilian financial and payment institutions may be disclosed to third parties are the following:
| · | the disclosure of information with the express consent of the interested parties; |
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| · | the exchange of information between financial institutions for record purposes; |
| · | the supplying to credit reference agencies of information based on data from the records of issuers of bank checks drawn on accounts without sufficient funds and defaulting debtors; and |
| · | the occurrence or suspicion that criminal or administrative illegal acts have been performed, in which case the financial institutions and the credit card companies may provide the pertinent authorities with information relating to such criminal acts when necessary for the investigation of such acts. |
Complementary Law 105/01 also allows the Brazilian Central Bank or the CVM to exchange information with foreign governmental authorities, provided that a specific treaty has previously been executed.
The government of the Federal Republic of Brazil and the government of the United States of America executed an agreement on March 20, 2007, by means of which these governments established rules for the exchange of information relating to tax, or “2007 Agreement”. Under the 2007 Agreement, the Brazilian tax authority would be able to send information it receives by virtue of Section 5 of the Bank Secrecy Law to the U.S. tax authority.
Data Protection Requirements
The GDPA was published in the Federal Official Gazette on August 15, 2018 and was amended by Law No. 13,853, issued on July 8, 2019 or “Law 13,853/2019”. The GDPA will take effect in August 2020.
Before the GDPA, Brazil lacked regulations specific to data privacy and a data protection authority. Despite this, privacy has been generally protected through the Federal Constitution, the Civil Code (Law No. 10,406 of January 10, 2002), the Consumer Protection Code (Law No. 8,078 of September 11, 1990) and the Civil Rights Framework for the Internet (Law No. 12,965 of April 23, 2014 and the Decree 8,771 of May 11, 2016, also known as the Internet Law).
The GDPA brings about profound changes in the rules and regulations applicable to the processing of personal data processing, with a set of rules to be complied with in activities such as the collection, processing, storage, use, transfer, sharing and erasure of information concerning identified or identifiable natural persons.
The GDPA has a wide range of applications and extends to individuals as well as private and public entities, regardless of the country where they are headquartered or where data are hosted, as long as (i) the data processing takes place in Brazil; (ii) the data processing activity is intended to offer or supply goods or services to, or to process data of individuals located in Brazil; or (iii) the subjects of the data are located in Brazil at the time their personal data are collected. The GDPA will apply irrespective of the industry or business when dealing with personal data and is not restricted to data processing activities performed through digital media and/or on the internet.
The GDPA sets out several rules related to data processing such as principles, requirements and duties imposed to data controllers and data processors; rights of data subjects; requirements in connection with cross-border transfers of data; obligation to appoint a data protection officer; data security and data breach notification; corporate governance practices; and the regime for civil liabilities and penalties in case of a breach of the provisions of the GDPA. Penalties include warnings, blocking and erasure of data, public disclosure of the offense and fines of up to 2% of the economic group’s turnover in Brazil in the preceding year, capped at R$50 million per offense.
Moreover, Law 13,853/2019 created the Brazilian National Data Protection Authority, or “ANPD”, which will have powers and responsibilities analogous to the European data protection authorities, exercising a triple role of (i) investigation, comprising the power to issue norms and procedures, deliberate on the interpretation of the GDPA and request information of controllers and
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processors; (ii) enforcement, in cases of noncompliance with the law, through an administrative process; and (iii) education, with the responsibility to disseminate information about and foster knowledge of the GDPA and security measures, fostering standards for services and products that facilitate control of data, and elaborating studies on national and international practices for the protection of personal data and privacy, among others.
The ANPD has been assured technical independence, although it is subordinated to the Presidency of the Republic. It will be composed of five commissioners, to be appointed by the President of Brazil, and advised by a National Council for the Protection of Personal Data and Privacy, composed of 23 unpaid members.
Regulations on Cybersecurity
Financial institutions must follow certain cyber risk management and cloud outsourcing requirements which apply to the design and adaptation of internal controls. Policies and action plans to prevent and respond to cybersecurity incidents must be in place before May 2019, and fully compliant by December 2021. Data location and processing may occur inside or outside Brazil, but access to data stored abroad must be granted at all times to the Brazilian Central Bank for inspection purposes. The contracting of relevant processing services must be communicated to the Brazilian Central Bank within 10 days from the execution of the agreement.
Auditing Requirements
The legislation and regulations issued by the CMN, CVM and B3 determine that the periodic financial statements of financial institutions must be audited by independent auditors (individuals or legal entities) that are registered with CVM and who meet the minimum requirements set forth by the Brazilian Central Bank, and that the financial statements must be presented together with an independent auditor’s report. Our financial statements are audited in accordance with International Standards on Auditing with regard to Brazilian GAAP and also with the standards of the Public Company Accounting Oversight Board with regard to IFRS as issued by the IASB, as required by the SEC. For purposes of the financial statements prepared according to Brazilian GAAP, as from January 2017 all financial institutions and other institutions authorized to operate by the Brazilian Central Bank are required to create provisions for all losses related to financial guarantees issued by them. As result of the auditing work, the independent auditor must prepare the following reports: (i) audit report, issuing an opinion regarding the accounting statements and the respective explanatory notes, including regarding the compliance with financial regulations issued by the CMN and the Brazilian Central Bank; (ii) an internal control system quality and adequacy evaluation report, including regarding electronic data processing and risk management systems, evidencing any identified deficiencies; (iii) a legal and regulatory provisions noncompliance report, regarding those which have, or may have, material impacts on the financial statements or on the audited financial institution’s operations; (iv) a limited assurance report, analyzing Santander Brasil’s Annual and Sustainability Report pursuant to the guidelines and requirements of the Global Reporting Initiative, or “GRI”; and (v) any other reports required by the Brazilian Central Bank, CVM and B3. The reports issued by independent auditors must be available for consultation upon request by the overseeing authorities.
Independent auditors and the audit committee, when established, individually or jointly, must formally notify the Brazilian Central Bank of the existence or evidence of error or fraud, within three business days of the identification of the respective occurrence, including:
| · | noncompliance with legal rules and regulations that place the continuity of the audited entity at risk; |
| · | frauds of any amount perpetrated by the management of the institution; |
| · | material frauds perpetrated by the institution’s employees or third parties; and |
| · | errors that result in major incorrectness in the financial statements of the audited entity. |
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The executive office of the financial institution must inform the independent auditor and the audit committee, when established, if any of the above situations occur.
CMN regulation also requires financial institutions and certain other entities holding Regulatory Capital equal to or greater than R$1 billion to create a corporate body designated as the “audit committee”. To obtain more information concerning the audit committee, see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board Advisory Committees—Audit Committee.”
Internal Auditing of Financial Institutions
Financial institutions are required to establish and maintain internal audit activities compatible with their operational specifications, so that such internal bodies are able to perform an independent, autonomous and impartial audit of the quality and effectiveness of the institution’s internal systems. Such unit shall be directly controlled by the institution’s board of directors. Internal and external independent auditors are also liable for failures of the financial institution’s internal control mechanisms.
Socio-Environmental Responsibility Policy
Financial institutions are required to have a responsibility policy, which must guide the social and environmental actions in conducting their businesses, their relationship with their customers and other users of their products and services. The responsibility policy must also guide the financial institution’s relationship with its personnel and with any others affected by the financial institution’s activities. In addition, the responsibility policy must provide for the management of social and environmental risks (which, according to the Brazilian Central Bank, represent one of the several categories of risk to which financial institutions are exposed).
Policy for Succession of Financial Institutions Managers
Brazilian financial institutions and other institutions authorized to operate by the Brazilian Central Bank shall implement and maintain internal policies for succession of managers, applicable to higher levels of the institution’s management. The internal policy shall encompass the procedures related to recruitment, promotion, appointment and retention of managers in accordance with the institution’s rules for identification, evaluation, training and selection of the candidates to management offices.
Corporate Governance of Financial Institutions
Financial institutions must (i) remit to the Brazilian Central Bank information on the financial institution’s management, controlling group and relevant shareholders, including the obligation to communicate to the regulator any information that may affect the reputation of any such persons; (ii) make available a communication channel allowing employees, contributors, customers, users, associates, or services providers to report anonymously situations indicating illegalities of any nature related to the institution; and (iii) have an internal body responsible for receiving the information and complying with the reporting obligations.
Compliance Policy
Financial institutions must implement and maintain a compliance policy compatible with the nature, size, complexity, structure, risk profile and business model of the institution, which is intended to ensure an effective compliance risk management by the institution and may be established at the consolidated enterprise level (conglomerado prudencial). The compliance policy must establish the scope and purpose of the compliance function in the institution, set forth the organizational structure of the compliance function, specify which personnel is allocated to the compliance function, and establish a segregation of roles among personnel in order to avoid conflicts of interest.
The compliance policy must be approved by the board of directors and the regulation also assigns to the board the responsibility to ensure the following: adequate management of the compliance policy
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throughout the institution, its effectiveness and continued application, its communication to all employees and services providers, as well as the dissemination of the integrity and ethical standards as part of the institution’s culture. The board of directors is also responsible for ensuring the application of measures in case of noncompliance, and for providing the necessary means for the activities related to the compliance functions to be adequately conducted.
Consumer Protection
Relationships between consumers and financial institutions are governed by Law 8,078, dated September 11, 1990, or “Brazilian Consumer Protection Code”, which grants consumers certain rights and sets forth measures to be observed by suppliers, which must be complied with by financial institutions. The Brazilian Consumer Protection Code sets forth as consumer rights, among others, the assistance/facilitation in the defense of consumers’ rights, including through reverse burden of proof in their favor, and possibility of judicial review of contractual provisions deemed abusive.
Furthermore, banking regulation establishes procedures that financial institutions must observe when contracting any transactions, as well as when rendering services. We may highlight the following as examples of said procedures:
| · | to timely provide the necessary information including rights, duties, responsibilities, costs or advantages, penalties and possible risks when carrying out a transaction or rendering a service to allow customers and users free choice and decision-making; |
| · | to timely provide, to the customer or user, agreements, receipts, statements, advice and other documents related to the transactions and services, as well as the possibility of timely cancellation of the agreements; |
| · | formalization of an adequate instrument setting forth the rights and obligations for opening, using and maintaining a postpaid payment account; |
| · | to forward a payment instrument to the customers’ or users’ residence or to enable the respective instrument only upon express request or authorization; and |
| · | identification of end users’ beneficiaries for payments or transfer in statements and bills of the payer, including in situations in which the payment service involves institutions participating in different payment arrangements. |
Financial institutions operating exclusively via digital means are excluded from the scope of certain aspects of the regulation.
Policy for Relationship with Customers and Users of Financial Products and Services
Financial institutions and other institutions authorized to operate by the Brazilian Central Bank must have a policy governing the relationship with customers and users of financial products and services. In addition, such entities shall comply with the principles of ethics, liability, transparency and diligence promoting the convergence of interests and the consolidation of the institutional image of credibility, security and expertise.
Ombudsman
Financial institutions and other entities that are authorized to operate by the Brazilian Central Bank must have an ombudsman office. An ombudsman office has the following attributes according the current regulation:
| · | to provide last resort assistance in connection with customer claims that have not been resolved through the conventional customer service channels (including the banking correspondents and the customer service attendance channel-SAC); |
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| · | to act as a communication channel between the financial institutions and their customers, including for dispute resolution; and |
| · | to keep management informed of its activities. |
Institutions that are part of a financial group are allowed to establish one ombudsman department to service the whole group. The officer in charge of the ombudsman office must prepare a report every six months, which must be provided to the management and auditing bodies, as well as be available to the Brazilian Central Bank for a period of at least five years.
Investment Funds Industry Regulation
Investment funds are subject to the regulation and supervision of the CMN and the CVM and, in certain specific matters, the Brazilian Central Bank. Investment funds may be managed by full-service banks, commercial banks, savings banks, investment banks, credit, financing and investment companies and brokerage and dealer companies within certain operational limits.
Investment funds may invest in any type of financial instrument available in the financial and capital markets, including, for example, fixed income instruments, stocks, debentures and derivative products, provided that, in addition to the denomination of the fund, a reference to the relevant type of fund is included.
Broker-Dealer Regulation
Broker and dealer firms are part of the national financial system and are subject to CMN, Brazilian Central Bank and CVM regulation and supervision. Brokerage firms must be chartered by the Brazilian Central Bank and are the only institutions in Brazil authorized to trade on stock exchanges. Both brokers and dealers may act as underwriters in the public placement of securities and engage in the brokerage of foreign currency in any exchange market.
As of August 29, 2019, securities brokers and dealers may loan their own securities to their clients as long as they use the funds as collateral for operations in which the institution itself intermediates. The loan transaction consists of the transfer of assets from the institution: (i) to the customer, in conjunction with the transfer of that asset to the clearinghouse or clearing and settlement service provider; or (ii) to the clearinghouse or clearing and settlement service provider on behalf of the customer through powers established in a formal written power of attorney. In either case, the assets or set of assets in question shall return to the positions originally held at the end of the period stipulated in the contract. To offer this new service, securities brokers and dealers must appoint a director responsible for the loan operations under consideration.
Foreign Exchange Market
Transactions involving the sale and purchase of foreign currency in Brazil may be conducted only by institutions duly authorized by the Brazilian Central Bank to operate in the foreign exchange market. There is no current limit to long or short positions in foreign currency for banks authorized to carry out transactions on the foreign exchange market. Other institutions within the national financial system are not allowed to have short positions in foreign currency, although there are no limits with respect to foreign exchange long positions.
The Brazilian Central Bank imposes a limit on the total exposure in foreign currency transactions and transactions subject to foreign exchange fluctuation undertaken by Brazilian financial institutions, including branches abroad, and their direct and indirect affiliates. The limit is currently equivalent to 30.0% of the financial institution’s Regulatory Capital (Patrimônio de Referência), on a consolidated basis. The CMN, the Brazilian Central Bank and the Brazilian government may change the regulation applicable to foreign currency and foreign exchange transactions undertaken by Brazilian financial institutions in accordance with Brazil’s economic policy (including its foreign exchange policy).
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On October 7, 2019, the Brazilian Central Bank, sent to the President of Brazil a draft bill to change the way in which the Brazilian foreign exchange market (“New Foreign Exchange Bill”). The draft also contains provisions regarding Brazilian capital abroad and foreign capital within Brazil. The initiative aims to modernize, simplify and reduce legal doubts associated with current Brazilian foreign exchange legislation.
The main aspects of the New Foreign Exchange Bill are: (i) ratification, at the legal level, that foreign exchange transactions may be carried out freely (provided such transactions are carried out by entities authorized to operate in this market and subject to applicable rules); (ii) granting of broad powers to the CMN and the Brazilian Central Bank to regulate the foreign exchange market and foreign exchange operations; (iii) expansion of international correspondence activities by Brazilian banks; (iv) possibility of Brazilian financial institutions investing and lending abroad funds that have been raised in Brazil or abroad; (v) the exclusion from its scope of foreign currency purchase and sale operations of up to US$1,000 carried out between individuals on an occasional and non-professional basis; and (vi) the granting of powers to the monetary authorities to establish situations in which the prohibition of the private offset of credits between residents and nonresidents, as well as payments in foreign currency in Brazil, would not apply. As of this date, the Brazilian Congress is still reviewing the proposal and it is not possible to estimate if and when it will be approved, or what changes will be proposed.
Foreign Investment in Brazilian Financial Institutions
According to the Brazilian federal constitution, the acquisition of equity interests by foreign individuals or legal entities in the capital stock of Brazilian financial institutions is forbidden, unless permitted by bilateral international treaties or by the Brazilian government by means of a presidential decree. A presidential decree issued on November 13, 1997, issued in respect of Banco Meridional do Brasil S.A. (our legal predecessor) allows 100% foreign participation in our capital stock. Foreign investors may acquire the shares issued by Santander Brasil as a result of this decree. In addition, foreign investors may acquire publicly traded nonvoting shares of Brazilian financial institutions traded on a stock exchange or securities depositary receipts offered abroad representing shares without specific authorization.
Following the enactment of Decree No. 10,029, the Brazilian Central Bank published, on January 22, 2020, Circular No.3,977 recognizing as an interest of the Brazilian government the foreign holding of equity or increase in equity interest of financial institutions headquartered in Brazil (which is still subject to the same requirements and procedures applicable to the any acquisition of equity in Brazilian financial institution), as well as the opening of local branches of foreign financial institutions. However, since Santander Brasil had already been granted a specific presidential decree authorizing the foreign interest in its share capital, prior to Decree 10,029/19 being issued it does not affect its operations in Brazil.
A foreign financial institution duly authorized to operate in Brazil through a branch or a subsidiary is subject to the same rules, regulations and requirements that are applicable to any Brazilian financial institution.
Bank Correspondents
Financial institutions are allowed to provide specific services to customers, including customer services, through other entities. These entities are called “bank correspondents” and the relationship between the financial institution and the bank correspondent is ruled by a specific regulation published by CMN and is subject to the supervision of the Brazilian Central Bank.
Regulation of Branches
Authorization by the Brazilian Central Bank is required for operations of branches or subsidiaries of Brazilian financial institutions, upon the compliance with certain term, capital and equity requirements, as well as the submission of an economic and financial feasibility analysis.
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The Brazilian Central Bank’s prior authorization is also required in order to: (i) allocate new funds to branches or subsidiaries abroad; (ii) subscribe capital increases, directly or indirectly, in subsidiaries abroad; (iii) increase equity participation, directly or indirectly, in subsidiaries abroad; and/or (iv) merge or spin off, directly or indirectly, subsidiaries abroad.
The Brazilian Central Bank determines that financial institutions can install the following establishments in Brazil: (i) branches, (ii) teller booths, (iii) automatic teller machines, and (iv) segregated administrative units, provided that, for items (i) to (iii), conformity with requirements of minimum capital and operating limits are necessary.
Cayman Islands Banking Regulation
We have a branch in the Cayman Islands with its own staff and representative officers. Banco Santander (Brasil) S.A. – Grand Cayman Branch is licensed under The Banks and Trust Companies Law (2013 Revision) of the Cayman Islands, or the “Banks and Trust Companies Law,” as a Category “B” Bank and it is duly registered as a Foreign Company with the Registrar of Companies in the Cayman Islands. The branch, therefore, is duly authorized to carry on banking business in the Cayman Islands. The branch was authorized by the local authorities to act as its own registered office and it is located at the Waterfront Centre Building, 28, North Church Street – 2nd floor, George Town, Grand Cayman, Cayman Islands, P.O. Box 10444 – KYI-1004, Phone: 1-345-769-4401 and Fax: 1-345-769-4601.
Our Grand Cayman Branch is currently engaged in the business of sourcing funds in the international banking and capital markets to provide credit lines for us, which are then extended to our customers for working capital and trade-related financings. It also takes deposits in foreign currency from corporate and individual customers and extends credit to Brazilian and non-Brazilian customers, mainly to support trade transactions with Brazil. The results of the operations of the Grand Cayman Branch are consolidated in our consolidated financial statements.
Banks and trust companies wishing to conduct business from within the Cayman Islands must be licensed by the Cayman Islands Monetary Authority under the Banks and Trust Companies Law, irrespective of whether the business is to be actually conducted in the Cayman Islands.
Under the Banks and Trust Companies Law, there are two main categories of banking license: a category “A” license, which permits unrestricted domestic and offshore banking business, and a category “B” license, which permits principally offshore banking business. The holder of a category “B” license may have an office in the Cayman Islands and conduct business with other licensees and offshore companies but, except in limited circumstances, may not do banking business locally with the public or residents of the Cayman Islands. We have an unrestricted category “B” license.
There are no specific ratio or liquidity requirements under the Banks and Trust Companies Law, but the Cayman Islands Monetary Authority will expect observance of prudent banking practices, and the Banks and Trust Companies Law imposes a minimum net worth requirement of an amount equal to CI$400,000 (or, in the case of licensees holding a restricted category “B” or a restricted trust license, CI$20,000). As of December 31, 2019, CI$1 was equivalent to R$4.88, according to the Brazilian Central Bank.
Luxembourg Banking Regulation
Branches of credit institutions from outside the European Union (“non-EU credit institutions”) must be licensed by the Luxembourg Minister of Finance under the law of 5 April 1993 on the financial sector, as amended, in order to operate in Luxembourg.
We have a branch in Luxembourg with its own staff and representative officers. Our Luxembourg branch is licensed as a Luxembourg branch of a non-EU credit institution and is duly registered with the Luxembourg Trade and Companies’ Registry. The branch, therefore, is duly authorized to carry on banking business in Luxembourg. Its registered offices are at 35F, avenue J.F. Kennedy, 2nd floor, L-
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1855 Luxembourg, Grand Duchy of Luxembourg.
Our Luxembourg branch is currently engaged in the business of sourcing funds in the international banking and capital markets to provide credit lines for us, which are then extended to our customers for working capital and trade-related financings. It also takes deposits in foreign currency from corporate and individual customers and extends credit to Brazilian and non-Brazilian customers, mainly to support trade transactions involving Brazil. The results of the operations of the Luxembourg branch are consolidated in our consolidated financial statements.
Luxembourg law requires the Luxembourg branch to have a minimum endowment capital of €8,700,000 and the solvency, and liquidity requirements deriving, among others, from EU Regulation No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms apply to it.
Foreign Subsidiary
We established an independent subsidiary in Spain, Santander EFC, in order to complement our foreign trade strategy for corporate customers, which are composed of large Brazilian companies and their operations abroad. This allows us to provide financial products and services by means of an offshore entity, which is not established in a “tax haven,” such as our Cayman Islands branch, in accordance with Law No. 12,249, of June 11, 2010, and Brazilian Federal Revenue Normative Ruling No. 1,037, of June 4, 2010.
The establishment of our foreign subsidiary was approved by the Brazilian Central Bank on September 26, 2011, by the SpanishMinisterio de Economia y Hacienda on February, 6, 2012 and by the Bank of Spain on March 28, 2012. The remittance of resources to pay up the share capital of the subsidiary was carried out on March 5, 2012, totaling €748 million. Santander EFC has been operational since March 2012.
U.S. Banking Regulation
Financial Regulatory Reform
Banking statutes and regulations are continually under review by the United States Congress. In addition to laws and regulations, the U.S. bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance. Many changes have occurred as a result of the 2010 Dodd-Frank Act and its implementing regulations, most of which are now in place. More recently, the President of the United States issued an executive order in 2017 that sets forth principles for financial regulatory and reform. In May 2018 the United States Congress passed, and President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) which, among other things, revised the thresholds for total consolidated assets at which certain enhanced prudential standards apply to bank holding companies. EGRRCPA made clear that the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") retains the right to apply enhanced prudential standards to FBOs with greater than $100 billion in global total consolidated assets, such as Santander Spain.
In October 2019, the federal banking agencies issued final rules (the "Tailoring Rules") that, pursuant to EGRRCPA, adjust the thresholds at which certain enhanced prudential standards and capital and liquidity requirements apply to certain banking organizations, including large FBOs such as Santander Spain. As a result, Santander Spain is now generally subject to less restrictive enhanced prudential standards and capital and liquidity requirements than under previously applicable regulations.
Volcker Rule
Section 13 of the U.S. Bank Holding Company Act of 1956, as amended, and its implementing rules (collectively, the “Volker Rule”) prohibits “banking entities” from engaging in certain forms of
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proprietary trading or from sponsoring or investing in “covered funds,” in each case subject to certain exceptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with covered funds with which they or their affiliates have certain relationships. Banking entities such as Santander Brasil and Santander Spain were required to bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement. Santander Spain has assessed how the Volcker Rule affects its businesses and subsidiaries, including Santander Brasil, and has brought its activities into compliance. Santander Brasil has adopted processes to establish, maintain, enforce, review and test the compliance program designed to achieve and maintain compliance with the Volcker Rule. The Volcker Rule contains exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations, as well as certain foreign government obligations, and trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained. Santander Spain’s non-U.S. banking organization subsidiaries, including Santander Brasil, are largely able to continue their activities outside the United States in reliance on the “solely outside the U.S.” exemptions from the Volcker Rule. Those exemptions generally exempt proprietary trading, and sponsoring or investing in covered funds if, among other restrictions, the essential actions take place outside the United States and any transactions are not with U.S. persons.
On July 21, 2017, the five regulatory agencies charged with implementing the Volcker Rule announced the coordination of reviews of the treatment of certain foreign funds that are investment funds organized and offered outside of the United States and that are excluded from the definition of covered fund under the agencies’ implementing regulations. Also in July 2017, the Federal Reserve issued guidelines for banking entities seeking an extension to conform certain “seeding” investments in covered funds to the requirements of the Volcker Rule.
As of October 2019, the five regulatory agencies charged with implementing the Volcker Rule finalized amendments to the Volcker Rule. These amendments tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the Volcker Rule, and modify the information companies are required to provide the federal agencies. Santander Brasil will still largely rely on the “solely outside the U.S. exemption” to conduct its trading activities.
In early 2020, the five federal agencies proposed additional amendments to the Volcker Rule related to the restrictions on ownership interests in and relationships with covered funds. Santander Spain will continue to monitor these Volcker Rule-related developments and assess their impact on its operations, including those of Santander Brasil, as necessary.
U.S. Anti-Money Laundering, Anti-Terrorist Financing, and Foreign Corrupt Practices Act Regulations
Santander Brasil, as a foreign private issuer whose securities are registered under the Exchange Act, is subject to the U.S. Foreign Corrupt Practices Act, or the “FCPA”. The FCPA generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained and accurate financial statements can be prepared. Penalties, fines and imprisonment of Santander Brasil’s officers and/or directors can be imposed for violations of the FCPA.
Furthermore, Santander Brasil is subject to a variety of U.S. anti-money laundering and anti-terrorist financing laws and regulations, such as the Bank Secrecy Act of 1970, as amended, and the USA Patriot Act of 2001, as amended, and a violation of such laws and regulations may result in substantial penalties, fines and imprisonment of Santander Brasil’s officers and/or directors.
U.S. Sanctions
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The Office of Foreign Assets Control (“OFAC”) is responsible for administering economic sanctions imposed against designated foreign countries, governments, individuals and entities pursuant to various Executive Orders, statutes and regulations. OFAC-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions on U.S. persons’ trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) blocking of assets of targeted governments or “specially designated nationals,” by prohibiting transfers of property subject to U.S. jurisdiction, including property in the possession or control of U.S. persons. Blocked assets, such as property and bank deposits, cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. In addition, non-U.S. persons can be liable for “causing” a sanctions violation by a U.S. person or can violate U.S. sanctions by exporting services from the United States to a sanctions target, for example by engaging in transactions with targets of U.S. sanctions denominated in U.S. dollars that clear through U.S. financial institutions (including through U.S. branches or subsidiaries of non-U.S. banks).
Failure to comply with applicable U.S. sanctions could have serious legal and reputational consequences, including significant civil monetary penalties and, in the most severe cases, criminal penalties.
In addition, the U.S. government has implemented various sanctions that target non-U.S. persons, including non-U.S. financial institutions, that engage in certain activities undertaken outside the United States and without the involvement of any U.S. persons (“secondary sanctions”) that involve Iran, North Korea, Russia, or Hezbollah or other persons designated by the U.S. under the specially Designated Global Terrorist (SDGT) sanctions program. If a non-U.S. financial institution were determined to have engaged in activities targeted by certain secondary U.S. sanctions, it could lose its ability to open or maintain correspondent or payable-through accounts with U.S. financial institutions, among other potential consequences.
Antitrust Regulation
According to the Brazilian antitrust law, actions that concentrate market share must be previously submitted to CADE for approval if the following criteria are met: (i) at least one of the groups involved in the deal has posted annual gross revenues or volume of business equal to or over R$750 million, in Brazil, in the year prior to the transaction; and (ii) at least another group has posted annual gross revenues or volume of business equal to or over R$75 million, in Brazil, in the year prior to the transaction. Closing of a transaction without CADE’s approval will subject the parties to fines ranging from R$60,000 to R$60 million.
The Brazilian Central Bank will also examine certain corporate reorganizations and other acts involving two or more financial institutions not only considering their potential effects on the financial system and its stability but also any potential impacts regarding market concentration and competition. Upon approval of the transaction, the Brazilian Central Bank may establish certain restrictions and require that the financial institutions execute an agreement of market concentration control, pursuant to which the terms and conditions of the sharing of the efficiency gain resulting from the act shall be set forth.
In December 2018, the Brazilian Central Bank and CADE approved a joint normative act establishing procedures with the purpose of increasing efficiency for their respective actions regarding antitrust matters. Pursuant to the joint normative act, the authorities are authorized to share information for the purposes of their respective activities and carry out meetings with each other to discuss matters requiring the regulatory cooperation between both authorities.
Insolvency Laws Concerning Financial Institutions
Financial institutions are subject to the proceedings established by Law 6,024 of March 13, 1974, or “Law 6024”, which establishes the applicable provisions in the event of intervention or extrajudicial
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liquidation by the Brazilian Central Bank, as well as to bankruptcy proceedings.
Intervention and extrajudicial liquidation occur when the Brazilian Central Bank has determined that the financial institution is in bad financial condition or upon the occurrence of events that may impact the creditors’ situation. Such measures are imposed by the Brazilian Central Bank in order to avoid the bankruptcy of the entity.
| Intervention |
An intervention can be carried out at the discretion of the Brazilian Central Bank in the following cases:
| · | risk to the creditors due to mismanagement; |
| · | consistent violation of Brazilian banking laws or regulations; or |
| · | if the intervention is a feasible alternative to the liquidation of the financial institution. |
As of the date on which it is ordered, the intervention will automatically suspend the enforceability of the payable obligations; prevent early termination or maturity of any previously contracted obligations; and freeze deposits existing on the date on which the intervention is decreed.
The intervention will cease if interested parties undertake to continue the economic activities of the financial institution, by presenting the necessary guarantees, as determined by the Brazilian Central Bank, when the situation of the entity is regularized as determined by the Brazilian Central Bank; or when extrajudicial liquidation or bankruptcy of the entity is ordered.
Intervention may also be ordered upon the request of a financial institution’s management.
Extrajudicial Liquidation
Extrajudicial liquidation is an administrative proceeding decreed by the Brazilian Central Bank (except that it is not applicable to financial institutions controlled by the Brazilian federal government) and conducted by a liquidator appointed by the Brazilian Central Bank. This extraordinary measure aims at terminating the activities of the affected financial institution, liquidating its assets and paying its liabilities, as in a judicially decreed bankruptcy. The Brazilian Central Bank will place a financial institution in extrajudicial liquidation if:
| · | the institution’s economic or financial situation is at risk, particularly when the institution ceases to meet its obligations as they become due, or upon the occurrence of an event that could indicate a state of insolvency under the rules of the Bankruptcy Law; |
| · | management seriously violates Brazilian banking laws, regulations or rulings; |
| · | the institution suffers a loss which subjects its unprivileged and unsecured creditors to severe risk; and/or |
| · | upon revocation of the authorization to operate, the institution does not initiate ordinary liquidation proceedings within 90 days or, if initiated, the Brazilian Central Bank determines that the pace of the liquidation may harm the institution’s creditors. |
A request for liquidation procedures can also be filed on reasonable grounds by the officers of the respective financial institution or by the receiver appointed by the Brazilian Central Bank in the receivership procedure.
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The decree of extrajudicial liquidation will: (i) suspend the actions or foreclose on rights and interests relating to the estate of the entity being liquidated, while no other actions or executions may be brought during the liquidation; (ii) accelerate the obligations of the entity; and (iii) interrupt the statute of limitations with regard to the obligations assumed by the institution.
Extrajudicial liquidation procedures may be terminated:
| · | by discretionary decision of the Brazilian Central Bank if the parties involved undertake the administration of the financial institution after having provided the necessary guarantees; or |
| · | when the final accounts of the receiver are delivered and approved and subsequently registered in the relevant public records; or |
| · | when converted into ordinary liquidation; or |
| · | when a financial institution is declared bankrupt. |
Temporary Special Administration Regime (Regime de Administração Especial Temporária or “RAET”)
In addition to the intervention procedures described above, the Brazilian Central Bank may also establish a RAET, under Law 9447, dated March 14, 1997 combined with Law 6,024/74, which is a less severe form of the Brazilian Central Bank intervention in private and nonfederal public financial institutions which allows institutions to continue to operate normally. The RAET may be ordered in the case of an institution that:
| · | continually enters into recurrent operations that are against economic or financial policies set forth in federal law; |
| · | faces a shortage of assets; |
| · | fails to comply with the compulsory reserves rules; |
| · | reveals the existence of hidden liabilities; |
| · | experiences the occurrence of situations that cause receivership pursuant to current legislation; |
| · | has reckless or fraudulent management; or |
| · | carries out activities which call for an intervention. |
The main objective of a RAET is to assist the recovery of the financial condition of the institution under special administration and thereby avoid intervention and/or liquidation. Therefore, a RAET does not affect the day-to-day business, operations, liabilities or rights of the financial institution, which continues to operate in the ordinary course of business. Measures which may be adopted by the institution include the transfer of assets, rights and obligations to other entities, and corporate restructuring of these entities, with a view to the continuity of the institution’s business or activities.
There is no minimum term for a RAET, which ceases upon the occurrence of any of the following events: (i) acquisition by the Brazilian federal government of control of the financial institution, (ii) corporate restructuring, merger, spinoff, amalgamation or transfer of the controlling interest of the financial institution, (iii) decision by the Brazilian Central Bank, or (iv) declaration of extrajudicial liquidation of the financial institution.
Bankruptcy Law
Law No. 11,101, of February 9, 2005, as amended, or the “Bankruptcy Law”, regulates judicial reorganizations, out-of-court reorganizations and the bankruptcy of individuals and corporations that
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have occurred since 2005 and applies to financial institutions only with respect to the matters not specifically regulated by the intervention and extrajudicial liquidation regimes described above.
Repayment of Creditors in a Liquidation or Bankruptcy
In the event of extrajudicial liquidation or bankruptcy of a financial institution, creditors are paid pursuant to their priorities and privileges. Prepetition claims are paid on a ratable basis in the following order: labor credits; secured credits; tax credits; credits with special privileges; credits with general privileges; unsecured credits; contractual fines and pecuniary penalties for breach of administrative or criminal laws, including those of a tax nature; and subordinated credits.
The current law confers immunity from attachment of compulsory deposits maintained by financial institutions with the Brazilian Central Bank. Such deposits may not be attached in actions by a bank’s general creditors for the repayment of debts and require that the assets of any insolvent bank funded by loans made by foreign banks under trade finance lines be used to repay amounts owing under such lines in preference to those amounts owing to the general creditors of such insolvent bank.
Recovery Plans for Systematically Important Financial Institutions
Systemically important Brazilian financial institutions must implement a recovery plan (plano de recuperação), with the aim of reestablishing adequate levels of capital and liquidity and to preserve the viability of such institutions. The recovery plans must identify their critical functions for the National Financial System, adopt stress-testing scenarios, define clear and transparent governance procedures, assess possible barriers to the entity’s recovery, as well as implement effective communication plans with key stakeholders.
Deposit Insurance - FGC
The purpose of the FGC is to guarantee the payment of funds deposited with financial institutions in case of intervention, liquidation, bankruptcy or insolvency. The FGC is funded by ordinary contributions made by the financial institutions in the amount of up to 0.0125% of the total amount of outstanding balances of the accounts corresponding to guaranteed obligations, and certain special contributions as determined. Delay in performing such contributions is subject to a penalty of 2% over the amount of the contribution.
The total amount of credit in the form of demand deposits, savings deposits, time deposits, deposits maintained in accounts blocked for transactions with checks (for the registration and control of funds relating to the rendering of services of payment of salaries, earnings, pensions), bills of exchange, real estate bills, mortgage bills, real estate credit bills and repurchase and resale agreements whose objects are instruments issued after March 8, 2012 by a company of the same group due to each customer by a financial institution (or by financial institutions of the same financial group) will be guaranteed by the FGC for up to a maximum of R$250,000 per customer. When the assets of the FGC reach 2% of the total amounts they guarantee, the CMN may temporarily suspend or reduce the contribution of financial institutions to the FGC. As from February 2016, credits of financial institutions and other institutions authorized to operate by the Brazilian Central Bank, complementary welfare entities, insurance companies, capitalization companies, investment clubs and investment funds, as well as those representing any interest in or financial instrument held by such entities, are not protected by the ordinary guarantee of FGC. In December 2017, the CMN enacted a new rule amending certain provisions of the FGC regulation among which includes the establishment of a limit of R$1 million per four-year period for the coverage of the credits of a certain creditor against the group of associated financial institutions.
Amendments to the Administrative Proceedings in the Brazilian National Financial System, the Brazilian Payment System and Capital Markets
Law 13,506 applies to entities authorized or supervised by the Brazilian Central Bank or by the CVM, as well as to market participants. Some of the key aspects of Law 13,506 are that: (i) it increases
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the maximum fine applicable by the Brazilian Central Bank from R$250,000 to R$2 billion or 0.5% of the revenues of the company arising from services and financial products in the year prior to the violation; (ii) it increases the maximum fine applicable by the CVM from R$500,000 to R$50 million; (iii) it makes additional types of violations subject to penalties; (iv) it provides that the penalty of “public admonition” may be cumulative to other penalties applicable by the Brazilian Central Bank; (v) it provides that Brazilian Central Bank may enter into cease-and-desist commitments; and (vi) it provides that the Brazilian Central Bank and the CVM may enter into administrative agreements similar to leniency agreements.
Opening, Maintenance and Closing of Deposit Accounts
CMN Resolution No. 4,753 provides criteria for the opening, maintenance and closing of deposit accounts. The regulation determines that financial institutions must adopt procedures and controls that allow the verification and validation of the identity and qualification of the account holders and, if applicable, their representatives, as well as the authenticity of the information provided by the client. This information must be kept updated by the financial institution.
The rule also requires financial institutions to ensure, through the procedures and technology used for the opening, maintaining and closing of deposit accounts, the integrity authenticity and confidentiality, as well as the protection against unauthorized access, use, alteration, reproduction and destruction, of the information and the electronic documents used by them during the process.
Issuance of Credit Instruments Electronically
Provisional Measure No. 897 (“MP 897/2019”) among other provisions, (i) created a new credit instrument, the Rural Real Estate Note (Cédula Imobiliária Rural or “CIR”), with the purpose of advancing rural real estate financing by the creation of an instrument specifically designed to that end; (ii) changed the rules governing Bank Deposit Certificates (Certificado de Depósito Bancário or “CDB”), especially regarding their issuance and the transfer of their ownership, by providing among other changes that CDB issued in book-entry form should be transferred by electronic endorsement, exclusively by means of a specific notation in the issuing institution's own electronic system or, when deposited in central depositary, by means of specific notation in the corresponding electronic system; and (iii) authorized that customary credit instruments such as the Agricultural Certificate of Deposit (Certificado de Depósito do Agronegócio - CDA), the Agricultural Warrant (Warrant Agropecuário - WA), the Real Estate Credit Certificate (Certificado de Crédito Imobiliário- CCI), the Bank Credit Note (Cédula de Crédito Bancário - CCB), the Rural Credit Note (Cédula de Crédito Rural - CCR) , the Rural Promissory Note (Nota Promissória Rural - NPR), the Rural Trade Bill (Duplicata Rural - DR), may be issued in book-entry form through the electronic bookkeeping system held at a financial institution or other entity authorized by the Central Bank to perform electronic bookkeeping activity.
Guidelines for Implementation of Open Banking in Brazil
The Brazilian Central Bank announced the initial guidelines for open banking regulation in Brazil through Notice No. 33,455 on April 25, 2019. Open Banking consists in the sharing of data and payment solutions by financial institutions and other authorized entities, upon customer’s authorization and via integration of information systems. Brazilian Central Bank has looked at open banking as an important tool for innovation in the financial market, making the banking industry more efficient and competitive.
The Brazilian open banking model will comprise financial institutions, payment institutions and other Brazilian Central Bank-licensed entities by making it possible to share, in a phased-in approach, (i) data on products and services, (ii) customer record data, and (iii) customer transaction data. Open banking will eventually cover the provision of payment services. The criteria and specifications of each phase will be specified by the Brazilian Central Bank on specific regulation and self-regulation yet to be issued. Within this context, Brazilian Central Bank-licensed entities opting to join the open banking ecosystem must share the information listed above with other participating institutions. At its inception the open banking model will only be compulsory for financial institutions belonging to prudential conglomerates in segments S1 and S2. With regard to customer data, customer authorization will always
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be required.
On November 28, 2019, the Brazilian Central Bank launched Public Consultation No. 73/2019, which ended on January 21, 2020, which disclosed the draft resolution to implement Open Banking in Brazil to the public, so as to collect comments and suggestions on the proposed resolution. Among other topics, the draft resolution deals with the duties and responsibilities of participants and the minimum requirements for the operationalization of the system. According to the draft, financial institutions and prudential conglomerates belonging to the S1 and S2 segments, as is the case of Santander Brasil, are required to participate in Open Banking.
Regulatory Sandbox
On November 28, 2019, the Brazilian Central Bank published Public Consultation No. 72/2019, which ended on January 31, 2020, regarding the Controlled Testing Environment for Financial Innovations (“Sandbox”) which is intended to enable institutions test innovative financial and payment projects for a specified period. The draft resolution released by the Brazilian Central Bank establishes the applicable conditions for the implementation of the Sandbox, among which are the specific rules for the first cycle of tests, such as duration and number of participants, required documentation, criteria for the classification of institutions and the schedule for registration, selection and authorization processes of such entities. The Public Consultation is set to end on January 31, 2019, and as of this date, the Brazilian Central Bank is yet to receive contributions from various market agents, which will result in alterations on the proposed draft.
Limitations on overdraft-secured checks
On November 27, 2019, the CMN issued Resolution No. 4,765 or “Resolution No. 4,765/2019”, providing for new rules on the overdraft granted by financial institutions in checking accounts held by individuals and individual micro entrepreneurs. The new rule limits the charging of fees on overdraft-secured checks to: (i) 0% for the opening credit facilities of up to R$ 500.00; and (ii) 0.25% for the opening of credit facilities larger than R$500.00, calculated with the amount of the facility that exceeds R$500.00. It also limits interest rates over the overdraft-secured check to up to 8% per month, to which must be added a discount of the overdraft fees already charged monthly by the financial institution. If the interest is less than or equal to the overdraft fees, such interest rates must be equal to zero. In addition, Resolution No. 4,765/2019 establishes that the overdraft-secured check must be compatible with the customer’s risk profile.
Resolution No. 4,765/2019 has come into force on January 6, 2020, for agreements executed after the referred date, will come into force on June 1, 2020, for agreements executed prior to such date. Regarding the 8% limitation above, the rule applies to all contracts from January 6, 2020, regardless of the date the applicable contract was entered into.
On February 6, 2020, the Brazilian Central Bank issued Circular No. 3,981, which deals with the new information regarding overdraft facilities that must be highlighted in the statement of the checking accounts held by natural persons or MEIs. Circular No. 3,981 will enter into effect on June 1, 2020.
Automatic debit of banking accounts
On December 19, 2018, CMN issued Resolution No. 4,771, which sets forth new rules for the automatic debit payments from checking account and accounts designated for the payment of an individual’s wages. The new rule sets forth that financial institutions should only process automatic debit payments upon prior and express authorization of the client, and provides for the procedures for the authorization and cancellation of automatic debit payments. The new rule will come into force on May 1st, 2020.
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Taxation
Corporate Income Tax (IRPJ) and Social Contribution Tax (CSLL)
The IRPJ is calculated at a rate of 15.0%, plus a surtax of 10.0% which is levied on profits exceeding the amount of R$240,000 per year and the CSLL is calculated at a rate of 15.0% for financial institutions (until February, 2020) and 9.0% for companies, after adjustments determined by the tax legislation.
Constitutional amendment No. 103/2019 increased the CSLL tax rate for financial institutions from 15.0% to 20.0% from March 1, 2020.
Deferred tax assets and liabilities are measured based on temporary differences between the book basis and tax basis of assets and liabilities, tax losses, and adjustments to fair value of securities and derivatives.
According to the requirements in the current regulations, the expected realization of deferred tax assets is based on projections of future results and a technical study approved by the Directors of Santander Brasil.
Tax on Services (ISS)
Each of the Municipalities of Brazil and the Federal District are responsible for establishing the applicable ISS rate, which is charged on the value of services provided by the company, to the municipality where the service renderer is located. The rates vary from 2.0% to 5.0% and depend on the nature of the service.
On December 30, 2016, Complementary Law n° 157/2016 was enacted. This new legislation establishes a minimum rate of 2.0% for these types of taxes, no reductions or deductions being permitted. This Law provides that the following services are subject to ISS in the municipality in which the service taker is located: (i) card management, including POS services, that may be paid to the municipality where the corresponding POS device has been registered; (ii) leasing; (iii) fund management; and (iv) consortium.
Before the aforementioned Law was enacted, the ISS was due in the municipality in which the service provider was located (irrespective of where the service taker was located). With this new legislation, ISS rates may vary depending on where the service taker is located.
There are several complications that may arise from this new legislation, including (i) as service takers are generally located in several municipalities, it is logistically difficult to comply and collect the taxes; and (ii) there are situations where the municipality of the service taker is not easily identifiable by the credit card company (as is the case for online transactions, for example).
Since the ISS is a municipal tax, the rule must be regulated by each municipality in order to be enforceable. This new rule is only applicable to triggering events occurring from 2018 onwards, when the municipal regulations to the Complementary Law n° 157 come into force.
On March 23, 2018, the Brazilian Supreme Court suspended the application of the Complementary Law n° 157. It is still suspended. Although, the Congress is discussing a Complementary law proposition to centralize ISS tax collection, in order to tackle Complementary Law n° 157 suspension while making tax collection easier.
PIS and COFINS Tax Rates
PIS and COFINS are social contributions due on financial revenues and commissions, net of financial expenses, which are payable by financial institutions. The rate is 0.65% for PIS and 4% for COFINS. They are levied cumulatively on an accrual basis, and collected monthly.
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The non-financial entities are taxed at the rates of 1.65% and 7.6% of PIS and COFINS, respectively, and are subject to non-cumulative incidence, which consists of deduction of certain expenses from the tax base as allowed by law.
Tax on Financial Transactions (IOF)
IOF is a tax levied on credit, currency exchange, insurance and securities transactions and it is imposed on the following transactions and at the following rates:
Transaction(1) | Maximum Legal Rate | Current Rate |
| Credit extended by financial institutions and non-financial entities | 1.5% or 3% | 0.0041% per day for loans contracted by legal entities and 0.0082% per day for individuals capped at 365 days. An additional 0.38% rate is applicable in both cases. |
| Transactions relating to securities(2) | 1.5% per day | 0.5% per day for certain investment funds. |
| 0% on transactions with equity securities and certain debt securities, such as debentures and real estate receivables and agribusiness receivables (CRI/CRA). | ||
| 1% per day on transactions with fixed income derived from federal, state, or municipal public and private bonds, and fixed income investment funds limited to certain percentages of the income raised from investment. This rate is reduced to zero from the 30th day following the acquisition date of the investment and on repurchase agreements carried out by financial institutions and other institutions authorized by the Brazilian Central Bank with debentures issued by institutions belonging to the same group (Decree 8,731/2016). | ||
| 0% on the assignment of securities to permit the issuance of Depositary Receipts abroad. | ||
| Transactions relating to derivatives | 25.0% | Although the maximum rate is 25%, it has been reduced to zero at this moment. |
| Insurance transactions entered into by insurance companies | 25% | 2.38% for health insurance. |
| 0.38% for life insurance. | ||
| 7.38% for other types of insurance. | ||
| Foreign exchange transactions(2) | 25% | 0.38% (general rule). |
| 6.38% on credit card transactions as from April 27, 2011. | ||
| 6.38% on withdrawals abroad using |
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Transaction(1) | Maximum Legal Rate | Current Rate |
| credit or debit cards as from December 28, 2013. | ||
| 6.38% on purchase of travelers checks or loading of international prepaid card as from December 28, 2013. | ||
| 0% for outflow of funds related to the payment of principal and interest in connection with foreign loans and financings. | ||
| 6% for the inflow of funds into Brazil, related to foreign loans subject to registration before the Brazilian Central Bank whose average maturity term is equal or less than 180 days. | ||
| 0% for the inflow of funds into Brazil, related to foreign loans subject to registration before the Brazilian Central Bank whose average maturity term is higher than 180 days. | ||
| 0% for interbank transactions. | ||
| 0% for exchange transactions in connection with the outflow of proceeds from Brazil for the remittance of interest on net equity and dividends to be received by foreign investors. | ||
| 0% for exchange transactions, including by means of simultaneous foreign exchange transactions, for the inflow of funds by foreign investors in the Brazilian financial and capital markets. | ||
| 0% for exchange transactions, including by means of simultaneous foreign exchange transactions, for the inflow of funds by foreign investors for purposes of initial or additional margin requirements in connection with transactions in stock exchanges. | ||
| 0% for exchange transactions for the outflow of funds invested by foreign investors in the Brazilian financial and capital markets. | ||
| 0% for exchange transactions for the inflow and outflow of funds invested by foreign investors, including by means of simultaneous foreign exchange transactions, in certificates of deposit of securities, known as Brazilian Depositary Receipts. | ||
| 0% for simultaneous exchange transactions, for the inflow of funds by |
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Transaction(1) | Maximum Legal Rate | Current Rate |
| foreign investors derived from the conversion of direct investments in Brazil made pursuant to Law 4,131/62 into investments in stock tradable in stock exchanges, as from May 2, 2016. | ||
| 0% for revenues related to the export of goods and services transactions. | ||
The applicable rate is 1.10% for acquisitions of foreign currency (Decree 8,731/2016). The applicable rate for credit on a foreign bank account belonging to a resident in Brazil is 1.10%, as from March 3, 2018. |
| (1) | The transactions mentioned in the table are for illustration purposes and do not reflect an exhaustive list of transactions subject to the IOF. |
| (2) | There are some exemptions or specific cases in which the applicable rate is zero. |
FATCA
The Foreign Account Tax Compliance Act, or “FATCA,” became law in the United States on March 18, 2010. The legislation requires foreign financial institutions, or “FFIs,” (such as Santander Brasil) to enter into an FFI agreement under which they agree to identify and provide the U.S. Internal Revenue Service, or “IRS,” with information on accounts held by U.S. persons and certain U.S.-owned foreign entities, or otherwise face a 30% withholding tax on certain U.S. source withholdable payments. In addition, FFIs that have entered into an FFI agreement will be required to withhold on such payments made to FFIs that have not entered into an FFI agreement, account holders who fail to provide sufficient information to classify an account as a U.S. or non-U.S. account, and U.S. account holders who do not agree to the FFI reporting their accounts to the IRS.
On September 23, 2014, Brazil and the United States announced that they entered into an intergovernmental agreement, or “IGA”, which became effective in Brazil by virtue of Decree No. 8,506 as of August 24, 2015. The aim of the IGA is to improve international tax compliance and implement FATCA. The IGA establishes an automatic annual bilateral exchange of information with the U.S. tax authorities. Under this agreement, Brazilian financial institutions will generally be required to provide certain information about their U.S. account holders to the Brazilian tax authorities (Receita Federal do Brasil), which will share that information with the IRS.
Complying with the required identification, withholding and reporting obligations requires significant investment in an FFI’s compliance and reporting framework. We are continuing to follow developments regarding FATCA closely and are coordinating with all relevant authorities.
Common Reporting Standard
On December 28, 2016, Normative Ruling n° 1,680 was enacted, introducing the Common Reporting Standard in Brazil. The Common Reporting Standard provides for certain account reporting obligations similar to those existing under FATCA. It was created in the context of the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting project, which is aimed at reducing tax avoidance. Normative Ruling n° 1,680 applies to legal entities required to present the e-Financeira pursuant to Normative Ruling n° 1,571, dated July 2, 2016.
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On the same date, the Normative Ruling n° 1,681 was enacted providing for the obligation to annually deliver the “Country to Country Statement,” an ancillary obligation also arising from the discussions under the BEPS Project, before the Brazilian Federal Revenue Service, or “RFB” as a measure to expand information exchange and improve the level of international tax transparency. This new regulation should not have any impact on Santander Brasil, since, as it is controlled by a legal entity resident in Spain, it is not required by the Brazilian regulation to present such statement.
Income Tax Levied on Capital Gains
Law 13,259, of March 16, 2016 (“Law 13,259/16”) introduced the application of progressive tax rates for income taxation over capital gains recognized by Brazilian individuals and by holders that are not domiciled in Brazil for purposes of Brazilian taxation (“Non-Resident Holders”) on the disposition of assets in general. Under Law 13,259/16, the income tax rates applicable to capital gains realized by these investors would be: (i) 15% for the portion of the gains up to R$5 million, (ii) 17.5% for the portion of the gain that exceeds R$5 million but does not exceed R$10 million, (iii) 20% for the portion of the gain that exceeds R$10 million but does not exceed R$30 million, and (iv) 22.5% for the portion of the gain that exceeds R$30 million.
The provisions of Law 13,259/16 apply to Non Resident Holders pursuant to CMN Resolution 4,373, provided such Non Resident Holders are not located in a Tax Haven. However, Non Resident Holders (whether they are considered to be Non-Resident Holders as a result of CMN Resolution 4373 or otherwise) located in a Tax Haven are subject to a specific tax regulation and will continue to be taxed at a rate of 25.0%.
The tax must be withheld and paid by the buyer or, in cases where the buyer and seller are domiciled abroad, a legal representative of buyer shall be designated for the payment of the tax.
New Income Tax Bylaw (RIR/18)
Decree 9,580/18, published in November, 2018, revoked and replaced RIR/99 (Decree 3,000/99).
The new RIR/18 consolidates rules regarding Income Tax published until December 31st, 2016.
It includes several rule changes which occurred over time, such as transfer pricing and thin capitalization rules, financial products’ taxation and corporate income tax changes brought by Law 12973/2014, listed below:
| · | Tax effects connected to IFRS; |
| · | Transitional Tax Regime (RTT) revocation, which was implemented in order to neutralize temporarily the effects related to IFRS until Law 12,973 was enacted; |
| · | Equity-method company valuation, including new provision to tax treatment on goodwill or the discount paid on these entities investments; |
| · | Tax regimen applicable to profits, dividends and interests on equity by Brazilian companies; |
| · | Creation of new tax regimen regarding foreign controlled companies (CFC rules) e its effects on taxation arising from the profits earned abroad by these companies; and |
| · | A new PIS/COFINS calculation basis for financial institutions, including income from essential activity. |
Disclosure pursuant to Section 219 of the Iran threat reduction and Syria Human Rights Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
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As we are part of the Santander Group, we must also disclose the exposure of other entities of the Santander Group to Iran. The following activities are disclosed in response to Section 13(r) with respect to the Santander Group and its affiliates. During the period covered by this annual report:
(a) Santander UK holds accounts for two customers, with the first customer holding one GBP Savings Account and one GBP Current Account, and the second customer holding one GBP Savings Account. Both customers, who are resident in the UK, are currently designated by the US under the SDGT sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2019 were negligible relative to the overall profits of Banco Santander S.A.
(b) During the period covered by this annual report, Santander UK held one savings account with a balance of £1.24, and one current account with a balance of £1,884.53 for another customer resident in the UK who is currently designated by the US under the SDGT sanctions program. The customer relationship pre-dates the designations of the customer under these sanctions. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. Santander UK determined to put a block on these accounts and the accounts were subsequently closed on 14 January 2019. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 2019 were negligible relative to the overall profits of Banco Santander S.A.
(c) Santander UK holds two frozen current accounts for two UK nationals who are designated by the US under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through 2019. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the year ended December 31, 2019.
(d) The Santander Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.
(e) During the period covered by this annual report, Santander Brasil held one current account with a balance of R$100.0 for a customer resident in Brazil who is currently designated by the U.S. under the SDGT sanctions program. The customer relationship pre-dates the designation of the customer under these sanctions. Santander Brasil determined to terminate the account even prior to the customer being formally designated under the SDGT sanctions program on September 10, 2019, and the account was subsequently closed on October 9, 2019. Revenues and profits generated by Santander Brasil on this account in the year ended December 31, 2019 were negligible relative to the overall profits of Banco Santander S.A.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2019, which were negligible relative to the overall revenues and profits of Banco Santander, S.A. The Santander Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Santander Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
SELECTED STATISTICAL INFORMATION
The following information for Santander Brasil is included for analytical purposes and is derived from, and should be read in conjunction with, the consolidated financial statements and related notes contained elsewhere herein, as well as “Item 5. Operating and Financial Review and Prospects.”
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Average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and each of the month-end balances of the 12 subsequent months. Average income statement and balance sheet data and other related statistical information have been prepared on a consolidated annual basis.
The selected statistical information set forth below includes information at and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 extracted from the audited financial statements prepared in conformity with IFRS as issued by the IASB. See “Presentation of Financial and Other Information” and “Item 3. Key Information-A. Selected Financial Data.”
Average Balance Sheet and Interest Rates
The following tables show our average balances and interest rates for each of the periods presented. With respect to the tables below and the tables under “—Changes in Net Interest Income – Volume and Rate Analysis” and “—Assets—Earning Assets–Yield Spread,” (i) we have stated average balances on a gross basis, before netting impairment losses, except for the total average asset figures, which include such netting, and (ii) all average data have been calculated using month-end balances, which is not significantly different from having used daily averages. We stop accruing interest on loans once they are more than 60 days past due. All our non-accrual loans are included in the table below under “Other assets.”
| For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||||||||||||||
| Assets and Interest | ||||||||||||||||||||||||||||||||||||
| Income | ||||||||||||||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 48,670 | 3,828 | 7.9 | % | 81,018 | 5,096 | 6.3 | % | 105,301 | 5,954 | 5.7 | % | ||||||||||||||||||||||||
| Loans and amounts due from credit institutions | 101,981 | 3,844 | 3.8 | % | 56,093 | 2,978 | 5.3 | % | 23,460 | 5,107 | 21.8 | % | ||||||||||||||||||||||||
| Loans and advances to customers | 323,180 | 50,406 | 15.6 | % | 304,633 | 46,471 | 15.3 | % | 277,797 | 44,507 | 16.0 | % | ||||||||||||||||||||||||
| Debt instruments | 178,811 | 13,528 | 7.6 | % | 164,111 | 13,629 | 8.3 | % | 146,822 | 13,457 | 9.2 | % | ||||||||||||||||||||||||
| Other interest – earning assets | - | 1,235 | - | - | 2,304 | - | - | 2,393 | - | |||||||||||||||||||||||||||
| Total interest – earning assets | 652,642 | 72,841 | 11.2 | % | 605,855 | 70,478 | 11.6 | % | 553,380 | 71,418 | 12.9 | % | ||||||||||||||||||||||||
| Equity instruments | 1,464 | 19 | 1.3 | % | 1,213 | 33 | 2.7 | % | 1,871 | 83 | 4.4 | % | ||||||||||||||||||||||||
| Investments in associates | 1,060 | - | - | 963 | - | - | 987 | - | - | |||||||||||||||||||||||||||
| Total earning assets | 655,166 | 72,860 | 11.1 | % | 608,031 | 70,511 | 11.6 | % | 556,238 | 71,501 | 12.9 | % | ||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 4,538 | - | - | 4,351 | - | - | 4,569 | - | - | |||||||||||||||||||||||||||
| Loans and amounts due from credit institutions | 2,258 | - | - | 1,676 | - | - | 2,455 | - | - | |||||||||||||||||||||||||||
| Impairment losses | (22,528 | ) | - | - | (21,056 | ) | - | - | (18,169 | ) | - | - | ||||||||||||||||||||||||
| Other assets | 56,912 | - | - | 56,276 | - | - | 55,648 | - | - | |||||||||||||||||||||||||||
| Tangible assets | 9,091 | - | - | 6,414 | - | - | 6,484 | - | - | |||||||||||||||||||||||||||
| Intangible assets | 30,070 | - | - | 29,839 | - | - | 30,286 | - | - | |||||||||||||||||||||||||||
| Total average assets | 735,507 | 72,860 | 9.9 | % | 685,531 | 70,511 | 10.3 | % | 637,511 | 71,501 | 11.2 | % | ||||||||||||||||||||||||
| Liabilities and Interest Expense | ||||||||||||||||||||||||||||||||||||
| Deposits from the Brazilian Central Bank and Deposits from credit institutions | 100,473 | 4,866 | 4.8 | % | 95,217 | 5,367 | 5.6 | % | 81,797 | 3,783 | 4.6 | % | ||||||||||||||||||||||||
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| Customer deposits | 303,741 | 14,966 | 4.9 | % | 285,694 | 13,577 | 4.8 | % | 244,364 | 19,491 | 8.0 | % | ||||||||||||||||||||||||
| Marketable debt securities | 76,194 | 5,138 | 6.7 | % | 71,525 | 4,607 | 6.4 | % | 82,055 | 7,901 | 9.6 | % | ||||||||||||||||||||||||
| Subordinated debts | 10,779 | 660 | 6.1 | % | 10,952 | 630 | 5.8 | % | 8,599 | 548 | 6.4 | % | ||||||||||||||||||||||||
| Other interest-bearing liabilities | - | 2,890 | - | - | 4,376 | - | - | 4,749 | - | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 491,187 | 28,520 | 5.8 | % | 463,388 | 28,557 | 6.2 | % | 416,815 | 36,472 | 8.8 | % | ||||||||||||||||||||||||
| Noninterest bearing demand deposits | 14,612 | - | - | 11,127 | - | - | 16,394 | - | - | |||||||||||||||||||||||||||
| Other liabilities | 133,255 | - | - | 121,198 | - | - | 115,689 | - | - | |||||||||||||||||||||||||||
| Non-controlling interests | 617 | - | - | 555 | - | - | 745 | - | - | |||||||||||||||||||||||||||
| Stockholders’ Equity | 95,836 | - | - | 89,263 | - | - | 87,868 | - | - | |||||||||||||||||||||||||||
| Total average liabilities and equity | 735,507 | 28,520 | 3.9 | % | 685,531 | 28,557 | 4.2 | % | 637,511 | 36,472 | 5.7 | % |
Changes in Net Interest Income – Volume and Rate Analysis
The following tables present the changes in our net interest income allocated between changes in average volume and changes in average rate for the year ended December 31, 2019, compared to the year ended December 31, 2018, and for the year ended December 31, 2018 compared to the year ended December 31, 2017. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
| For the Years Ended 2019/2018 | For the Years Ended 2018/2017 | |||||||||||||||||||||||
| Increase (decrease) due to changes in | ||||||||||||||||||||||||
| Volume | Rate | Net change | Volume | Rate | Net change | |||||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||||||
| Interest and Similar Income | ||||||||||||||||||||||||
| Interest-earning assets | ||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | (2,348 | ) | 1,080 | (1,268 | ) | (1,477 | ) | 619 | (858 | ) | ||||||||||||||
| Loans and amounts due from credit institutions | 1,915 | (1,049 | ) | 866 | 3,624 | (5,753 | ) | (2,129 | ) | |||||||||||||||
| Loans and advances to customers | 2,876 | 1,059 | 3,935 | 4,162 | (2,198 | ) | 1,964 | |||||||||||||||||
| Debt instruments | 1,166 | (1,267 | ) | (101 | ) | 1,502 | (1,330 | ) | 172 | |||||||||||||||
| Other interest-earning assets | (1,069 | ) | - | (1,069 | ) | (89 | ) | - | (89 | ) | ||||||||||||||
| Total interest-earning assets | 2,540 | (177 | ) | 2,363 | 7,722 | (8,662 | ) | (940 | ) | |||||||||||||||
| Equity Instruments | 6 | (20 | ) | (14 | ) | (24 | ) | (26 | ) | (50 | ) | |||||||||||||
| Total earning assets | 2,546 | (197 | ) | 2,349 | 7,698 | (8,688 | ) | (990 | ) | |||||||||||||||
| Interest Expense and Similar Charges | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Deposits from the Brazilian Central Bank and Deposits from credit institutions | 285 | (786 | ) | (501 | ) | 679 | 905 | 1,584 | ||||||||||||||||
| Customer deposits | 878 | 511 | 1,389 | 2,903 | (8,817 | ) | (5,914 | ) | ||||||||||||||||
| Marketable debt securities | 309 | 222 | 531 | (920 | ) | (2,374 | ) | (3,294 | ) | |||||||||||||||
| Subordinated liabilities | (10 | ) | 40 | 30 | 139 | (57 | ) | 82 | ||||||||||||||||
| Other interest-bearing liabilities | (1,486 | ) | - | (1,486 | ) | (80 | ) | - | (80 | ) | ||||||||||||||
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| Total interest-bearing liabilities | (24 | ) | (13 | ) | (37 | ) | 2,721 | (10,343 | ) | (7,622 | ) |
Assets
Earning Assets – Yield Spread
The following table analyzes our average earning assets, interest income and dividends on equity securities and net interest income and shows gross yields, net yields and yield spread for each of the periods indicated. You should read this table and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
| For the Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in millions of R$, except percentages) | ||||||||||||
| Average total interest – earning assets | 652,642 | 605,855 | 553,380 | |||||||||
| Interest and dividends on equity securities(1) | 72,860 | 70,511 | 71,501 | |||||||||
| Net interest income | 44,340 | 41,954 | 35,029 | |||||||||
| Gross yield(2) | 11.2 | % | 11.6 | % | 12.9 | % | ||||||
| Net yield(3) | 6.8 | % | 6.9 | % | 6.3 | % | ||||||
| Yield spread(4) | 5.3 | % | 5.4 | % | 4.0 | % | ||||||
| (*) | Yield information does not give effect to changes in fair value that are reflected as a component of stockholder’s equity. |
| (1) | Total earning assets plus dividends from companies accounted for by the equity method (equity instruments). |
| (2) | Gross yield is the amount of “Interest and dividends on equity securities” divided by “Average earning assets.” |
| (3) | Net yield is the amount of “Net interest income” divided by “Average earning assets.” |
| (4) | Yield spread is the difference between the average rate of “Total earning asset” and the average rate of “Total interest-bearing liabilities.” |
Return on Equity and Assets
The following table presents our selected financial ratios for the periods indicated.
| For the Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| ROA: Return on average total assets | 2.3 | % | 1.9 | % | 1.4 | % | ||||||
| ROE: Return on average stockholders’ equity | 17.4 | % | 14.3 | % | 10.4 | % | ||||||
| ROE (adjusted) (1) | 24.6 | % | 21.0 | % | 15.4 | % | ||||||
| Average stockholders’ equity as a percentage of average total assets | 13.0 | % | 13.0 | % | 13.8 | % | ||||||
| Payout(2) | 65.8 | % | 52.5 | % | 70.7 | % | ||||||
| (1) | “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” is a non-GAAP financial measure which adjusts “Return on average stockholders’ |
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equity” to exclude the goodwill arising from the acquisition of Banco Real in 2008. See “Item 3. Key Information—A. Selected Financial Data—Selected Consolidated Ratios” for a reconciliation of “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” to “Return on average stockholders’ equity.”
| (2) | Dividend payout ratio (dividends declared per preferred share divided by net income per preferred share). |
Interest-Earning Assets
The following table shows the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
| For the Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Cash and balances with the Brazilian Central Bank | 7.5 | % | 13.4 | % | 19.0 | % | ||||||
| Loans and amounts due from credit institutions | 15.6 | % | 9.3 | % | 4.2 | % | ||||||
| Loans and advances to customers | 49.5 | % | 50.3 | % | 50.2 | % | ||||||
| Debt instruments | 27.4 | % | 27.0 | % | 26.5 | % | ||||||
| Total interest-earning assets | 100 | % | 100 | % | 100 | % | ||||||
Loans and Amounts Due from Credit Institutions
For further information about Loans and Amounts Due from Credit Institutions, see note “5 – Loans and amounts due from credit institutions” to our consolidated financial statements included in “Item 18. Financial Statements” of this annual report.
Investment Securities
As of December 31, 2019 and 2018, the book value of investment securities was R$176 billion and R$177 billion, respectively (representing 23% of our total assets as of such dates). Brazilian government securities totaled R$136 billion, or 77.3% and R$117 billion, or 66.0% of our investment securities as of December 31, 2019 and 2018, respectively. For a discussion of how our investment securities are valued, see notes 7 and 8 to our consolidated financial statements.
The following table shows the carrying amounts of our investment securities by type and residence of the counterparty at each of the indicated dates:
| As of December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in millions of R$) | ||||||||||||
| Debt securities | ||||||||||||
| Government securities—Brazil | 135,848 | 116,531 | 122,362 | |||||||||
| Debentures and promissory notes | 13,875 | 10,556 | 12,097 | |||||||||
| Other debt securities | 23,609 | 48,346 | 14,626 | |||||||||
| Total domestic/debt securities | 173,332 | 175,433 | 149,086 | |||||||||
| Equity securities | ||||||||||||
| Shares of Brazilian companies | 665 | 783 | 389 | |||||||||
| Shares of foreign companies | - | 2 | 5 | |||||||||
| Investment fund units and shares | 1,693 | 320 | 1,235 | |||||||||
| Total equity securities | 2,358 | 1,106 | 1,629 | |||||||||
| Total investment securities | 175,690 | 176,539 | 150,715 | |||||||||
As of December 31, 2019 and 2018, we held no securities of single issuers or related groups of companies whose aggregate book or market value exceed 1% of our stockholders’ equity, other than the Brazilian government securities, which represented 140% and 127%, respectively of our stockholders’ equity. As of December 31, 2019 and 2018, the total value of our debt securities was
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approximately 179% and 191%, respectively, of stockholders’ equity.
The following table analyzes the maturities and weighted average yields of our debt investment securities (before impairment allowance) as of December 31, 2019. Yields on tax-exempt obligations have not been calculated on a tax equivalent basis because the effect on such calculation is not significant.
| Maturing within 1 year | Maturing between 1 and 5 years | Maturing between 5 and 10 years | Maturing after 10 years | Total | ||||||||||||||||
| (in R$ millions) | ||||||||||||||||||||
| Debt securities | ||||||||||||||||||||
| Government securities—Brazil | 20,263 | 90,716 | 20,476 | 8,775 | 135,848 | |||||||||||||||
| Other debt securities | - | 25,031 | 8,071 | - | 37,484 | |||||||||||||||
| Total debt investment securities | 20,263 | 115,747 | 28,547 | 8,775 | 173,332 | |||||||||||||||
The average rate for debt investment securities is 7.6%.
Domestic and Foreign Currency
The following table shows our assets and liabilities by domestic and foreign currency, as of the dates indicated.
| As of December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Domestic Currency | Foreign Currency | Domestic Currency | Foreign Currency | Domestic Currency | Foreign Currency | |||||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank (1) | 4,878 | 15,250 | 16,651 | 15,065 | 18,144 | 15,981 | ||||||||||||||||||
| Debt instruments | 164,447 | 8,885 | 166,743 | 8,690 | 137,420 | 11,666 | ||||||||||||||||||
| Loans and amounts due from credit institutions, gross (1) | 107,694 | 1,553 | 79,166 | 454 | 65,279 | - | ||||||||||||||||||
| Loans and advances to customers, gross | 326,421 | 20,835 | 304,031 | 17,902 | 269,126 | 18,703 | ||||||||||||||||||
| Equity Instruments | 2,358 | - | 1,106 | - | 1,624 | 6 | ||||||||||||||||||
| Total assets | 605,798 | 46,523 | 567,697 | 42,111 | 491,593 | 46,356 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Financial Liabilities at Amortized cost: | ||||||||||||||||||||||||
| Deposits from the Brazilian Central Bank and Deposits from credit institutions | 58,283 | 40,988 | 74,160 | 24,863 | 56,563 | 22,812 | ||||||||||||||||||
| Customer deposits | 336,515 | - | 304,198 | - | 276,042 | - | ||||||||||||||||||
| Marketable debt securities | 64,987 | 8,715 | 70,109 | 4,517 | 68,335 | 1,912 | ||||||||||||||||||
| Subordinated debts | - | - | 9,886 | - | 519 | - | ||||||||||||||||||
| Debt instruments eligible to compose capital | - | 10,176 | - | 9,780 | 8,435 | - | ||||||||||||||||||
| Other financial liabilities | 60,885 | - | 51,729 | - | 44,261 | - | ||||||||||||||||||
| Total liabilities | 520,670 | 59,879 | 510,082 | 39,160 | 454,155 | 24,724 | ||||||||||||||||||
| (1) | In the fiscal year ended December 31, 2019, the balances related to compulsory deposits were reclassified from cash and reserves at the Brazilian Central Bank to the item Loans and other amounts with credit institutions for better presentation and, consequently, the respective comparative balances also have been reclassified. |
Loan Portfolio
As of December 31, 2019, our total loans and advances to customers were R$347 billion (45.6% of our total assets). Net impairment losses, loans and advances to customers were R$327 billion as ofDecember 31, 2019 (42.9% of our total assets). In addition to loans, we had outstanding as of December
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31, 2019, 2018, 2017, 2016 and 2015, R$125.9 billion, R$122.7 billion, R$106.9 billion, R$91.2 billion and R$91.9 billion respectively, of loan commitments drawable by third parties.
Types of Loans by Type of Customer
Substantially all of our loans are to borrowers domiciled in Brazil and are denominated inreais. The table below analyzes our loans and advances to customers (including securities purchased under agreements to resell), by type of customer loan, at each of the dates indicated. For each category of loan, we maintain specific risk management policies in line with the standards of the Santander Group and as managed and monitored by our board of officers through the credit committee. Our credit approval processes for each category of loan are structured primarily around our business segments. See “Item 11. Quantitative and Qualitative Disclosures about Risk—Credit Risk” for details on our credit approval policies for retail and wholesale lending.
We have a diversified loan portfolio with no specific concentration exceeding 10% of our total loans. Furthermore, currently, 1.01% of our loan portfolio is allocated to our largest debtor and 6.79% to our next 10 largest debtors.
For further information about Loans breakdown and Maturity see note “9 – Loans and advances to clients” sections “a - Breakdown” and “b – Detail” in “Item 18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB.
Fixed and Variable Rate Loans
The following table sets forth a breakdown of our fixed and variable rate loans by maturity as of December 31, 2019.
| Fixed and variable rate loans with maturity | ||||||||||||||||||||||||||||||||
| Less than one year | One to five years | Over five years | Total | |||||||||||||||||||||||||||||
| Balance | % of Total | Balance | % of Total | Balance | % of Total | Balance | % of Total | |||||||||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||||||||||
| Fixed rate | 155,506 | 84 | 91,283 | 77 | 11,972 | 28 | 258,761 | 75 | ||||||||||||||||||||||||
| Variable rate | 30,691 | 16 | 26,558 | 23 | 31,247 | 72 | 88,496 | 25 | ||||||||||||||||||||||||
| Total | 186,197 | 100 | 117,841 | 100 | 43,218 | 100 | 347,256 | 100 | ||||||||||||||||||||||||
Cross-Border Outstandings
The following table presents, at each balance sheet date indicated, the aggregate amount of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked). Cross-border outstandings do not include local currency loans made by subsidiary banks in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the majority of the loans made by our Cayman Islands branch, which are fully hedged.
| As of December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Balance | % of Total Assets | Balance | % of Total Assets | Balance | % of Total Assets | |||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||
| OECD countries(1) | ||||||||||||||||||||||||
| Spain | 2,589 | 0.3 | 1,984 | 0.3 | 1,217 | 0.2 | ||||||||||||||||||
| United States | 9,081 | 1.2 | 3,721 | 0.5 | 3,304 | 0.5 | ||||||||||||||||||
| Netherlands | 2,355 | 0,3 | 1,531 | 0.2 | 3,853 | 0.6 | ||||||||||||||||||
| United Kingdom() | 158 | 0.0 | 1,003 | 0.1 | 6,508 | 1.0 | ||||||||||||||||||
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| Other OECD countries(2) | 218 | 0.0 | 16,264 | 2.4 | 1,072 | 0.1 | ||||||||||||||||||
| Total OECD | 14,401 | 1.9 | 24,503 | 3.6 | 15,954 | 2.5 | ||||||||||||||||||
| Non-OECD countries | ||||||||||||||||||||||||
| Latin American countries(2) | 189 | 0.0 | 1,382 | 0.2 | 314 | - | ||||||||||||||||||
| Cayman Islands | 467 | 0.1 | 3,528 | 0.5 | (8,304 | ) | (1.3 | ) | ||||||||||||||||
| Other(2) | 483 | 0.1 | 2,397 | 0.3 | 100 | - | ||||||||||||||||||
| Total non-OECD | 1,139 | 0.1 | 7,307 | 1.1 | (7,890 | ) | (1.3 | ) | ||||||||||||||||
| Total | 15,540 | 2.0 | 31,810 | 4.6 | 8,064 | 1.2 |
| (1) | The Organization for Economic Cooperation and Development. |
| (2) | Aggregate outstandings in any single country in this category do not exceed 1.2% of our total assets. |
The following table presents the amounts of our cross-border outstandings as of December 31, 2019, 2018 and 2017 by type of borrower where outstandings in the borrower’s country exceeded 1.2% of total assets.
| Government | Banks and Other Financial Institutions | Commercial and Industrial | Other Loans | Total | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| 2017 | ||||||||||||||||||||
| United States | - | 3,168 | 20 | 115 | 3,303 | |||||||||||||||
| Netherlands | - | - | 3,853 | - | 3,853 | |||||||||||||||
| Austria | - | - | 280 | (5 | ) | 275 | ||||||||||||||
| United Kingdom | - | 5 | 247 | 6,256 | 6,508 | |||||||||||||||
| Cayman Islands | 5,656 | - | 1,485 | (15,445 | ) | (8,304 | ) | |||||||||||||
| Total | 5,656 | 3,172 | 5,885 | (9,079 | ) | 5,634 | ||||||||||||||
| 2018 | ||||||||||||||||||||
| United States | - | 3,569 | 23 | 130 | 3,722 | |||||||||||||||
| Netherlands | - | - | 1,531 | - | 1,531 | |||||||||||||||
| Austria | - | - | 197 | (4 | ) | 193 | ||||||||||||||
| United Kingdom | - | 1 | 38 | 964 | 1,003 | |||||||||||||||
| Cayman Islands | 3,541 | 1,987 | 3,685 | (5,685 | ) | 3,528 | ||||||||||||||
| Total | 3,541 | 5,557 | 5,474 | (4,595 | ) | 9,977 | ||||||||||||||
| 2019 | ||||||||||||||||||||
| United States | - | 8,710 | 55 | 316 | 9,081 | |||||||||||||||
| Netherlands | - | - | 2,355 | - | 2,355 | |||||||||||||||
| Austria | - | - | 127 | (2 | ) | 125 | ||||||||||||||
| United Kingdom | - | - | 7 | 151 | 158 | |||||||||||||||
| Cayman Islands | 469 | 263 | 488 | (752 | ) | 467 | ||||||||||||||
| Total | 469 | 8,973 | 3,030 | (287 | ) | 12.185 | ||||||||||||||
Non-current assets held for sale
For further information, see note “10 - Non-current assets held for sale” in “Item 18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB.
Liabilities
Deposits
The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits.
For further information, see note “16 – Deposits from the Brazilian Central Bank and Deposits from Credit Institutions” and “17 – Client deposits” in “Financial Statements” in “Item 18. Financial
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Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB.
The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of U.S.$100,000 or more at the dates indicated. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.
| As of December 31, 2019 | ||||||||
| Domestic | International | |||||||
| (in millions of R$) | ||||||||
| Under 3 months | 216,896 | - | ||||||
| 3 to 6 months | 62,672 | - | ||||||
| 6 to 12 months | 62,671 | - | ||||||
| Over 12 months | 93,547 | - | ||||||
| Total | 435,786 | - | ||||||
Short-Term Borrowings
The following table shows our short-term borrowings consisting of government securities that we sold under agreements to repurchase for purpose of funding our operations.
| As of December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Amount | Average Rate | Amount | Average Rate | Amount | Average Rate | |||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||||||||||
| As of December 31 | 123,941 | 5.00 | % | 99,379 | 7.34 | % | 97,421 | 8.33 | % | |||||||||||||||
| Average during the period (1) | 100,473 | 4.84 | % | 102,051 | 9.67 | % | 98,567 | 10.63 | % | |||||||||||||||
| Maximum month-end balance | 123,941 | 113,691 | 119,007 | |||||||||||||||||||||
| Total short-term borrowings at year end | 123,941 | 99,379 | 97,421 | |||||||||||||||||||||
| (1) | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
Changes in Allowances for Impairment Losses on the Balances of “Loans and receivables”
The following tables analyze changes in our allowances for impairment losses for the periods indicated. For further discussion of movements in the allowances for impairment losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Years Ended December 31, 2019, 2018 and 2017—Results of Operations—Impairment Losses on Financial Assets (Net).”
| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Balance at beginning of year | 22,969 | 18,262 | 18,191 | 15,412 | 13,563 | |||||||||||||||
| Initial adoption of IFRS 9 | - | 2,461 | - | - | - | |||||||||||||||
| Balance adjusted | 22,969 | 20,723 | 18,191 | 15,412 | 13,563 | |||||||||||||||
| Impairment losses charged to income for the year | 14,361 | 13,540 | 13,493 | 14,383 | 13,723 | |||||||||||||||
| Write-off of impaired balances against recorded impairment allowance | (14,705 | ) | (11,294 | ) | (13,422 | ) | (11,605 | ) | (11,874 | ) | ||||||||||
| Balance at end of year | 22,625 | 22,969 | 18,262 | 18,191 | 15,412 | |||||||||||||||
| Of which: | ||||||||||||||||||||
| Loans and advances to customers | 20,557 | 20,242 | 15,409 | 16,435 | 15,233 | |||||||||||||||
| Loans and amounts due from credit institutions | 14 | 14 | 69 | 201 | 179 | |||||||||||||||
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| Provision for Debt Instruments | 2,055 | 2,714 | 2,784 | 1,555 | 144 | |||||||||||||||
| Recoveries of loans previously charged off(1) | 991 | 827 | 1,154 | 994 | 757 |
| (1) | Impairment losses on financial assets, net, as reported in our consolidated financial statements, reflect net provisions for credit losses less recoveries of loans previously written off. |
Allowance by Type of Borrower
The table below shows a breakdown of recoveries, net provisions and write-offs against credit loss allowance by type of borrower for the periods indicated.
| For the Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Recoveries of loans previously charged off(1) | 991 | 827 | 1,154 | 994 | 757 | |||||||||||||||
| Commercial and industrial | 481 | 345 | 413 | 563 | 294 | |||||||||||||||
| Real estate – construction | 47 | 103 | 210 | 103 | 86 | |||||||||||||||
| Installment loans to individuals | 456 | 370 | 521 | 314 | 348 | |||||||||||||||
| Lease finance | 8 | 9 | 10 | 14 | 29 | |||||||||||||||
| Impairment losses charged to income for the year(1) | 14,361 | 13,540 | 13,492 | 14,383 | 13,723 | |||||||||||||||
| Commercial and industrial | 2,377 | 3,620 | 5,499 | 6,523 | 6,634 | |||||||||||||||
| Real estate – construction | 95 | 193 | 471 | 369 | 91 | |||||||||||||||
| Installment loans to individuals | 11,866 | 9,708 | 7,461 | 7,617 | 6,766 | |||||||||||||||
| Lease finance | 23 | 19 | 61 | (125 | ) | 232 | ||||||||||||||
| Write-off of impaired balances against recorded impairment allowance | (14,705 | ) | (11,294 | ) | (13,422 | ) | (11,605 | ) | (11,874 | ) | ||||||||||
| Commercial and industrial | (4,101 | ) | (3,981 | ) | (5,716 | ) | (4,553 | ) | (4,953 | ) | ||||||||||
| Real estate – construction | (93 | ) | (191 | ) | (342 | ) | (190 | ) | (77 | ) | ||||||||||
| Installment loans to individuals | (10,462 | ) | (7,100 | ) | (7,312 | ) | (6,811 | ) | (6,622 | ) | ||||||||||
| Lease finance | (49 | ) | (22 | ) | (52 | ) | (51 | ) | (222 | ) | ||||||||||
| (1) | Impairment losses on financial assets, net, as reported in our consolidated financial statements, reflect net provisions for credit losses less recoveries of loans previously written off. |
The table below shows a breakdown of allowances for credit losses by type of borrowers and the percentage of loans in each category as a share of total loans at the date indicated.
| As of December 31, | ||||||||||||||||||||||||
| 2019 | % of Total Loans | 2018 | % of Total Loans | 2017 | % of Total Loans | |||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||
| Borrowers | ||||||||||||||||||||||||
| Commercial and industrial | 7,836 | 35 | 10,792 | 47 | 10,338 | 56.6 | ||||||||||||||||||
| Real estate – construction | 355 | 2 | 358 | 2 | 493 | 2.7 | ||||||||||||||||||
| Installment loans to individuals | 14,409 | 64 | 11,768 | 51 | 7,374 | 40.4 | ||||||||||||||||||
| Lease financing | 25 | 0 | 51 | 0 | 56 | 0.3 | ||||||||||||||||||
| Total | 22,625 | 100 | 22,969 | 100.0 | 18,261 | 100.0 | ||||||||||||||||||
Internal Risk Rating
The following table presents a breakdown of our portfolio by internal risk rating, at the dates indicated:
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| As of | ||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in millions of R$) | ||||||||||||
| Internal Risk Rating | ||||||||||||
| Low | 257,133 | 240,440 | 226,098 | |||||||||
| Medium-low | 56,549 | 50,486 | 33,635 | |||||||||
| Medium | 11,755 | 11,967 | 10,423 | |||||||||
| Medium-high | 8,513 | 7,722 | 8,215 | |||||||||
| High | 13,307 | 11,318 | 9,457 | |||||||||
| Loans and advances to customers, gross | 347,257 | 321,933 | 287,829 |
For further information on our internal risk rating levels and their corresponding probability of default, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk—Credit Monitoring.”
Renegotiation Portfolio
The renegotiation portfolio for the year ended on December 31, 2019 amounted to R$15 billion, compared to R$14 billion for the same period in 2018, an increase of R$1,966 million or 14.5%. This portfolio includes loans and advances to customers that were extended and/or modified to facilitate repayment under conditions agreed upon with customers.
The renegotiation portfolio was covered by allowances for impairment losses of 48.5% as of December 31, 2019 and 53.9% as of December 31, 2018. These levels are considered appropriate for the characteristics of these loans and advances to customers.
The following table presents a breakdown of our renegotiation portfolio by type of customer, allowances for impairment losses and our coverage ratio at the dates indicated:
| 2019 | 2018 | 2017 | ||||||||||
| (in millions of R$, except percentages) | ||||||||||||
| Renegotiation Portfolio by type of customer | ||||||||||||
| Commercial and industrial | 5,141 | 5,949 | 6,086 | |||||||||
| Real Estate | - | - | 1 | |||||||||
| Installment loans to individuals | 10,102 | 7,492 | 6,047 | |||||||||
| Financial leasing | 239 | 75 | 79 | |||||||||
| Total | 15,482 | 13,516 | 12,213 | |||||||||
| Allowances for impairment losses | 7,501 | 7,279 | 6,596 | |||||||||
| Coverage ratio | 48.45 | % | 53.85 | % | 54.0 | % | ||||||
Balances are deemed to be impaired when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts on the dates indicated in the loan agreement, after taking into account the collateral guarantees received to secure (fully or partially) collection of the related balances.
In relation to renegotiated products, we, through our internal renegotiation policy, require at least a minimum amount of payment of quotas for any renegotiated products to be considered performing (note that the classification of such transactions as renegotiated operations will remain even after such payments). Renegotiated loans that are more than 60 days later than due date are also accounted for as impaired.
Since 2015, we increased our efforts regarding the collection of loans that are less than 60 days past due and also in relation to written off loans. We are also continuing with our strategy (in place since 2012) of granting loans to persons with low risk profile and higher levels of collaterals and guarantees.
Impaired Assets
The following table shows our impaired assets.
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| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||
| Impaired assets | ||||||||||||||||||||
| Past due and other impaired assets(1) | 23,426 | 22,426 | 19,145 | 18,887 | 18,599 | |||||||||||||||
| Impaired assets as a percentage of total loans | 6.7 | % | 7.0 | % | 6.7 | % | 7.0 | % | 7.0 | % | ||||||||||
| Net loan charge-offs as a percentage of total loans | 4.3 | % | 3.5 | % | 4.7 | % | 4.3 | % | 4.4 | % | ||||||||||
| Net loan charge-offs as a percentage of average total loans | 5.3 | % | 3.8 | % | 4.8 | % | 4.5 | % | 4.5 | % |
| (1) | Includes as of December 31, 2019, R$2,788 million of doubtful loans (R$3,754 million in 2018, R$5,439 million in 2017, R$5,576 million in 2016 and R$5,549 million in 2015) that were not past-due. |
Evolution of Impaired Assets
Our impaired assets increased by 4.5%, or R$1,000 million, to R$23,426 million as of December 31, 2019, compared to R$22,426 million as of December 31, 2018. Provisions for impairment losses, including total recoveries of loans previously charged off, decreased 1.5%, or R$344 million, to R$22,626 million as of December 31, 2019, compared to R$22,969 million as of December 31, 2018. Offsetting these effects were recoveries of R$991 million on loans previously written off as of December 31, 2019 and R$ 827 million as of December 31, 2018.
The following table shows the changes in our impaired assets at the dates indicated:
| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Balance at beginning of year | 22,426 | 19,145 | 18,887 | 18,599 | 14,011 | |||||||||||||||
| Initial Adoption of IFRS9(1) | - | 703 | - | - | - | |||||||||||||||
| Adjusted Balance | 22,426 | 19,848 | 18,887 | 18,599 | 14,011 | |||||||||||||||
| Net additions | 16,001 | 13,872 | 13,679 | 11,893 | 16,462 | |||||||||||||||
| Write-offs | (15,001 | ) | (11,294 | ) | (13,422 | ) | (11,605 | ) | (11,874 | ) | ||||||||||
| Balance at end of year | 23,426 | 22,426 | 19,145 | 18,887 | 18,599 | |||||||||||||||
| (1) | Further information, see Financial Statements notes 1 and 9. |
The amount of “net additions” for any period is assets that became impaired in that period less assets that were impaired but became performing in that period. In 2019, better options to restructure debts collaborated to maintain the “net additions” relatively at the same level.
Impaired Assets by Type of Customer
The following table shows the amount of our impaired assets by type of customers at the dates indicated:
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in millions of R$) | ||||||||
| Commercial and industrial | 10,073 | 11,832 | ||||||
| Real estate – construction | 827 | 1,036 | ||||||
| Installment loans to individuals | 12,497 | 9,499 | ||||||
| Lease financing | 29 | 59 | ||||||
| Total | 23,426 | 22,426 | ||||||
Commercial and Industrial
Impaired assets in the portfolio of commercial and industrial loans amounted to R$10,073 million as of December 31, 2019, a decrease of R$1,759 million, or 15%, compared to R$11,832 million as of December 31, 2018. The decrease in impaired assets in this portfolio was primarily due to the measures that Santander Brasil put in place to manage impaired assets, including collection practices with respect to our borrowers whereby we offered certain customers the chance to negotiate a restructuring of their debts or asset disposal.
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Real Estate
Impaired assets in the real estate lending portfolio totaled R$827 million on December 31, 2019, a decrease of R$209 million, or 20.2%, compared to R$1,036 million as of December 31, 2018. The decrease was primarily due to change on macroeconomic conditions lead to reduction on the interest rates on real estate portfolio in Brazil.
Installment Loans to Individuals
Impaired assets in the installment loans to individuals lending portfolio totaled R$12,497 million as of December 31, 2019, with an increase of R$2,998 million, or 31.6%, compared to 2018. This increase was a consequence of the recurrent growth the portfolio and the weak macroeconomic conditions related to the portfolio in Brazil, such as unemployment rate and degree of income commitment.
Lease Financing
Impaired assets in the lease financing lending portfolio totaled R$29 million on December 31, 2019, a decrease of R$30 million compared to December 31, 2018.
Methodology for Impairment Losses
We evaluate all loans regarding the provision for impairment losses from credit risk. Loans are either individually evaluated for impairment, or collectively evaluated by grouping similar risk characteristics. Loans that are individually evaluated for impairment losses are not evaluated collectively.
To measure the impairment loss on loans individually evaluated for impairment, we consider the conditions of the borrowers, such as their economic and financial situation, level of indebtedness, ability to generate income, cash flow, management, corporate governance and quality of internal controls, payment history, industry expertise, contingencies and credit limits, as well as the characteristics of assets, such as their nature and purpose, type, sufficiency and liquidity level guarantees and total amount of credit, as well as based on historical experience of impairment and other circumstances known at the time of evaluation.
To measure the impairment loss on loans collectively evaluated for impairment, we segregate financial assets into groups considering the characteristics and similarity of credit risk. In other words, according to segment, the type of assets, guarantees and other factors associated such as the historical experience of impairment and other circumstances known at the time of assessment.
The expected loss measurement is made through the following factors:
| · | Exposure at Default (EAD): is the amount of a transaction exposed to credit risk including the ratio of current outstanding balance exposure that could be provided at default. Developed models incorporate hypotheses considering possible modifications to the payment schedule. |
| · | Probability of Default (PD): is defined as the probability that the counterparty can meet its obligations to pay the principal and / or interest. For the purposes of IFRS 9, both will be considered: PD - 12 months (Stage 1), which is the probability that the financial instrument will default during the next 12 months as well as PD - life time (Stage 2 and 3), which considers the probability that the transaction between in default between the balance sheet date and the residual maturity date of the transaction. The standard requires that future information relevant to the estimation of these parameters should be considered. |
| · | Loss Given Default (LGD): is the loss produced in the event of default. In other words, this reflects the percentage of exposure that could not be recovered in the event of a default. It depends mainly on the collateral, which is considered as credit risk mitigants associated with each financial asset, |
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and the future cash flows that are expected to be recovered. According to the standard, forward-looking information must be taken into account in the estimation.
| · | Discount rate: the rate applied to the future cash flows estimated during the expected life of the asset, and which is equal to the net present value of the financial instrument at its carrying value. |
In order to estimate the above parameters, the Bank has applied its experience in developing internal models for parameters calculation both for regulatory and management purposes.
Loans Past Due for Less Than 90 Days but Not Classified as Impaired
The following table shows the loans past due for less than 90 days but not classified as impaired at the dates indicated:
| As of December 31, | ||||||||||||||||
| 2019 | % of total | 2018 | % of total | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Commercial and industrial | 3,517 | 15.4 | 4,424 | 19.8 | ||||||||||||
| Mortgage loans | 5,782 | 25.3 | 4,527 | 20.2 | ||||||||||||
| Installment loans to individuals | 13,489 | 59.1 | 13,256 | 59.2 | ||||||||||||
| Lease financing | 24 | 0.1 | 168 | 0.8 | ||||||||||||
| Total (*) | 22,812 | 100.0 | 22,375 | 100.0 | ||||||||||||
| (*) | Refers only to loans past due between 1 and 90 days. |
Impaired Asset Ratios
Our Credit risk exposure portfolio increased by R$27.4 billion to R$391.6 billion as of December 31, 2019, compared to R$364.2 billion as of December 31, 2018. Our impaired assets increased by approximately R$1 billion in the same period, from R$22.4 billion to R$23.4 billion. The default rate decreased by 20 basis points in 2019 in comparison to 2018, explained in part by the growth of the portfolio and measures that Santander Brasil put in place to manage impaired assets.
The following table shows the ratio of our impaired assets to total credit risk exposure and our coverage ratio at the dates indicated.
| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (in millions of R$ except percentages) | ||||||||||||||||||||
| Loans and advances to customers, gross | 347,257 | 321,933 | 287,829 | 268,438 | 267,266 | |||||||||||||||
| Impaired assets | 23,426 | 22,426 | 19,145 | 18,887 | 18,599 | |||||||||||||||
| Provisions for impairment losses | 22,626 | 22,969 | 18,262 | 18,191 | 15,412 | |||||||||||||||
| Credit risk exposure Non-GAAP – customers(1) | 391,569 | 364,194 | 330,474 | 301,703 | 310,877 | |||||||||||||||
| Ratios | ||||||||||||||||||||
| Impaired assets to credit risk exposure | 6.0 | % | 6.2 | % | 5.8 | % | 6.3 | % | 6.0 | % | ||||||||||
| Coverage ratio(2) | 96.6 | % | 102.4 | % | 95.4 | % | 96.3 | % | 82.9 | % | ||||||||||
| Impairment losses | (13,370 | ) | (12,713 | ) | (12,338 | ) | (13,389 | ) | (12,966 | ) | ||||||||||
Gains (losses) due to derecognition of financial assets measured at amortized cost(3) | - | - | - | 88 | (524 | ) | ||||||||||||||
| Impairment losses on financial assets (net) (4) | (13,370 | ) | (12,713 | ) | (12,338 | ) | (13,301 | ) | (13,490 | ) | ||||||||||
| (1) | Credit risk exposure is a non-GAAP financial measure. Credit risk exposure is the sum of the amortized cost amounts of loans and advances to customers (including impaired assets) amounting to R$347 billion as of December 31, 2019 and guarantees and documentary credits amounting to R$44 billion as of December 31, 2019. We include off-balance sheet information in this measure |
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to better demonstrate our total managed credit risk.
| (2) | Provisions for impairment losses as a percentage of impaired assets. |
| (3) | Corresponds to the registration of losses of a permanent character in the realization value of bonds and securities classified as “securities available for sale” currently accounted for in “earnings on financial assets (net).” |
| (4) | As of December 31, 2019 impairment losses on financial assets (net) included R$2,055 million relating to debt instruments. |
The following chart shows our impaired assets to credit risk ratio from 2014 through 2019:
| 4C. | Organizational Structure |
Santander Group controls Santander Brasil directly and indirectly through Santander Spain, Sterrebeeck B.V., or “Sterrebeeck”, and Grupo Empresarial Santander, S.L. which are controlled subsidiaries of the Santander Group. As of December 31, 2019, Santander Spain held, directly and indirectly, 89.5% of our voting stock (not including the shares held by Banco Madesant - Sociedade Unipessoal).
As of December 31, 2019, Santander Spain was the largest bank in the euro zone by market capitalization, with a market capitalization of approximately €61,986 million. As of December 31, 2019, Santander Spain’s attributable profit totaled €6,515 million, 17% lower than the previous year, and the total shareholder remuneration on account of the earnings for the 2019 financial year is €0.23 per share (subject to the approval by the 2020 annual shareholders’ meeting). The Santander Group operates principally in Spain, the United Kingdom, other European countries, Brazil and other Latin American countries and the United States, offering a wide range of financial products. In Latin America, the Santander Group has majority shareholdings in financial institutions in Argentina, Brazil, Chile, Mexico, Peru, Puerto Rico and Uruguay. As of December 31, 2019, Santander Brasil contributed 28% of the profit attributable to the Santander Group.
The following table presents the name, country of incorporation or residence and proportion of ownership interest of our main subsidiaries in accordance with the criteria for consolidation pursuant to IFRS:
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| Activity | Country of Incorporation | Ownership Interest |
| Direct and Indirect subsidiaries of Banco Santander (Brasil) S.A. | |||
| Banco Bandepe S.A. | Bank | Brazil | 100.00% |
| Santander Leasing S.A. Arrendamento Mercantil | Leasing | Brazil | 99.99% |
| Aymoré Crédito, Financiamento e Investimento S.A. | Financial | Brazil | 100.00% |
| Santander Brasil Administradora de Consórcio Ltda. | Buying club | Brazil | 100.00% |
| Atual Serviços de Recuperação de Créditos e Meios Digitais S.A. (current name of Atual Companhia Securitizadora de Créditos S.A.) | Credit Recovery Services | Brazil | 100.00% |
| Santander Corretora de Câmbio e Valores Mobiliários S.A. | Broker | Brazil | 100.00% |
| Santander Corretora de Seguros, Investimentos e Serviços S.A. | Holding | Brazil | 100.00% |
| Getnet Adquirência e Serviços para Meios de Pagamento S.A.(1) | Payment Institution | Brazil | 100.00% |
| Sancap Investimentos e Participações S.A. | Holding | Brazil | 100.00% |
| Santander Brasil, EFC | Financial | Spain | 100.00% |
| Santander Holding Imobiliária S.A. (current name of Webcasas S.A.) | Holding | Brazil | 100.00% |
| Santander Brasil Tecnologia S.A. | Technology | Brazil | 100.00% |
| Rojo Entretenimento S.A. | Other Activities | Brazil | 94.60% |
| BEN Benefícios e Serviços S.A. | Other Activities | Brazil | 100.00% |
| Esfera Fidelidade S.A. | Other Activities | Brazil | 100.00% |
| Super Pagamentos e Administração de Meios Eletrônicos S.A.(2). | Other Activities | Brazil | 100.00% |
| Banco Olé Consignado S.A. (current name of Banco Bonsucesso Consignado S.A.)(3). | Bank | Brazil | 60.00% |
| Controlled by Atual Serviços de Recuperação de Créditos e Meios Digitais S.A. (current name of Atual Companhia Securitizadora de Créditos S.A.) | |||
| Return Capital Serviços de Recuperação de Créditos S.A. (current name of Ipanema Empreendimentos e Participações S.A.) | Credit Recovery Services | Brazil | 100.00% |
| Controlled by Return Capital Serviços de Recuperação de Créditos S.A. (current name of Ipanema Empreendimentos e Participações S.A.) | |||
| Return Gestão de Recursos S.A. (current name of Gestora de Investimentos Ipanema S.A.) | Asset Management | Brazil | 100.00% |
| Controlled by Sancap Investimentos e Participações S.A. | |||
| Santander Capitalização S.A. | Savings and annuities | Brazil | 100.00% |
| Evidence Previdência S.A. | Social Securities | Brazil | 100.00% |
| Controlled by Getnet Adquirência e Serviços para Meios de Pagamento S.A. | |||
| Auttar HUT Processamento de Dados Ltda. | Other Activities | Brazil | 100.00% |
| Toque Fale Serviços de Telemarketing Ltda. | Other Activities | Brazil | 100.00% |
| Controlled by Aymoré Crédito, Financiamento e Investimento S.A. | |||
| Banco PSA Finance Brasil S.A. (6) | Bank | Brazil | 50.00% |
| Banco Hyundai Capital Brasil S.A. (current name of BHJV Assessoria e Consultoria Empresarial Ltda.) | Bank | Brazil | 50.00% |
| Controlled by Banco Olé Consignado | |||
| Crediperto Promotora de Vendas e Cobrança Ltda. | Other Activities | Brazil | 100.00% |
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| Olé Tecnologia Ltda. | Other Activities | Brazil | 100.00% |
| Controlled by Santander Leasing S.A. Arrendamento Mercantil | |||
| Pi Distribuidora de Títulos e Valores Mobiliários S.A. (current name of Santander Finance Arrendamento Mercantil) | Leasing | Brazil | 100.00% |
| Consolidated Investment Funds | |||
| Santander FIC FI Contract I Referenciado DI | Investment Fund | Brazil | (a) |
| Santander Fundo de Investimento Unix Multimercado Crédito Privado | Investment Fund | Brazil | (a) |
| Santander Fundo de Investimento Diamantina Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | Brazil | (a) |
| Santander Fundo de Investimento Amazonas Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | Brazil | (a) |
| Santander Fundo de Investimento SBAC Referenciado DI Crédito Privado | Investment Fund | Brazil | (a) |
| Santander Fundo de Investimento Guarujá Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | Brazil | (a) |
| Santander Fundo de Investimento Financial Curto Prazo | Investment Fund | Brazil | (a) |
| Santander Fundo de Investimento Capitalization Renda Fixa | Investment Fund | Brazil | (a) |
| Santander Paraty QIF PLC (5) | Investment Fund | Brazil | (a) |
| Santander FI Hedge Strategies Fund (5) | Investment Fund | Brazil | (a) |
| BRL V - Fundo de Investimento Imobiliário-FII (4) | Real Estate Investment Fund | Brazil | (a) |
| Fundo de Investimento em Direitos Creditórios Multisegmentos NPL Ipanema VI - Não Padronizado | Investment Fund | Brazil | (a) |
| Fundo de Investimento em Direitos Creditórios Multisegmentos NPL Ipanema VI - Não Padronizado | Investment Fund | Brazil | (a) |
| Santander Hermes Multimercado Crédito Privado Infraestrutura Fundo de Investimentos | Investment Fund | Brazil | (a) |
| (a) | Company to which we are exposed, or have rights to variable returns and have the ability to affect those returns by making certain decisions in accordance with IFRS 10 - Consolidated Financial Statements. We and/or our subsidiaries hold 100% of the quotas of these investment funds. |
| (1) | In May 2016, Super received approval from the Brazilian Central Bank to operate as a payment institution. |
| (2) | On February 28, 2020, we sold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Super Pagamentos e Administração de Meios Eletrônicos S.A. (“Superdigital”). We received consideration of R$ 270 million for our interest in Superdigital. As a result, we are no longer a shareholder of Superdigital. |
| (3) | On December 31, 2020, Santander Brasil and the shareholders of Bosan Participações S.A. (holding company whose single asset are the shares representing 40% of the corporate capital of Banco Olé) have entered into the definitive agreements and performed the closing acts related to the purchase and sale of all shares issued by Bosan, upon transferring Bosan’s shares to Santander Brasil and the payment to the sellers of the total price of R$1,608,772,783.47. As a result, Santander Brasil became, directly and indirectly, the holder of all shares issued by Banco Olé. |
| (4) | This fund was established and became consolidated from August 2016. It is a structure in which Santander Brasil is the creditor of certain debts guaranteed by real estate. The real estate provided as guarantee was converted into capital contributions to the fund. Simultaneously with this, the shares in the fund were transferred to Santander Brasil. |
| (5) | Santander Brasil, through its subsidiaries, holds the risks and benefits of Santander Paraty QIF PLC and the sub-fund Santander FI Hedge Strategies Fund, both of which are based in Ireland and since August 2016 are fully consolidated into Santander Brasil’s financial statements. Santander Paraty QIF PLC does not hold any investments itself, acting instead through Santander FI Hedge Strategies Fund. |
| (6) | Investment acquired on August 1, 2016. |
| 4D. | Property, Plant and Equipment |
We operate four major administrative operational centers, all of which are owned properties. Additionally, we own 405 properties for the activities of our banking network and rent 2,130 properties
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for the same purpose. Furthermore, in 2014, we opened and concluded the migration of our operation to the new data center located in Campinas, which also is an owned property. For further information about the location of our branches, see “—Item 4. Information on the Company—B. Business Overview—Distribution Network.” Our headquarters are located at Av. Presidente Juscelino Kubitschek, 2,041 and 2,235 Block A, Vila Olímpia, São Paulo, State of São Paulo, Brazil.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
| 5A. | Operating Results |
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements for the years ended December 31, 2019, 2018 and 2017 and the related notes thereto, and with the financial information presented under the section entitled “Item 3. Key Information—A. Selected Financial Data” included elsewhere in this annual report. The preparation of the consolidated financial statements referred to in this section required the adoption of assumptions and estimates that affect the amounts recorded as assets, liabilities, revenue and expenses in the years and periods presented and are subject to certain risks and uncertainties. Our future results may vary substantially from those indicated as a result of various factors that affect our business, including, among others, those mentioned in the sections “Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors,” and other factors discussed elsewhere in this annual report. Our consolidated financial statements for the years ended December 31, 2019, 2018 and 2017, prepared in accordance with IFRS as issued by the IASB and the report of our independent registered public accounting firm are included in “Item 18. Financial Statements.”
Principal Factors Affecting Our Financial Condition and Results of Operations
Brazilian Macroeconomic Environment
As a Brazilian bank, we are significantly affected by the general economic environment in Brazil. The Brazilian economic environment has historically been characterized by significant variations in economic growth, inflation and currency exchange rates. Our results of operations and financial condition are influenced by these factors and the effect that these factors have on employment rates, the availability of credit and average wages in Brazil. The following table presents key data of the Brazilian economy for the periods indicated:
| For the year ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| GDP growth (1) | 1.2 | % | 1.1 | % | 1.0 | % | ||||||
| CDI rate (2) | 6.0 | % | 6.4 | % | 9.9 | % | ||||||
| TJLP (3) | 5.6 | % | 7.0 | % | 7.0 | % | ||||||
| SELIC rate (4) | 4.5 | % | 6.5 | % | 7.00 | % | ||||||
| Increase (decrease) in real rate against the U.S. dollar | 4.0 | % | 17.1 | % | -16.5 | % | ||||||
| Selling exchange rate (at period end) R$ per U.S.$1.00 | 4.03 | 3.87 | 3.31 | |||||||||
| Average exchange rate R$ per U.S.$1.00 (5) | 3.94 | 3.65 | 3.19 | |||||||||
| Inflation (IGP-M) (6) | 7.3 | % | 7.6 | % | -0.5 | % | ||||||
| Inflation (IPCA) (7) | 4.3 | % | 3.8 | % | 2.9 | % | ||||||
Sources: BNDES, Brazilian Central Bank, FGV and IBGE.
| (1) | Revised series. Source: IBGE. |
| (2) | The overnight interbank deposit rate (Certificado de Depósito Interbancário), or “CDI” is the average daily interbank deposit rate in Brazil (at the end of each month and annually). This is the average rate for the given year. |
| (3) | Represents the interest rate applied by the BNDES for long-term financing (at the end of the period). |
| (4) | The benchmark interest rate payable to holders of some securities, such as treasury financial letters, issued by the Brazilian government and traded on the SELIC rate at the end of the applicable period. |
| (5) | Average of the selling exchange rate for the business days during the period. |
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| (6) | The inflation rate is the general index of market prices (Índice Geral de Preços-Mercado, or “IGP-M”), as calculated by FGV. |
| (7) | The inflation rate is the consumer price index (Índice de Preços ao Consumidor – Amplo, or “IPCA”), as calculated by the IBGE. |
General economic stability in Brazil following the onset of the global financial crisis in 2009 allowed the Brazilian Central Bank to continue its policy of reducing interest rates. Due to inflation and other general macroeconomic concerns, the Brazilian Central Bank began increasing interest rates, with the SELIC, a benchmark interest rate, reaching 10.00% at the end of December 31, 2013, 11.75% at the end of December 31, 2014 and 14.25% at the end of December 31, 2015. The Central Bank has been reducing interest rates since then, with the SELIC reaching 13.75% as of December 31, 2016, 7.00% as of December 31, 2017, 6.50% as of December 31, 2018, and 4.50% as of December 31, 2019.
Presidential elections were held in Brazil in October 2018. The resolution of the political and economic crisis in Brazil depends on the approval of reforms that are expected to be promoted by the President of Brazil.The economic and political crisis in Brazil may adversely affect the performance of the Brazilian economy. As a result, our credit portfolio, which is focused on Brazil, may not grow or could decrease and our provisions for loan losses could increase.
Any deterioration in Brazil’s rate of economic growth, changes in interest rates, the unemployment rate or price levels generally may adversely affect our business, financial conditions and results of operations.
Interest Rates
A decrease in the SELIC rate may have a positive impact on our operations by promoting volume growth, even though it may also create pressure on asset-side spreads, while liability spreads should remain stable or even improve.
The following table presents the low, high, average and period-end SELIC rate since 2015, as reported by the Brazilian Central Bank:
| Low | High(1) | Average(2) | Period-End | |||||||||||||
| Year | ||||||||||||||||
| 2015 | 11.75 | 14.25 | 13.58 | 14.25 | ||||||||||||
| 2016 | 13.75 | 14.25 | 14.15 | 13.75 | ||||||||||||
| 2017 | 7.00 | 13.75 | 9.83 | 7.00 | ||||||||||||
| 2018 | 6.50 | 7.00 | 6.75 | 6.50 | ||||||||||||
| 2019 | 4.50 | 6.50 | 6.13 | 4.50 | ||||||||||||
| 2020 (through March 5, 2020) | 4.25 | 4.50 | 4.38 | - | ||||||||||||
| (1) | Highest month-end rate. |
| (2) | Average of month-end rates during the period. |
Our assets are predominantly fixed rate and our liabilities are predominantly floating. The resulting exposure to increases in market rates of interest is modified by our use of cash flow hedges to convert floating rates to fixed, but we maintain an exposure to interest rate movements. As of December 31, 2019, a 100 basis point increase in the yield curve would have resulted in R$334 million decline in the net interest income over a one-year period.
Credit Volume and Quality in Brazil
Our annual growth of outstanding credit of 6.7%, a ratio of nonperforming loans to individuals increased to 4.2% and a decrease of the household debt burden to 21.2%. In 2016, outstanding credit contracted 3.5% in nominal terms, but delinquency continued to fall: the ratio of nonperforming loans to individuals reached 6.1%. Subsequently, in 2017, 2018 and 2019, the ratio of nonperforming loans to individuals reached 5.3%, 4.8% and 5.0%, respectively.
The total outstanding credit to GDP increased from 34.7% in December 2007 to 49.7% in December 2016, and fell to 47.1% in 2017. The ratio increased to 47.3% in 2018 and climbed to 47.8% in 2019.
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| 2019 | 2018 | 2017 | ||||||||||
| (in billions of R$) | ||||||||||||
| Total Credit Outstanding (*) | 3,471 | 3,261 | 3,064 | |||||||||
| Earmarked credit | 1,465 | 1,500 | 1,511 | |||||||||
| Non-earmarked based credit | 2,006 | 1,761 | 1,553 | |||||||||
| of which: | ||||||||||||
| Corporate | 905 | 814 | 705 | |||||||||
| Individuals (retail) | 1,101 | 948 | 847 | |||||||||
| (*) | Some figures may be subject to revision by the Brazilian Central Bank. |
Source: Brazilian Central Bank.
Foreign Exchange Rates
Our policy is to maintain limited foreign exchange rate exposure by seeking to match foreign currency denominated assets and liabilities as closely as possible, including through the use of derivative instruments. In 2019, we recorded foreign exchange expenses of R$2,789 million, foreign exchange expenses of R$2,806 million in 2018 and foreign exchange revenues R$605 million in 2017. These results are due to the variation of the U.S. dollar against thereal on our assets and liabilities positions in U.S. dollar denominated instruments during these years. These foreign exchange gains and losses were offset in large part in each year by a corresponding loss or gain on derivatives entered into to hedge this exposure. Such losses and gains are recorded under “Exchange differences (net).”
The Brazilian currency has, during the last decades, experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. During 2016, thereal appreciated 17% against the U.S. dollar as a result of improved macroeconomic conditions in Brazil. On December 31, 2016, the exchange rate was R$3.26 per U.S.$1.00. In 2017 therealremained relatively stable against the U.S. dollar, with a small depreciation of 1.5% to R$3.31 per U.S.$1.00 as of December 31, 2017. Therealdepreciated further against the U.S. dollar throughout 2018, with a depreciation of 17%. On December 31, 2018, the exchange rate was R$3.87 per U.S.$1.00. In 2019 and through to the date of this annual report, the real has depreciated against the U.S. dollar. As of December 31, 2019, the exchange rate was R$4.03 per U.S.$1.00.
Depreciation of thereal relative to the U.S. dollar has created additional inflationary pressures in Brazil, which have led to decreases in interest rates, limited Brazilian companies’ access to foreign financial markets and prompted the adoption of recessionary policies by the Brazilian government. Depreciation of thereal may also, in the context of an economic slowdown, lead to decreased consumer spending, inflationary pressures and reduced growth of the Brazilian economy as a whole, and thereby harm our asset base, financial condition and results of operations. Additionally, depreciation of thereal could make our foreign currency-linked obligations and funding more expensive, negatively affect the market price of our securities portfolios and have similar consequences for our borrowers. Conversely, appreciation of thereal relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange currency accounts, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of thereal could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.
Inflation
In recent years, inflation has been oscillating around the target, which is set by the CMN. From 2005 to 2018, the targeted level was 4.5%, with a tolerance interval of 2.0 percentage points that prevailed until 2016 – since then the tolerance band has been narrowed to 1.5 percentage point. In addition, the targeted set for 2019 by the CMN was lowered to 4.25% and additional 0.25 percentage point decreases have already been defined for the targets until 2022 (4.00% for 2020, 3.75% for 2021 and 3.50% for 2022).
Between 2012 and 2014, inflation ranged from 5.8% to 6.4%, i.e., it was close to the top of the fluctuation range in the Brazilian Central Bank’s inflation targeting range. In 2015, as a result of the indexation of a significant portion of contracts for services to the inflation levels of the previous years,
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the impact of adjustment of tariffs and the impact of the depreciation of the real on prices, the inflation rate reached a level of 10.7%, the highest on record since May 2005 and well above the Brazilian Central Bank’s inflation target of 4.5%. In 2017, inflation fell substantially as a result of the consistent efforts of the Brazilian Central Bank to reduce the inflation rate, ending the year at 2.95% (12-month accumulated rate). As a result, the Brazilian Central Bank was required to send a letter to the CMN explaining the reasons for not meeting the target in which the Brazilian Central Bank explained that it expected that the monetary easing undertaken in 2018would make the actual inflation rate converge toward the target. In 2018 the inflation increased to 3.75%, thus reinforcing the efficiency of the monetary policy in the country. In 2019 and through to the date of this annual report, inflation reached 3.3% in 12-month accumulated terms.
The majority of our income, expenses, assets and liabilities are directly tied to interest rates. Therefore, our results of operations and financial condition are significantly affected by inflation, interest rate fluctuations and related government monetary policies, all of which may materially and adversely affect the growth of the Brazilian economy, our loan portfolios, our cost of funding and our income from credit operations. We estimate that in 2019, a 1.0% increase or decrease in the base interest rate would have resulted in a decrease or increase, respectively, in our net interest income of R$443 million. Any changes in interest rates may negatively impact our business, financial condition and results of operations. In addition, increases in base interest rates may adversely affect us by reducing the demand for our credit and investment products, increasing funding costs and increasing in the short run the risk of default by our customers.
Inflation adversely affects our personnel and other administrative expenses that are directly or indirectly tied to inflation indexes, generally the consumer price index (Índice de Preços ao Consumidor – Amplo), or “IPCA,” and the general index of market prices (Índice Geral de Preços-Mercado), or “IGPM.” For example, considering the amounts in 2019, each additional percentage point change in inflation, would impact our personnel and other administrative expenses by approximately R$93 million and R$76 million, respectively.
Reserve and Lending Requirements
The requirements set by the Brazilian Central Bank for reserves and credit has a significant impact on the operational results of the financial institutions in Brazil. Increases or decreases in such requirements may have an impact on our operational results by limiting or expanding the amounts available for commercial credit transactions.
The table below shows the requirements for reserves and credit to which we are subject for each financing category:
| Product | As of December 31, 2019 | As of December 31, 2018 | Form of Required Reserve | Yield | ||||||||
| Demand deposits | ||||||||||||
| Rural credit loans (1) | 30.00 | % | 30.00 | % | Loans | Cap rate: 7.0% p.a. | ||||||
| Microcredit loans (2) | 2.00 | % | 2.00 | % | Loans | Cap rate: 2.0% p.m. | ||||||
| Reserve requirements (4) | 21.00 | % | 21.00 | % | Cash | Zero | ||||||
| Additional reserve requirements | 0.00 | % | 0.00 | % | Cash | SELIC | ||||||
| Free funding (3) | 47.00 | % | 47.00 | % | ||||||||
| Savings accounts | ||||||||||||
| Mortgage loans | 65 | % | 65 | % | Loans | TR + 12.0% p.a. | ||||||
| Reserve requirements (4) | 20.00 | % | 20.00 | % | Cash | TR + 70.0% of the target SELIC | ||||||
| Additional reserve requirements | 0.00 | % | 0.00 | % | Cash | SELIC | ||||||
| Free funding (3) | 15.00 | % | 15.00 | % | ||||||||
| Time deposits | ||||||||||||
| Reserve requirements (4) | 31 | % | 33 | % | Cash | SELIC | ||||||
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| In cash or other instruments | 0.00 | % | 0.00 | % | Cash or other instruments | SELIC for Cash | ||||||
| In cash | 0.00 | % | 0.00 | % | Cash | SELIC | ||||||
| Additional reserve requirements | 0.00 | % | 0.00 | % | Cash | SELIC | ||||||
| Free funding(3) | 69.00 | % | 67.00 | % |
| (1) | Rural credits are credits granted to farmers in the amount of R$12.9 billion and R$11.8 billion on December 31, 2019 and December 31, 2018, respectively. |
| (2) | Microcredit is a credit granted to very small businesses, with an open position of R$1.2 billion and R$642.0 million on December 31, 2019 and December 31, 2018, respectively. |
| (3) | Interest-free financing is the amount to be used on a free of interest basis for other purposes in each financing category. |
| (4) | According to Circular No. 3,823 of the CMN, the Brazilian Central Bank replaced the reserve requirement deduction of time deposits and demand deposits by a fixed amount, based on total deductions as of January 20, 2017. From 2020, no deductions will be allowed. No deductions are allowed to meet reserve requirements for saving accounts. |
Taxes
See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulation —Taxation.”
Hedging in Foreign Investments
We operate two foreign branches, one in the Cayman Islands, and another one in Luxemburg, and have a subsidiary named Santander Brasil Establecimiento Financiero de Credito, EFC, or “Santander EFC” (an independent wholly-owned subsidiary in Spain) which are used primarily for sourcing funds in the international banking and capital markets to provide credit lines for us that are extended to our customers for working capital and trade-related financings. Under Brazilian income tax rules, the gains or losses resulting from the impact of appreciation or devaluation of thereal on foreign investments are non-taxable or non-deductible. This tax treatment results in volatility of the income tax line item in our income statement. This asymmetry is offset through a derivative position in U.S. dollar futures, which generates gains or losses dependent on any devaluation or appreciation of thereal, which is our strategy to protect our after-tax results. The reconciliation of our effective tax rate to the statutory tax rate is set forth in note 23b to our consolidated financial statements as of and for the year ended December 31, 2019.
Goodwill of Banco Real
We generated goodwill of R$27 billion as a result of our acquisition of Banco Real in 2008. Under IFRS, we are required to analyze goodwill for impairment at least annually or whenever there are indications of impairment. In 2019, 2018 and 2017, the recoverable goodwill amounts are determined from “value in use” calculations. For this purpose, we estimate cash flow for a period of five years. We prepare cash flow estimates considering several factors, including: (i) macroeconomic projections, such as interest rates, inflation and exchange rates, among others, (ii) the performance and growth estimates of the Brazilian financial system, (iii) increased costs, returns, synergies and investment plans, (iv) the behavior of customers, and (v) the growth rate of, and long-term adjustments to, cash flows. These estimates rely on assumptions regarding the likelihood of future events, and changing certain factors could result in different outcomes. The estimate of cash flows is based on valuations prepared by an independent research company, which is reviewed and approved by the board of directors. Therefore, amortization of goodwill for tax purposes generates a permanent difference and, as a result, no record of the deferred tax liability.
The following table shows the main assumptions for the basis of valuation as of the dates indicated.
| 2019 | 2018 | 2017 | ||||||||||
| (Value in use: cash flows) | ||||||||||||
| Main Assumptions(*) | ||||||||||||
| Basis of valuation | ||||||||||||
| Period of the projections of cash flows(1) | 5 years | 5 years | 5 years | |||||||||
| Growth rate(2) | 4.8 | % | 5.1 | % | 8.3 | % | ||||||
| Discount rate(3) | 12.5 | % | 13.6 | % | 14.6 | % | ||||||
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| (1) | The projections of cash flow are prepared using internal budget and growth plans of management, based on historical data, market expectations and conditions such as industry growth, interest rate and inflation. |
| (2) | The growth rate is calculated based on areal growth rate of 1% p.a. plus annual long-term inflation in 2019. |
| (3) | The discount rate is calculated based on the capital asset pricing model. The discount rate before tax is 17,78% in 2019, 19.33% in 2018 and 20.42% in 2017. |
| (*) | The recoverability test was performed during the second half of 2017. Goodwill is tested for impairment at the end of each reportable period or whenever there is any indication of a potential impairment. |
We performed a sensitivity test in the goodwill impairment analysis considering the main assumptions that could reasonably be expected to possibly change, as required by the IFRS. Accordingly, we applied such a test considering the discount rate and perpetuity growth rate as the main assumption subject to reasonably possible change and we did not identify any impairment to goodwill.
Other Factors Affecting the Comparability of Our Results of Operations
Acquisition of residual equity stake in Getnet
On December 19, 2018, the minority shareholders of Getnet Put Option, pursuant to the applicable Share Purchase Agreement, or SPA. On the exercise date of the Put Option, we entered into a binding amendment to the SPA, to acquire all of the Getnet shares owned by minority shareholders, corresponding to 11.5% Getnet’s share capital, for an amount of R$1.431 billion. The acquisition transaction was approved by the Brazilian Central Bank on February 18, 2019 and settled on February 25, 2019, and we became the holders of 100% of Getnet’s shares.
Formation of Esfera Fidelidade S.A.
Esfera Fidelidade was incorporated on August 14, 2018 as our wholly-owned subsidiary. Esfera Fidelidade was formed to develop and manage customer loyalty programs. The company started its operations in November 2018.
Investment in Loop Gestão de Pátios S.A.
In 2018, Webmotors S.A., a company in which we own an indirect 70% equity interest, entered into an agreement with Allpark Empreendimentos, Participações e Serviços S.A. and Celta L.A. Participações S.A. to acquire a 51% stake in Loop through a capital increase and issuance of new shares by Loop which were fully subscribed and paid-in by Webmotors. Loop conducts physical and virtual car auctions. This acquisition has enabled Webmotors to expand its service portfolio and strengthen its competitive position. The transaction was completed on September 25, 2018 for the amount of R$23.9 million.
Formation of BEN Benefícios e Serviços S.A.
On June 11, 2018, Santander Brasil incorporated BEN Beneficios. BEN Beneficios is engaged in create, supply and administer various types of vouchers and tickets used for the provision of employee benefits (such as for meals, transportation and cultural events) in the form of printed electronic and magnetic cards. The company began its operations in the second quarter of 2019.
Creation of PI Distribuidora de Títulos e Valores Mobiliários S.A.
On May 3, 2018, Santander Finance Arrendamento Mercantil S.A., one of our indirect subsidiaries, was converted into a securities brokerage and changed its corporate name to SI Distribuidora de Títulos e Valores Mobiliários S.A. The conversion process was approved by the Brazilian Central Bank on November 21, 2018. On December 17, 2018, SI Distribuidora de Títulos e Valores Mobiliários S.A. changed its corporate name to PI Distribuidora de Títulos e Valores Mobiliários S.A.. On January 22, 2019 it received approval for the aforementioned name change from the Brazilian Central Bank. The
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company begun its operations in March 2019.
Acquisition of Isban Brasil S.A. and Produban Serviços de Informática S.A. Companies
On February 19 and 28, 2018, respectively, we purchased all shares issued by Isban Brasil from Ingenería de Software Bancário, S.L., and all shares issued by Produban Serviços de Informática from Produban Servicios Informáticos Generales, S.L., for R$61,078 thousand and R$42,731 thousand, respectively. While all parties to these transactions are ultimately controlled by Santander Spain, the transactions were conducted on an arm’s length basis. On February 28, 2018, Isban Brasil was merged into Produban Serviços de Informática S.A. and on the same date, Produban Serviços de Informática changed its corporate name to Santander Brasil Tecnologia S.A
Sale of equity interest in BW Guirapá I S.A.
On December 22, 2017, Santander Corretora de Seguros, Cia. de Ferro Ligas da Bahia – Ferbasa S.A. and Brazil Wind S.A. entered into an agreement for the sale of 100% of the shares issued by BW Guirapá I S.A. held by Santander Corretora de Seguros and Brazil Wind to Cia. de Ferro Ligas da Bahia – Ferbasa S.A. The transaction also encompassed the seven wind farms organized as special purpose companies held by BW I. The base consideration paid was R$414 million, and an additional amount of up to R$35 million may be paid if certain contractual targets are met. The transaction closed on April 2, 2018.
Formation of Santander Auto S.A.
On December 20, 2017, we entered into binding agreements with HDI Seguros for the formation of a partnership through the creation of a new insurance company called Santander Auto S.A., or “Santander Auto”. Sancap Investimentos e Participações S.A., a company controlled by Santander Brasil, will hold 50% of the issued share capital of Santander Auto with the remaining 50% being held by HDI Seguros. Santander Auto will focus on offering motor insurance policies through a 100% digital platform. The transaction closed on October 9, 2018 for the amount of R$15 million when the documentation to form Santander Auto S.A. was executed. On January 9, 2019, SUSEP granted Santander Auto the regulatory authorization to operate. Santander Auto began its operation on August 2019.
Acquisition of equity stake in the Returns Entities
On October 16, 2017, Santander Brasil, through its wholly-owned subsidiary Atual Companhia Securitizadora de Créditos Financeiros or “Atual”, acquired a direct equity interest in 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 its decision to exercise the call option for the shares representing the remaining 30% the Return Entities’s total voting capital owned by them, 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.
Joined Certain Tax Payment Plans
In August 2017, we joined the PERT. The program allows for certain tax debts to be repaid in installments. In connection with our participation in this program, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to corporate income tax and social security contributions for the periods from 1999 to 2005 in a total amount of R$492 million in January 2018 (taking into account the reduction arising from our participation in the program). A payment of R$191.9 million was due in August 2017 and a further payment of R$299.7
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million was due by January 2018, both of which we have made within the prescribed time limits. As a result of our participation, we recorded expenses in an amount of R$364 million (after tax) in the third quarter of 2017.
In October 2017, we joined the Incentive Payment Programs and Installments (Programas de Parcelamento Incentivado) created by the cities Rio de Janeiro and São Paulo. The program allows for certain tax debts to be repaid in installments. In connection with our participation in these programs, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to ISS for the periods from 2005 to 2016 in a total amount of R$293 million as of December 31, 2017. As we had made provisions for these losses, we registered income of R$435 million as a result of the reversal of certain provisions, net of tax effects, in an amount of R$96 million.
Establishment of Credit Intelligence Bureau
On January 20, 2016, we entered into a non-binding memorandum of understanding with Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A., for the creation of a credit intelligence bureau, the CIB. The CIB 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. will have a 20% ownership stake in the corporation.
The purpose of the CIB is to develop a database that, in conformity with applicable laws, will collect, reconcile and handle the credit information of individuals and legal entities that register with the CIB and expressly authorize the inclusion of their credit information on the CIB’s database. We believe this initiative will lead to an increased degree of efficiency and improvement of our credit management activities, and will also facilitate the disbursement of long and medium-term lines of credit to participants in the Brazilian Financial System and to other corporate entities.
On April 14, 2017, the definitive documents were signed by the shareholders. At the extraordinary shareholders’ meeting held on October 5, 2017, a capital increase in an amount of R$285,205 thousand was approved as a result of which CIB’s capital stock increased from R$65,823 thousand to R$351,028 thousand. The company began its activities in 2019.
Formation of Banco Hyundai Capital Brasil S.A.
On April 28, 2016, our wholly-owned subsidiary Aymoré CFI entered into a joint venture with Hyundai Capital, for the incorporation of (i) Banco Hyundai Capital Brasil S.A. and (ii) an insurance brokerage company, in order to provide, respectively, auto finance and insurance brokerage services, as well as products to consumers and Hyundai dealerships in Brazil. Aymoré CFI holds a 50% equity stake in Banco Hyundai Capital Brasil S.A. while Hyundai Capital holds the remaining 50% equity interest. On February 21, 2019, the Brazilian Central Bank granted to Banco Hyundai Capital Brasil S.A. the authorization to operate as a banking entity. Banco Hyundai Capital Brasil S.A. began its operations in the first half of 2019. On April 30, 2019, the Brazilian Central Bank granted the authorization to the formation of the insurance brokerage company, which was incorporated on July 2, 2019. The company began its operations on November 2019.
Sale of Santander Securities Services Brasil Distribuidora de Títulos e Valores Mobiliários S.A., or “SSS DTVM”
On June 19, 2014, we executed preliminary documents containing the main terms and conditions of the sale of our qualified custody business and the sale of our subsidiary SSS DTVM, which renders third party fund administration services, to a holding company owned by Santander Spain and a group of private equity funds managed by Warburg Pincus. Following the sale, we will continue to act as the administrator of the funds, as per CVM Instruction No. 306, dated as of May 5, 1999, as amended.
The closing of the transaction occurred on August 31, 2015, when all of our shares in SSS DTVM were formally transferred to Santander Securities Brasil and SSS DTVM acquired our qualified custody business. We received R$859 million at the closing of the transaction which generated gains of R$751
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million before taxes recorded in the “Other non-financial gains/losses” line.
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.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB and the principal accounting policies are described in Note 2 - Accounting policies and method of measurement to our audited consolidated financial statements. The following discussion describes those areas that require the most judgment or involve a higher degree of complexity in the application of the accounting policies.
Fair Value of Financial Instruments
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique.
For further information, see notes “5 - Loans and amounts due from credit institutions”; “6 - Debt instruments”; “7 - Equity instruments”; “8 - Derivative financial instruments and Short positions”; “9 - Loans and advances to clients”; “26 - Other Comprehensive Income”; and “30 - Fair value of financial assets and liabilities” in “Item 18. Financial Statements,”.
Impairment Losses on Financial Assets
A financial asset is considered impaired when there is objective evidence that events have occurred which:
| · | in the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date; |
| · | in the case of equity instruments, mean that their carrying amount may not be fully recovered; |
| · | arise from the violation of terms of loans; and |
| · | arise during the Bankruptcy process. |
For further information, see notes “5 - Loans and amounts due from credit institutions”; “6 - Debt instruments”; “7 - Equity instruments”; “8 - Derivative financial instruments and Short positions”; and “9 - Loans and advances to clients” in “Item 18. Financial Statements,”.
Impairment
Certain assets, such as intangible assets, including goodwill, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review.
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We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable.
For further information, see notes “13 - Intangible assets - Goodwill” and “24 - Tax assets and liabilities” in “Item 18. Financial Statements”.
Post-employment Benefit Plan
The post-employment benefits plans include the following obligations undertaken by us: (i) to supplement the public social security system benefits, and (ii) medical assistance in the event of retirement, permanent disability or death for eligible employees and their direct beneficiaries.
For further information, see notes “22 - Provisions for pensions and similar obligations” in “Item 18. Financial Statements”.
New Accounting Pronouncements
The new accounting standards which will come into force after December 31, 2019 are mentioned in our audited consolidated financial statements included in this annual report. For further information, see note “1 - Introduction, basis of presentation of the consolidated financial statements and other information” to our audited consolidated financial statements.
All accounting policies and measurement bases with a material effect on the consolidated financial statements for 2019 were applied in the preparation of such financial statements.
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Results of Operations for the Years Ended December 31, 2019, 2018 and 2017
| Executive Summary – Santander Brasil Results at a glance | |
Total Income amounted to R$58,769 million in 2019, an increase of 18.7% in comparison with the year ended December 31, business lines. Excluding the effects of the hedge for investment Consolidated Profit for 2019 totaled R$16.6 million, in the year ended December 31, 2019, 29.9% increase over the year ended December 31, 2018, as a result of an increase in net interest income and net fees and commissions as well as lower losses in gains/losses on financial assets and liabilities (net) and exchange differences (net). | Loan Portfolio to customers amounted R$347 billion as of December 2019, an increase of 7.9% compared to December 31, 2018, mainly due to an increase in loans to individuals and consumer finance portfolio. Credit Qualityremains at reasonable levels and support our growth.Impaired assets to credit risk ratio was 6.0% for the year ended December 31, Deposits from Brazilian Central Bank and deposits from credit institutions plus customer deposits increased by 8.1% to R$436 billion in 2019. |
Results of Operations
The following table presents our consolidated results of operations for the years ended December 31, 2019, 2018 and 2017:
| For the Year Ended December 31, | ||||||||||||||||||||
| % Change | % Change | |||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||
| 2019/2018 | 2018/2017 | |||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||
| Net interest income | 44,321 | 41,921 | 34,946 | 5.7 | 20.0 | |||||||||||||||
| Income from equity instruments | 19 | 33 | 83 | (42.0 | ) | (60.8 | ) | |||||||||||||
| Income from companies accounted for by the equity method | 149 | 66 | 72 | 126.6 | (8.4 | ) | ||||||||||||||
| Net fee and commission income | 15,713 | 14,132 | 12,722 | 11.2 | 11.1 | |||||||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange differences (net) | (326 | ) | (5,589 | ) | 1,574 | (94.2 | ) | (455.1 | ) | |||||||||||
| Other operating income (expenses) | (1,108 | ) | (1,056 | ) | (672 | ) | 4.9 | 57.1 | ||||||||||||
| Total income | 58,769 | 49,507 | 48,725 | 18.7 | 1.6 | |||||||||||||||
| Administrative expenses | (16,942 | ) | (16,792 | ) | (16,121 | ) | 0.9 | 4.2 | ||||||||||||
| Depreciation and amortization | (2,392 | ) | (1,740 | ) | (1,662 | ) | 37.5 | 4.7 | ||||||||||||
| Provisions (net) | (3,682 | ) | (2,000 | ) | (3,309 | ) | 84.1 | (39.6 | ) | |||||||||||
| Impairment losses on financial assets (net) | (13,370 | ) | (12,713 | ) | (12,338 | ) | 5.2 | 3.0 | ||||||||||||
| Impairment losses on other assets (net) | (131 | ) | (508 | ) | (457 | ) | (74.1 | ) | 11.3 | |||||||||||
| Other nonfinancial gain (losses) | 20 | 156 | (324 | ) | (86.9 | ) | (148.2 | ) | ||||||||||||
| Operating profit before tax | 22,273 | 15,910 | 14,514 | 40.0 | 9.6 | |||||||||||||||
| Income tax | (5,642 | ) | (3,110 | ) | (5,376 | ) | 81.4 | (42.2 | ) | |||||||||||
| Consolidated profit for the year | 16,631 | 12,800 | 9,138 | 29.9 | 40.1 | |||||||||||||||
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Our consolidated profit for the year ended December 31, 2019 was R$16,631 million, an increase of R$3,832 million, or 29.9%, as compared to our consolidated profit of R$12,800 million for the year ended December 31, 2018 as a result of:
| (i) | an increase of R$2,400 million in net interest income mainly due to the |
| (ii) | an increase of R$ |
Our consolidated profit for the year ended December 31, 2018 was R$12,800 million, an increase of R$3,662 million, or 40.1%, as compared to our consolidated profit of R$9,138 million for the year ended December 31, 2017 as a result of:
(i) an increase of R$6,975 million in net interest income mostly driven by growth in our loan portfolio driven by our commercial banking segment;
(ii) an increase of R$1,410 million in net fees and commissions, primarily as a result of: (a) an increase of R$571 million in revenues from credit and debit cards; (b) an increase of R$370 million in revenues from current account services; and (c) an increase of R$354 million in revenues from insurance and premium bonds. These increases were in turn due to an 11.6% increase in our total active customer base and a 24.8% increase in the number of loyal customers; and
(iii) a decrease of R$7,163 million in gains/losses on financial assets and liabilities (net) and exchange differences (net), both of which include the effects of the hedge for investment held abroad.
Net Interest Income
Net interest income for the year ended December 31, 2019 was R$44,321 million, a 5.7% or R$2,400 million increase from R$41,921 million for the year ended December 31, 2018. This increase was mainly explained by a 7.9% increase in the volume of our credit portfolio, driven by individuals and consumer finance.
Average total earning assets in 2019 were R$655.2 billion, a 7.8% or R$47.1 billion increase from R$608.0 billion in 2018. The principal drivers were an increase of R$45.9 billion, or 81.8%, in the average of loans and amounts due from credit institutions, a R$18.5 billion increase in average of loans and advance to customers and a R$14.7 billion increase in average of debit instruments, which were partially offset by a R$32.3 billion decrease in average of cash on balances with the Brazilian Central Bank. Net yield (the net interest income divided by average earning assets) was 6.8% in 2019 compared to 6.9% in 2018, an decrease of 0.1 p.p.
Average total interest-bearing liabilities in 2019 were R$491.2 billion, a 6.0% or R$27.8 billion increase from R$463.4 billion in 2018. The main drivers of this growth were an increase of R$18.0 billion in customer deposits, an increase of R$5.3 billion in deposits from the Brazilian Central Bank and deposits from credit institutions and an increase of R$4.7 billion in marketable debt securities.
Finally, the yield spread (the difference between gross yield on earning assets and the average cost of interest-bearing liabilities) was 5.3% in 2019 as compared to 5.4% in 2018, mainly due to a decrease in the cost of funding, associated with the overall reduction in Brazil’s interest rate from 6.50% in 2018 to 4.5% in 2019.
Net interest income for the year ended December 31, 2018 was R$41,921 million, a 20.0% or
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R$6,975 million increase from R$34,946 million for the year ended December 31, 2017. This increase was mainly due to an 11.6% increase in the volume of our credit portfolio which was primarily concentrated in our commercial banking segment, and which was partially offset a decrease in our revenues from deposits as a result of the interest rate being lower in the fiscal year ended December 31, 2018 than the fiscal year ended December 31, 2017.
Average total earning assets in 2018 were R$608.0 billion, a 9.3% or R$51.8 billion increase from R$556.2 billion in 2017. The principal drivers were an increase of R$32.6 billion increase in the average of loans and amounts due to credit institutions, a R$26.8 billion, or 9.7%, in the average of loans and advances to customers, a R$17.3 billion increase in average of debt instruments , which were partially offset by a R$ 24.3 billion decrease in average of cash on balances with the Brazilian Central Bank. Net yield (the net interest income divided by average earning assets) was 6.9% in 2018 compared to 6.4% in 2017, an increase of 0.5 p.p.
Average total interest-bearing liabilities in 2018 were R$463.4 billion, an 11.2% or R$46.6 billion increase from R$416.8 billion in 2017. The main drivers of this growth were an increase of R$41.3 billion in customer deposits, an increase of R$13.4 billion in deposits from the Brazilian Central Bank and deposits from credit institutions and an increase of R$2.4 billion in subordinated debts, which were offset by a decrease of R$10.5 billion in marketable debt securities.
Finally, the yield spread (the difference between gross yield on earning assets and the average cost of interest-bearing liabilities) was 5.4% in 2018, as compared to 4.1% in 2017, mainly due our Commercial Banking segment accounting for a greater share of in our total results and a decrease in the cost of funding, associated with the overall reduction in Brazil’s interest rate.
Income from Equity Instruments
Income from equity instruments for the year ended December 31, 2019 totaled R$19 million, a R$14 million decrease from R$33 million for the year ended December 31, 2018, mainly due to lower dividends received from Santander Fundo de Investimento Guarujá Multimercado Crédito Privado Investimento no Exterior.
Income from equity instruments in 2018, totaled R$33 million, a R$50 million decrease from R$83 million for the year ended December 31, 2017. This decrease was primarily due to a receipt of dividends of Rio Alto Gestão de Creditos e Participações S.A. that did not occur in 2018.
Income from Companies Accounted for by the Equity Method
Income from companies accounted for by the equity method for the year ended December 31, 2019 was R$149 million, an R$84 million increase from R$66 million for the year ended 2018, mainly due to an increase of R$59 million in the result of operations of Banco RCI Brasil S., a jointly-controlled company, an increase of R$19 million in the results of operations of Tecban (Tecnologia Bancária S.A.), a jointly-controlled company and an increase of R$12 million in the results of operations of Webmotors S.A., a jointly-controlled company. These improved results were partially offset by a decrease of R$5 million in the results of operations of Gestora de Inteligência de Crédito, a jointly-controlled company and a R$2 million reduction in the results of operations of Santander Auto S.A. a jointly-controlled company.
Income from companies accounted for by the equity method for the year ended December 31, 2018 was R$66 million, a R$6 million decrease from R$72 million for the year ended December 31, 2017. This increase was mainly due to the positive results of operations of Banco RCI Brasil S.A., a jointly-controlled company, which were partially offset by negative results of operations of Webmotors S.A., a jointly-controlled company.
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Net Fee and Commission Income
Net fee and commission income for the year ended December 31, 2019 reached R$15,713 million, an increase of 11.2% or R$1,581 million compared to R$14,132 million for the year ended December 31, 2018. This increase was mainly due to an increase of R$722 million in revenues from credit and debit cards, R$417 million in revenues from sale of insurance and premium bonds, R$295 million in revenues from capital markets and R$138 million from revenues from current account services.
Net fees and commissions for the year ended December 31, 2018 reached R$14,132 million, a 11.1%, or R$1,410 million, increase from R$12,722 million for the year ended December 31, 2017. This increase was mainly due to an increase of R$571 million in revenues from credit and debit cards, R$370 million in revenues from current account services, R$354 million in revenues from insurance and premium bonds.
Net fees and commissions from credit and debit cards totaled R$4,986 million for the year ended December 31, 2019, an increase of 16.9% compared to the year ended December 31, 2018. This increase was as a result of a higher turnover (R$236.4 billion in the fiscal year ended December 31, 2019 as compared to R$201.6 billion the fiscal year ended December 31, 2018.
Net fees and commissions from credit and debit cards totaled R$4,264 million for the year ended December 31, 2018, an increase of 15.5% compared to the year ended December 31, 2017. This increase was primarily due to a higher transaction volume (2,338.2 million in the year ended December 31, 2018 as compared to 1,987.6 million the year ended December 31, 2017).
Net fees and commissions from insurance and premium bonds totaled R$3,586 million for the year ended December 31, 2019, a 13.1% increase compared to the year ended December 31, 2018, mainly due to credit life insurance associated to the good evolution of the portfolio.
Net fees and commissions from insurance and premium bonds totaled R$3,169 million for the year ended December 31, 2018, an increase of 12.6% compared to the year ended December 31, 2017, mainly due to credit life insurance associated with portfolio dynamics.
Revenues from fees and commissions charged in connection with capital markets totaled R$1,211 million for the year ended December 31, 2019, an increase of 32.2% compared to the year ended 2018, mainly due to an increase of R$263 million in revenues from securities underwriting and placement and an increase of R$32 million in revenues from administration and custody.
Revenues from fees and commissions charged in connection with capital markets totaled R$916 million for the year ended December 31, 2018, an increase of 4.9% compared to the year ended 2017, mainly due to an increase in revenues from securities placements.
Net fees and commissions from current account services totaled R$4,051 million for the year ended December 31, 2019, an increase of 3.5% compared to the year ended 2018 driven by the expansion of our active current account holders due to greater customer loyalty.
Net fees and commissions from current account totaled R$3,913 million for the year ended December 31, 2018, an increase of 10.4% compared to the year ended December 31, 2017 explained by the growth of digital transactions and the increase of active current account holders.
The following table reflects the breakdown of net fee and commission income for the year ended December 31, 2019, 2018 and 2017:
| For the Year Ended December 31 | ||||||||||||||||||||
| 2019 | 2018 | 2017 | % Change 2019/2018 | Change% 2018/2017 | ||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||
| Current account services | 4,051 | 3,913 | 3,544 | 3.5 | 10.4 | |||||||||||||||
| Collection and payment services | 1,313 | 1,291 | 1,152 | 1.7 | 12.1 | |||||||||||||||
| Insurance and capitalization | 3,586 | 3,169 | 2,815 | 13.2 | 12.6 | |||||||||||||||
| Asset Management and pension funds | 1,434 | 1,289 | 824 | 11.2 | 56.4 | |||||||||||||||
| Credit and debit cards | 4,986 | 4,264 | 3,692 | 16.9 | 15.5 | |||||||||||||||
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| Capital markets | 1,211 | 916 | 873 | 32.2 | 4.9 | |||||||||||||||
| Trade finance | 1,317 | 1,228 | 956 | 7.2 | 28.5 | |||||||||||||||
| Tax on services | (622 | ) | (671 | ) | (526 | ) | (7.3 | ) | 27.6 | |||||||||||
| Others | (1,562 | ) | (1,266 | ) | (608 | ) | 23.4 | 108.2 | ||||||||||||
| Total | 15,713 | 14,133 | 12,722 | 11.2 | 11.1 |
Gains/losses on Financial Assets and Liabilities (net) and Exchange Differences (net)
Gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2019 were losses of R$326 million, a reduction of R$5,263 million in losses from R$5,589 million for the year ended December 31, 2018. This variation is mainly due to gains of R$5,156 million related to financial assets measure at fair value through profit or loss held and gains of R$ 17.9 million related to exchange differences (net). Excluding the results of hedging on investments abroad effect, gains/losses on financial assets and liabilities (net) and exchange differences (net) were gains of R$938 million for the year ended December 31, 2019, a R$660 million increase from gains of R$278 million compared to the year ended December 31, 2018 mainly due to the positive results in our derivative positions. Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”.
Gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2018 were losses of R$5,589 million, a decrease of R$7,163 million from gains of R$1,574 million for the year ended December 31, 2017. This variation is mainly due to a decrease of R$5,057 million in derivatives transactions as a consequence of our results on investment abroad, which was offset by the same amount in income taxes. Excluding the results of hedging on investments abroad effect, gains/losses on financial assets and liabilities (net) and exchange differences (net) were R$278 million for the year ended December 31, 2018, a 88.3% decrease from R$2,384 million compared to the year ended December 31, 2017, primarily due to positive results in our derivative positions as a result of market volatility which occurred in the fiscal year ended December 31, 2017 did not occur in the fiscal year ended December 31, 2018. Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”.
The following table presents our gains/losses on Financial Assets and Liabilities (net) and Exchange Differences (net) for the periods indicated.
| For the Year Ended December 31 | ||||||||||||||||||||
| 2019 | 2018 | 2017 | % Change 2019/2018 | Change% 2018/2017 | ||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange differences (net) | (326 | ) | (5,589 | ) | 1,574 | (94.2 | ) | (455.1 | ) | |||||||||||
| Effects of the hedge for investment held abroad | 1,264 | 5,867 | 810 | (78.5 | ) | 624.3 | ||||||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding Hedge Impact(1) | 938 | 278 | 2,384 | 237.7 | (88.4 | ) | ||||||||||||||
| (1) | Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.” |
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Other Operating Income/Expenses
Other operating income/expenses for the year ended December 31, 2019 were expenses of R$1,108 million, an increase of R$52 million compared to expenses of R$1,056 million for the year ended December 31, 2018. Other operating income/expenses for the year ended December 31, 2018, were expenses of R$1,056 million, an increase of R$384 million compared to expenses of R$672 million for the year ended December 31, 2017, mainly due to assets we received as guarantees from our customers.
Administrative Expenses
Administrative expenses for the year ended December 31, 2019 were R$16,942 million, a R$149 million increase compared to expenses of R$16,792 million for the year ended December 31, 2018. For the year ended December 31, 2018, our administrative expenses of R$16,792 million reflected a R$672 million increase compared to administrative expenses of R$16,121 million for the year ended December 31, 2017. The performance in both periods is primarily attributed to the increase in: (i) personnel expenses, which are in line, with our meritocratic culture and the performance of our business; and (ii) data processing expenses line in order to support the increase in the volume of our customer transactions.
Personnel expenses increased R$122 million for the year ended December 31, 2019, as a consequence of the increase in the benefits line and higher wages and salaries with a result of the renegotiation of our collective bargaining agreement. In the year ended December 31, 2018, our personnel expenses increased R$269 million compared to the same period in 2017. This performance can be attributed to the increase in wages and salaries and social security costs and benefits, which are in line with our meritocratic culture and the performance of our business.
The following table sets forth our personnel expenses for each of the periods indicated:
| For the Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | % Change 2019/2018 | Change% 2018/2017 | ||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||
| Wages and salaries | 5,876 | 5,813 | 5,714 | 1.1 | 1.7 | |||||||||||||||
| Social security costs | 1,277 | 1,405 | 1,381 | (9.1 | ) | 1.7 | ||||||||||||||
| Benefits | 1,492 | 1,387 | 1,309 | 7.5 | 6.0 | |||||||||||||||
| Training | 66 | 63 | 58 | 4.8 | 8.6 | |||||||||||||||
| Other personnel expenses | 617 | 538 | 475 | 14.7 | 13.3 | |||||||||||||||
| Total | 9,328 | 9,206 | 8,937 | 1.3 | 3.0 | |||||||||||||||
Other administrative expenses increased R$28 million to R$7,614 million for the year ended December 31, 2019 from R$7,586 million for the year ended December 31, 2018, mainly due to a R$272 million increase in technology and systems, a R$91 million increase in advertising, R$83 million increase in specialized and technical service, both expenses derived from more intense commercial actions in our business, partially offset by a decrease of R$582 million with general maintenance expenses which as a result of the adoption of IFRS 16.
In the year ended December 31, 2018 other administrative expenses increased R$403 million to R$7,586 million for the year ended December 31, 2018 from R$7,183 million for the year ended December 31, 2017, mainly due to: (i) a R$422 million increase in technology and systems associated with greater transactionality and expansion of our customer base, (ii) an R$189 million increase in specialized and technical services especially technology services. This growth in expenses was partially offset by R$136 million decrease in communications-related expenses.
The following table sets forth our other administrative expenses for each of the periods indicated:
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| For the Year Ended December 31, | |||||||||||||||||||||
| 2019 | 2018 | 2017 | % Change 2019/2018 | Change% 2018/2017 | |||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||
| Specialized and technical services | 2,173 | 2,090 | 1,901 | 4.0 | 9.9 | |||||||||||||||
| General maintenance expenses | 748 | 1,331 | 1,284 | (43.8 | ) | 3.7 | ||||||||||||||
| Technology maintenance expenses | 2,059 | 1,786 | 1,365 | 15.3 | 30.8 | |||||||||||||||
| Advertising | 713 | 622 | 618 | 14.6 | 0.6 | |||||||||||||||
| Communications | 473 | 457 | 593 | 3.5 | (22.9 | ) | ||||||||||||||
| Per diems and travel expenses | 140 | 127 | 107 | 10.2 | 18.7 | |||||||||||||||
| Taxes other than income tax | 112 | 89 | 123 | 25.9 | (27.4 | ) | ||||||||||||||
| Surveillance and cash courier services | 631 | 617 | 630 | 2.3 | (2.1 | ) | ||||||||||||||
| Insurance premiums | 35 | 29 | 27 | 20.7 | 7.4 | |||||||||||||||
| Other administrative expenses (1) | 531 | 535 | 595 | 21.5 | (18.3 | ) | ||||||||||||||
| Total | 7,614 | 7,586 | 7,183 | 0.4 | 5.6 | |||||||||||||||
(1) In December 31, 2019, includes mainly Data Processing Expenses in the balance of R$2.4 million (2018 – R$67.7 million and 2017 - R$73.7 million), Service Expenses in the balance of R$2.2 million (2018 - revenue of R$26.8 million and 2017 - R$87.2 million), Expenses with Benefit Guarantor Fund - FGB R$53.5 milion (2018 – R$35.0 million and 2017 - R$5.3 million), Interest on Own Capital R$0 (2018 – R$38.0 million and 2017 - R$20.8 million), and Recovery of Charges and Expenses R$97.4 million (2018 – R$92.4 million and 2017 – R$89.4 million).
The efficiency ratio, which we calculate as total administrative expenses divided by total income, decreased to 28.8% in the year ended December 31, 2019, as compared to 33.9% for the year ended December 31, 2018 For the year ended December 31, 2017 it was 33.1%. Our adjusted efficiency ratio, which excludes the effect of the hedge for investment held abroad (see “—Hedging in Foreign Investments” and “Selected Financial Data—Selected Consolidated Ratios, Including Non-GAAP Ratios”), was 28.2%, 30.3% and 32.5% in 2019, 2018 and 2017, respectively.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2019 was R$2,392 million, a R$652 million increase from R$1,740 million for the year ended December 31, 2018, primarily due to the change in accounting practices resulting from the adoption of IFRS 16 following the principles of IAS 17. For further information, please see “Item 1 Introduction, basis of presentation of the consolidated financial statements and other information, c.1) Adoption of new standards and interpretations of our consolidated financial statements included in “item 18.Financial Statements of this annual report. For the year ended December 31, 2018, depreciation and amortization amounted to R$1,740 million, a R$78 million increase from R$1,662 million for the year ended December 31, 2017, mainly due to higher depreciation expenses related to technology items and higher amortization expenses in relation to third party real estate and facilities.
Provisions (Net)
Provisions principally include provisions for tax, civil, and especially labor claims. Provisions (net) totaled R$3,682 million for the year ended December 31, 2019, an increase of R$1,682 million compared to R$2,000 million for the year ended December 31, 2018, mainly due to an increase of R$700 million related to the creation of an efficiency and productivity fund, an increase in civil and labor proceedings due to revision of the operational model and a constitution of provisions related to the legal proceeding brought by the association of retired employees of Banespa (Associação dos Funcionários Aposentados do Banco do Estado de São Paulo), or AFABESP, an association of former employees of Banespa in which the classification of the chance of loss was revised to probable in December 2019 (for further information see note 23 to our audited consolidated financial statements included in the ”Item 18. Financial Statements” of this annual report).
In the year ended December 31, 2018, provisions (net) totaled R$2,000 million, a increase of R$1,310 million compared to R$3,309 million for the year ended December 31, 2017, mainly due to a decrease of R$816 million related to the past service cost in the contribution established for a post-employment benefit plan named Cabesp due to changes in the plan in the first half of 2018 (for further information, see note 22. to our audited consolidated financial statements included in “Item 18. Financial Statements” of in this annual report) and lower gains related to foreclosed assets.
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Impairment Losses on Financial Assets (Net)
Impairment losses on financial assets (net) for the year ended December 31, 2019 were R$13,370 million, an R$657 million increase compared to R$12,713 million for the year ended December 31, 2018. This increase was principally due to Installment Loans to Individuals, due to the recurrent growth of the credit portfolio in this segment.
For the year ended December 31, 2018, impairment losses on financial assets (net) were R$12,713 million, an R$375 million increase compared to R$12,338 million for the year ended December 31, 2017 principally due to:
An increase of 3%, or R$375 million, in impairment loss for loans and receivables to R$12,713 million as of December 31, 2018, from R$12,338 million on December 31, 2017. This increase was primarily a result of the adoption of IFRS 9 criteria.
Our credit risk exposure portfolio increased by R$25.3 billion to R$347.3 billion as of December 31, 2019 compared to R$321.9 billion as of December 31, 2018. Furthermore, our impaired assets increased R$1 billion from R$23.4 billion as of December 31, 2018 to R$22.4 billion for the year ended December 31, 2019. The default rate decreased by 20 base points in 2019 in comparison with 2018.
The following table shows the ratio of our impaired assets to total credit risk exposure and our coverage ratio as of December 31, 2019 and December 31, 2018 and 2017.
| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | % Change 2019/2018 | % Change 2018/2017 | ||||||||||||||||
| (in millions of R$ except percentages) | ||||||||||||||||||||
| Loans and advances to customers, gross | 347,257 | 321,933 | 287,829 | 7.9 | 11.8 | |||||||||||||||
| Impaired assets | 23,426 | 22,426 | 19,145 | 4.5 | 17.1 | |||||||||||||||
| Provisions for impairment losses | 22,625 | 22,969 | 18,262 | (1.5 | ) | 25.8 | ||||||||||||||
| Credit risk exposure Non-GAAP – customers(1) | 391,569 | 364,194 | 330,474 | 7.5 | 10.2 | |||||||||||||||
| Ratios | ||||||||||||||||||||
| Impaired assets to credit risk exposure | 6.0 | % | 6.2 | % | 5.8 | % | (0.2 | ) | 0.4 | |||||||||||
| Coverage ratio(2) | 96.6 | % | 102.4 | % | 95.4 | % | (5.7 | ) | 7.3 | |||||||||||
| Impairment losses | (13,370 | ) | (12,713 | ) | (12,338 | ) | 5.2 | 3.0 | ||||||||||||
| Gains (losses) due to derecognition of financial assets measured at amortized cost(3) | - | - | - | - | (100 | ) | ||||||||||||||
| Impairment losses on financial assets (net) (4) | (13,370 | ) | (12,713 | ) | (12,338 | ) | 5.2 | 3.0 | ||||||||||||
The table below presents our operating profit before tax and our operating profit before tax excluding the effects of the hedge for investment held abroad for the periods presented.
| For the Year Ended December 31, | ||||||
| 2018 | 2017 | 2016 | % Change 2018/2017 | %Change 2017/2016 | ||
| (in millions of R$, except percentages) | ||||||
| Operating Profit Before Tax | 15,910 | 14,514 | 16,384 | 9.6 | (11.41) | |
| Effects of the hedge for investment held abroad | (5,867) | (810) | 6,140 | 624.3 | (113.2) | |
| Adjusted operating profit before tax | 21,777 | 15,324 | 10,244 | 42.1 | 49.6 | |
The following table shows a managerial breakdown of our loans and advances by customer type at the dates indicated:
Commercial Banking 1. Retail Individuals We have structured this customer segment as follows: Private Banking– is responsible for select group of customers with at least R$5.0 million in assets available for investment. In this segment, we offer a complete and tailored portfolio of onshore and offshore financial products and services, investment advice, loans and asset management through a dedicated manager for investments and banking services. • Santander Select– is responsible for customers with a monthly income above R$20,000, or a monthly income above R$10,000 and R$30,000 in investments, or more than R$ 300,000 in 58 investments. The offer here consists of a value proposition with differentiated products and services, exclusive service spaces, relationship managers who serve a small number of customers and provide asset management advisory services. • Santander Van Gogh– is responsible for customers with a monthly income from R$4,000 to R$10,000, or with investments above R$40,000. Our goal is to understand the needs of our customers at each stage of their life and provide them with financial advice through a multi-channel solution, including financial products and services as well as financial advice. • Santander Especial- is responsible for customers who earn up to R$4,000 per month. Our business model offers simple and efficient solutions with an attractive cost benefit to the customer, primarily through electronic channels. It is worth noting that we also support our Select and Van Gogh customers through our Santander Direct channel. Santander Direct is suited to customers who want more flexible service hours, from 8:00 a.m. to 10:00 p.m., and who prefer using a remote method, such as telephone, e-mail or chat, as well as access to digital channels. This service complements our offering and broadens our capillarity by also catering to regions where we do not have a physical presence. Small and Medium Enterprises (SMEs) We serve SMEs under the Santander Negócios e Empresas brand, under the following segmentation:
It is worth noting that we also offer an attendance channel, the Negócios Direct (Direct Business), which is responsible for companies with annual revenues of up to R$1 million. We support these clients through a relationship manager who is available during extended service hours and via remote channels, such as telephone, e-mail or chat, as well as access to digital channels that facilitate a customer’s daily life. 2. Consumer Finance We provide consumer credit to finance motor vehicles, goods and services directly or through intermediate agencies. Santander Financiamentos is our main service channel but we also operate under multiple brands. The following table sets forth certain key financial and operating data regarding our credit finance for motor vehicles to individuals for the periods indicated: 59
Our corporate customer segment caters to large companies that have annual gross revenues greater than R$200 million (except for our Santander Corporate & Investment Banking customers). We focus on fostering a close relationship with our corporate customers through managers and specialists geographically distributed across Brazil, providing customer-tailored services with a complete portfolio of local and global products (including products from Commercial Banking and SCIB as defined below). Global Wholesale Banking
SCIB is the global business unit that covers those customers, which, due to their size and complexity, require tailored services or high-value-added wholesale products. In this segment, we provide a wide range of domestic and international financial services to large Brazilian and multinational companies. Our customer portfolio consists of a range of industries, including telecommunications, retail, aviation, real estate and logistics, power, construction and infrastructure, natural resources, food, agribusiness and financial institutions. Our customers in the SCIB segment benefit from the global structure of services provided by the Santander Group with its worldwide-integrated wholesale banking network and global services solutions, combined with its local market expertise and provision of integrated services.
Our proprietary trading division is responsible for managing our proprietary books and liquidity positions. Our Portfolio of Products and Services Payments
We operate in the credit and debit card market by issuing these products to our customers (including both account and non-account holders), with the majority of customers being individuals. Our strategy is to offer credit and debit cards compatible with the income level and lifestyle of each of our customers. We are the exclusive distributors of the AAdvantage® card in Brazil, which is linked to the American Airlines loyalty program, one of the most recognized programs in the market. We highlight the Crediário, launched in March 2019, which allows our customers to simulate and pay for their purchases in installments directly on a POS device. Merchants receive payments two days after they are effective. The following table sets forth certain key financial and operating data regarding our credit card business for the periods indicated. 60
SantanderWay an app that allows customers to manage all their Santander Brasil cards through a digital channel and has also become a payment platform, with new features that allow instant transfers peer-to-peer through contact list or QR Code, account sharing between users and payments via QR Code in POS Getnet.
Getnet is a technology company that offers physical and digital solutions, to people and businesses. The acquisition of Getnet, which was completed in 2019, gave us more flexibility, and enabled us to create more complete and tailored solutions for our customers, integrating its services with Santander Brasil. Through Getnet, we are able to offer a wide array of payment solutions to individuals and companies, including: (i) mobile and Wi-Fi point of sale or POS devices; (ii) SuperGet, a mobile POS device that self-employed professionals and small companies can buy or rent from us; (iii) TEF, a solution for establishments with a significant number of transactions, operating in synergy with the establishment’s systems and which offers sales reconciliation through our bank-integrated customer benefits; (iv) Getnet App, which allows its users to track sales details in real time, and anticipate amounts, while also providing business analytics information, such as the best time to make a sale, thus helping business owners better manage their activities based on a richer set of data; (v) Digital POS, a complete solution that can be customized and, when connected to the internet, allows app downloads and the use of integrated management functions; and (vi) Getnet Digital Platform, a tool for all e-commerce environments, with integrated services such as safe boxes, recurrence and anti-fraud systems, which is modeled after the “one-stop shop” concept and provides financial intermediation between a marketplace and its storeowners, as well as several other financial services, such bill generation, and sales conciliation; (vii) Getnet Digital, which is geared towards Small and Medium-sized Enterprises (SME) and allows its users to set up their stores online, in addition to offering a number of services, such as payment platform, alongside visual and fully integrated management. Getnet also enables us to provide SME customers with a fully integrated offer, including card payment solutions. One of them is “Conta Integrada,” a bundle that combines a current account with an integrated card payment solution, which rewards customers who concentrate their sales on POS devices. The following table sets forth certain key financial and operating data regarding our merchant acquiring business for the periods indicated. 61
Superdigital is a digital pre-paid solution that allows customers to manage their daily financial activities entirely online through a pre-paid account with a user-friendly interface. As mentioned above, on February 28, 2020, we sold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Superdigital.
Esfera is our loyalty program, which can be accessed through a dedicated website and mobile app. Our loyalty program enables holders of credit cards issued by Santander Brasil to exchange their reward points for many products, services and travel benefits, with exclusive deals and discounts with partners such as Cinépolis, FastShop and Casas Bahia, among others.
BEN is a benefits company that brings greater freedom, purchasing power and quality of life to the people who use them, in addition to delivering an integrated digital experience, as mentioned above in the “Item 4.A—History and development of the Company—Important Events.” Payroll Loans Payroll loans support account holders and non-account holders in the execution of projects and financial organization. Monthly installments are deducted directly from borrowers’ paychecks by their own employers, and are then credited to Santander Brasil, significantly reducing our credit risk. As a result, payroll loan rates are lower than other credit options. We make payroll loans available to our account holders, as well as to non-account holders through Olé Consignado. Payroll loans are offered through our mobile banking platform and through our branches. Our customers have the possibility of refinancing their payroll loans, as well as choosing from other options to help them manage their debts. The following table sets forth certain key financial and operating data regarding our payroll loans business as of the dates indicated. 62
Mortgages We offer long-term financing to our customers for the purchase of real estate, secured by deeds of trust, or for customers who wish to obtain a loan using real estate as collateral. We consider mortgages to be a strategic product due to their lower risk (since the acquired property serves as collateral) and ability to increase customer loyalty with the Bank (especially given that we offer customers more attractive rates if they choose to bank with us). 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 make any financing for 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 or other types of revenue, which allows us to evaluate their credit risk profile and (iii) other indebtedness added to the financing cannot exceed 35% of borrowers’ monthly gross income. To improve practicality for our customers, we have launched our real estate portal, a digital channel that enable customers to obtain mortgages in a 100% digital fashion. We believe we are first bank in Brazil to offer customers the opportunity to obtain a mortgage while only need to be physically present to sign the contract and then return it duly registered. We have established a partnership with the largest real estate portal in Brazil in order to improve our sales network and strengthen our digital presence. In addition, we launched a high-impact marketing campaign, in conjunction with a major retailer in which we offered customers market-leading terms to obtain mortgage financing or transfer their existing mortgage financing to us, while also giving customers the chance to win a refrigerator. The following table sets forth certain key financial and operating data regarding our mortgage business for the periods indicated.
Tailored Products and Services We have a complete offering 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: ·Global Transaction Banking -which includes the sale and management of local and global transactional banking products, which includes local loans, commercial finance (confirming), transfers of BNDES onlending, trade finance, guarantees, structured loans, cash management solutions and funding from international banks. 63 ·Global Transactional Services - which is responsible for sales and management of global transactional banking, trade finance, guarantees, structured loans, and funding from international banks; ·Global Debt Financing - which includes funding and financial advisory services related to projects, origination and distribution of fixed-income securities in the debt capital markets, financing of acquisitions and syndicated loans, other structured financing arrangements, subordinated debt and energy efficiency transactions. ·Investment Banking - which includes advisory services in mergers and acquisitions and equity capital markets transactions, including initial public offering and follow-on offerings. ·Equities - which includes stock brokerage and advisory services, equity services for individuals, corporate and financial institutional investors in stocks, derivatives, as well as equity research. ·Treasury Customers - which is responsible for structuring and offering foreign exchange, derivative and investment products for customers from several segments of Santander Brasil, including institutional investors, corporate and retail customers. ·Market Making - which is responsible for the pricing of customer deals originated by our sales force from corporate, institutional, private banking and retail segments. We are one of the leading banks in capital markets and financial advisory services in the Brazilian and international markets as evidenced by the awards we have received, the principal among which are listed in the table below.
64
Customer Solutions Agribusiness Agribusiness remains one of our key areas of expansion, and we believe that expanding our agribusiness network further also helps broadening our reach within the Brazilian countryside to areas in which are not present yet. We provide a full range of products and services focused on the agribusiness sector. Our approach to rural producers differs from the approach we take with our other customers as we offer rural producers a specialized relationship, which we believe to be more agile and efficient through a network of physical stores and digital solutions. The following table sets forth certain key financial and operating data regarding our agribusiness for the periods indicated.
Microfinance Prospera Santander Microfinance is the largest productive and microcredit-oriented operation among privately owned banks in Brazil, based on market share and portfolio value. It is geared toward supporting formal and informal microentrepreneurs in society with the purpose of generating work and income. With a 100% digitalized service process, in addition to products intended to improve business management skills, we have clients who hire us for services previously not available to them, because they do otherwise have access to financial services, such as property finance, consortium and investment services. 65 Webmotors Webmotors is the first and biggest Brazilian technology company focused on automotive purchase and sale solutions for dealers, original equipment manufacturers and private sellers, holding the biggest online automotive classified in Brazil. Webmotors received over 30 million visits each month and had an average over 450,000 cars listed. Through the Cockpit, a pioneering and disruptive platform for car dealers, which combines solutions for the entire chain described above, we offer the following solutions: business management/performance, buyer profile (CRM), data intelligence, predictive pricing models and market data (AutoGuru). This hub generated positive results, such as a 25% increase in the volume of contracts by sellers and a 15% decrease in the time of these contracts with end-customers. With that, we experienced a 30% growth in the number of dealerships with a high level of engagement with us. We have also launched “+Fidelidade,” a loyalty program aimed at providing our intermediate customers with a full value offer through a model of incentives to store owners based on their loyalty and relationship level with Grupo Santander Brasil and Webmotors. We have sought to improve customers’ after-sales experience through several functionalities made available on an online portal. + Negócios and + Vezes In 2017 we launched + Negócios, an innovative digital trading platform designed to be simple and intuitive, which enables faster execution of loan simulations, receipt of credit approval and proposal formalization for vehicle, in addition to providing portfolio management reports. In the same year we introduced “+Vezes”, a digital trading platform which allows retailers to offer installment payment options when they sell goods and services. Cash Management We offer cash management solutions to corporate customers and SMEs online through our Internet banking and mobile banking services. Our revenues from cash management include fees from the following products which we offer: (i) collections, in which we assist customers in carrying out commercial transactions using printed or online payment slips; (ii) payments, consisting of simple and automatic management of our customers’ accounts payable activities through individual transactions or via electronic file transfer; (iii) payroll, which is intended to facilitate the management of salary and benefits payments to our customers’ employees via an online tool; (iv) collection of values, which consists of the payment of cash values and checks at the customer’s points of sale; and (v) custody, by which we perform the custody, control and deposit of predated checks up to the date of clearing. In addition, other products generate revenue and are structured and tailored to the customer’s operation. Customer Funding Our main sources of liquidity are customer funding through deposits and other bank funding instruments. These deposits, combined with equity and other instruments, enable us to meet most of our liquidity and legal reserve requirements. For further information, see “Item 5. Review and Operating and Financial Outlook—B. Liquidity and Capital Resources—Liquidity and Funding.” Investments Our investment process for retail customers seeks to provide qualified guidance and help them to achieve their financial objectives based on four major pillars:
66 of financial culture, investment horizons, liquidity needs and the levels of risk they are willing to assume, among other factors. This analysis is reviewed periodically, according to customer’s needs and local regulations.
In order to identify possible deviations in the positions from the investment profile, we also rely on automated monitoring systems. These controls warns the costumers of any operations that compromise the suitability of their portfolio and are in line to our commitment to protect our costumer’s interests. Furthermore, each customer has direct access to its positions through a private access site on the Internet and Mobile App, enabling them to view the evolution of their investment strategies. Programa Avançar We also have a non-financial solution aimed at entrepreneurial customers, which we make available a web platform through which SMEs can access content and solutions related to management and innovation, internationalization, team building, and other topics that we believe are relevant to businesses. We see this program as a key component of our offering to Brazilian entrepreneurs. Service Channels We offer our financial services and products to our customers through our multichannel distribution network, composed of: (i) physical channels, such as branches, mini-branches and ATMs; (ii) call centers; and (iii) digital channels, such as Internet banking and mobile banking. Physical Distribution Network Our distribution network provides integrated financial services and products to our customers. The following table presents our physical distribution network as of the dates indicated.
67 Branch Network Our branch network offers our customers our entire portfolio of products and services with personal and customized customer service. The table below shows the geographic distribution of our branch network as of the dates indicated.
PABs (Mini-branches) We offer daily banking services to our SME and corporate customers and their employees through our PABs (the acronym stands for Postos de Atendimento Bancário in Portuguese) located on their sites, as well as in hospitals and universities. Our PABs are generally exclusive sale points at customers’ sites. The presence of PABs in our customers’ offices strengthens our relationship and builds loyalty with those customers, who benefit from the convenience of conducting their banking transactions at their workplace. ATMs We operate an extensive network of 13,296 ATMs, including those located in our branches and Mini-branches. In addition, our customers have access to the “Banco24Horas” network, which operates 23,780 ATM units. Through this network, our customers are able to access their accounts and conduct banking transactions, as well as purchase most of the products and services available in our portfolio. Call Centers Our call centers provide active Santander Brasil customers (account and single product holders) with consultation, financial transactions and product hiring services. This important distribution channel has a variety of customer self-service facilities. Our call centers received over 150 million contacts in 2019. Digital Channels Our digital channels include Internet banking, mobile banking and other digital solutions intended to provide our customers a convenient manner in which to access the products and services that we offer. We highlight the following key features:
• Santander On “Financial control” – This service is also available through Santander App and enables our customers view all of their commitments to us, as well as pending issues with the Brazilian tax authorities (Receita Federal do Brasil), Serasa (a Brazilian credit bureau) and the Brazilian Central Bank and transparency in the credit relationship with Santander Brasil. Its service shows, with easy interface and simple language, credit quality and the use of debt with Santander, allowing income to be updated without the necessity of showing any voucher, as well as relocation of available limits. The following table provides certain key operating information with regards to our digital channels as of the dates indicated. 68
The following table provides an overview of the weight of each key non-physical distribution channel in our overall distribution system.
In addition to Internet banking and mobile banking, we have digital solutions that play an important role in providing a better digital experience for our customers and potential customers, including:
Technology and Infrastructure Throughout 2019, we accelerated our investments in technology. Our goal was to deliver an innovative and agile bank, being able to face pertinent challenges to our digital transformation with competitiveness and service quality. Through technology, we aimed to boost our efficiency to grow faster. In 2019, we launched a program to simplify and digitize our sales network and customer support 69 processes by 2022. We have also improved our development and system implementation chain by adopting a more automated, robust and scalable architecture based on micro services and cloud computing as well as by refining our DevSecTestOps practices for application development and infrastructure operations. We have listed below a few initiatives we have delivered this year: • Corporate Platform:We have redesigned our mobile channel, in order to deliver a simple and safer navigation. We have deployed the QR Code authentication on ATMs, a new chat services platform, registration of favorite contacts for future transactions and digital access to Getnet sales receipt, online access to consolidated receipts within Corporate Internet Banking and payment of municipal, state and federal taxes through bar code, ensuring a more transparent and digital experience to our corporate customers.
• Multicloud:We have executed our Cloud First global strategy, which focuses on providing an Infrastructure as a Service (IaaS and PaaS), supported by a secure integration architecture between Santander’s Datacenter in Brazil and various local public cloud service providers. This infrastructure allows applications to be balanced between internal environment and the public cloud, ensuring greater flexibility and agility for an accelerated implementation of new business structures with the development of modern, digital and continually monitored applications. This transformation adds more robustness and scalability to our technology solutions, increasing the offer and availability of services provided to our customers and then leveraging the growth of our business while keeping high quality and performance standards. • Business Process Digitization:In order to improve efficiency and productivity, we digitized over seventeen major processes from our asset, transactional services, manufacture and treasury/cards departments, by developing new business rules in our business process management tool. This reduced the total analysis time for each process, paper printing and increased our overall control over the processes. • Payroll loans:we have made improvements to the product’s digital journeys, in order to make the customer’s interaction more intuitive and decrease the amount of complaints reported to local regulatory agencies. We have launched new preventive credit products in order to support our customer’s doubts clarification and increase the institution’s capital allocation efficiency. Furthermore, we have improved the point of sales designation, making the post sales experience more transparent to our customers and increasing the accuracy of the point of sales goals control. • Interactive Voice Response (IVR) Transformation:we have deployed a newly humanized interactive voice response, or IVR for contact center and corporate customers support, with conversation mechanisms and a language closer to human language. The IVR can also predict customer’s actions, enabling a better self-service experience and minimizing the need for intervention from human assistants. Additionally, new features were incorporated into the IVR for individual customers, such as identification of defaulting customers and call transfer to the debt collection department so that customers can renegotiate credit products debts. • Chatbots:we have implemented a modern chatbot platform to develop and evolve new communication solutions with our customers. These solutions take advantage of artificial intelligence and Natural Language Processing (NLU), to allow our customers to solve their needs with the support of chats and virtual assistants, in a practical and digital way. 70
• Technology lifecycle management and applications portfolio optimization:In 2019, we updated and renewed over nearly 18% of our software applications, avoiding risks of upcoming obsolescence events, which could lead to high unavailability incidents, security, and data breaches as well as long time to recover on service outages. Additionally, we have strongly optimized our software applications portfolio: almost 8% of our software applications were decommissioned in the means of functional consolidation toward fewer software components holding same business products and services. Secure Bank (Cyber Security and Antifraud) •Cyber Security:In order to protect our business and our customers against potential sensitive data leaks or confidential data, we have strengthened our infrastructure and capabilities to detect and prevent cyber attacks in 2019. We integrated our cyber security systems and processes at a global level, expanded the use of artificial intelligence to proactively identify behaviors of potential threats, evolved our security operational centers (SOCs) and expanded our data protection and access control levels. •Antifraud:On the field of fraud prevention, we have enhanced our biometric platform through the deployment of facial recognition solutions to authenticate online inquiries and payments on checking account or Santander Way applications. On the corporate platform, we have developed a new module to monitor malwares installed in computers that access our Internet Banking, preventing our customers to be redirected to fake websites. Communications and Marketing We operate under multiple brands. A key aspect of our brand positioning strategy is to endeavor to fulfill our role as a responsible bank, i.e. one that does not just offer products and services, but also encourages its customers to use these responsibly by offering financial education and by seeking to be transparent in all of our actions. We use and monitor several communication tools in order to achieve our multiple customer portfolio with a unique approach and visual identity. This include not only the traditional media, such as television, but also internet and mobile advertising. We had over 7.8 million users connected to us across social media (Facebook, Instagram, Twitter, LinkedIn and Youtube) as of December 31, 2019, which enables us to reach significant audiences. We also carried out important television campaigns, which we believe demonstrated our constant search for democratization in access to information and financial services, in addition to maintaining transparency about all of our actions. Sustainability Based on a responsible internal management, a consistent risk culture, ethical values as a basis and technology at the service of people and business we seek to support the Brazilian society in its transformation into the Brazil of the 21st century by fostering the economic growth in a resilient and inclusive manner, stimulating the development of human potential and promoting an efficient and strategic use of natural resources. In Brazil, sustainability governance is based on global guidelines, locally identified commitments and demands, and our local business strategy. Decision-making goes through the Board of Directors, the Sustainability Committee (responsible for clarifications and recommendations to the Board of Directors regarding the development of guidelines related to sustainability), our executive committee and the Sustainability Executive Superintendence 71 Resilient and Inclusive Economy Our broad commercial activity allows us to advise and support both from large clients and projects as well as informal entrepreneurs. Thus, our role is to be a facilitator and contribute to the generation of jobs, income, improvement of logistics and infrastructure, in order to contribute to the development of Brazil. Through this pillar, for example, we seek to financially empower people who are unbanked, underbanked or who may be financially vulnerable by offering access to banking services, products and non-financial initiatives. Regarding financial education, in 2019, we trained approximately 28,000 people. This also included providing in-person training at our branches over the weekend, where volunteers taught over 1,961 people. In addition, we have specific offers supporting microentrepreneurs and small and medium enterprises such as above mentioned Santander ON and Prospera SantanderMicrofinanças. Development of Potentials Our commitment to the development of potential begins with our employees. We have been ranked as one of the best companies to work for in the Great Place to Work survey since 2016. Guided by our corporate culture and internal policies, we offer opportunities supporting the development and professional growth, in order to build a culture of delivering results, respect, innovation, inclusion and diversity. We also contribute to the promotion of the rights of children and adolescents. Through Amigo de Valor Program, Santander Brasil, employees and clients directly donate a part of the due income tax to the Funds for the Rights of Children and Adolescents (Fundo dos Direitos da Criança e do Adolescente). In 2019, this program raised funds R$19 million. Through the Santander Universities Program, we offer initiatives focused on granting national and international scholarships, programs for the development of entrepreneurs and internship and employment programs. On December 31, 2019, about 6,000 scholarships and entrepreneurships were granted with a total investment of about R$27 million. Efficient and strategic use of the Natural Resource In 2019, the total amount of environmental financing with Santander Brasil facilitated across Santander Financiamentos, Responsible Agribusiness, Corporate, Retail (Individual and Corporate clients), Project Finance and Santander Corporate and Investment Banking, including Green Bonds, totaled approximately R$13 billion. In relation to internal environmental management, in 2019, we announced our decision to eliminate the single-use plastic consumption at Santander Brasil, by launching the #Desplastifique program. The implementation plan started with the administrative buildings, in 2019, and will be present in all branches by the end of 2020. We also intend to have 100% of our operations powered by renewal energy by 2025. In December 2019, approximately 24% of the electricity we consumed was derived from renewable sources. Socio-Environmental Responsibility Policy Our Socio-Environmental Responsibility Policy or PRSA meets the requirements of CMN Resolution n° 4.327/14 and SARB Regulation 14 of FEBRABAN. It defines guidelines and consolidates specific policies for socio-environmental practices in business and relationships with certain parties. These practices include socio-environmental opportunities, impacts and risk management related to subjects, 72 such as suitability in granting and using credits, management of suppliers and socio-environmental risk analysis. There is a Senior Group of our PRSA, which consists of our vice-presidents of Risks, Corporate, Human Resources, Finance, and Communication, Marketing, Institutional Relationships and Sustainability, as well as the Agribusiness and the Compliance Officers. This Senior Group is involved in the decision-making related to the PRSA and operates as a connection with our Executive Committee. Competition and Industry Transformation Currently, there are five commercial financial institutions at the forefront of the Brazilian financial industry in terms of assets: Santander Brasil, Bradesco, Itaú Unibanco, Banco do Brasil and Caixa Econômica Federal. Together, these financial institutions accounted for 73.3% of the credit and 68.8% of the deposits available in the country in September 2019, according to the Brazilian Central Bank and the financial statements of the aforementioned banks. The following table shows the total loans and deposits of the five leading financial institutions in Brazil at the dates indicated:
(1) According to the Brazilian Central Bank, reported and presented in accordance with Brazilian GAAP (December 2019). Insurance Coverage We maintain insurance policies that we renew annually in order to protect our assets. All of our branches, affiliates and administrative buildings are insured against loss caused by fire, lightning, explosions and other risks. Such coverage establishes reimbursement for the asset replacement value. In addition, we also maintain the following insurance policies:
Dependence on Patents, Licenses, Contracts and Processes The major trademarks we use, including, among others, the “Santander” brand, are owned by Santander Investment Bank. Santander Brasil has a license to use this brand. All trademarks of our business are registered with the National Institute of Intellectual Property (Instituto Nacional de Propriedade Industrial, or “INPI”), the agency responsible for registering trademarks, patents and designs in Brazil, or have been submitted to INPI by us or by the Santander Group. After registration, 73 the owner has exclusive rights of use of the trademark throughout Brazil for a ten-year period that can be successively renewed for equal periods. As of the date of this annual report, we own 567 trademarks in Brazil, among them, Santander Brasil owns over 100 trademark registrations in Brazil with the remaining owned by other companies of the Santander Group. REGULATION AND SUPERVISION The basic institutional framework of the Brazilian financial system was established by Law 4,595, of December 31, 1964, as amended from time to time, or the “Banking Reform Law”. The Banking Reform Law created the CMN, responsible for establishing the general guidelines of the monetary, foreign currency and credit policies, as well as regulating the institutions of the financial system. Principal Regulatory Agencies CMN The CMN oversees the Brazilian monetary, credit, budgetary, fiscal and public debt policies. The board of the CMN is composed of the president of the Brazilian Central Bank, the Minister of Planning and the Minister of Finance, who also chairs the Board. Pursuant to the Banking Reform Law, the CMN is the highest regulatory entity within the Brazilian financial system, authorized to regulate the credit operations of Brazilian financial institutions, to regulate the Brazilian currency, to supervise Brazil’s reserves of gold and foreign exchange, to determine Brazilian savings and investment policies and to regulate the Brazilian capital markets with the purpose of promoting the economic and social development of Brazil. In this regard, the CMN also oversees the activities of the Brazilian Central Bank and the CVM. Brazilian Central Bank The Brazilian Central Bank is responsible for implementation of the CMN policies related to foreign currency and credit, regulation of Brazilian financial institutions, including as regards the minimum capital and compulsory deposit requirements, disclosure of the transactions carried out by financial institutions, as well as their financial information. The Brazilian Central Bank has committees to address specific issues. COPOM, one of these, has the purpose of adopting measures to fulfill the inflation targets defined by the CMN and establishing monetary policy guidelines. The activity of the COPOM in the control of inflation targets includes the definition of the target for the SELIC Rate (the average rate for daily financing, backed by federal instruments, as assessed under the Special Settlement and Custody System) and publication of reports on the Brazilian economic and financial environment and projections for the inflation rate. CVM The CVM is responsible for implementation of the policies established by the CMN related to securities, with the purpose of regulating, developing, controlling and inspecting the securities market and its participants (companies with securities traded in the market, investment funds, investors, financial agents, such as custodians of instruments and securities, asset managers, independent auditors, consultants and instruments and securities analysts). Self-Regulating Entities The Brazilian financial and capital markets are also subject to the regulation of self-regulating entities that are divided by field of activity. The self-regulating entities include, among others, the National Association of Investment Banks – ANBIMA, the Brazilian Association of Credit Card and Services Companies – ABECS, the Brazilian Banks Federation – FEBRABAN, the Brazilian Association of Publicly-Held Companies – ABRASCA and the B3. 74 Principal Limitations and Obligations of Financial Institutions In line with leading international standards of regulation, Brazilian financial institutions are subject to a series of limitations and obligations. In general, such limitations and obligations concern the offering of credit, the concentration of risk, investments, operating procedures, loans and other transactions in foreign currency, the administration of third-party funds and micro-credit. The restrictions and requirements for banking activities, established by applicable legislation and regulations, include the following:
75 or director in common with the financial institution providing credit, provided that the officer or director is considered an independent member in both entities; (ii) transactions carried out under market-compatible conditions, without additional benefits or different benefits when compared to the operations deferred to the institution to other customers with the same profile, (iii) credit operations that have as counterparty a financial institution that is part of the institution prudential conglomerate, provided that they contain contractual clauses of subordination, except in the case of overnight and loan transactions with other financial institutions specified by the law, (iv) the interbank deposits, according to the law, (v) the obligations assumed by related parties under the compensation and settlement services authorized by the Brazilian Central Bank or by the CVM and their respective counterparties, and (vi) other cases authorized by the CMN; the management of third-party assets must be segregated from other activities and must follow the regulations issued by the CVM.
Additionally, as part of the Santander Group and due to the global nature of our organization we are subject to related international rules. Capital Adequacy and Leverage – Basel Current Requirements The Brazilian Central Bank supervises the Brazilian banking system in accordance with the Basel Committee on Banking Supervision, or “Basel Committee” guidelines and other applicable regulations, including the Basel II Accord, or “Basel II”, which was recently implemented in Brazil, and the Basel III Accord, or “Basel III”, which supplements and amends Basel II and is in the process of being implemented. For this purpose, banks provide the Brazilian Central Bank with the information necessary for it to perform its supervisory functions, which include supervising the changes in the solvency and the capital adequacy of banks. The main principle that guides the directives set forth in Basel II and Basel III is that a bank’s own resources must cover its principal risks, including credit risk, market risk and operational risk. Brazilian financial institutions are subject to capital measurement and standards based on a risk weighted asset ratio. The parameters of this methodology resemble the international framework for minimum capital measurements adopted by Basel II, except for certain differences (for instance, Basel II requires banks to have a capital to risk weighted assets ratio of at least 8.0%, while current Brazilian rules require minimum capital of 11.0% of risk weighted assets). Brazilian financial institutions’ 76 Regulatory Capital is composed of two tiers. Tier I capital is represented by stockholders’ equity plus certain reserves, earned income and hybrid debt and capital instruments authorized by the Brazilian Central Bank. Tier II capital is represented by revaluation reserves, contingency reserves, special profit reserves related to mandatory dividends not yet distributed, preferred cumulative stock, certain subordinated debt and hybrid instruments and non-realized earnings related to available-for-sale securities market value adjustments. Basel III On December 16, 2010, the Basel Committee issued the Basel III framework, which supplements and amends Basel II. Basel III includes higher minimum capital requirements and new conservation and countercyclical buffer capital requirements, revised risk-based capital measures and the introduction of a new leverage ratio and two liquidity standards. As with other Basel directives, the Basel III framework will not be self-effectuating and will be implemented gradually by each country through legislation or regulation to be imposed upon that country’s home banks. Basel III is currently being implemented in Brazil and its implementation is expected to conclude on January 1, 2022, according to the agreed international time frame. Regulatory Capital will continue to be composed of two tiers. Tier I capital will have to reach a minimum index of 6.0% (according to the schedule established by the Brazilian Central Bank), divided into two portions: (i) Principal Capital consisting mainly of corporate capital and profit reserves (shares, units of ownership, reserves and earned income) of at least 4.5%, and (ii) Supplementary Capital consisting mainly of hybrid securities and capital instruments authorized by the Brazilian Central Bank (but excluding amounts relating to funding instruments issued by other local or foreign financial institutions) and any of our own shares purchased by us and the integration of which into the Supplementary Capital is permitted. To improve the quality of the capital of financial institutions, Basel III restricts the acceptance of financial instruments that fail to demonstrate effective capability of absorbing losses and requires the reduction of assets that in certain situations could jeopardize the financial institution’s capital value due to the instruments’ low liquidity, dependence on future profits for realization or difficulty of value measurement. Current hybrid instruments and subordinated debt approved by the Brazilian Central Bank as additional capital requirements or Tier II are expected to be maintained if they also comply with requirements introduced by Basel III, including the mandatory conversion clauses into equity or write-off upon the occurrence of triggering events provided for in the regulations. The instruments that do not comply with Basel III rules have been gradually reduced since January 1, 2013 and shall continue to be so reduced until they do not consist of any portion of our Regulatory Capital as from January 1, 2022. In accordance with the Basel III standards, the Brazilian Central Bank created the Premium Principal Capital (Adicional de Capital Principal), which corresponds to additional capitals (buffers) that create additional capital reserves to be used in periods of stress. In accordance with CMN regulation, the Brazilian Central Bank is entitled to establish the percentage of the Premium Principal Capital within certain minimum and maximum limits previously set forth by the CMN, the final minimum and maximum limits being 2.5% and 5%, respectively, of the risk weighted asset ratio. On December 29, 2014, the Brazilian Central Bank established that the amount of the Premium Principal Capital was to start at 0.625% of the risk weighted asset ratio as of January 1, 2016, increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019. In 2015, the CMN and the Brazilian Central Bank enacted a set of rules which determined that the Premium Principal Capital will be equivalent to the sum of the Capital Conservation Buffer (Adicional de Conservação de Capital Principal), the Countercyclical Buffer (Adicional Contracíclico de Capital Principal), and the Systemic Relevance Premium Principal Capital (Adicional de Importância Sistêmica de Capital Principal). The regulation establishes the minimum requirements and methods to calculate each of them separately. The Conservation Buffer and the Countercyclical Buffer will compose the Premium Principal Capital of all financial institutions and institutions authorized to operate by the 77 Brazilian Central Bank (except for those expressly waived from complying with Regulatory Capital requirements). The Systemic Relevance Premium Principal Capital will only apply to multiple banks, commercial banks, investment banks and saving banks (caixas econômicas). The Basel III minimum capital index increased from the former 11% to a maximum of 13% as from 2019. The total index will be calculated as the sum of two parts: the Regulatory Capital and the Premium Principal Capital. The Basel III rules also provide for the implementation of a leverage ratio calculated by the division of the Tier I capital by a bank’s total exposure. In early 2015, the Brazilian Central Bank issued a new regulation governing the calculation and reporting of the leverage ratio of Brazilian financial institutions in line with the Basel III rules which became effective in October 2015. In 2015, the CMN and the Brazilian Central Bank also issued a set of rules for the implementation in Brazil of the liquidity coverage ratio or “LCR,” a short-term liquidity index. The purpose of the LCR is to demonstrate that financial institutions have sufficient liquid assets to make it through a stress scenario lasting one month. According to the recently enacted rules, the largest Brazilian banks have been required to maintain an LCR of at least 60% since October 2015. This ratio will increase 10% annually until it reaches 100% in 2019. The Brazilian Central Bank also released in 2015 the local methodology for calculating the LCR so as to align the existing rules with the guidelines of the document “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” issued by the Bank for International Settlements in January 2013. In January 2017, the Brazilian Central Bank enacted a new rule amending the calculation method and procedures for disclosure of LCR information. The new regulation establishes a new possible stress scenario and for purposes of LCR retail includes spot and forward deposits. As mentioned above, the LCR is a short-term liquidity ratio for a 30-day stress scenario. It represents the result of the division of the high quality liquidity assets by net outflows. High Quality Liquidity Assets are composed mainly by Brazilian federal government bonds and reserve requirements returns. Net Outflows are mainly composed by losses of deposits, offset in part by Inflows, which are mainly credits. In the months ending on October 31, November 30 and December 31, 2017, Santander Brasil had a surplus (difference between net assets and net cash outflows) of R$14.6 billion, which resulted in an LCR of 123%, above the regulatory requirement of 80%. In November 2017, the CMN established a minimum limit for the Net Stable Funding Ratio (Índice de Liquidez de Longo Prazo, or “NSFR”) and the Leverage Ratio (Razão de Alavancagem, or “RA”) with which Brazilian financial institutions are required to comply. The NSFR corresponds to the ratio between the Available Stable Funds (Recursos Estáveis Disponíveis, or “ASF”) and the Required Stable Funds (Recursos Estáveis Requeridos, or “RSF”) of the financial institution. The financial institutions classified as “segment 1” for purposes of the application of prudential rules, as we are, and must maintain, as from October 1, 2018, a minimum NSFR of 1.00. The RA consists of the ratio between the sum of the principal capital and the supplementary capital divided by the total liabilities of the financial institution as determined pursuant to applicable regulation. The financial institutions classified as “segment 1,” as we are, or “segment 2” for purposes of the application of prudential rules are required to maintain a minimum RA of 3% as from January 1, 2018. The following table presents an estimate of the implementation schedule of the main changes related to capital adequacy and leverage expected as a result of Basel III, as established by the Brazilian Central Bank:
78 In addition, in order to enable the implementation of the Basel III framework in Brazil, certain legislative changes were made. Among others, Law No 12,838 enacted on July 9, 2013, granted powers to the Brazilian Central Bank to limit the payment of dividends by financial institutions in case of non-compliance with the prudential capital requirements defined by the CMN. Systemically Important Financial Institutions The assessment of the global systemic importance of financial institutions, or “IAISG” comprises the index of systemic importance, or “ISG” and the aggregate of ancillary indexes established by regulations issued by the Brazilian Central Bank, which take into account, among other things, amounts relating to certain current and long-term liabilities, deposits, financial transactions and revenues. The Brazilian Central Bank adopted the same components set out by the Basel Committee to calculate the ISG, including (i) size; (ii) interconnectedness; (iii) lack of readily available substitute or financial institution infrastructure for the services provided; (iv) global or cross-jurisdictional activity; and (v) complexity, with each of these components receiving an equal weight in the assessment. This assessment should be carried out by banks with total exposure in excess of R$500 billion, individually or at the consolidated enterprise level (conglomerado prudencial), as the case may be. Our controlling shareholder Santander Spain is considered a global systemically important financial institution in accordance with the Basel Committee rules. In Brazil, we are considered a systemically important financial institution pursuant to regulations issued by the Brazilian Central Bank. Other Applicable Laws and Regulations Consolidated Enterprise Level (conglomerado prudencial) Financial institutions must submit to the Brazilian Central Bank, monthly and semiannually, consolidated financial statements based on the “consolidated enterprise level” (conglomerado prudencial) of which the financial institution is a member, which serve as the basis for calculation of the required Regulatory Capital of the Brazilian institutions. The “consolidated enterprise level” includes data relative to the financial institutions and other institutions authorized to operate by the Brazilian Central Bank, administrators of consortia, payment institutions and credit factoring companies, including real estate credit, or of credit rights, such as mercantile foment companies, securitization companies and specific purpose companies, located in Brazil or abroad, as well as other legal entities headquartered in Brazil that have equity participation in the mentioned entities as their exclusive business purpose. On January 29, 2020, the CMN published Resolution No. 4,776, which requires financial institutions categorized as S1, S2 and S3 to publish IFRS financial statements. The requirement is already in force for publicly held financial institutions and financial institutions which are leaders of a prudential conglomerate, and will come into effect for all remaining financial institutions on January 1, 2022. Segmentation for the Proportional Application of Prudential Regulation In January 2017, the CMN enacted a resolution establishing segmentation for financial institutions, financial institution groups, and other institutions authorized to operate by the Brazilian Central Bank for the purposes of proportional application of the prudential regulation. The segmentation is based on the size, international activity and risk profile of members of each segment. Pursuant to the resolution, the segments are as follows: (i) Segment 1 comprises multiservice banks, commercial banks, investment banks, foreign exchange banks and savings banks with (a) an asset base equivalent or superior to 10% of Brazil’s GDP; 79 or (b) which perform relevant international activities, irrespective of the size of the institution; (ii) Segment 2 comprises multiservice banks, commercial banks, investment banks, foreign exchange banks and savings banks with (a) an asset base lower than 10% of Brazil’s GDP; and (b) other institutions with an asset base equivalent to or greater than 1% of Brazil’s GDP; (iii) Segment 3 comprises institutions with an asset base lower than 1% and equivalent to or greater than 0.1% of Brazil’s GDP; (iv) Segment 4 comprises institutions with an asset base lower than 0.1% of Brazil’s GDP; and (v) Segment 5 comprises institutions with an asset base lower than 0.1% of Brazil’s GDP that applies a simplified optional method for the verification of reference equity’s minimum requirements, except for multiservice banks, commercial banks, investment banks, foreign exchange banks and savings bank. We have been categorized by the Brazilian Central Bank in segment 1, the highest level for application of regulation for banks in Brazil. Regulation of Risk and Capital Management Structure The rules enacted by the CMN and the Brazilian Central Bank provide that risk management must be conducted through an integrated effort by the relevant entity (i.e., not only must risks be analyzed on an individual basis, but must also control and mitigate the adverse effects caused by the interaction between different risks). The rules set out different structures for risk and capital management, which are applicable for different risk profiles. This means that a financial institution of limited systemic importance can have a simplified structure of management, while institutions of larger complexity have to follow stricter protocols. Compulsory Reserve Requirements Currently, the Brazilian Central Bank imposes a series of compulsory reserves requirements. Financial institutions must deposit these reserves with the Brazilian Central Bank. The Brazilian Central Bank uses these reserve requirements as a mechanism to control the liquidity of the Brazilian financial system for both monetary policy and risk mitigation purposes. Reserves imposed on time deposits, demand deposits and saving accounts represent almost the entirety of the amount that must be deposited at the Brazilian Central Bank. ·Time Deposits (CDBs). The Brazilian Central Bank imposes a reserve requirement of 31% in relation to time deposits. Financial institutions must deposit an amount equivalent to the surplus of (i) R$3.6 billion for financial institutions with consolidated Tier 1 capital under R$3 billion; (ii) R$2.4 billion for financial institutions with consolidated Tier 1 capital between R$3 billion and R$10 billion; (iii) R$1.2 billion for financial institutions with consolidated Tier 1 capital between R$10 billion and R$15 billion; and (iv) zero for financial institutions with a Regulatory Capital greater than R$15 billion. Additionally, since Brazilian Central Bank Circular No. 3,943 of May 23, 2019 was enacted, interbank deposits made by leasing companies are excluded from the assessment base of the compulsory reserve requirement for time deposits of financial institutions of the same conglomerate. ·Demand Deposits. As a general rule, the Brazilian Central Bank imposes a reserve requirement of 21% in relation to demand deposits. ·Savings Deposits. The Brazilian Central Bank imposes a reserve requirement of 20% in relation to general savings deposits and to rural savings deposits. Asset Composition Requirements Permanent assets (defined as property and equipment other than commercial leasing operations, 80 unconsolidated investments and deferred charges) of Brazilian financial institutions may not exceed 50% of their adjusted net equity, calculated in accordance with the criteria established by the Brazilian Central Bank. Brazilian financial institutions, as a general rule, may not have more than 25% of their Tier 1 Regulatory Capital allocated to credit and leasing transactions and guarantees extended to the same customer or group of customers acting jointly or representing the same economic interest. In addition, Brazilian financial institutions must comply with an exposure limit of 25% of their Regulatory Capital in connection with underwriting for or investments in securities of the same entity, its affiliates, or controlled or controlling companies. Repurchase transactions executed in Brazil are subject to operational capital limits based on the financial institution’s Regulatory Capital, as adjusted in accordance with Brazilian Central Bank regulations. A financial institution may carry out repurchase transactions in an amount of up to 30 times its Regulatory Capital. Within that limit, repurchase transactions involving private securities may not exceed five times the Regulatory Capital. Limits on repurchase transactions involving securities backed by Brazilian governmental authorities vary in accordance with the type of security involved in the transaction and the perceived risk of the issuer as determined by the Brazilian Central Bank. The regulation issued by the Brazilian Central Bank with respect to the classification and valuation of securities and derivative financial instruments — including government securities — owned by financial institutions, based on the investment strategy of the financial institution, determined that securities and derivatives are to be classified into three categories: (i) trading; (ii) available for sale; and (iii) held to maturity. “Trading” and “available for sale” securities are to be marked-to-market with effects in income and stockholders’ equity, respectively. Securities classified as “held to maturity” are recorded at amortized cost. Derivatives are marked-to-market and recorded as assets and liabilities in the balance sheet. Changes in the market value of derivatives are generally recognized in income with certain modifications, if these are designated as hedges and qualify for hedge accounting under the regulations issued by the Brazilian Central Bank. Securities and derivatives in the “held to maturity” portfolio may be hedged for accounting purposes but their increase or decrease in value as derived from the marked-to-market accounting method should not be taken into account. On June 31, 2018, the CMN enacted a rule providing that financial institutions categorized as “Segment 1” as per the Brazilian Central Bank’s classification system established in 2017 (which is our case) (1) may not have more than 25.0% of their Regulatory Capital allocated to a single legal or natural person, and (2) that the total exposure of such financial institutions to one individual customer may not exceed 600% of their Regulatory Capital allocated to focused exposure, that is 10% of their Regulatory Capital – Tier 1. The rule also subjects financial institutions categorized as segment 2, segment 3 or segment 4 to less restrictive rules. Centralized Registration and Deposit of Financial Assets and Securities Law No. 13,476/17 consolidates the provisions on creation of liens over financial assets and securities. CMN Rule No. 4,593/2017, as amended, regulates the registration and deposit of financial instruments and securities by financial institutions as well as the provision of custody services by such institutions. Resolution 4,734/19 sets out the guidelines applicable to the establishment of liens and encumbrances on credit and debit payment instruments due to credit operations with financial institutions andregulatescredit operations guaranteed by receivables from payment arrangements. The amount of receivables perfected into guarantees for a certain credit transaction be reduced, whenever applicable, so that they are limited to the outstanding balance of the transaction or to the maximum limit extended, in the case of an extension of a non-dischargeable credit facility by a financial institution on an absolute and unilateral basis. Circular 3,952/19, deals in particular with the procedures for the registration of receivables, and 81 requires a convention between market infrastructures to guarantee the uniqueness of the receivables as financial assets that can be registered, interoperability, exchange of information between registration systems and participants in the structure. Brazilian Payment and Settlement System The rules for the settlement of payments in Brazil are based on the guidelines adopted by the Bank of International Settlements, or “BIS,” and the current Brazilian Payment and Settlement System (Sistema de Pagamentos Brasileiroor the “SPB”). The Brazilian Central Bank and CVM (in relation to transactions with securities) have the power to regulate and supervise this system. SPB is composed of systems for the clearing of checks, clearing and settlement of debit and credit electronic orders, transfer of funds and other financial assets, clearing and settlement of transactions involving securities, clearing and settlement of transactions carried out in commodities and futures, and others, collectively designated as Financial Market Infrastructures, as well as the payment arrangements and payment institutions. Within the scope of SPB, the Brazilian Central Bank operates the Reserves Transfer System, or “STR” and the SELIC. STR is a system of transfer of funds with real-time gross settlement, which means that transfers are made at the processing time, one by one, and are subject to the existence of outstanding balance in the account. STR is composed of financial institutions, clearing and settlement houses and the National Treasury Office. SELIC is a system intended for custody of book-entry securities issued by the National Treasury Office and for the registration and settlement of transactions involving such securities. The Brazilian Central Bank also plans to implement an instant payment ecosystem by November 2020, and is taking steps to launch the ecosystem before the scheduled implementation date, such as studying and testing available technologies, establishing parameters and participants of the system. The settlement of the system will be centralized at the Brazilian Central Bank. In addition to increasing the speed at which payments or transfers are made and received, available 24 hours a day, seven days a week in all days of the year, the ecosystem has the potential to increase market competitiveness and efficiency; lower costs; and enhance customer experience. On February 18, 2020, the Brazilian Central Bank published Circular No. 3,985, which sets out implementation procedures and participation criteria for the Brazilian Instant Payments System (Sistema de Pagamentos Instantâneos or “SPI”) and the Brazilian Central Bank’s instant payments arrangement. The rule determines that all financial and payment institutions with a license to operate granted by the Central Bank and which have more than 500,000 active client accounts (including checking, savings and payment accounts) will mandatorily participate in the SPI and in the Central Banks instant payments arrangement. Circular No. 3,985 will enter into effect on March 2, 2020. Treatment of Overdue Debts The Brazilian Central Bank requires financial institutions to classify credit transactions in accordance with their level of credit risk and to make provisions according to the level attributed to each transaction. Such credit classifications shall be determined in accordance with criteria set forth from time to time by the Brazilian Central Bank, relating to the conditions of the debtor and the guarantor and the transaction terms. Where there are several credit transactions involving the same customer, economic group or group of companies, the credit risk must be determined by analyzing the particular credit transaction of such customer or group that represents the greatest credit risk to the financial institution. Credit transactions of up to R$50,000 may be classified either by the financial institution’s own evaluation method or according to the number of days such transaction is past due, whichever is the more stringent. Credit classifications are required to be reviewed (i) monthly, in the event of a delay in the payment of any installment of principal or interest, in accordance with the maximum risk classifications; (ii) every six months, in the case of transactions involving the same customer, economic group or group of companies, the amount of which exceeds 5% of the adjusted net worth of the financial 82 institution in question; and (iii) once every 12 months, in all circumstances, except in the case of credit transactions with a customer whose total liability is lower than R$50,000, the classification of which may be reviewed as provided above. Such R$50,000 limit may be amended by the Brazilian Central Bank from time to time. The provisions set forth above are not applicable to our IFRS consolidated financial statements, which are based on the criteria described under “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies—Impairment Losses on Financial Assets.” Regulation of the Transfer of Customer Data by Financial Institutions to Database Managers Brazilian law regulates the formation and consultation of databases with information regarding performance, individuals or legal entities, for the formation of credit history. Resolution No. 4,737 determines that the history of the following operations should be provided: (i) credit operations; (ii) leasing operations; (iii) self-financing operations executed upon consortium groups; and (iv) other operations with characteristics of credit granting; and defines the criteria for the registration of database managers, such as the identification of the natural and legal persons that are part of the control group of the database manager. Collection of Bank Fees Bank services to individuals are divided into the following four groups: (i) essential services; (ii) priority services; (iii) special services; and (iv) specific or differentiated services. Banks are not able to collect fees in exchange for supplying essential services to individuals with regard to checking accounts, such as (i) supplying a debit card; (ii) supplying 10 checks per month to account holders who meet the requirements to use checks, as per the applicable rules; (iii) supplying a second debit card (except in cases of loss, theft, damage and other reasons not caused by the bank); (iv) up to four withdrawals per month, which can be made at a branch of the bank, using checks or in ATM terminals; (v) supplying up to two statements describing the transactions during the month, to be obtained through ATM terminals; (vi) inquiries over the Internet; (vii) up to two transfers of funds between accounts held by the same bank, per month, at a branch, through ATM terminals or over the Internet; (viii) clearing checks; and (ix) supplying a consolidated statement describing, on a month-by-month basis, the fees charged over the preceding year with regard to checking accounts and savings accounts. Certain services rendered to individuals with regard to savings accounts also fall under the category of essential services and therefore are exempt from the payment of fees. CMN prohibits banks from charging fees for supplying essential services in connection with deposit and savings accounts where customers agree to access and use their accounts by electronic means only (being authorized to charge fees for supplying essential services only when the customer voluntarily elects to obtain personal service at the banks’ branches or customer service locations). Priority services are those rendered to individuals with regard to checking accounts, transfers of funds, credit transactions, leasing, standard credit cards, over-the-counter exchange transactions for the purchase or sale of foreign currency in respect of international travel, and records, and are subject to the collection of fees by the financial institutions only if the service and its nomenclature are listed in its regulations. Commercial banks must also offer to their individual customers a “standardized package” of priority services, whose content is defined, as well as the customers’ option to acquire individual services instead of adhering to the package. The collection of fees in exchange for the supply of special services (including, among others, services relating to rural credit, currency exchange market and onlending of funds from the real estate financial system) is governed by the specific provisions found in the laws and regulations relating to such services. The regulation authorizes financial institutions to charge fees for the performance of specific services, provided either that the account holder or user is informed of the conditions for use 83 and payment or that the fee and charging method are defined in the contract. It is worth pointing out: (i) the prohibition against charging fees in cases of adhesion contract amendments, except in the cases of asset replacement in leasing transactions, early liquidation or amortization, cancellation or termination; (ii) the prohibition against including services related to credit cards and other services not subject to fees in service packages that include priority, special and/or differentiated services; (iii) the requirement that subscription to service packages must be through a separate contract; (iv) the requirement that information given to the customer with respect to a service package must include the value of each service included in the package, the number of times that each service may be utilized per month, and the total price of the package; (v) the requirement that a customer’s annual banking statement must separately identify default interest, penalties and other costs charged on loans and leasing transactions; (vi) the requirement that registration fees cannot be cumulatively charged; and (vii) the requirement that overdraft fees can be charged, at most, once over the course of 30 days. In addition, CMN regulations establish that all debits related to the collection of fees must be charged to a bank account only if there are sufficient funds to cover such debits in such account and thus forbid overdrafts caused by the collection of banking fees. Furthermore, a minimum of 30 days’ notice must precede any increase or creation of fees (except if related to credit card services, when a minimum of 45 days’ notice is required), while fees related to priority services and the “standardized package” can be increased only after 180 days from the date of the last increase (except if related to credit card services, when a minimum of 365 days’ notice is required) whereas reductions can take place at any time. Late Payment Fees The default payment fees charged by financial institutions, consumer credit companies (financeiras), and leasing companies are expressly limited to compensatory interest per day on the amount that is overdue, interest on arrears and fines on arrears. Credit Cards The banking regulations also have specific rules relative to the charging of credit card fees, the publication of information in the card invoices and the obligation to provide a package of basic services upon offering credit cards to customers. Credit card holders must pay monthly at least 15% of outstanding credit card balances. This minimum payment does not apply to credit cards with payment by means of direct payroll deductions. Revolving credit for financings of credit card bills may only be extended to customers until the due date of the following credit card bill. After this term, financial institutions offer customers another product with conditions more favorable than the ones typically found in the credit card market. Banks are prohibited from offering this type of credit to customers who have already contracted one revolving credit for financing of credit card bills which were not repaid in a timely manner. Payment Agents and Payment Arrangements The regulation issued by the Brazilian Central Bank, determines, among other aspects: (i) consumer protection, anti-money laundering compliance and risk prevention systems that should be observed by payment agents and payment arrangers; (ii) the procedures for incorporation, organization, authorization and operation of payment agents, as well as transfer of shareholding control, subject to the Brazilian Central Bank’s prior approval; (iii) capital requirements; (iv) definition of arrangements excluded from the SPB; and (v) rules related to payment accounts, which are divided into prepaid and postpaid accounts and require the allocation of the totality of their balance to a special account at the Brazilian Central Bank or investment in government bonds. 84 Portability of Credit Transactions Financial institutions’ customers can transfer their credit transactions from one institution to another. Such transfers must comply with the specific rules established by the Brazilian Central Bank, including, among others, the requirement that the amount and term of the transaction in the receiving financial institution must not be higher than the amount due and term of the original transaction. Digitalization of Documents and Record Keeping Financial institutions and other institutions authorized to operate by the Brazilian Central Bank may keep on their records digital documents instead of physical documents, provided that certain requirements to ensure the documents’ authenticity and validity are met. Anti-Money Laundering Regulations Under the Brazilian Anti-Money Laundering Law, it is a crime to conceal or dissimulate the nature, origin, location, availability, transaction or ownership of assets, rights or amounts resulting, directly or indirectly, from any criminal offense, as well as their use in economic or financial activity and to participate in a group, association or office while being aware that its principal or secondary activities are directed toward the practice of such acts. The Brazilian Anti-Money Laundering Law also created the Financial Intelligence Unit (Unidade de Inteligência Financeiraor “UIF”), which operates under the jurisdiction of the Ministry of Finance. The purpose of the UIF is to investigate, examine, identify and impose administrative sanctions in respect of any suspicious occurrences of illicit activities related to money laundering in Brazil. The UIF is composed of individuals with recognized competence in this area, appointed by the Minister of Finance, all of whom are nominated by each of the following entities: (i) the Brazilian Central Bank; (ii) the CVM; (iii) the SUSEP; (iv) the National Treasury Attorney-General’s Office; (v) the Brazilian Federal Revenue; (vi) the Federal Intelligence Agency; (vii) the Ministry of Foreign Affairs; (viii) the Ministry of Justice; (ix) the Federal Police Department; (x) the Ministry of Social Security; and (xi) the General Comptroller’s Office, one of whom will be the president, which shall be appointed by the President of Brazil on the basis of recommendations by the Minister of Finance. Financial institutions must maintain specific records of (i) the transactions in cash (deposit, withdrawal, withdrawal by means of a prepaid card or request of provision for withdrawal) so as to enable the identification of a deposit in cash, withdrawal in cash, withdrawal in cash by means of a prepaid card, or request of provision for withdrawal, of (a) an amount equal to or greater than R$100,000.00 or (b) that presents evidence of concealment or dissimulation of the nature, of the origin, of the location, of the disposal, of the movement or of the ownership of assets, rights and valuables; and (ii) the issuances of cashier’s checks, funds electronic transfers (TED) or of any other instrument of transfer of funds upon payment in cash, for an amount equal to or greater than R$100,000.00. Financial institutions must maintain records of all operations, products and services contracted, including withdrawals, deposits, contributions, payments, receipts and transfers of funds. Additionally, the institutions must also keep specific records of (i) transactions in cash with an individual value greater than R$2,000.00; (ii) deposit or cash transactions of an individual value equal to or greater than R$50,000.00; and (iii) withdrawal transactions, including those carried out by check or money order, with an individual value equal to or greater than R$50,000.00. The regulations also impose an obligation on financial institutions to request that both clients and non-clients a providing a withdrawal request at least three working days in advance for withdrawals (including those carried out by check or money order) in an amount equal to or greater than R$50,000.00. On January 23, 2020, the Brazilian Central Bank published Circular No. 3,978, which improves 85 the regulation applicable to financial institutions, by expanding the adoption of a risk-based approach and will enter into effect on July 1, 2020. Regulated institutions must carry out specific internal risk assessments in order to identify and measure the risk of using their products and services in the practice of money laundering and terrorist funding. In connection with the aforementioned change, the Know-Your-Client procedures were also improved and includes the identification, qualification and classification of the customer, compatible with the risk profile, the nature of the relationship with the AML policy and the institution's internal risk assessment, which must be permanently reassessed, according to the evolution of the business relationship and the risk profile of the client. The procedures must also include the verification of the client's (their representatives, family members or close collaborators) condition as a Politically Exposed Individual, as well consider them in the monitoring, selection and analysis of operations and situations with indications of suspected money laundering or terrorist funding. On December 5, 2019, the CVM issued CVM Instruction No. 617, which establishes a new framework for the prevention of money laundering and the financing of terrorism in the Brazilian securities market. CVM Instruction No. 617 is in line with the practices currently implemented in the principal global securities markets, including with regard to the recommendations of the Financial Action Group against Money Laundering and the Financing of Terrorism (GAFI/FATF), as well as with the duties arising from Brazilian anti-money laundering laws. Brazilian Anti-Corruption Law Law No. 12,846/13 of August 1, 2013, or the “Brazilian Anti-Corruption Law” establishes that legal entities will have strict liability regardless of fault or willful misconduct for acts against the public administration carried out in their interest or for their benefit. The Law encompasses not only performance of acts of corruption but also performance of other injurious acts contrary to the Brazilian or foreign public administration. Corporations that violate the Brazilian Anti-Corruption Law’s provisions will be subject to heavy penalties, some of which may be imposed through administrative proceedings and others solely through judicial channels. The Brazilian Anti-Corruption Law also creates a leniency program under which self-disclosure of violations and cooperation by corporations might result in the reduction of fines and other sanctions. Politically Exposed Individuals Financial institutions and other institutions authorized by the Brazilian Central Bank to operate must take certain actions and have certain controls in order to establish business relationships with and to follow up on the financial transactions of customers who are deemed to be politically exposed individuals (public agents and their immediate family members, spouses, life partners and stepchildren who occupy or have occupied a relevant public office or position over the past five years in Brazil or other countries, territories and foreign jurisdictions). The internal procedures developed and implemented for this purpose by financial institutions must be structured in such a way as to enable the identification of politically exposed individuals, as well as the origin of the funds involved in the transactions of such customers. One option is to verify the compatibility between the customer’s transactions and the net worth stated in such customer’s file. Bank Secrecy Brazilian financial and payment institutions shall also maintain the secrecy of their banking operations and services provided to their customers. The only circumstances in which information about customers, services or transactions of Brazilian financial and payment institutions may be disclosed to third parties are the following:
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Complementary Law 105/01 also allows the Brazilian Central Bank or the CVM to exchange information with foreign governmental authorities, provided that a specific treaty has previously been executed. The government of the Federal Republic of Brazil and the government of the United States of America executed an agreement on March 20, 2007, by means of which these governments established rules for the exchange of information relating to tax, or “2007 Agreement”. Under the 2007 Agreement, the Brazilian tax authority would be able to send information it receives by virtue of Section 5 of the Bank Secrecy Law to the U.S. tax authority. Data Protection Requirements The GDPA was published in the Federal Official Gazette on August 15, 2018 and was amended by Law No. 13,853, issued on July 8, 2019 or “Law 13,853/2019”. The GDPA will take effect in August 2020. Before the GDPA, Brazil lacked regulations specific to data privacy and a data protection authority. Despite this, privacy has been generally protected through the Federal Constitution, the Civil Code (Law No. 10,406 of January 10, 2002), the Consumer Protection Code (Law No. 8,078 of September 11, 1990) and the Civil Rights Framework for the Internet (Law No. 12,965 of April 23, 2014 and the Decree 8,771 of May 11, 2016, also known as the Internet Law). The GDPA brings about profound changes in the rules and regulations applicable to the processing of personal data processing, with a set of rules to be complied with in activities such as the collection, processing, storage, use, transfer, sharing and erasure of information concerning identified or identifiable natural persons. The GDPA has a wide range of applications and extends to individuals as well as private and public entities, regardless of the country where they are headquartered or where data are hosted, as long as (i) the data processing takes place in Brazil; (ii) the data processing activity is intended to offer or supply goods or services to, or to process data of individuals located in Brazil; or (iii) the subjects of the data are located in Brazil at the time their personal data are collected. The GDPA will apply irrespective of the industry or business when dealing with personal data and is not restricted to data processing activities performed through digital media and/or on the internet. The GDPA sets out several rules related to data processing such as principles, requirements and duties imposed to data controllers and data processors; rights of data subjects; requirements in connection with cross-border transfers of data; obligation to appoint a data protection officer; data security and data breach notification; corporate governance practices; and the regime for civil liabilities and penalties in case of a breach of the provisions of the GDPA. Penalties include warnings, blocking and erasure of data, public disclosure of the offense and fines of up to 2% of the economic group’s turnover in Brazil in the preceding year, capped at R$50 million per offense. Moreover, Law 13,853/2019 created the Brazilian National Data Protection Authority, or “ANPD”, which will have powers and responsibilities analogous to the European data protection authorities, exercising a triple role of (i) investigation, comprising the power to issue norms and procedures, deliberate on the interpretation of the GDPA and request information of controllers and 87 processors; (ii) enforcement, in cases of noncompliance with the law, through an administrative process; and (iii) education, with the responsibility to disseminate information about and foster knowledge of the GDPA and security measures, fostering standards for services and products that facilitate control of data, and elaborating studies on national and international practices for the protection of personal data and privacy, among others. The ANPD has been assured technical independence, although it is subordinated to the Presidency of the Republic. It will be composed of five commissioners, to be appointed by the President of Brazil, and advised by a National Council for the Protection of Personal Data and Privacy, composed of 23 unpaid members. Regulations on Cybersecurity Financial institutions must follow certain cyber risk management and cloud outsourcing requirements which apply to the design and adaptation of internal controls. Policies and action plans to prevent and respond to cybersecurity incidents must be in place before May 2019, and fully compliant by December 2021. Data location and processing may occur inside or outside Brazil, but access to data stored abroad must be granted at all times to the Brazilian Central Bank for inspection purposes. The contracting of relevant processing services must be communicated to the Brazilian Central Bank within 10 days from the execution of the agreement. Auditing Requirements The legislation and regulations issued by the CMN, CVM and B3 determine that the periodic financial statements of financial institutions must be audited by independent auditors (individuals or legal entities) that are registered with CVM and who meet the minimum requirements set forth by the Brazilian Central Bank, and that the financial statements must be presented together with an independent auditor’s report. Our financial statements are audited in accordance with International Standards on Auditing with regard to Brazilian GAAP and also with the standards of the Public Company Accounting Oversight Board with regard to IFRS as issued by the IASB, as required by the SEC. For purposes of the financial statements prepared according to Brazilian GAAP, as from January 2017 all financial institutions and other institutions authorized to operate by the Brazilian Central Bank are required to create provisions for all losses related to financial guarantees issued by them. As result of the auditing work, the independent auditor must prepare the following reports: (i) audit report, issuing an opinion regarding the accounting statements and the respective explanatory notes, including regarding the compliance with financial regulations issued by the CMN and the Brazilian Central Bank; (ii) an internal control system quality and adequacy evaluation report, including regarding electronic data processing and risk management systems, evidencing any identified deficiencies; (iii) a legal and regulatory provisions noncompliance report, regarding those which have, or may have, material impacts on the financial statements or on the audited financial institution’s operations; (iv) a limited assurance report, analyzing Santander Brasil’s Annual and Sustainability Report pursuant to the guidelines and requirements of the Global Reporting Initiative, or “GRI”; and (v) any other reports required by the Brazilian Central Bank, CVM and B3. The reports issued by independent auditors must be available for consultation upon request by the overseeing authorities. Independent auditors and the audit committee, when established, individually or jointly, must formally notify the Brazilian Central Bank of the existence or evidence of error or fraud, within three business days of the identification of the respective occurrence, including:
88 The executive office of the financial institution must inform the independent auditor and the audit committee, when established, if any of the above situations occur. CMN regulation also requires financial institutions and certain other entities holding Regulatory Capital equal to or greater than R$1 billion to create a corporate body designated as the “audit committee”. To obtain more information concerning the audit committee, see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board Advisory Committees—Audit Committee.” Internal Auditing of Financial Institutions Financial institutions are required to establish and maintain internal audit activities compatible with their operational specifications, so that such internal bodies are able to perform an independent, autonomous and impartial audit of the quality and effectiveness of the institution’s internal systems. Such unit shall be directly controlled by the institution’s board of directors. Internal and external independent auditors are also liable for failures of the financial institution’s internal control mechanisms. Socio-Environmental Responsibility Policy Financial institutions are required to have a responsibility policy, which must guide the social and environmental actions in conducting their businesses, their relationship with their customers and other users of their products and services. The responsibility policy must also guide the financial institution’s relationship with its personnel and with any others affected by the financial institution’s activities. In addition, the responsibility policy must provide for the management of social and environmental risks (which, according to the Brazilian Central Bank, represent one of the several categories of risk to which financial institutions are exposed). Policy for Succession of Financial Institutions Managers Brazilian financial institutions and other institutions authorized to operate by the Brazilian Central Bank shall implement and maintain internal policies for succession of managers, applicable to higher levels of the institution’s management. The internal policy shall encompass the procedures related to recruitment, promotion, appointment and retention of managers in accordance with the institution’s rules for identification, evaluation, training and selection of the candidates to management offices. Corporate Governance of Financial Institutions Financial institutions must (i) remit to the Brazilian Central Bank information on the financial institution’s management, controlling group and relevant shareholders, including the obligation to communicate to the regulator any information that may affect the reputation of any such persons; (ii) make available a communication channel allowing employees, contributors, customers, users, associates, or services providers to report anonymously situations indicating illegalities of any nature related to the institution; and (iii) have an internal body responsible for receiving the information and complying with the reporting obligations. Compliance Policy Financial institutions must implement and maintain a compliance policy compatible with the nature, size, complexity, structure, risk profile and business model of the institution, which is intended to ensure an effective compliance risk management by the institution and may be established at the consolidated enterprise level (conglomerado prudencial). The compliance policy must establish the scope and purpose of the compliance function in the institution, set forth the organizational structure of the compliance function, specify which personnel is allocated to the compliance function, and establish a segregation of roles among personnel in order to avoid conflicts of interest. The compliance policy must be approved by the board of directors and the regulation also assigns to the board the responsibility to ensure the following: adequate management of the compliance policy 89 throughout the institution, its effectiveness and continued application, its communication to all employees and services providers, as well as the dissemination of the integrity and ethical standards as part of the institution’s culture. The board of directors is also responsible for ensuring the application of measures in case of noncompliance, and for providing the necessary means for the activities related to the compliance functions to be adequately conducted. Consumer Protection Relationships between consumers and financial institutions are governed by Law 8,078, dated September 11, 1990, or “Brazilian Consumer Protection Code”, which grants consumers certain rights and sets forth measures to be observed by suppliers, which must be complied with by financial institutions. The Brazilian Consumer Protection Code sets forth as consumer rights, among others, the assistance/facilitation in the defense of consumers’ rights, including through reverse burden of proof in their favor, and possibility of judicial review of contractual provisions deemed abusive. Furthermore, banking regulation establishes procedures that financial institutions must observe when contracting any transactions, as well as when rendering services. We may highlight the following as examples of said procedures:
Financial institutions operating exclusively via digital means are excluded from the scope of certain aspects of the regulation. Policy for Relationship with Customers and Users of Financial Products and Services Financial institutions and other institutions authorized to operate by the Brazilian Central Bank must have a policy governing the relationship with customers and users of financial products and services. In addition, such entities shall comply with the principles of ethics, liability, transparency and diligence promoting the convergence of interests and the consolidation of the institutional image of credibility, security and expertise. Ombudsman Financial institutions and other entities that are authorized to operate by the Brazilian Central Bank must have an ombudsman office. An ombudsman office has the following attributes according the current regulation:
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Institutions that are part of a financial group are allowed to establish one ombudsman department to service the whole group. The officer in charge of the ombudsman office must prepare a report every six months, which must be provided to the management and auditing bodies, as well as be available to the Brazilian Central Bank for a period of at least five years. Investment Funds Industry Regulation Investment funds are subject to the regulation and supervision of the CMN and the CVM and, in certain specific matters, the Brazilian Central Bank. Investment funds may be managed by full-service banks, commercial banks, savings banks, investment banks, credit, financing and investment companies and brokerage and dealer companies within certain operational limits. Investment funds may invest in any type of financial instrument available in the financial and capital markets, including, for example, fixed income instruments, stocks, debentures and derivative products, provided that, in addition to the denomination of the fund, a reference to the relevant type of fund is included. Broker-Dealer Regulation Broker and dealer firms are part of the national financial system and are subject to CMN, Brazilian Central Bank and CVM regulation and supervision. Brokerage firms must be chartered by the Brazilian Central Bank and are the only institutions in Brazil authorized to trade on stock exchanges. Both brokers and dealers may act as underwriters in the public placement of securities and engage in the brokerage of foreign currency in any exchange market. As of August 29, 2019, securities brokers and dealers may loan their own securities to their clients as long as they use the funds as collateral for operations in which the institution itself intermediates. The loan transaction consists of the transfer of assets from the institution: (i) to the customer, in conjunction with the transfer of that asset to the clearinghouse or clearing and settlement service provider; or (ii) to the clearinghouse or clearing and settlement service provider on behalf of the customer through powers established in a formal written power of attorney. In either case, the assets or set of assets in question shall return to the positions originally held at the end of the period stipulated in the contract. To offer this new service, securities brokers and dealers must appoint a director responsible for the loan operations under consideration. Foreign Exchange Market Transactions involving the sale and purchase of foreign currency in Brazil may be conducted only by institutions duly authorized by the Brazilian Central Bank to operate in the foreign exchange market. There is no current limit to long or short positions in foreign currency for banks authorized to carry out transactions on the foreign exchange market. Other institutions within the national financial system are not allowed to have short positions in foreign currency, although there are no limits with respect to foreign exchange long positions. The Brazilian Central Bank imposes a limit on the total exposure in foreign currency transactions and transactions subject to foreign exchange fluctuation undertaken by Brazilian financial institutions, including branches abroad, and their direct and indirect affiliates. The limit is currently equivalent to 30.0% of the financial institution’s Regulatory Capital (Patrimônio de Referência), on a consolidated basis. The CMN, the Brazilian Central Bank and the Brazilian government may change the regulation applicable to foreign currency and foreign exchange transactions undertaken by Brazilian financial institutions in accordance with Brazil’s economic policy (including its foreign exchange policy). 91 On October 7, 2019, the Brazilian Central Bank, sent to the President of Brazil a draft bill to change the way in which the Brazilian foreign exchange market (“New Foreign Exchange Bill”). The draft also contains provisions regarding Brazilian capital abroad and foreign capital within Brazil. The initiative aims to modernize, simplify and reduce legal doubts associated with current Brazilian foreign exchange legislation. The main aspects of the New Foreign Exchange Bill are: (i) ratification, at the legal level, that foreign exchange transactions may be carried out freely (provided such transactions are carried out by entities authorized to operate in this market and subject to applicable rules); (ii) granting of broad powers to the CMN and the Brazilian Central Bank to regulate the foreign exchange market and foreign exchange operations; (iii) expansion of international correspondence activities by Brazilian banks; (iv) possibility of Brazilian financial institutions investing and lending abroad funds that have been raised in Brazil or abroad; (v) the exclusion from its scope of foreign currency purchase and sale operations of up to US$1,000 carried out between individuals on an occasional and non-professional basis; and (vi) the granting of powers to the monetary authorities to establish situations in which the prohibition of the private offset of credits between residents and nonresidents, as well as payments in foreign currency in Brazil, would not apply. As of this date, the Brazilian Congress is still reviewing the proposal and it is not possible to estimate if and when it will be approved, or what changes will be proposed. Foreign Investment in Brazilian Financial Institutions According to the Brazilian federal constitution, the acquisition of equity interests by foreign individuals or legal entities in the capital stock of Brazilian financial institutions is forbidden, unless permitted by bilateral international treaties or by the Brazilian government by means of a presidential decree. A presidential decree issued on November 13, 1997, issued in respect of Banco Meridional do Brasil S.A. (our legal predecessor) allows 100% foreign participation in our capital stock. Foreign investors may acquire the shares issued by Santander Brasil as a result of this decree. In addition, foreign investors may acquire publicly traded nonvoting shares of Brazilian financial institutions traded on a stock exchange or securities depositary receipts offered abroad representing shares without specific authorization. Following the enactment of Decree No. 10,029, the Brazilian Central Bank published, on January 22, 2020, Circular No.3,977 recognizing as an interest of the Brazilian government the foreign holding of equity or increase in equity interest of financial institutions headquartered in Brazil (which is still subject to the same requirements and procedures applicable to the any acquisition of equity in Brazilian financial institution), as well as the opening of local branches of foreign financial institutions. However, since Santander Brasil had already been granted a specific presidential decree authorizing the foreign interest in its share capital, prior to Decree 10,029/19 being issued it does not affect its operations in Brazil. A foreign financial institution duly authorized to operate in Brazil through a branch or a subsidiary is subject to the same rules, regulations and requirements that are applicable to any Brazilian financial institution. Bank Correspondents Financial institutions are allowed to provide specific services to customers, including customer services, through other entities. These entities are called “bank correspondents” and the relationship between the financial institution and the bank correspondent is ruled by a specific regulation published by CMN and is subject to the supervision of the Brazilian Central Bank. Regulation of Branches Authorization by the Brazilian Central Bank is required for operations of branches or subsidiaries of Brazilian financial institutions, upon the compliance with certain term, capital and equity requirements, as well as the submission of an economic and financial feasibility analysis. 92 The Brazilian Central Bank’s prior authorization is also required in order to: (i) allocate new funds to branches or subsidiaries abroad; (ii) subscribe capital increases, directly or indirectly, in subsidiaries abroad; (iii) increase equity participation, directly or indirectly, in subsidiaries abroad; and/or (iv) merge or spin off, directly or indirectly, subsidiaries abroad. The Brazilian Central Bank determines that financial institutions can install the following establishments in Brazil: (i) branches, (ii) teller booths, (iii) automatic teller machines, and (iv) segregated administrative units, provided that, for items (i) to (iii), conformity with requirements of minimum capital and operating limits are necessary. Cayman Islands Banking Regulation We have a branch in the Cayman Islands with its own staff and representative officers. Banco Santander (Brasil) S.A. – Grand Cayman Branch is licensed under The Banks and Trust Companies Law (2013 Revision) of the Cayman Islands, or the “Banks and Trust Companies Law,” as a Category “B” Bank and it is duly registered as a Foreign Company with the Registrar of Companies in the Cayman Islands. The branch, therefore, is duly authorized to carry on banking business in the Cayman Islands. The branch was authorized by the local authorities to act as its own registered office and it is located at the Waterfront Centre Building, 28, North Church Street – 2nd floor, George Town, Grand Cayman, Cayman Islands, P.O. Box 10444 – KYI-1004, Phone: 1-345-769-4401 and Fax: 1-345-769-4601. Our Grand Cayman Branch is currently engaged in the business of sourcing funds in the international banking and capital markets to provide credit lines for us, which are then extended to our customers for working capital and trade-related financings. It also takes deposits in foreign currency from corporate and individual customers and extends credit to Brazilian and non-Brazilian customers, mainly to support trade transactions with Brazil. The results of the operations of the Grand Cayman Branch are consolidated in our consolidated financial statements. Banks and trust companies wishing to conduct business from within the Cayman Islands must be licensed by the Cayman Islands Monetary Authority under the Banks and Trust Companies Law, irrespective of whether the business is to be actually conducted in the Cayman Islands. Under the Banks and Trust Companies Law, there are two main categories of banking license: a category “A” license, which permits unrestricted domestic and offshore banking business, and a category “B” license, which permits principally offshore banking business. The holder of a category “B” license may have an office in the Cayman Islands and conduct business with other licensees and offshore companies but, except in limited circumstances, may not do banking business locally with the public or residents of the Cayman Islands. We have an unrestricted category “B” license. There are no specific ratio or liquidity requirements under the Banks and Trust Companies Law, but the Cayman Islands Monetary Authority will expect observance of prudent banking practices, and the Banks and Trust Companies Law imposes a minimum net worth requirement of an amount equal to CI$400,000 (or, in the case of licensees holding a restricted category “B” or a restricted trust license, CI$20,000). As of December 31, 2019, CI$1 was equivalent to R$4.88, according to the Brazilian Central Bank. Luxembourg Banking Regulation Branches of credit institutions from outside the European Union (“non-EU credit institutions”) must be licensed by the Luxembourg Minister of Finance under the law of 5 April 1993 on the financial sector, as amended, in order to operate in Luxembourg. We have a branch in Luxembourg with its own staff and representative officers. Our Luxembourg branch is licensed as a Luxembourg branch of a non-EU credit institution and is duly registered with the Luxembourg Trade and Companies’ Registry. The branch, therefore, is duly authorized to carry on banking business in Luxembourg. Its registered offices are at 35F, avenue J.F. Kennedy, 2nd floor, L- 93 1855 Luxembourg, Grand Duchy of Luxembourg. Our Luxembourg branch is currently engaged in the business of sourcing funds in the international banking and capital markets to provide credit lines for us, which are then extended to our customers for working capital and trade-related financings. It also takes deposits in foreign currency from corporate and individual customers and extends credit to Brazilian and non-Brazilian customers, mainly to support trade transactions involving Brazil. The results of the operations of the Luxembourg branch are consolidated in our consolidated financial statements. Luxembourg law requires the Luxembourg branch to have a minimum endowment capital of €8,700,000 and the solvency, and liquidity requirements deriving, among others, from EU Regulation No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms apply to it. Foreign Subsidiary We established an independent subsidiary in Spain, Santander EFC, in order to complement our foreign trade strategy for corporate customers, which are composed of large Brazilian companies and their operations abroad. This allows us to provide financial products and services by means of an offshore entity, which is not established in a “tax haven,” such as our Cayman Islands branch, in accordance with Law No. 12,249, of June 11, 2010, and Brazilian Federal Revenue Normative Ruling No. 1,037, of June 4, 2010. The establishment of our foreign subsidiary was approved by the Brazilian Central Bank on September 26, 2011, by the SpanishMinisterio de Economia y Hacienda on February, 6, 2012 and by the Bank of Spain on March 28, 2012. The remittance of resources to pay up the share capital of the subsidiary was carried out on March 5, 2012, totaling €748 million. Santander EFC has been operational since March 2012. U.S. Banking Regulation Financial Regulatory Reform Banking statutes and regulations are continually under review by the United States Congress. In addition to laws and regulations, the U.S. bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance. Many changes have occurred as a result of the 2010 Dodd-Frank Act and its implementing regulations, most of which are now in place. More recently, the President of the United States issued an executive order in 2017 that sets forth principles for financial regulatory and reform. In May 2018 the United States Congress passed, and President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) which, among other things, revised the thresholds for total consolidated assets at which certain enhanced prudential standards apply to bank holding companies. EGRRCPA made clear that the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") retains the right to apply enhanced prudential standards to FBOs with greater than $100 billion in global total consolidated assets, such as Santander Spain. In October 2019, the federal banking agencies issued final rules (the "Tailoring Rules") that, pursuant to EGRRCPA, adjust the thresholds at which certain enhanced prudential standards and capital and liquidity requirements apply to certain banking organizations, including large FBOs such as Santander Spain. As a result, Santander Spain is now generally subject to less restrictive enhanced prudential standards and capital and liquidity requirements than under previously applicable regulations. Volcker Rule Section 13 of the U.S. Bank Holding Company Act of 1956, as amended, and its implementing rules (collectively, the “Volker Rule”) prohibits “banking entities” from engaging in certain forms of 94 proprietary trading or from sponsoring or investing in “covered funds,” in each case subject to certain exceptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with covered funds with which they or their affiliates have certain relationships. Banking entities such as Santander Brasil and Santander Spain were required to bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement. Santander Spain has assessed how the Volcker Rule affects its businesses and subsidiaries, including Santander Brasil, and has brought its activities into compliance. Santander Brasil has adopted processes to establish, maintain, enforce, review and test the compliance program designed to achieve and maintain compliance with the Volcker Rule. The Volcker Rule contains exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations, as well as certain foreign government obligations, and trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained. Santander Spain’s non-U.S. banking organization subsidiaries, including Santander Brasil, are largely able to continue their activities outside the United States in reliance on the “solely outside the U.S.” exemptions from the Volcker Rule. Those exemptions generally exempt proprietary trading, and sponsoring or investing in covered funds if, among other restrictions, the essential actions take place outside the United States and any transactions are not with U.S. persons. On July 21, 2017, the five regulatory agencies charged with implementing the Volcker Rule announced the coordination of reviews of the treatment of certain foreign funds that are investment funds organized and offered outside of the United States and that are excluded from the definition of covered fund under the agencies’ implementing regulations. Also in July 2017, the Federal Reserve issued guidelines for banking entities seeking an extension to conform certain “seeding” investments in covered funds to the requirements of the Volcker Rule. As of October 2019, the five regulatory agencies charged with implementing the Volcker Rule finalized amendments to the Volcker Rule. These amendments tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the Volcker Rule, and modify the information companies are required to provide the federal agencies. Santander Brasil will still largely rely on the “solely outside the U.S. exemption” to conduct its trading activities. In early 2020, the five federal agencies proposed additional amendments to the Volcker Rule related to the restrictions on ownership interests in and relationships with covered funds. Santander Spain will continue to monitor these Volcker Rule-related developments and assess their impact on its operations, including those of Santander Brasil, as necessary. U.S. Anti-Money Laundering, Anti-Terrorist Financing, and Foreign Corrupt Practices Act Regulations Santander Brasil, as a foreign private issuer whose securities are registered under the Exchange Act, is subject to the U.S. Foreign Corrupt Practices Act, or the “FCPA”. The FCPA generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained and accurate financial statements can be prepared. Penalties, fines and imprisonment of Santander Brasil’s officers and/or directors can be imposed for violations of the FCPA. Furthermore, Santander Brasil is subject to a variety of U.S. anti-money laundering and anti-terrorist financing laws and regulations, such as the Bank Secrecy Act of 1970, as amended, and the USA Patriot Act of 2001, as amended, and a violation of such laws and regulations may result in substantial penalties, fines and imprisonment of Santander Brasil’s officers and/or directors. U.S. Sanctions 95 The Office of Foreign Assets Control (“OFAC”) is responsible for administering economic sanctions imposed against designated foreign countries, governments, individuals and entities pursuant to various Executive Orders, statutes and regulations. OFAC-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions on U.S. persons’ trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) blocking of assets of targeted governments or “specially designated nationals,” by prohibiting transfers of property subject to U.S. jurisdiction, including property in the possession or control of U.S. persons. Blocked assets, such as property and bank deposits, cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. In addition, non-U.S. persons can be liable for “causing” a sanctions violation by a U.S. person or can violate U.S. sanctions by exporting services from the United States to a sanctions target, for example by engaging in transactions with targets of U.S. sanctions denominated in U.S. dollars that clear through U.S. financial institutions (including through U.S. branches or subsidiaries of non-U.S. banks). Failure to comply with applicable U.S. sanctions could have serious legal and reputational consequences, including significant civil monetary penalties and, in the most severe cases, criminal penalties. In addition, the U.S. government has implemented various sanctions that target non-U.S. persons, including non-U.S. financial institutions, that engage in certain activities undertaken outside the United States and without the involvement of any U.S. persons (“secondary sanctions”) that involve Iran, North Korea, Russia, or Hezbollah or other persons designated by the U.S. under the specially Designated Global Terrorist (SDGT) sanctions program. If a non-U.S. financial institution were determined to have engaged in activities targeted by certain secondary U.S. sanctions, it could lose its ability to open or maintain correspondent or payable-through accounts with U.S. financial institutions, among other potential consequences. Antitrust Regulation According to the Brazilian antitrust law, actions that concentrate market share must be previously submitted to CADE for approval if the following criteria are met: (i) at least one of the groups involved in the deal has posted annual gross revenues or volume of business equal to or over R$750 million, in Brazil, in the year prior to the transaction; and (ii) at least another group has posted annual gross revenues or volume of business equal to or over R$75 million, in Brazil, in the year prior to the transaction. Closing of a transaction without CADE’s approval will subject the parties to fines ranging from R$60,000 to R$60 million. The Brazilian Central Bank will also examine certain corporate reorganizations and other acts involving two or more financial institutions not only considering their potential effects on the financial system and its stability but also any potential impacts regarding market concentration and competition. Upon approval of the transaction, the Brazilian Central Bank may establish certain restrictions and require that the financial institutions execute an agreement of market concentration control, pursuant to which the terms and conditions of the sharing of the efficiency gain resulting from the act shall be set forth. In December 2018, the Brazilian Central Bank and CADE approved a joint normative act establishing procedures with the purpose of increasing efficiency for their respective actions regarding antitrust matters. Pursuant to the joint normative act, the authorities are authorized to share information for the purposes of their respective activities and carry out meetings with each other to discuss matters requiring the regulatory cooperation between both authorities. Insolvency Laws Concerning Financial Institutions Financial institutions are subject to the proceedings established by Law 6,024 of March 13, 1974, or “Law 6024”, which establishes the applicable provisions in the event of intervention or extrajudicial 96 liquidation by the Brazilian Central Bank, as well as to bankruptcy proceedings. Intervention and extrajudicial liquidation occur when the Brazilian Central Bank has determined that the financial institution is in bad financial condition or upon the occurrence of events that may impact the creditors’ situation. Such measures are imposed by the Brazilian Central Bank in order to avoid the bankruptcy of the entity.
An intervention can be carried out at the discretion of the Brazilian Central Bank in the following cases:
As of the date on which it is ordered, the intervention will automatically suspend the enforceability of the payable obligations; prevent early termination or maturity of any previously contracted obligations; and freeze deposits existing on the date on which the intervention is decreed. The intervention will cease if interested parties undertake to continue the economic activities of the financial institution, by presenting the necessary guarantees, as determined by the Brazilian Central Bank, when the situation of the entity is regularized as determined by the Brazilian Central Bank; or when extrajudicial liquidation or bankruptcy of the entity is ordered. Intervention may also be ordered upon the request of a financial institution’s management. Extrajudicial Liquidation Extrajudicial liquidation is an administrative proceeding decreed by the Brazilian Central Bank (except that it is not applicable to financial institutions controlled by the Brazilian federal government) and conducted by a liquidator appointed by the Brazilian Central Bank. This extraordinary measure aims at terminating the activities of the affected financial institution, liquidating its assets and paying its liabilities, as in a judicially decreed bankruptcy. The Brazilian Central Bank will place a financial institution in extrajudicial liquidation if:
A request for liquidation procedures can also be filed on reasonable grounds by the officers of the respective financial institution or by the receiver appointed by the Brazilian Central Bank in the receivership procedure. 97 The decree of extrajudicial liquidation will: (i) suspend the actions or foreclose on rights and interests relating to the estate of the entity being liquidated, while no other actions or executions may be brought during the liquidation; (ii) accelerate the obligations of the entity; and (iii) interrupt the statute of limitations with regard to the obligations assumed by the institution. Extrajudicial liquidation procedures may be terminated:
Temporary Special Administration Regime (Regime de Administração Especial Temporária or “RAET”) In addition to the intervention procedures described above, the Brazilian Central Bank may also establish a RAET, under Law 9447, dated March 14, 1997 combined with Law 6,024/74, which is a less severe form of the Brazilian Central Bank intervention in private and nonfederal public financial institutions which allows institutions to continue to operate normally. The RAET may be ordered in the case of an institution that:
The main objective of a RAET is to assist the recovery of the financial condition of the institution under special administration and thereby avoid intervention and/or liquidation. Therefore, a RAET does not affect the day-to-day business, operations, liabilities or rights of the financial institution, which continues to operate in the ordinary course of business. Measures which may be adopted by the institution include the transfer of assets, rights and obligations to other entities, and corporate restructuring of these entities, with a view to the continuity of the institution’s business or activities. There is no minimum term for a RAET, which ceases upon the occurrence of any of the following events: (i) acquisition by the Brazilian federal government of control of the financial institution, (ii) corporate restructuring, merger, spinoff, amalgamation or transfer of the controlling interest of the financial institution, (iii) decision by the Brazilian Central Bank, or (iv) declaration of extrajudicial liquidation of the financial institution. Bankruptcy Law Law No. 11,101, of February 9, 2005, as amended, or the “Bankruptcy Law”, regulates judicial reorganizations, out-of-court reorganizations and the bankruptcy of individuals and corporations that 98 have occurred since 2005 and applies to financial institutions only with respect to the matters not specifically regulated by the intervention and extrajudicial liquidation regimes described above. Repayment of Creditors in a Liquidation or Bankruptcy In the event of extrajudicial liquidation or bankruptcy of a financial institution, creditors are paid pursuant to their priorities and privileges. Prepetition claims are paid on a ratable basis in the following order: labor credits; secured credits; tax credits; credits with special privileges; credits with general privileges; unsecured credits; contractual fines and pecuniary penalties for breach of administrative or criminal laws, including those of a tax nature; and subordinated credits. The current law confers immunity from attachment of compulsory deposits maintained by financial institutions with the Brazilian Central Bank. Such deposits may not be attached in actions by a bank’s general creditors for the repayment of debts and require that the assets of any insolvent bank funded by loans made by foreign banks under trade finance lines be used to repay amounts owing under such lines in preference to those amounts owing to the general creditors of such insolvent bank. Recovery Plans for Systematically Important Financial Institutions Systemically important Brazilian financial institutions must implement a recovery plan (plano de recuperação), with the aim of reestablishing adequate levels of capital and liquidity and to preserve the viability of such institutions. The recovery plans must identify their critical functions for the National Financial System, adopt stress-testing scenarios, define clear and transparent governance procedures, assess possible barriers to the entity’s recovery, as well as implement effective communication plans with key stakeholders. Deposit Insurance - FGC The purpose of the FGC is to guarantee the payment of funds deposited with financial institutions in case of intervention, liquidation, bankruptcy or insolvency. The FGC is funded by ordinary contributions made by the financial institutions in the amount of up to 0.0125% of the total amount of outstanding balances of the accounts corresponding to guaranteed obligations, and certain special contributions as determined. Delay in performing such contributions is subject to a penalty of 2% over the amount of the contribution. The total amount of credit in the form of demand deposits, savings deposits, time deposits, deposits maintained in accounts blocked for transactions with checks (for the registration and control of funds relating to the rendering of services of payment of salaries, earnings, pensions), bills of exchange, real estate bills, mortgage bills, real estate credit bills and repurchase and resale agreements whose objects are instruments issued after March 8, 2012 by a company of the same group due to each customer by a financial institution (or by financial institutions of the same financial group) will be guaranteed by the FGC for up to a maximum of R$250,000 per customer. When the assets of the FGC reach 2% of the total amounts they guarantee, the CMN may temporarily suspend or reduce the contribution of financial institutions to the FGC. As from February 2016, credits of financial institutions and other institutions authorized to operate by the Brazilian Central Bank, complementary welfare entities, insurance companies, capitalization companies, investment clubs and investment funds, as well as those representing any interest in or financial instrument held by such entities, are not protected by the ordinary guarantee of FGC. In December 2017, the CMN enacted a new rule amending certain provisions of the FGC regulation among which includes the establishment of a limit of R$1 million per four-year period for the coverage of the credits of a certain creditor against the group of associated financial institutions. Amendments to the Administrative Proceedings in the Brazilian National Financial System, the Brazilian Payment System and Capital Markets Law 13,506 applies to entities authorized or supervised by the Brazilian Central Bank or by the CVM, as well as to market participants. Some of the key aspects of Law 13,506 are that: (i) it increases 99 the maximum fine applicable by the Brazilian Central Bank from R$250,000 to R$2 billion or 0.5% of the revenues of the company arising from services and financial products in the year prior to the violation; (ii) it increases the maximum fine applicable by the CVM from R$500,000 to R$50 million; (iii) it makes additional types of violations subject to penalties; (iv) it provides that the penalty of “public admonition” may be cumulative to other penalties applicable by the Brazilian Central Bank; (v) it provides that Brazilian Central Bank may enter into cease-and-desist commitments; and (vi) it provides that the Brazilian Central Bank and the CVM may enter into administrative agreements similar to leniency agreements. Opening, Maintenance and Closing of Deposit Accounts CMN Resolution No. 4,753 provides criteria for the opening, maintenance and closing of deposit accounts. The regulation determines that financial institutions must adopt procedures and controls that allow the verification and validation of the identity and qualification of the account holders and, if applicable, their representatives, as well as the authenticity of the information provided by the client. This information must be kept updated by the financial institution. The rule also requires financial institutions to ensure, through the procedures and technology used for the opening, maintaining and closing of deposit accounts, the integrity authenticity and confidentiality, as well as the protection against unauthorized access, use, alteration, reproduction and destruction, of the information and the electronic documents used by them during the process. Issuance of Credit Instruments Electronically Provisional Measure No. 897 (“MP 897/2019”) among other provisions, (i) created a new credit instrument, the Rural Real Estate Note (Cédula Imobiliária Rural or “CIR”), with the purpose of advancing rural real estate financing by the creation of an instrument specifically designed to that end; (ii) changed the rules governing Bank Deposit Certificates (Certificado de Depósito Bancário or “CDB”), especially regarding their issuance and the transfer of their ownership, by providing among other changes that CDB issued in book-entry form should be transferred by electronic endorsement, exclusively by means of a specific notation in the issuing institution's own electronic system or, when deposited in central depositary, by means of specific notation in the corresponding electronic system; and (iii) authorized that customary credit instruments such as the Agricultural Certificate of Deposit (Certificado de Depósito do Agronegócio - CDA), the Agricultural Warrant (Warrant Agropecuário - WA), the Real Estate Credit Certificate (Certificado de Crédito Imobiliário- CCI), the Bank Credit Note (Cédula de Crédito Bancário - CCB), the Rural Credit Note (Cédula de Crédito Rural - CCR) , the Rural Promissory Note (Nota Promissória Rural - NPR), the Rural Trade Bill (Duplicata Rural - DR), may be issued in book-entry form through the electronic bookkeeping system held at a financial institution or other entity authorized by the Central Bank to perform electronic bookkeeping activity. Guidelines for Implementation of Open Banking in Brazil The Brazilian Central Bank announced the initial guidelines for open banking regulation in Brazil through Notice No. 33,455 on April 25, 2019. Open Banking consists in the sharing of data and payment solutions by financial institutions and other authorized entities, upon customer’s authorization and via integration of information systems. Brazilian Central Bank has looked at open banking as an important tool for innovation in the financial market, making the banking industry more efficient and competitive. The Brazilian open banking model will comprise financial institutions, payment institutions and other Brazilian Central Bank-licensed entities by making it possible to share, in a phased-in approach, (i) data on products and services, (ii) customer record data, and (iii) customer transaction data. Open banking will eventually cover the provision of payment services. The criteria and specifications of each phase will be specified by the Brazilian Central Bank on specific regulation and self-regulation yet to be issued. Within this context, Brazilian Central Bank-licensed entities opting to join the open banking ecosystem must share the information listed above with other participating institutions. At its inception the open banking model will only be compulsory for financial institutions belonging to prudential conglomerates in segments S1 and S2. With regard to customer data, customer authorization will always 100 be required. On November 28, 2019, the Brazilian Central Bank launched Public Consultation No. 73/2019, which ended on January 21, 2020, which disclosed the draft resolution to implement Open Banking in Brazil to the public, so as to collect comments and suggestions on the proposed resolution. Among other topics, the draft resolution deals with the duties and responsibilities of participants and the minimum requirements for the operationalization of the system. According to the draft, financial institutions and prudential conglomerates belonging to the S1 and S2 segments, as is the case of Santander Brasil, are required to participate in Open Banking. Regulatory Sandbox On November 28, 2019, the Brazilian Central Bank published Public Consultation No. 72/2019, which ended on January 31, 2020, regarding the Controlled Testing Environment for Financial Innovations (“Sandbox”) which is intended to enable institutions test innovative financial and payment projects for a specified period. The draft resolution released by the Brazilian Central Bank establishes the applicable conditions for the implementation of the Sandbox, among which are the specific rules for the first cycle of tests, such as duration and number of participants, required documentation, criteria for the classification of institutions and the schedule for registration, selection and authorization processes of such entities. The Public Consultation is set to end on January 31, 2019, and as of this date, the Brazilian Central Bank is yet to receive contributions from various market agents, which will result in alterations on the proposed draft. Limitations on overdraft-secured checks On November 27, 2019, the CMN issued Resolution No. 4,765 or “Resolution No. 4,765/2019”, providing for new rules on the overdraft granted by financial institutions in checking accounts held by individuals and individual micro entrepreneurs. The new rule limits the charging of fees on overdraft-secured checks to: (i) 0% for the opening credit facilities of up to R$ 500.00; and (ii) 0.25% for the opening of credit facilities larger than R$500.00, calculated with the amount of the facility that exceeds R$500.00. It also limits interest rates over the overdraft-secured check to up to 8% per month, to which must be added a discount of the overdraft fees already charged monthly by the financial institution. If the interest is less than or equal to the overdraft fees, such interest rates must be equal to zero. In addition, Resolution No. 4,765/2019 establishes that the overdraft-secured check must be compatible with the customer’s risk profile. Resolution No. 4,765/2019 has come into force on January 6, 2020, for agreements executed after the referred date, will come into force on June 1, 2020, for agreements executed prior to such date. Regarding the 8% limitation above, the rule applies to all contracts from January 6, 2020, regardless of the date the applicable contract was entered into. On February 6, 2020, the Brazilian Central Bank issued Circular No. 3,981, which deals with the new information regarding overdraft facilities that must be highlighted in the statement of the checking accounts held by natural persons or MEIs. Circular No. 3,981 will enter into effect on June 1, 2020. Automatic debit of banking accounts On December 19, 2018, CMN issued Resolution No. 4,771, which sets forth new rules for the automatic debit payments from checking account and accounts designated for the payment of an individual’s wages. The new rule sets forth that financial institutions should only process automatic debit payments upon prior and express authorization of the client, and provides for the procedures for the authorization and cancellation of automatic debit payments. The new rule will come into force on May 1st, 2020. 101 Taxation Corporate Income Tax (IRPJ) and Social Contribution Tax (CSLL) The IRPJ is calculated at a rate of 15.0%, plus a surtax of 10.0% which is levied on profits exceeding the amount of R$240,000 per year and the CSLL is calculated at a rate of 15.0% for financial institutions (until February, 2020) and 9.0% for companies, after adjustments determined by the tax legislation. Constitutional amendment No. 103/2019 increased the CSLL tax rate for financial institutions from 15.0% to 20.0% from March 1, 2020. Deferred tax assets and liabilities are measured based on temporary differences between the book basis and tax basis of assets and liabilities, tax losses, and adjustments to fair value of securities and derivatives. According to the requirements in the current regulations, the expected realization of deferred tax assets is based on projections of future results and a technical study approved by the Directors of Santander Brasil. Tax on Services (ISS) Each of the Municipalities of Brazil and the Federal District are responsible for establishing the applicable ISS rate, which is charged on the value of services provided by the company, to the municipality where the service renderer is located. The rates vary from 2.0% to 5.0% and depend on the nature of the service. On December 30, 2016, Complementary Law n° 157/2016 was enacted. This new legislation establishes a minimum rate of 2.0% for these types of taxes, no reductions or deductions being permitted. This Law provides that the following services are subject to ISS in the municipality in which the service taker is located: (i) card management, including POS services, that may be paid to the municipality where the corresponding POS device has been registered; (ii) leasing; (iii) fund management; and (iv) consortium. Before the aforementioned Law was enacted, the ISS was due in the municipality in which the service provider was located (irrespective of where the service taker was located). With this new legislation, ISS rates may vary depending on where the service taker is located. There are several complications that may arise from this new legislation, including (i) as service takers are generally located in several municipalities, it is logistically difficult to comply and collect the taxes; and (ii) there are situations where the municipality of the service taker is not easily identifiable by the credit card company (as is the case for online transactions, for example). Since the ISS is a municipal tax, the rule must be regulated by each municipality in order to be enforceable. This new rule is only applicable to triggering events occurring from 2018 onwards, when the municipal regulations to the Complementary Law n° 157 come into force. On March 23, 2018, the Brazilian Supreme Court suspended the application of the Complementary Law n° 157. It is still suspended. Although, the Congress is discussing a Complementary law proposition to centralize ISS tax collection, in order to tackle Complementary Law n° 157 suspension while making tax collection easier. PIS and COFINS Tax Rates PIS and COFINS are social contributions due on financial revenues and commissions, net of financial expenses, which are payable by financial institutions. The rate is 0.65% for PIS and 4% for COFINS. They are levied cumulatively on an accrual basis, and collected monthly. 102 The non-financial entities are taxed at the rates of 1.65% and 7.6% of PIS and COFINS, respectively, and are subject to non-cumulative incidence, which consists of deduction of certain expenses from the tax base as allowed by law. Tax on Financial Transactions (IOF) IOF is a tax levied on credit, currency exchange, insurance and securities transactions and it is imposed on the following transactions and at the following rates:
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FATCA The Foreign Account Tax Compliance Act, or “FATCA,” became law in the United States on March 18, 2010. The legislation requires foreign financial institutions, or “FFIs,” (such as Santander Brasil) to enter into an FFI agreement under which they agree to identify and provide the U.S. Internal Revenue Service, or “IRS,” with information on accounts held by U.S. persons and certain U.S.-owned foreign entities, or otherwise face a 30% withholding tax on certain U.S. source withholdable payments. In addition, FFIs that have entered into an FFI agreement will be required to withhold on such payments made to FFIs that have not entered into an FFI agreement, account holders who fail to provide sufficient information to classify an account as a U.S. or non-U.S. account, and U.S. account holders who do not agree to the FFI reporting their accounts to the IRS. On September 23, 2014, Brazil and the United States announced that they entered into an intergovernmental agreement, or “IGA”, which became effective in Brazil by virtue of Decree No. 8,506 as of August 24, 2015. The aim of the IGA is to improve international tax compliance and implement FATCA. The IGA establishes an automatic annual bilateral exchange of information with the U.S. tax authorities. Under this agreement, Brazilian financial institutions will generally be required to provide certain information about their U.S. account holders to the Brazilian tax authorities (Receita Federal do Brasil), which will share that information with the IRS. Complying with the required identification, withholding and reporting obligations requires significant investment in an FFI’s compliance and reporting framework. We are continuing to follow developments regarding FATCA closely and are coordinating with all relevant authorities. Common Reporting Standard On December 28, 2016, Normative Ruling n° 1,680 was enacted, introducing the Common Reporting Standard in Brazil. The Common Reporting Standard provides for certain account reporting obligations similar to those existing under FATCA. It was created in the context of the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting project, which is aimed at reducing tax avoidance. Normative Ruling n° 1,680 applies to legal entities required to present the e-Financeira pursuant to Normative Ruling n° 1,571, dated July 2, 2016. 105 On the same date, the Normative Ruling n° 1,681 was enacted providing for the obligation to annually deliver the “Country to Country Statement,” an ancillary obligation also arising from the discussions under the BEPS Project, before the Brazilian Federal Revenue Service, or “RFB” as a measure to expand information exchange and improve the level of international tax transparency. This new regulation should not have any impact on Santander Brasil, since, as it is controlled by a legal entity resident in Spain, it is not required by the Brazilian regulation to present such statement. Income Tax Levied on Capital Gains Law 13,259, of March 16, 2016 (“Law 13,259/16”) introduced the application of progressive tax rates for income taxation over capital gains recognized by Brazilian individuals and by holders that are not domiciled in Brazil for purposes of Brazilian taxation (“Non-Resident Holders”) on the disposition of assets in general. Under Law 13,259/16, the income tax rates applicable to capital gains realized by these investors would be: (i) 15% for the portion of the gains up to R$5 million, (ii) 17.5% for the portion of the gain that exceeds R$5 million but does not exceed R$10 million, (iii) 20% for the portion of the gain that exceeds R$10 million but does not exceed R$30 million, and (iv) 22.5% for the portion of the gain that exceeds R$30 million. The provisions of Law 13,259/16 apply to Non Resident Holders pursuant to CMN Resolution 4,373, provided such Non Resident Holders are not located in a Tax Haven. However, Non Resident Holders (whether they are considered to be Non-Resident Holders as a result of CMN Resolution 4373 or otherwise) located in a Tax Haven are subject to a specific tax regulation and will continue to be taxed at a rate of 25.0%. The tax must be withheld and paid by the buyer or, in cases where the buyer and seller are domiciled abroad, a legal representative of buyer shall be designated for the payment of the tax. New Income Tax Bylaw (RIR/18) Decree 9,580/18, published in November, 2018, revoked and replaced RIR/99 (Decree 3,000/99). The new RIR/18 consolidates rules regarding Income Tax published until December 31st, 2016. It includes several rule changes which occurred over time, such as transfer pricing and thin capitalization rules, financial products’ taxation and corporate income tax changes brought by Law 12973/2014, listed below:
Disclosure pursuant to Section 219 of the Iran threat reduction and Syria Human Rights Act Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. 106 As we are part of the Santander Group, we must also disclose the exposure of other entities of the Santander Group to Iran. The following activities are disclosed in response to Section 13(r) with respect to the Santander Group and its affiliates. During the period covered by this annual report: (a) Santander UK holds accounts for two customers, with the first customer holding one GBP Savings Account and one GBP Current Account, and the second customer holding one GBP Savings Account. Both customers, who are resident in the UK, are currently designated by the US under the SDGT sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2019 were negligible relative to the overall profits of Banco Santander S.A. (b) During the period covered by this annual report, Santander UK held one savings account with a balance of £1.24, and one current account with a balance of £1,884.53 for another customer resident in the UK who is currently designated by the US under the SDGT sanctions program. The customer relationship pre-dates the designations of the customer under these sanctions. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. Santander UK determined to put a block on these accounts and the accounts were subsequently closed on 14 January 2019. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 2019 were negligible relative to the overall profits of Banco Santander S.A. (c) Santander UK holds two frozen current accounts for two UK nationals who are designated by the US under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through 2019. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the year ended December 31, 2019. (d) The Santander Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007. (e) During the period covered by this annual report, Santander Brasil held one current account with a balance of R$100.0 for a customer resident in Brazil who is currently designated by the U.S. under the SDGT sanctions program. The customer relationship pre-dates the designation of the customer under these sanctions. Santander Brasil determined to terminate the account even prior to the customer being formally designated under the SDGT sanctions program on September 10, 2019, and the account was subsequently closed on October 9, 2019. Revenues and profits generated by Santander Brasil on this account in the year ended December 31, 2019 were negligible relative to the overall profits of Banco Santander S.A. In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2019, which were negligible relative to the overall revenues and profits of Banco Santander, S.A. The Santander Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Santander Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws. SELECTED STATISTICAL INFORMATION The following information for Santander Brasil is included for analytical purposes and is derived from, and should be read in conjunction with, the consolidated financial statements and related notes contained elsewhere herein, as well as “Item 5. Operating and Financial Review and Prospects.” 107 Average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and each of the month-end balances of the 12 subsequent months. Average income statement and balance sheet data and other related statistical information have been prepared on a consolidated annual basis. The selected statistical information set forth below includes information at and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 extracted from the audited financial statements prepared in conformity with IFRS as issued by the IASB. See “Presentation of Financial and Other Information” and “Item 3. Key Information-A. Selected Financial Data.” Average Balance Sheet and Interest Rates The following tables show our average balances and interest rates for each of the periods presented. With respect to the tables below and the tables under “—Changes in Net Interest Income – Volume and Rate Analysis” and “—Assets—Earning Assets–Yield Spread,” (i) we have stated average balances on a gross basis, before netting impairment losses, except for the total average asset figures, which include such netting, and (ii) all average data have been calculated using month-end balances, which is not significantly different from having used daily averages. We stop accruing interest on loans once they are more than 60 days past due. All our non-accrual loans are included in the table below under “Other assets.”
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Changes in Net Interest Income – Volume and Rate Analysis The following tables present the changes in our net interest income allocated between changes in average volume and changes in average rate for the year ended December 31, 2019, compared to the year ended December 31, 2018, and for the year ended December 31, 2018 compared to the year ended December 31, 2017. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
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Assets Earning Assets – Yield Spread The following table analyzes our average earning assets, interest income and dividends on equity securities and net interest income and shows gross yields, net yields and yield spread for each of the periods indicated. You should read this table and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
Return on Equity and Assets The following table presents our selected financial ratios for the periods indicated.
110 equity” to exclude the goodwill arising from the acquisition of Banco Real in 2008. See “Item 3. Key Information—A. Selected Financial Data—Selected Consolidated Ratios” for a reconciliation of “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” to “Return on average stockholders’ equity.”
Interest-Earning Assets The following table shows the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
Loans and Amounts Due from Credit Institutions For further information about Loans and Amounts Due from Credit Institutions, see note “5 – Loans and amounts due from credit institutions” to our consolidated financial statements included in “Item 18. Financial Statements” of this annual report. Investment Securities As of December 31, 2019 and 2018, the book value of investment securities was R$176 billion and R$177 billion, respectively (representing 23% of our total assets as of such dates). Brazilian government securities totaled R$136 billion, or 77.3% and R$117 billion, or 66.0% of our investment securities as of December 31, 2019 and 2018, respectively. For a discussion of how our investment securities are valued, see notes 7 and 8 to our consolidated financial statements. The following table shows the carrying amounts of our investment securities by type and residence of the counterparty at each of the indicated dates:
As of December 31, 2019 and 2018, we held no securities of single issuers or related groups of companies whose aggregate book or market value exceed 1% of our stockholders’ equity, other than the Brazilian government securities, which represented 140% and 127%, respectively of our stockholders’ equity. As of December 31, 2019 and 2018, the total value of our debt securities was 111 approximately 179% and 191%, respectively, of stockholders’ equity. The following table analyzes the maturities and weighted average yields of our debt investment securities (before impairment allowance) as of December 31, 2019. Yields on tax-exempt obligations have not been calculated on a tax equivalent basis because the effect on such calculation is not significant.
The average rate for debt investment securities is 7.6%. Domestic and Foreign Currency The following table shows our assets and liabilities by domestic and foreign currency, as of the dates indicated.
Loan Portfolio As of December 31, 2019, our total loans and advances to customers were R$347 billion (45.6% of our total assets). Net impairment losses, loans and advances to customers were R$327 billion as ofDecember 31, 2019 (42.9% of our total assets). In addition to loans, we had outstanding as of December 112 31, 2019, 2018, 2017, 2016 and 2015, R$125.9 billion, R$122.7 billion, R$106.9 billion, R$91.2 billion and R$91.9 billion respectively, of loan commitments drawable by third parties. Types of Loans by Type of Customer Substantially all of our loans are to borrowers domiciled in Brazil and are denominated inreais. The table below analyzes our loans and advances to customers (including securities purchased under agreements to resell), by type of customer loan, at each of the dates indicated. For each category of loan, we maintain specific risk management policies in line with the standards of the Santander Group and as managed and monitored by our board of officers through the credit committee. Our credit approval processes for each category of loan are structured primarily around our business segments. See “Item 11. Quantitative and Qualitative Disclosures about Risk—Credit Risk” for details on our credit approval policies for retail and wholesale lending. We have a diversified loan portfolio with no specific concentration exceeding 10% of our total loans. Furthermore, currently, 1.01% of our loan portfolio is allocated to our largest debtor and 6.79% to our next 10 largest debtors. For further information about Loans breakdown and Maturity see note “9 – Loans and advances to clients” sections “a - Breakdown” and “b – Detail” in “Item 18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB. Fixed and Variable Rate Loans The following table sets forth a breakdown of our fixed and variable rate loans by maturity as of December 31, 2019.
Cross-Border Outstandings The following table presents, at each balance sheet date indicated, the aggregate amount of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked). Cross-border outstandings do not include local currency loans made by subsidiary banks in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the majority of the loans made by our Cayman Islands branch, which are fully hedged.
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The following table presents the amounts of our cross-border outstandings as of December 31, 2019, 2018 and 2017 by type of borrower where outstandings in the borrower’s country exceeded 1.2% of total assets.
Non-current assets held for sale For further information, see note “10 - Non-current assets held for sale” in “Item 18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB. Liabilities Deposits The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits. For further information, see note “16 – Deposits from the Brazilian Central Bank and Deposits from Credit Institutions” and “17 – Client deposits” in “Financial Statements” in “Item 18. Financial 114 Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB. The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of U.S.$100,000 or more at the dates indicated. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.
Short-Term Borrowings The following table shows our short-term borrowings consisting of government securities that we sold under agreements to repurchase for purpose of funding our operations.
Changes in Allowances for Impairment Losses on the Balances of “Loans and receivables” The following tables analyze changes in our allowances for impairment losses for the periods indicated. For further discussion of movements in the allowances for impairment losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Years Ended December 31, 2019, 2018 and 2017—Results of Operations—Impairment Losses on Financial Assets (Net).”
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Allowance by Type of Borrower The table below shows a breakdown of recoveries, net provisions and write-offs against credit loss allowance by type of borrower for the periods indicated.
The table below shows a breakdown of allowances for credit losses by type of borrowers and the percentage of loans in each category as a share of total loans at the date indicated.
Internal Risk Rating The following table presents a breakdown of our portfolio by internal risk rating, at the dates indicated: 116
For further information on our internal risk rating levels and their corresponding probability of default, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk—Credit Monitoring.” Renegotiation Portfolio The renegotiation portfolio for the year ended on December 31, 2019 amounted to R$15 billion, compared to R$14 billion for the same period in 2018, an increase of R$1,966 million or 14.5%. This portfolio includes loans and advances to customers that were extended and/or modified to facilitate repayment under conditions agreed upon with customers. The renegotiation portfolio was covered by allowances for impairment losses of 48.5% as of December 31, 2019 and 53.9% as of December 31, 2018. These levels are considered appropriate for the characteristics of these loans and advances to customers. The following table presents a breakdown of our renegotiation portfolio by type of customer, allowances for impairment losses and our coverage ratio at the dates indicated:
Balances are deemed to be impaired when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts on the dates indicated in the loan agreement, after taking into account the collateral guarantees received to secure (fully or partially) collection of the related balances. In relation to renegotiated products, we, through our internal renegotiation policy, require at least a minimum amount of payment of quotas for any renegotiated products to be considered performing (note that the classification of such transactions as renegotiated operations will remain even after such payments). Renegotiated loans that are more than 60 days later than due date are also accounted for as impaired. Since 2015, we increased our efforts regarding the collection of loans that are less than 60 days past due and also in relation to written off loans. We are also continuing with our strategy (in place since 2012) of granting loans to persons with low risk profile and higher levels of collaterals and guarantees. Impaired Assets The following table shows our impaired assets. 117
Evolution of Impaired Assets Our impaired assets increased by 4.5%, or R$1,000 million, to R$23,426 million as of December 31, 2019, compared to R$22,426 million as of December 31, 2018. Provisions for impairment losses, including total recoveries of loans previously charged off, decreased 1.5%, or R$344 million, to R$22,626 million as of December 31, 2019, compared to R$22,969 million as of December 31, 2018. Offsetting these effects were recoveries of R$991 million on loans previously written off as of December 31, 2019 and R$ 827 million as of December 31, 2018. The following table shows the changes in our impaired assets at the dates indicated:
The amount of “net additions” for any period is assets that became impaired in that period less assets that were impaired but became performing in that period. In 2019, better options to restructure debts collaborated to maintain the “net additions” relatively at the same level. Impaired Assets by Type of Customer The following table shows the amount of our impaired assets by type of customers at the dates indicated:
Commercial and Industrial Impaired assets in the portfolio of commercial and industrial loans amounted to R$10,073 million as of December 31, 2019, a decrease of R$1,759 million, or 15%, compared to R$11,832 million as of December 31, 2018. The decrease in impaired assets in this portfolio was primarily due to the measures that Santander Brasil put in place to manage impaired assets, including collection practices with respect to our borrowers whereby we offered certain customers the chance to negotiate a restructuring of their debts or asset disposal. 118 Real Estate Impaired assets in the real estate lending portfolio totaled R$827 million on December 31, 2019, a decrease of R$209 million, or 20.2%, compared to R$1,036 million as of December 31, 2018. The decrease was primarily due to change on macroeconomic conditions lead to reduction on the interest rates on real estate portfolio in Brazil. Installment Loans to Individuals Impaired assets in the installment loans to individuals lending portfolio totaled R$12,497 million as of December 31, 2019, with an increase of R$2,998 million, or 31.6%, compared to 2018. This increase was a consequence of the recurrent growth the portfolio and the weak macroeconomic conditions related to the portfolio in Brazil, such as unemployment rate and degree of income commitment. Lease Financing Impaired assets in the lease financing lending portfolio totaled R$29 million on December 31, 2019, a decrease of R$30 million compared to December 31, 2018. Methodology for Impairment Losses We evaluate all loans regarding the provision for impairment losses from credit risk. Loans are either individually evaluated for impairment, or collectively evaluated by grouping similar risk characteristics. Loans that are individually evaluated for impairment losses are not evaluated collectively. To measure the impairment loss on loans individually evaluated for impairment, we consider the conditions of the borrowers, such as their economic and financial situation, level of indebtedness, ability to generate income, cash flow, management, corporate governance and quality of internal controls, payment history, industry expertise, contingencies and credit limits, as well as the characteristics of assets, such as their nature and purpose, type, sufficiency and liquidity level guarantees and total amount of credit, as well as based on historical experience of impairment and other circumstances known at the time of evaluation. To measure the impairment loss on loans collectively evaluated for impairment, we segregate financial assets into groups considering the characteristics and similarity of credit risk. In other words, according to segment, the type of assets, guarantees and other factors associated such as the historical experience of impairment and other circumstances known at the time of assessment. The expected loss measurement is made through the following factors:
119 and the future cash flows that are expected to be recovered. According to the standard, forward-looking information must be taken into account in the estimation.
In order to estimate the above parameters, the Bank has applied its experience in developing internal models for parameters calculation both for regulatory and management purposes. Loans Past Due for Less Than 90 Days but Not Classified as Impaired The following table shows the loans past due for less than 90 days but not classified as impaired at the dates indicated:
Impaired Asset Ratios Our Credit risk exposure portfolio increased by R$27.4 billion to R$391.6 billion as of December 31, 2019, compared to R$364.2 billion as of December 31, 2018. Our impaired assets increased by approximately R$1 billion in the same period, from R$22.4 billion to R$23.4 billion. The default rate decreased by 20 basis points in 2019 in comparison to 2018, explained in part by the growth of the portfolio and measures that Santander Brasil put in place to manage impaired assets. The following table shows the ratio of our impaired assets to total credit risk exposure and our coverage ratio at the dates indicated.
120 to better demonstrate our total managed credit risk.
The following chart shows our impaired assets to credit risk ratio from 2014 through 2019:
Santander Group controls Santander Brasil directly and indirectly through Santander Spain, Sterrebeeck B.V., or “Sterrebeeck”, and Grupo Empresarial Santander, S.L. which are controlled subsidiaries of the Santander Group. As of December 31, 2019, Santander Spain held, directly and indirectly, 89.5% of our voting stock (not including the shares held by Banco Madesant - Sociedade Unipessoal). As of December 31, 2019, Santander Spain was the largest bank in the euro zone by market capitalization, with a market capitalization of approximately €61,986 million. As of December 31, 2019, Santander Spain’s attributable profit totaled €6,515 million, 17% lower than the previous year, and the total shareholder remuneration on account of the earnings for the 2019 financial year is €0.23 per share (subject to the approval by the 2020 annual shareholders’ meeting). The Santander Group operates principally in Spain, the United Kingdom, other European countries, Brazil and other Latin American countries and the United States, offering a wide range of financial products. In Latin America, the Santander Group has majority shareholdings in financial institutions in Argentina, Brazil, Chile, Mexico, Peru, Puerto Rico and Uruguay. As of December 31, 2019, Santander Brasil contributed 28% of the profit attributable to the Santander Group. The following table presents the name, country of incorporation or residence and proportion of ownership interest of our main subsidiaries in accordance with the criteria for consolidation pursuant to IFRS: 121
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We operate four major administrative operational centers, all of which are owned properties. Additionally, we own 405 properties for the activities of our banking network and rent 2,130 properties 123 for the same purpose. Furthermore, in 2014, we opened and concluded the migration of our operation to the new data center located in Campinas, which also is an owned property. For further information about the location of our branches, see “—Item 4. Information on the Company—B. Business Overview—Distribution Network.” Our headquarters are located at Av. Presidente Juscelino Kubitschek, 2,041 and 2,235 Block A, Vila Olímpia, São Paulo, State of São Paulo, Brazil. ITEM 4A. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements for the years ended December 31, 2019, 2018 and 2017 and the related notes thereto, and with the financial information presented under the section entitled “Item 3. Key Information—A. Selected Financial Data” included elsewhere in this annual report. The preparation of the consolidated financial statements referred to in this section required the adoption of assumptions and estimates that affect the amounts recorded as assets, liabilities, revenue and expenses in the years and periods presented and are subject to certain risks and uncertainties. Our future results may vary substantially from those indicated as a result of various factors that affect our business, including, among others, those mentioned in the sections “Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors,” and other factors discussed elsewhere in this annual report. Our consolidated financial statements for the years ended December 31, 2019, 2018 and 2017, prepared in accordance with IFRS as issued by the IASB and the report of our independent registered public accounting firm are included in “Item 18. Financial Statements.” Principal Factors Affecting Our Financial Condition and Results of Operations Brazilian Macroeconomic Environment As a Brazilian bank, we are significantly affected by the general economic environment in Brazil. The Brazilian economic environment has historically been characterized by significant variations in economic growth, inflation and currency exchange rates. Our results of operations and financial condition are influenced by these factors and the effect that these factors have on employment rates, the availability of credit and average wages in Brazil. The following table presents key data of the Brazilian economy for the periods indicated:
Sources: BNDES, Brazilian Central Bank, FGV and IBGE.
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General economic stability in Brazil following the onset of the global financial crisis in 2009 allowed the Brazilian Central Bank to continue its policy of reducing interest rates. Due to inflation and other general macroeconomic concerns, the Brazilian Central Bank began increasing interest rates, with the SELIC, a benchmark interest rate, reaching 10.00% at the end of December 31, 2013, 11.75% at the end of December 31, 2014 and 14.25% at the end of December 31, 2015. The Central Bank has been reducing interest rates since then, with the SELIC reaching 13.75% as of December 31, 2016, 7.00% as of December 31, 2017, 6.50% as of December 31, 2018, and 4.50% as of December 31, 2019. Presidential elections were held in Brazil in October 2018. The resolution of the political and economic crisis in Brazil depends on the approval of reforms that are expected to be promoted by the President of Brazil.The economic and political crisis in Brazil may adversely affect the performance of the Brazilian economy. As a result, our credit portfolio, which is focused on Brazil, may not grow or could decrease and our provisions for loan losses could increase. Any deterioration in Brazil’s rate of economic growth, changes in interest rates, the unemployment rate or price levels generally may adversely affect our business, financial conditions and results of operations. Interest Rates A decrease in the SELIC rate may have a positive impact on our operations by promoting volume growth, even though it may also create pressure on asset-side spreads, while liability spreads should remain stable or even improve. The following table presents the low, high, average and period-end SELIC rate since 2015, as reported by the Brazilian Central Bank:
Our assets are predominantly fixed rate and our liabilities are predominantly floating. The resulting exposure to increases in market rates of interest is modified by our use of cash flow hedges to convert floating rates to fixed, but we maintain an exposure to interest rate movements. As of December 31, 2019, a 100 basis point increase in the yield curve would have resulted in R$334 million decline in the net interest income over a one-year period. Credit Volume and Quality in Brazil Our annual growth of outstanding credit of 6.7%, a ratio of nonperforming loans to individuals increased to 4.2% and a decrease of the household debt burden to 21.2%. In 2016, outstanding credit contracted 3.5% in nominal terms, but delinquency continued to fall: the ratio of nonperforming loans to individuals reached 6.1%. Subsequently, in 2017, 2018 and 2019, the ratio of nonperforming loans to individuals reached 5.3%, 4.8% and 5.0%, respectively. The total outstanding credit to GDP increased from 34.7% in December 2007 to 49.7% in December 2016, and fell to 47.1% in 2017. The ratio increased to 47.3% in 2018 and climbed to 47.8% in 2019. 125
Source: Brazilian Central Bank. Foreign Exchange Rates Our policy is to maintain limited foreign exchange rate exposure by seeking to match foreign currency denominated assets and liabilities as closely as possible, including through the use of derivative instruments. In 2019, we recorded foreign exchange expenses of R$2,789 million, foreign exchange expenses of R$2,806 million in 2018 and foreign exchange revenues R$605 million in 2017. These results are due to the variation of the U.S. dollar against thereal on our assets and liabilities positions in U.S. dollar denominated instruments during these years. These foreign exchange gains and losses were offset in large part in each year by a corresponding loss or gain on derivatives entered into to hedge this exposure. Such losses and gains are recorded under “Exchange differences (net).” The Brazilian currency has, during the last decades, experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. During 2016, thereal appreciated 17% against the U.S. dollar as a result of improved macroeconomic conditions in Brazil. On December 31, 2016, the exchange rate was R$3.26 per U.S.$1.00. In 2017 therealremained relatively stable against the U.S. dollar, with a small depreciation of 1.5% to R$3.31 per U.S.$1.00 as of December 31, 2017. Therealdepreciated further against the U.S. dollar throughout 2018, with a depreciation of 17%. On December 31, 2018, the exchange rate was R$3.87 per U.S.$1.00. In 2019 and through to the date of this annual report, the real has depreciated against the U.S. dollar. As of December 31, 2019, the exchange rate was R$4.03 per U.S.$1.00. Depreciation of thereal relative to the U.S. dollar has created additional inflationary pressures in Brazil, which have led to decreases in interest rates, limited Brazilian companies’ access to foreign financial markets and prompted the adoption of recessionary policies by the Brazilian government. Depreciation of thereal may also, in the context of an economic slowdown, lead to decreased consumer spending, inflationary pressures and reduced growth of the Brazilian economy as a whole, and thereby harm our asset base, financial condition and results of operations. Additionally, depreciation of thereal could make our foreign currency-linked obligations and funding more expensive, negatively affect the market price of our securities portfolios and have similar consequences for our borrowers. Conversely, appreciation of thereal relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange currency accounts, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of thereal could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations. Inflation In recent years, inflation has been oscillating around the target, which is set by the CMN. From 2005 to 2018, the targeted level was 4.5%, with a tolerance interval of 2.0 percentage points that prevailed until 2016 – since then the tolerance band has been narrowed to 1.5 percentage point. In addition, the targeted set for 2019 by the CMN was lowered to 4.25% and additional 0.25 percentage point decreases have already been defined for the targets until 2022 (4.00% for 2020, 3.75% for 2021 and 3.50% for 2022). Between 2012 and 2014, inflation ranged from 5.8% to 6.4%, i.e., it was close to the top of the fluctuation range in the Brazilian Central Bank’s inflation targeting range. In 2015, as a result of the indexation of a significant portion of contracts for services to the inflation levels of the previous years, 126 the impact of adjustment of tariffs and the impact of the depreciation of the real on prices, the inflation rate reached a level of 10.7%, the highest on record since May 2005 and well above the Brazilian Central Bank’s inflation target of 4.5%. In 2017, inflation fell substantially as a result of the consistent efforts of the Brazilian Central Bank to reduce the inflation rate, ending the year at 2.95% (12-month accumulated rate). As a result, the Brazilian Central Bank was required to send a letter to the CMN explaining the reasons for not meeting the target in which the Brazilian Central Bank explained that it expected that the monetary easing undertaken in 2018would make the actual inflation rate converge toward the target. In 2018 the inflation increased to 3.75%, thus reinforcing the efficiency of the monetary policy in the country. In 2019 and through to the date of this annual report, inflation reached 3.3% in 12-month accumulated terms. The majority of our income, expenses, assets and liabilities are directly tied to interest rates. Therefore, our results of operations and financial condition are significantly affected by inflation, interest rate fluctuations and related government monetary policies, all of which may materially and adversely affect the growth of the Brazilian economy, our loan portfolios, our cost of funding and our income from credit operations. We estimate that in 2019, a 1.0% increase or decrease in the base interest rate would have resulted in a decrease or increase, respectively, in our net interest income of R$443 million. Any changes in interest rates may negatively impact our business, financial condition and results of operations. In addition, increases in base interest rates may adversely affect us by reducing the demand for our credit and investment products, increasing funding costs and increasing in the short run the risk of default by our customers. Inflation adversely affects our personnel and other administrative expenses that are directly or indirectly tied to inflation indexes, generally the consumer price index (Índice de Preços ao Consumidor – Amplo), or “IPCA,” and the general index of market prices (Índice Geral de Preços-Mercado), or “IGPM.” For example, considering the amounts in 2019, each additional percentage point change in inflation, would impact our personnel and other administrative expenses by approximately R$93 million and R$76 million, respectively. Reserve and Lending Requirements The requirements set by the Brazilian Central Bank for reserves and credit has a significant impact on the operational results of the financial institutions in Brazil. Increases or decreases in such requirements may have an impact on our operational results by limiting or expanding the amounts available for commercial credit transactions. The table below shows the requirements for reserves and credit to which we are subject for each financing category:
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Taxes See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulation —Taxation.” Hedging in Foreign Investments We operate two foreign branches, one in the Cayman Islands, and another one in Luxemburg, and have a subsidiary named Santander Brasil Establecimiento Financiero de Credito, EFC, or “Santander EFC” (an independent wholly-owned subsidiary in Spain) which are used primarily for sourcing funds in the international banking and capital markets to provide credit lines for us that are extended to our customers for working capital and trade-related financings. Under Brazilian income tax rules, the gains or losses resulting from the impact of appreciation or devaluation of thereal on foreign investments are non-taxable or non-deductible. This tax treatment results in volatility of the income tax line item in our income statement. This asymmetry is offset through a derivative position in U.S. dollar futures, which generates gains or losses dependent on any devaluation or appreciation of thereal, which is our strategy to protect our after-tax results. The reconciliation of our effective tax rate to the statutory tax rate is set forth in note 23b to our consolidated financial statements as of and for the year ended December 31, 2019. Goodwill of Banco Real We generated goodwill of R$27 billion as a result of our acquisition of Banco Real in 2008. Under IFRS, we are required to analyze goodwill for impairment at least annually or whenever there are indications of impairment. In 2019, 2018 and 2017, the recoverable goodwill amounts are determined from “value in use” calculations. For this purpose, we estimate cash flow for a period of five years. We prepare cash flow estimates considering several factors, including: (i) macroeconomic projections, such as interest rates, inflation and exchange rates, among others, (ii) the performance and growth estimates of the Brazilian financial system, (iii) increased costs, returns, synergies and investment plans, (iv) the behavior of customers, and (v) the growth rate of, and long-term adjustments to, cash flows. These estimates rely on assumptions regarding the likelihood of future events, and changing certain factors could result in different outcomes. The estimate of cash flows is based on valuations prepared by an independent research company, which is reviewed and approved by the board of directors. Therefore, amortization of goodwill for tax purposes generates a permanent difference and, as a result, no record of the deferred tax liability. The following table shows the main assumptions for the basis of valuation as of the dates indicated.
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We performed a sensitivity test in the goodwill impairment analysis considering the main assumptions that could reasonably be expected to possibly change, as required by the IFRS. Accordingly, we applied such a test considering the discount rate and perpetuity growth rate as the main assumption subject to reasonably possible change and we did not identify any impairment to goodwill. Other Factors Affecting the Comparability of Our Results of Operations Acquisition of residual equity stake in Getnet On December 19, 2018, the minority shareholders of Getnet Put Option, pursuant to the applicable Share Purchase Agreement, or SPA. On the exercise date of the Put Option, we entered into a binding amendment to the SPA, to acquire all of the Getnet shares owned by minority shareholders, corresponding to 11.5% Getnet’s share capital, for an amount of R$1.431 billion. The acquisition transaction was approved by the Brazilian Central Bank on February 18, 2019 and settled on February 25, 2019, and we became the holders of 100% of Getnet’s shares. Formation of Esfera Fidelidade S.A. Esfera Fidelidade was incorporated on August 14, 2018 as our wholly-owned subsidiary. Esfera Fidelidade was formed to develop and manage customer loyalty programs. The company started its operations in November 2018. Investment in Loop Gestão de Pátios S.A. In 2018, Webmotors S.A., a company in which we own an indirect 70% equity interest, entered into an agreement with Allpark Empreendimentos, Participações e Serviços S.A. and Celta L.A. Participações S.A. to acquire a 51% stake in Loop through a capital increase and issuance of new shares by Loop which were fully subscribed and paid-in by Webmotors. Loop conducts physical and virtual car auctions. This acquisition has enabled Webmotors to expand its service portfolio and strengthen its competitive position. The transaction was completed on September 25, 2018 for the amount of R$23.9 million. Formation of BEN Benefícios e Serviços S.A. On June 11, 2018, Santander Brasil incorporated BEN Beneficios. BEN Beneficios is engaged in create, supply and administer various types of vouchers and tickets used for the provision of employee benefits (such as for meals, transportation and cultural events) in the form of printed electronic and magnetic cards. The company began its operations in the second quarter of 2019. Creation of PI Distribuidora de Títulos e Valores Mobiliários S.A. On May 3, 2018, Santander Finance Arrendamento Mercantil S.A., one of our indirect subsidiaries, was converted into a securities brokerage and changed its corporate name to SI Distribuidora de Títulos e Valores Mobiliários S.A. The conversion process was approved by the Brazilian Central Bank on November 21, 2018. On December 17, 2018, SI Distribuidora de Títulos e Valores Mobiliários S.A. changed its corporate name to PI Distribuidora de Títulos e Valores Mobiliários S.A.. On January 22, 2019 it received approval for the aforementioned name change from the Brazilian Central Bank. The 129 company begun its operations in March 2019. Acquisition of Isban Brasil S.A. and Produban Serviços de Informática S.A. Companies On February 19 and 28, 2018, respectively, we purchased all shares issued by Isban Brasil from Ingenería de Software Bancário, S.L., and all shares issued by Produban Serviços de Informática from Produban Servicios Informáticos Generales, S.L., for R$61,078 thousand and R$42,731 thousand, respectively. While all parties to these transactions are ultimately controlled by Santander Spain, the transactions were conducted on an arm’s length basis. On February 28, 2018, Isban Brasil was merged into Produban Serviços de Informática S.A. and on the same date, Produban Serviços de Informática changed its corporate name to Santander Brasil Tecnologia S.A Sale of equity interest in BW Guirapá I S.A. On December 22, 2017, Santander Corretora de Seguros, Cia. de Ferro Ligas da Bahia – Ferbasa S.A. and Brazil Wind S.A. entered into an agreement for the sale of 100% of the shares issued by BW Guirapá I S.A. held by Santander Corretora de Seguros and Brazil Wind to Cia. de Ferro Ligas da Bahia – Ferbasa S.A. The transaction also encompassed the seven wind farms organized as special purpose companies held by BW I. The base consideration paid was R$414 million, and an additional amount of up to R$35 million may be paid if certain contractual targets are met. The transaction closed on April 2, 2018. Formation of Santander Auto S.A. On December 20, 2017, we entered into binding agreements with HDI Seguros for the formation of a partnership through the creation of a new insurance company called Santander Auto S.A., or “Santander Auto”. Sancap Investimentos e Participações S.A., a company controlled by Santander Brasil, will hold 50% of the issued share capital of Santander Auto with the remaining 50% being held by HDI Seguros. Santander Auto will focus on offering motor insurance policies through a 100% digital platform. The transaction closed on October 9, 2018 for the amount of R$15 million when the documentation to form Santander Auto S.A. was executed. On January 9, 2019, SUSEP granted Santander Auto the regulatory authorization to operate. Santander Auto began its operation on August 2019. Acquisition of equity stake in the Returns Entities On October 16, 2017, Santander Brasil, through its wholly-owned subsidiary Atual Companhia Securitizadora de Créditos Financeiros or “Atual”, acquired a direct equity interest in 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 its decision to exercise the call option for the shares representing the remaining 30% the Return Entities’s total voting capital owned by them, 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. Joined Certain Tax Payment Plans In August 2017, we joined the PERT. The program allows for certain tax debts to be repaid in installments. In connection with our participation in this program, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to corporate income tax and social security contributions for the periods from 1999 to 2005 in a total amount of R$492 million in January 2018 (taking into account the reduction arising from our participation in the program). A payment of R$191.9 million was due in August 2017 and a further payment of R$299.7 130 million was due by January 2018, both of which we have made within the prescribed time limits. As a result of our participation, we recorded expenses in an amount of R$364 million (after tax) in the third quarter of 2017. In October 2017, we joined the Incentive Payment Programs and Installments (Programas de Parcelamento Incentivado) created by the cities Rio de Janeiro and São Paulo. The program allows for certain tax debts to be repaid in installments. In connection with our participation in these programs, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to ISS for the periods from 2005 to 2016 in a total amount of R$293 million as of December 31, 2017. As we had made provisions for these losses, we registered income of R$435 million as a result of the reversal of certain provisions, net of tax effects, in an amount of R$96 million. Establishment of Credit Intelligence Bureau On January 20, 2016, we entered into a non-binding memorandum of understanding with Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A., for the creation of a credit intelligence bureau, the CIB. The CIB 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. will have a 20% ownership stake in the corporation. The purpose of the CIB is to develop a database that, in conformity with applicable laws, will collect, reconcile and handle the credit information of individuals and legal entities that register with the CIB and expressly authorize the inclusion of their credit information on the CIB’s database. We believe this initiative will lead to an increased degree of efficiency and improvement of our credit management activities, and will also facilitate the disbursement of long and medium-term lines of credit to participants in the Brazilian Financial System and to other corporate entities. On April 14, 2017, the definitive documents were signed by the shareholders. At the extraordinary shareholders’ meeting held on October 5, 2017, a capital increase in an amount of R$285,205 thousand was approved as a result of which CIB’s capital stock increased from R$65,823 thousand to R$351,028 thousand. The company began its activities in 2019. Formation of Banco Hyundai Capital Brasil S.A. On April 28, 2016, our wholly-owned subsidiary Aymoré CFI entered into a joint venture with Hyundai Capital, for the incorporation of (i) Banco Hyundai Capital Brasil S.A. and (ii) an insurance brokerage company, in order to provide, respectively, auto finance and insurance brokerage services, as well as products to consumers and Hyundai dealerships in Brazil. Aymoré CFI holds a 50% equity stake in Banco Hyundai Capital Brasil S.A. while Hyundai Capital holds the remaining 50% equity interest. On February 21, 2019, the Brazilian Central Bank granted to Banco Hyundai Capital Brasil S.A. the authorization to operate as a banking entity. Banco Hyundai Capital Brasil S.A. began its operations in the first half of 2019. On April 30, 2019, the Brazilian Central Bank granted the authorization to the formation of the insurance brokerage company, which was incorporated on July 2, 2019. The company began its operations on November 2019. Sale of Santander Securities Services Brasil Distribuidora de Títulos e Valores Mobiliários S.A., or “SSS DTVM” On June 19, 2014, we executed preliminary documents containing the main terms and conditions of the sale of our qualified custody business and the sale of our subsidiary SSS DTVM, which renders third party fund administration services, to a holding company owned by Santander Spain and a group of private equity funds managed by Warburg Pincus. Following the sale, we will continue to act as the administrator of the funds, as per CVM Instruction No. 306, dated as of May 5, 1999, as amended. The closing of the transaction occurred on August 31, 2015, when all of our shares in SSS DTVM were formally transferred to Santander Securities Brasil and SSS DTVM acquired our qualified custody business. We received R$859 million at the closing of the transaction which generated gains of R$751 131 million before taxes recorded in the “Other non-financial gains/losses” line. 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. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB and the principal accounting policies are described in Note 2 - Accounting policies and method of measurement to our audited consolidated financial statements. The following discussion describes those areas that require the most judgment or involve a higher degree of complexity in the application of the accounting policies. Fair Value of Financial Instruments The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. For further information, see notes “5 - Loans and amounts due from credit institutions”; “6 - Debt instruments”; “7 - Equity instruments”; “8 - Derivative financial instruments and Short positions”; “9 - Loans and advances to clients”; “26 - Other Comprehensive Income”; and “30 - Fair value of financial assets and liabilities” in “Item 18. Financial Statements,”. Impairment Losses on Financial Assets A financial asset is considered impaired when there is objective evidence that events have occurred which:
For further information, see notes “5 - Loans and amounts due from credit institutions”; “6 - Debt instruments”; “7 - Equity instruments”; “8 - Derivative financial instruments and Short positions”; and “9 - Loans and advances to clients” in “Item 18. Financial Statements,”. Impairment Certain assets, such as intangible assets, including goodwill, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review. 132 We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable. For further information, see notes “13 - Intangible assets - Goodwill” and “24 - Tax assets and liabilities” in “Item 18. Financial Statements”. Post-employment Benefit Plan The post-employment benefits plans include the following obligations undertaken by us: (i) to supplement the public social security system benefits, and (ii) medical assistance in the event of retirement, permanent disability or death for eligible employees and their direct beneficiaries. For further information, see notes “22 - Provisions for pensions and similar obligations” in “Item 18. Financial Statements”. New Accounting Pronouncements The new accounting standards which will come into force after December 31, 2019 are mentioned in our audited consolidated financial statements included in this annual report. For further information, see note “1 - Introduction, basis of presentation of the consolidated financial statements and other information” to our audited consolidated financial statements. All accounting policies and measurement bases with a material effect on the consolidated financial statements for 2019 were applied in the preparation of such financial statements. 133 Results of Operations for the Years Ended December 31, 2019, 2018 and 2017
Results of Operations The following table presents our consolidated results of operations for the years ended December 31, 2019, 2018 and 2017:
134 Our consolidated profit for the year ended December 31, 2019 was R$16,631 million, an increase of R$3,832 million, or 29.9%, as compared to our consolidated profit of R$12,800 million for the year ended December 31, 2018 as a result of:
Our consolidated profit for the year ended December 31, 2018 was R$12,800 million, an increase of R$3,662 million, or 40.1%, as compared to our consolidated profit of R$9,138 million for the year ended December 31, 2017 as a result of: (i) an increase of R$6,975 million in net interest income mostly driven by growth in our loan portfolio driven by our commercial banking segment; (ii) an increase of R$1,410 million in net fees and commissions, primarily as a result of: (a) an increase of R$571 million in revenues from credit and debit cards; (b) an increase of R$370 million in revenues from current account services; and (c) an increase of R$354 million in revenues from insurance and premium bonds. These increases were in turn due to an 11.6% increase in our total active customer base and a 24.8% increase in the number of loyal customers; and (iii) a decrease of R$7,163 million in gains/losses on financial assets and liabilities (net) and exchange differences (net), both of which include the effects of the hedge for investment held abroad. Net Interest Income Net interest income for the year ended December 31, 2019 was R$44,321 million, a 5.7% or R$2,400 million increase from R$41,921 million for the year ended December 31, 2018. This increase was mainly explained by a 7.9% increase in the volume of our credit portfolio, driven by individuals and consumer finance. Average total earning assets in 2019 were R$655.2 billion, a 7.8% or R$47.1 billion increase from R$608.0 billion in 2018. The principal drivers were an increase of R$45.9 billion, or 81.8%, in the average of loans and amounts due from credit institutions, a R$18.5 billion increase in average of loans and advance to customers and a R$14.7 billion increase in average of debit instruments, which were partially offset by a R$32.3 billion decrease in average of cash on balances with the Brazilian Central Bank. Net yield (the net interest income divided by average earning assets) was 6.8% in 2019 compared to 6.9% in 2018, an decrease of 0.1 p.p. Average total interest-bearing liabilities in 2019 were R$491.2 billion, a 6.0% or R$27.8 billion increase from R$463.4 billion in 2018. The main drivers of this growth were an increase of R$18.0 billion in customer deposits, an increase of R$5.3 billion in deposits from the Brazilian Central Bank and deposits from credit institutions and an increase of R$4.7 billion in marketable debt securities. Finally, the yield spread (the difference between gross yield on earning assets and the average cost of interest-bearing liabilities) was 5.3% in 2019 as compared to 5.4% in 2018, mainly due to a decrease in the cost of funding, associated with the overall reduction in Brazil’s interest rate from 6.50% in 2018 to 4.5% in 2019. Net interest income for the year ended December 31, 2018 was R$41,921 million, a 20.0% or 135 R$6,975 million increase from R$34,946 million for the year ended December 31, 2017. This increase was mainly due to an 11.6% increase in the volume of our credit portfolio which was primarily concentrated in our commercial banking segment, and which was partially offset a decrease in our revenues from deposits as a result of the interest rate being lower in the fiscal year ended December 31, 2018 than the fiscal year ended December 31, 2017. Average total earning assets in 2018 were R$608.0 billion, a 9.3% or R$51.8 billion increase from R$556.2 billion in 2017. The principal drivers were an increase of R$32.6 billion increase in the average of loans and amounts due to credit institutions, a R$26.8 billion, or 9.7%, in the average of loans and advances to customers, a R$17.3 billion increase in average of debt instruments , which were partially offset by a R$ 24.3 billion decrease in average of cash on balances with the Brazilian Central Bank. Net yield (the net interest income divided by average earning assets) was 6.9% in 2018 compared to 6.4% in 2017, an increase of 0.5 p.p. Average total interest-bearing liabilities in 2018 were R$463.4 billion, an 11.2% or R$46.6 billion increase from R$416.8 billion in 2017. The main drivers of this growth were an increase of R$41.3 billion in customer deposits, an increase of R$13.4 billion in deposits from the Brazilian Central Bank and deposits from credit institutions and an increase of R$2.4 billion in subordinated debts, which were offset by a decrease of R$10.5 billion in marketable debt securities. Finally, the yield spread (the difference between gross yield on earning assets and the average cost of interest-bearing liabilities) was 5.4% in 2018, as compared to 4.1% in 2017, mainly due our Commercial Banking segment accounting for a greater share of in our total results and a decrease in the cost of funding, associated with the overall reduction in Brazil’s interest rate. Income from Equity Instruments Income from equity instruments for the year ended December 31, 2019 totaled R$19 million, a R$14 million decrease from R$33 million for the year ended December 31, 2018, mainly due to lower dividends received from Santander Fundo de Investimento Guarujá Multimercado Crédito Privado Investimento no Exterior. Income from equity instruments in 2018, totaled R$33 million, a R$50 million decrease from R$83 million for the year ended December 31, 2017. This decrease was primarily due to a receipt of dividends of Rio Alto Gestão de Creditos e Participações S.A. that did not occur in 2018. Income from Companies Accounted for by the Equity Method Income from companies accounted for by the equity method for the year ended December 31, 2019 was R$149 million, an R$84 million increase from R$66 million for the year ended 2018, mainly due to an increase of R$59 million in the result of operations of Banco RCI Brasil S., a jointly-controlled company, an increase of R$19 million in the results of operations of Tecban (Tecnologia Bancária S.A.), a jointly-controlled company and an increase of R$12 million in the results of operations of Webmotors S.A., a jointly-controlled company. These improved results were partially offset by a decrease of R$5 million in the results of operations of Gestora de Inteligência de Crédito, a jointly-controlled company and a R$2 million reduction in the results of operations of Santander Auto S.A. a jointly-controlled company. Income from companies accounted for by the equity method for the year ended December 31, 2018 was R$66 million, a R$6 million decrease from R$72 million for the year ended December 31, 2017. This increase was mainly due to the positive results of operations of Banco RCI Brasil S.A., a jointly-controlled company, which were partially offset by negative results of operations of Webmotors S.A., a jointly-controlled company. 136 Net Fee and Commission Income Net fee and commission income for the year ended December 31, 2019 reached R$15,713 million, an increase of 11.2% or R$1,581 million compared to R$14,132 million for the year ended December 31, 2018. This increase was mainly due to an increase of R$722 million in revenues from credit and debit cards, R$417 million in revenues from sale of insurance and premium bonds, R$295 million in revenues from capital markets and R$138 million from revenues from current account services. Net fees and commissions for the year ended December 31, 2018 reached R$14,132 million, a 11.1%, or R$1,410 million, increase from R$12,722 million for the year ended December 31, 2017. This increase was mainly due to an increase of R$571 million in revenues from credit and debit cards, R$370 million in revenues from current account services, R$354 million in revenues from insurance and premium bonds. Net fees and commissions from credit and debit cards totaled R$4,986 million for the year ended December 31, 2019, an increase of 16.9% compared to the year ended December 31, 2018. This increase was as a result of a higher turnover (R$236.4 billion in the fiscal year ended December 31, 2019 as compared to R$201.6 billion the fiscal year ended December 31, 2018. Net fees and commissions from credit and debit cards totaled R$4,264 million for the year ended December 31, 2018, an increase of 15.5% compared to the year ended December 31, 2017. This increase was primarily due to a higher transaction volume (2,338.2 million in the year ended December 31, 2018 as compared to 1,987.6 million the year ended December 31, 2017). Net fees and commissions from insurance and premium bonds totaled R$3,586 million for the year ended December 31, 2019, a 13.1% increase compared to the year ended December 31, 2018, mainly due to credit life insurance associated to the good evolution of the portfolio. Net fees and commissions from insurance and premium bonds totaled R$3,169 million for the year ended December 31, 2018, an increase of 12.6% compared to the year ended December 31, 2017, mainly due to credit life insurance associated with portfolio dynamics. Revenues from fees and commissions charged in connection with capital markets totaled R$1,211 million for the year ended December 31, 2019, an increase of 32.2% compared to the year ended 2018, mainly due to an increase of R$263 million in revenues from securities underwriting and placement and an increase of R$32 million in revenues from administration and custody. Revenues from fees and commissions charged in connection with capital markets totaled R$916 million for the year ended December 31, 2018, an increase of 4.9% compared to the year ended 2017, mainly due to an increase in revenues from securities placements. Net fees and commissions from current account services totaled R$4,051 million for the year ended December 31, 2019, an increase of 3.5% compared to the year ended 2018 driven by the expansion of our active current account holders due to greater customer loyalty. Net fees and commissions from current account totaled R$3,913 million for the year ended December 31, 2018, an increase of 10.4% compared to the year ended December 31, 2017 explained by the growth of digital transactions and the increase of active current account holders. The following table reflects the breakdown of net fee and commission income for the year ended December 31, 2019, 2018 and 2017:
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Gains/losses on Financial Assets and Liabilities (net) and Exchange Differences (net) Gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2019 were losses of R$326 million, a reduction of R$5,263 million in losses from R$5,589 million for the year ended December 31, 2018. This variation is mainly due to gains of R$5,156 million related to financial assets measure at fair value through profit or loss held and gains of R$ 17.9 million related to exchange differences (net). Excluding the results of hedging on investments abroad effect, gains/losses on financial assets and liabilities (net) and exchange differences (net) were gains of R$938 million for the year ended December 31, 2019, a R$660 million increase from gains of R$278 million compared to the year ended December 31, 2018 mainly due to the positive results in our derivative positions. Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”. Gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2018 were losses of R$5,589 million, a decrease of R$7,163 million from gains of R$1,574 million for the year ended December 31, 2017. This variation is mainly due to a decrease of R$5,057 million in derivatives transactions as a consequence of our results on investment abroad, which was offset by the same amount in income taxes. Excluding the results of hedging on investments abroad effect, gains/losses on financial assets and liabilities (net) and exchange differences (net) were R$278 million for the year ended December 31, 2018, a 88.3% decrease from R$2,384 million compared to the year ended December 31, 2017, primarily due to positive results in our derivative positions as a result of market volatility which occurred in the fiscal year ended December 31, 2017 did not occur in the fiscal year ended December 31, 2018. Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “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 presents our gains/losses on Financial Assets and Liabilities (net) and Exchange Differences (net) for the periods indicated.
138 Other Operating Income/Expenses Other operating income/expenses for the year ended December 31, 2019 were expenses of R$1,108 million, an increase of R$52 million compared to expenses of R$1,056 million for the year ended December 31, 2018. Other operating income/expenses for the year ended December 31, 2018, were expenses of R$1,056 million, an increase of R$384 million compared to expenses of R$672 million for the year ended December 31, 2017, mainly due to assets we received as guarantees from our customers. Administrative Expenses Administrative expenses for the year ended December 31, 2019 were R$16,942 million, a R$149 million increase compared to expenses of R$16,792 million for the year ended December 31, 2018. For the year ended December 31, 2018, our administrative expenses of R$16,792 million reflected a R$672 million increase compared to administrative expenses of R$16,121 million for the year ended December 31, 2017. The performance in both periods is primarily attributed to the increase in: (i) personnel expenses, which are in line, with our meritocratic culture and the performance of our business; and (ii) data processing expenses line in order to support the increase in the volume of our customer transactions. Personnel expenses increased R$122 million for the year ended December 31, 2019, as a consequence of the increase in the benefits line and higher wages and salaries with a result of the renegotiation of our collective bargaining agreement. In the year ended December 31, 2018, our personnel expenses increased R$269 million compared to the same period in 2017. This performance can be attributed to the increase in wages and salaries and social security costs and benefits, which are in line with our meritocratic culture and the performance of our business. The following table sets forth our personnel expenses for each of the periods indicated:
Other administrative expenses increased R$28 million to R$7,614 million for the year ended December 31, 2019 from R$7,586 million for the year ended December 31, 2018, mainly due to a R$272 million increase in technology and systems, a R$91 million increase in advertising, R$83 million increase in specialized and technical service, both expenses derived from more intense commercial actions in our business, partially offset by a decrease of R$582 million with general maintenance expenses which as a result of the adoption of IFRS 16. In the year ended December 31, 2018 other administrative expenses increased R$403 million to R$7,586 million for the year ended December 31, 2018 from R$7,183 million for the year ended December 31, 2017, mainly due to: (i) a R$422 million increase in technology and systems associated with greater transactionality and expansion of our customer base, (ii) an R$189 million increase in specialized and technical services especially technology services. This growth in expenses was partially offset by R$136 million decrease in communications-related expenses. The following table sets forth our other administrative expenses for each of the periods indicated: 139
(1) In December 31, 2019, includes mainly Data Processing Expenses in the balance of R$2.4 million (2018 – R$67.7 million and 2017 - R$73.7 million), Service Expenses in the balance of R$2.2 million (2018 - revenue of R$26.8 million and 2017 - R$87.2 million), Expenses with Benefit Guarantor Fund - FGB R$53.5 milion (2018 – R$35.0 million and 2017 - R$5.3 million), Interest on Own Capital R$0 (2018 – R$38.0 million and 2017 - R$20.8 million), and Recovery of Charges and Expenses R$97.4 million (2018 – R$92.4 million and 2017 – R$89.4 million). The efficiency ratio, which we calculate as total administrative expenses divided by total income, decreased to 28.8% in the year ended December 31, 2019, as compared to 33.9% for the year ended December 31, 2018 For the year ended December 31, 2017 it was 33.1%. Our adjusted efficiency ratio, which excludes the effect of the hedge for investment held abroad (see “—Hedging in Foreign Investments” and “Selected Financial Data—Selected Consolidated Ratios, Including Non-GAAP Ratios”), was 28.2%, 30.3% and 32.5% in 2019, 2018 and 2017, respectively. Depreciation and Amortization Depreciation and amortization for the year ended December 31, 2019 was R$2,392 million, a R$652 million increase from R$1,740 million for the year ended December 31, 2018, primarily due to the change in accounting practices resulting from the adoption of IFRS 16 following the principles of IAS 17. For further information, please see “Item 1 Introduction, basis of presentation of the consolidated financial statements and other information, c.1) Adoption of new standards and interpretations of our consolidated financial statements included in “item 18.Financial Statements of this annual report. For the year ended December 31, 2018, depreciation and amortization amounted to R$1,740 million, a R$78 million increase from R$1,662 million for the year ended December 31, 2017, mainly due to higher depreciation expenses related to technology items and higher amortization expenses in relation to third party real estate and facilities. Provisions (Net) Provisions principally include provisions for tax, civil, and especially labor claims. Provisions (net) totaled R$3,682 million for the year ended December 31, 2019, an increase of R$1,682 million compared to R$2,000 million for the year ended December 31, 2018, mainly due to an increase of R$700 million related to the creation of an efficiency and productivity fund, an increase in civil and labor proceedings due to revision of the operational model and a constitution of provisions related to the legal proceeding brought by the association of retired employees of Banespa (Associação dos Funcionários Aposentados do Banco do Estado de São Paulo), or AFABESP, an association of former employees of Banespa in which the classification of the chance of loss was revised to probable in December 2019 (for further information see note 23 to our audited consolidated financial statements included in the ”Item 18. Financial Statements” of this annual report). In the year ended December 31, 2018, provisions (net) totaled R$2,000 million, a increase of R$1,310 million compared to R$3,309 million for the year ended December 31, 2017, mainly due to a decrease of R$816 million related to the past service cost in the contribution established for a post-employment benefit plan named Cabesp due to changes in the plan in the first half of 2018 (for further information, see note 22. to our audited consolidated financial statements included in “Item 18. Financial Statements” of in this annual report) and lower gains related to foreclosed assets. 140 Impairment Losses on Financial Assets (Net) Impairment losses on financial assets (net) for the year ended December 31, 2019 were R$13,370 million, an R$657 million increase compared to R$12,713 million for the year ended December 31, 2018. This increase was principally due to Installment Loans to Individuals, due to the recurrent growth of the credit portfolio in this segment. For the year ended December 31, 2018, impairment losses on financial assets (net) were R$12,713 million, an R$375 million increase compared to R$12,338 million for the year ended December 31, 2017 principally due to: An increase of 3%, or R$375 million, in impairment loss for loans and receivables to R$12,713 million as of December 31, 2018, from R$12,338 million on December 31, 2017. This increase was primarily a result of the adoption of IFRS 9 criteria. Our credit risk exposure portfolio increased by R$25.3 billion to R$347.3 billion as of December 31, 2019 compared to R$321.9 billion as of December 31, 2018. Furthermore, our impaired assets increased R$1 billion from R$23.4 billion as of December 31, 2018 to R$22.4 billion for the year ended December 31, 2019. The default rate decreased by 20 base points in 2019 in comparison with 2018. The following table shows the ratio of our impaired assets to total credit risk exposure and our coverage ratio as of December 31, 2019 and December 31, 2018 and 2017.
The following chart shows our impaired assets to credit risk ratio from 2014 through 2019: 141
Impaired Assets by Type of Loan The following table shows our impaired assets by type of loan as of December 31, 2019, 2018 and 2017.
For a discussion of the evolution in impairment in our lending portfolios and our methodology for loan loss allowances with respect to the following lending portfolios, see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.” See also “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally—Ongoing investigations relating to corruption and diversion of public funds that are being conducted by the Brazilian federal police as well as other Brazilian and non-Brazilian regulators and law enforcement officials may adversely affect the growth of the Brazilian economy and could have a material adverse effect on us” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally—The financial problems faced by our customers could adversely affect us.” Commercial and Industrial Impaired assets in the portfolio of commercial and industrial loans amounted to R$10,073 million as of December 31, 2019, a decrease of R$1,759 million, or 14.9%, compared to R$11,832 million as of December 31, 2018. The decrease in impaired assets in this portfolio was the result of the measures that Santander Brasil put in place to manage it, including collection practices with respect to our borrowers whereby we offered certain customers the chance to negotiate a restructuring of their debts or asset disposal. Impaired assets in the portfolio of commercial and industrial loans amounted to R$11,832 million as of December 31, 2018, a decrease of R$162 million, or 1.3%, compared to R$11,994 million as of December 31, 2017. This decrease in impaired assets in this portfolio was mainly caused by the slowdown in the Brazilian economy between 2014 and 2017, affecting our commercial and industrial 142 portfolio. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.” Real Estate Impaired assets in the real estate lending portfolio totaled R$827 million on December 31, 2019, a decrease of R$209 million, or 20.2%, compared to R$1,036 million as of December 31, 2018. The decrease was primarily due to changes on monetary policy that lead to reduction on the interest rates on real estate portfolio in Brazil. Impaired assets in the real estate lending portfolio totaled R$1,036 million on December 31, 2018, an increase of R$254 million compared to R$782 million as of December 31, 2017. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.” Installment Loans to Individuals Impaired assets in the installment loans to individuals lending portfolio totaled R$12,497 million as of December 31, 2019, with an increase of R$ 2,998 million, or 31.6%, compared to 2018. This increase was a consequence of the recurrent growth of the portfolio and the weak macroeconomic conditions related to the portfolio in Brazil, such as unemployment rate and degree of income commitment. Impaired assets in the installment loans to individuals lending portfolio totaled R$9,499 million as of December 31, 2018, with an increase of R$3,195 million, or 50.7%, compared to 2017. This increase was a result of adoption of IFRS 9 criteria this year and the weak macroeconomic conditions in Brazil. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.” Financial Leasing Impaired assets in the lease financing lending portfolio totaled R$29 million on December 31, 2019, a decrease of R$30 million compared to December 31, 2018. Impaired assets in the financial leasing lending portfolio amounted to R$59 million as of December 31, 2018, a decrease of R$6 million compared to December 31, 2017. This decrease in impaired assets was mainly due to defaults by certain borrowers as a result of weak macroeconomic conditions in Brazil. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses”. Impairment Losses on Other Assets (Net) Impairment losses on other assets (net) for the year ended December 31, 2019 amounted to losses of R$131 million, a decrease of R$377 million as compared to the year ended December 31, 2018, mainly due to impairment loss of assets in the acquisition and development of software that was recorded due to obsolescence function and disruption of these systems in 2018 that did not occur in 2019. For the year ended December 31, 2018, impairment losses on other assets (net) amounted to losses of R$508 million, an increase of R$52 million as compared to 2017, mainly due to higher loss provision of non onlending payroll loans. 143 Other Nonfinancial Gains/Losses Other nonfinancial gains/losses were gains of R$20 million during the year ended December 31, 2019, a negative variation of R$136 million from losses of R$156 million during the year ended December 31, 2018, primarily due to (i) an increase of R$104 million relating to income from the reversal of the provision for impairment of properties and R$78 million which is related to the sale of assets received in the recovery of credits with customers that occurred in 2018 that did not occur in 2019. During the year ended December 31, 2018, other nonfinancial gains/losses were losses of R$156 million, a negative variation of R$168 million from gains of R$324 million during the year ended December 31, 2017, primarily due to (i) an increase of R$272 million related to provisions for devaluations on real estate that occurred in the fiscal year ended December 31, 2017 that did not occur in the fiscal year ended December 31, 2018 and (ii) an increase of R$182 million of which R$104 million relating to income from the reversal of the provision for impairment of properties and R$78 million which is related to the sale of assets received in the recovery of credits with customers. For further information, see note 42 and 43 from our audited consolidated financial statements included in this annual report. Operating Profit Before Tax Operating profit before tax for the year ended December 31, 2019 was R$22,273 million, an increase of R$6,363 million, or 40.0%, as compared to R$15,910 million for the year ended December 31, 2018. In the year ended December 31, 2017, our operating profit before tax for the year was R$14,514 million. Excluding the effects of the hedge for investment held abroad operating profit before tax amounted to R$23,537 million for the year ended December 31, 2019, an 8.1% increase from R$21,777 million compared to the year ended December 31, 2018. In the year ended December 31, 2017 operating profit before tax was R$14,514 million. Operating profit before tax excluding the effects of the hedge for investment held abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.” The table below presents our operating profit before tax and our operating profit before tax excluding the effects of the hedge for investment held abroad for the periods presented.
Income Taxes Income taxes expense includes income tax, social contribution, PIS and COFINS. Income taxes amounted to expenses of R$5,642 million for the year ended December 31, 2019, a R$2,532 million increase from expenses of R$3,110 million for the year ended December 31, 2018. This increase was mainly attributable to the following events: (i) foreign exchange losses of R$1,512 million as a result of the effects of exchange rate variations on investments abroad and losses on 144 hedge instruments, affecting the line “Gains (losses) on financial assets and liabilities (net)” line; (ii) the increase in Operating Income before taxation arising from the result of the entities' operations, and (iii) the recognition of certain deferred tax credits in December 2019 as a result of the adjustment of CSLL tax credits derived from the tax rate increase to 20% for banks (Constitutional amendment nº103/2019). For further information, see note 24 from our audited consolidated financial statements included in this annual report. For the year ended December 31, 2018, income taxes amounted to expenses of R$3,110 million for the year of 2018, a R$2,266 million decrease from expenses of R$5,376 million for the year ended December 31, 2017. This decrease was mainly attributable to the foreign exchange gains of R$5,057 million as a consequence of the effects of foreign exchange rate variations in investments abroad for our foreign branches and subsidiary, and the associated hedging instruments, affecting the “Gains (losses) on financial assets and liabilities (net)” line. The following table shows our income taxes and income taxes excluding the effects of the hedge for investment held abroad for the periods indicated.
Results of Operations by Segment for the Years Ended December 31, 2019, 2018 and 2017 The following tables show our results of operations for the years ended December 31, 2019, 2018 and 2017, for each of our operating segments. Commercial Banking
145
2019 and 2018 Operating profit before tax attributed to the Commercial Banking segment for the year ended December 31, 2019 was R$18.4 billion, a 48.2% or R$6.0 billion increase from R$12.4 billion for the year ended December 31, 2018. This variation was mainly due to: • an increase of R$2,653 million in net interest income for the year ended December 31, 2019, compared to the year ended December 31, 2018 mainly due to an 15.0% increase in the volume of our credit. • an increase of R$1,386 million in net fee and commission income for the year ended December 31, 2019, compared to the year ended December 31, 2018, mainly due to (i) an increase in revenues from credit and debit cards, (ii) an increase in revenues from sale of insurance and premium bonds, and (iii) an increase in revenues from current account service; and. • a decrease of R$377 million in impairment losses on other assets (net) mainly due to impairment loss of assets in the acquisition and development of software that was recorded due to obsolescence function and disruption of these systems in 2018 that did not occur in 2019. 2018 and 2017 Operating profit before tax attributed to the Commercial Banking segment for the year ended December 31, 2018 was R$12.4 billion, a 10.5%, or R$1.2 billion increase from R$11.2 billion for the year ended December 31, 2017. This variation was mainly due to: • an increase of R$6,998 million in net interest income for the year ended December 31, 2018, compared to the year ended December 31, 2017, as a result of an increase in volume of loans extended to customers, partially offset by revenues from deposits decreased as a result of interest rates beinglower in the fiscal year ended December 31, 2018 than in the fiscal year ended December 31, 2017; and 146 an increase of R$1,275 million in net fee and commission income for the year ended December 31, 2018, compared to the year ended December 31, 2017, mainly due to (i) an increase in revenues from credit and debit cards, (ii) an increase in revenues from current accounts, and (iii) an increase in revenues from insurance and premium bonds. These results were partially offset by: • a decrease of R$6,726 million in gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2018, compared to the year ended December 31, 2017. This variation is mainly due to a decrease of R$5,057 million in derivatives transactions as a consequence of our results of hedging on investment abroad. For further information, see “— Other Factors Affecting Our Financial Condition and Results of Operations—Hedging in Foreign Investments.” Excluding the effects of the hedge for investments held abroad on our revenues, our operating profit before taxes would have been R$19.6 billion, 7.5% higher than in the fiscal year ended December 31, 2018. For the year ended December 31, 2017 our adjusted operation profit before tax was R$12.0 billion. Operating profit before taxes excluding the hedge of investments held abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.” Global Wholesale Banking
147 2019 and 2018 Profit before tax attributed to the Global Wholesale Banking segment for the year ended December 31, 2019 was R$3.9 billion, a 11.0%, or R$385 million increase compared to December 31, 2018. This variation was mainly due to:
These results were partially offset by:
2018 and 2017 Profit before tax attributed to the Global Wholesale Banking segment for the year ended December 31, 2018 was R$3.5 billion, a 6.7%, or R$220 million, a decrease from R$3.3 billion for the year ended December 31, 2017.
This variation was mainly due to:
These results were partially offset by:
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