|LYG||Lloyds Banking Group||168,921|
|BMO||Bank of Montreal||44,440|
|KB||KB Financial Group||12,729|
|BFR||BBVA Banco Frances||7,983|
|Item 1. Identity of Directors, Senior Management and Advisers|
|Item 2. Offer Statistics and Expected Timetable|
|Item 3. Key Information|
|Item 4. Information on The Company|
|Item 4A. Unresolved Staff Comments|
|Item 5. Operating and Financial Review and Prospects|
|Item 6. Directors, Senior Management and Employees|
|Item 7. Major Shareholders and Related Party Transactions|
|Item 8. Financial Information|
|Item 9. The Offer and Listing|
|Item 10. Additional Information|
|Item 11. Quantitative and Qualitative Disclosures About Market Risk|
|Item 12. Description of Securities Other Than Equity Securities|
|Item 13. Defaults, Dividend Arrearages and Delinquencies|
|Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15. Controls and Procedures|
|Item 16. [Reserved]|
|Item 16A. Audit Committee Financial Expert|
|Item 16B. Santander Brasil's Code of Ethical Conduct|
|Item 16C. Principal Accountant Fees and Services|
|Item 16D. Exemptions From The Listing Standards for Audit Committees|
|Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers|
|Item 16F. Change in Registrant's Certifying Accountant|
|Item 16G. Corporate Governance|
|Item 16H. Mine Safety Disclosure|
|Item 17. Financial Statements|
|Item 18. Financial Statements|
|Item 19. Exhibits|
|Note 2018 2017 2016|
|Note 44-D Contains A Detail of The Residual Maturity Periods of Financial Assets Measured At Amortized Cost.		|
|Note 44-D Contains A Detail of The Residual Maturity Periods of Loans and Receivables.	|
|Note 44-D Contains A Detail of The Residual Maturity Periods of Financial Liabilities At Amortized Cost.			|
|Note 44-D Contains A Detail of The Residual Maturity Periods of Subordinated Liabilities At Each Year-End in Each Year.	|
|Balance Sheet||Income Statement||Cash Flow|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☐||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES|
EXCHANGE ACT OF 1934
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
ACT OF 1934
For the fiscal year ended December 31, 2018
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
|☐||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
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
(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:
|Units, each composed of 1 common share, no par value, and 1 preferred share, no par value||New York Stock Exchange*|
|Common Shares, no par value||New York Stock Exchange*|
|Preferred Shares, no par value||New York Stock Exchange*|
|American Depositary Shares, each representing one unit (or a right to receive one unit) which is composed of 1 common share, no par value, and 1 preferred share, no par value, of Banco Santander (Brasil) S.A.||New York Stock Exchange|
|*||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:
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
|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.
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 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 ☐ 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:
|☒||International Financial Reporting Standards as issued by the International Accounting Standards Board|
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 ☒|
|PRESENTATION OF FINANCIAL AND OTHER INFORMATION||6|
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||10|
|1A. Directors and Senior Management||10|
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE||10|
|2A. Offer Statistics||10|
|2B. Method and Expected Timetable||10|
|ITEM 3. KEY INFORMATION||11|
|3A. Selected Financial Data||11|
|3B. Capitalization and Indebtedness||19|
|3C. Reasons for the Offer and Use of Proceeds||19|
|3D. Risk Factors||19|
|ITEM 4. INFORMATION ON THE COMPANY||50|
|4A. History and Development of the Company||50|
|4B. Business Overview||55|
|4C. Organizational Structure||135|
|4D. Property, Plant and Equipment||137|
|ITEM 4A. UNRESOLVED STAFF COMMENTS||137|
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS||137|
|5A. Operating Results||137|
|5B. Liquidity and Capital Resources||168|
|5C. Research and Development, Patents and Licenses, etc.||172|
|5D. Trend Information||173|
|5E. Off-Balance Sheet Arrangements||173|
|5F. Contractual Obligations||174|
|5G. Safe Harbor||175|
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||175|
|6A. Board of Directors and Board of Executive Officers||175|
|6C. Board Practices||194|
|6E. Share Ownership||201|
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||202|
|7A. Major Shareholders||202|
|7B. Related Party Transactions||203|
|7C. Interests of Experts and Counsel||208|
|ITEM 8. FINANCIAL INFORMATION||208|
|8A. Consolidated Statements and Other Financial Information||208|
|8B. Significant Changes||218|
|ITEM 9. THE OFFER AND LISTING||218|
|9A. Offering and Listing Details||218|
|9B. Plan of Distribution||221|
|9D. Selling Shareholders||224|
|9F. Expenses of the Issue||224|
|ITEM 10. ADDITIONAL INFORMATION||224|
|10A. Share Capital||224|
|10C. Material Contracts||235|
|10D. Exchange Controls||235|
|10F. Dividends and Paying Agents||245|
|10G. Statement by Experts||245|
|10H. Documents on Display||245|
|10I. Subsidiary Information||245|
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||245|
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||269|
|12A. Debt Securities||269|
|12B. Warrants and Rights||269|
|12C. Other Securities||269|
|12D. American Depositary Receipts||269|
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||271|
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||271|
|ITEM 15. CONTROLS AND PROCEDURES||271|
|15A. Disclosure Controls and Procedures||271|
|15B. Management’s Annual Report on Internal Control over Financial Reporting||271|
|15C. Audit Report of the Registered Public Accounting Firm||272|
|15D. Changes in Internal Control over Financial Reporting||272|
|ITEM 16. [RESERVED]||272|
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT||272|
|ITEM 16B. SANTANDER BRASIL’S CODE OF ETHICAL CONDUCT||273|
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES||273|
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES||274|
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS||274|
|ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT||275|
|ITEM 16G. CORPORATE GOVERNANCE||275|
|ITEM 16H. MINE SAFETY DISCLOSURE||278|
|ITEM 17. FINANCIAL STATEMENTS||279|
|ITEM 18. FINANCIAL STATEMENTS||279|
|ITEM 19. EXHIBITS||279|
In this annual report, the terms “Santander Brasil,” the “Bank,” “we,” “us,” “our,” “our company” and “our organization” mean Banco Santander (Brasil) S.A. and its consolidated subsidiaries, unless otherwise indicated. References to “Banco Real” mean Banco ABN AMRO Real S.A. and ABN AMRO Brasil Dois Participações S.A. and their respective consolidated subsidiaries, unless otherwise indicated. References to “Banespa” mean Banco do Estado de São Paulo S.A. – Banespa, one of our predecessor entities. The term “Santander Spain” means Banco Santander, S.A. References to “Santander Group” mean the worldwide operations of the Santander Spain conglomerate, as indirectly controlled by Santander Spain and its consolidated subsidiaries, including Santander Brasil.
All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” are to United States (or “U.S.”) dollars. All references to “euro,” “euros” or “€” are to the common legal currency of the member states participating in the European Economic and Monetary Union. References to “CI$” are to Cayman Islands dollars. References to “£” are to United Kingdom pounds sterling. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian currency.
Solely for the convenience of the reader, we have translated certain amounts included in “Item 3. Key Information—A. Selected Financial Data” and elsewhere in this annual report from reais into U.S. dollars using the exchange rate as reported by the Brazilian Central Bank (Banco Central do Brasil), or the “Brazilian Central Bank,” as of December 31, 2018, which was R$3.8748 to U.S.$1.00, or on the indicated dates (subject, on any applicable date, to rounding adjustments). We make no representation that the real or U.S. dollar amounts actually represent or could have been or could be converted into U.S. dollars at the rates indicated, at any particular exchange rate or at all.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
Consolidated Financial Statements
We maintain our books and records in reais, our functional currency and the presentation currency for our consolidated financial statements.
This annual report contains our consolidated financial statements as of December 31, 2018, 2017 and 2016, and for the years ended December 31, 2018, 2017 and 2016. 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”. Our consolidated financial statements as of and for the years ended December 31, 2018, 2017 and 2016 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, 2018, 2017 and 2016, 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 National Monetary Council (Conselho Monetário Nacional), or “CMN,” the Brazilian Central Bank
and document template provided in the Accounting Chart for National Financial System Institutions (Plano Contábil das Instituições do Sistema Financeiro Nacional), and the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários), or “CVM,” to the extent such practices do not conflict with the 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.
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 newly-elected administration of Brazil which took office on January 1, 2019;|
|·||exposure to various types of inflation and interest rate risks, and Brazilian government efforts to control inflation and interest rates;|
|·||exposure to the sovereign debt of Brazil;|
|·||the effect of interest rate fluctuations on our obligations under employee pension funds;|
|·||exchange rate volatility;|
|·||infrastructure and labor force deficiencies in Brazil;|
|·||economic developments and perception of risk in other countries, including a global downturn;|
|·||the exit of the United Kingdom from the European Union;|
|·||increasing competition and consolidation in the Brazilian financial services industry;|
|·||extensive regulation by the Brazilian government and the Brazilian Central Bank, among others;|
|·||changes in reserve requirements;|
|·||changes in taxes or other fiscal assessments;|
|·||potential losses associated with 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;|
|·||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.
|1A.||Directors and Senior Management|
|2B.||Method and Expected Timetable|
Financial information for Santander Brasil as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 has been derived from our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB. See “Item 18. Financial Statements.” This financial information should be read in conjunction with our audited consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.
Income Statement Data
|For the Year Ended December 31,|
|(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)|
|Depreciation and amortization||(449)||(1,740)||(1,662)||(1,483)||(1,490)||(1,362)|
|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|
|Consolidated Profit for the Year||3,303||12,800||9,138||7,465||9,834||5,708|
|(1)||Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2018, for reais into U.S. dollars of R$3.8748 to U.S.$1.00.|
|(2)||Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits. For further discussion, see notes 22 and 23 to our consolidated financial statements.|
|(3)||Net provisions to the credit loss allowance less recovery of loans previously written off.|
Earnings and Dividend per Share Information
|For the Year Ended December 31,|
|Basic and Diluted Earnings per 1,000 shares|
|From continuing and discontinued operations(1)|
|Basic Earnings per shares (reais)|
|Diluted Earnings per shares (reais)|
|Basic Earnings per shares (U.S. dollars) (2)|
|Diluted Earnings per shares (U.S. dollars) (2)|
|From continuing operations|
|Basic Earnings per shares (reais)|
|Diluted Earnings per shares (reais)|
|Basic Earnings per shares (U.S. dollars) (2)|
|Diluted Earnings per shares (U.S. dollars) (2)|
|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|
|Weighted average shares outstanding (in thousands) – diluted(3)|
|(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, 2018, for reais into U.S. dollars of R$3.8748 to U.S.$1.00.|
|(3)||Average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and each of the month-end balances of the 12 subsequent months.|
Balance Sheet Data
|As of December 31,|
|(in millions of U.S.$)(1)||(in millions of R$)|
|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||-||-||-||-|
|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|
|Average total assets*||176,920||685,531||637,511||605,646||571,918||478,560|
|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|
|Marketable debt securities||19,259||74,626||70,247||99,843||94,658||70,355|
|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|
|Other Comprehensive Income||(227)||(879)||(774)||(1,348)||(4,132)||(1,802)|
|Total Stockholders’ Equity||23,639||91,595||87,088||84,812||79,835||78,683|
|Total liabilities and stockholders’ equity||186,814||723,865||645,703||634,393||605,395||520,231|
|Average interest-bearing liabilities*||119,590||463,388||416,816||408,067||400,008||318,639|
|Average total stockholders’ equity*||23,037||89,263||87,868||84,283||81,475||78,818|
|*||The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and for each of the month-end balances of the 12 subsequent months.|
|(1)||Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2018, for reais into U.S. dollars of R$3.8748 to U.S.$1.00.|
|(2)||In the fiscal year ended December 31, 2018, the balances related to the compulsory deposits on time deposits were reclassified from cash and balances with the Brazilian Central Bank to financial assets measured at amortized cost for a better presentation and, consequently, the respective comparative balances were also reclassified (loans and receivables for fiscal years before December 31, 2018).|
|(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,|
|Profitability and performance|
|Return on average total assets||1.9||1.4||1.2||1.7||1.2|
|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|
|Basel capital adequacy ratio(2)||15.1||15.8||16.3||15.7||17.5|
|*||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)||Impaired assets include all loans and advances past due by more than 90 days and other doubtful credits. For further information, see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets.”|
|(2)||Basel capital adequacy ratio as measured pursuant to Brazilian Central Bank rules in effect as from December 31, 2014. This ratio is subject to a phased-in implementation schedule established by the Brazilian Central Bank, which is expected to be completed by 2019. The Basel III framework applies to all commercial banks operating in Brazil and covers, among other things, minimum capital requirements, capital buffers, risk-based capital measures, liquidity standards, net stable funding ratio, leverage ratio, exposures to central counterparties, as well as the definition of consolidated enterprise level (conglomerado prudencial). Since the enactment of the initial Basel III framework in 2013, the authorities have been implementing additional regulations and some important amendments to the existing framework. For more information, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Capital Adequacy and Leverage – Basel.”|
|(3)||Efficiency ratio is determined by taking administrative expenses divided by total income.|
|(4)||In 2018, including the debt instruments accounted for in the loans and receivables, the ratio is 78.1%. For 2017 the ratio was 95.0%. The debt instruments amount was not material in prior years.|
|(5)||In 2018, including the debt instruments accounted for in the loans and receivables the ratio is 6.3%. For 2017 the ratio was 5.3%. The debt instruments amount was not material in prior years.|
Selected Consolidated Ratios, Including Non-GAAP Ratios (*)
|As of and for the Year Ended December 31,|
|Profitability and performance|
|Return on average stockholders’ equity(2)||14.3||10.4||8.9||12.1||7.3|
|Adjusted return on average stockholders’ equity(2)||21.0||15.4||13.3||18.5||11.3|
|Average stockholders’ equity as a percentage of average total assets(2)(*)||13.0||13.8||13.9||14.2||16.4|
|Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(2)(*)||9.3||9.8||9.7||9.8||11.3|
|Impaired assets as a percentage of credit risk exposure (3)||6.2||5.8||6.3||6.0||4.8|
|Impaired assets as a percentage of stockholders’ equity excluding goodwill(2)(3)||35.5||32.6||33.5||36.1||27.5|
|Loans and advances to customers, net as a percentage of total funding(4)||60.6||62.7||58.0||59.3||63.9|
|Adjusted efficiency ratio(5)||38.5||32.5||34.9||34.8||38.1|
(*) The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months.
(1) “Net yield” is defined as net interest income (including dividends on equity securities) divided by average interest earning assets.
(2) “Adjusted return on average stockholders’ equity,” “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” and “Impaired assets as a percentage of stockholders’ equity excluding goodwill” are non-GAAP financial measures which adjust “Return on average stockholders’ equity,” “Average stockholders’ equity as a percentage of average total assets” and “Impaired assets as a percentage of stockholders’ equity,” to exclude the goodwill arising from the acquisition of Banco Real in 2008, Getnet Adquirência e Serviços para Meios de Pagamento S.A., or “GetNet” and Super Pagamentos e Administração de Meios Eletrônicos Ltda., or “Super”, 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,|
|(in millions of R$, except percentages)|
|Effects of the hedge for investments held abroad||5,867||(810)||(6,140)||10,919||1,668|
|Adjusted efficiency ratio||38.5%||32.5%||34.9%||34.8%||38.1%|
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 their most directly comparable IFRS financial measures. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding the substantial impact of the R$1.1 billion goodwill arising from the acquisition of GetNet and Super both during 2014, the acquisition of Banco Olé Bonsucesso Consignado S.A. in 2015 and the significance of other factors affecting stockholders’ equity and the related ratios. See “Item 4. Information on the Company—4A. History and Development of the Company—Important Events.” The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill, as set forth in the above tables. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.
|As of and for the Year Ended December 31,|
|(in millions of R$, 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 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 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 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 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:|
|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 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|
|Credit risk exposure||364,182||330,474||301,703||310,877||288,445|
|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|
|Loans and advances to customers, net as a percentage of total funding(2)||60.6%||62.7%||58.0%||59.3%||63.9%|
|(*)||The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months.|
|(1)||Provision for impairment losses of loans and advances to customers.|
|(2)||Total funding is the sum of financial liabilities at amortized cost, excluding the other financial liabilities.|
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,|
|(in millions of R$, except as otherwise indicated)|
|Gains (losses) on financial assets and liabilities (net) and exchange differences (net)||(5,589)||1,574||7,591||(9,918)||(888)|
|Effects of the hedge for investments held abroad||5,867||(810)||6,140||(10,919)||(1,668)|
|Total income excluding effects of the hedge for investments held abroad||43,640||49,535||42,697||41,733||36,618|
|Efficiency ratio adjusted for effects of the hedge for investments held abroad||38.5%||32.5%||34.9%||34.8%||38.1%|
Reconciliation of Non-GAAP Measures to Their Most Directly Comparable IFRS Financial Measures
The information in the table below presents the calculation of specified non-GAAP financial measures from each of their most directly comparable IFRS financial measures. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding effects of the hedge for investments held abroad. The limitation associated with the exclusion of effects of the hedge for investments held abroad is that it has the effect of excluding a portion of gains/losses on financial assets and liabilities (net) plus exchange differences (net) line item which is offset by excluding a portion in the Income tax line item. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.
|As of and for the year ended December 31,|
|(in millions of R$, 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|
|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|
|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|
The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.
Since 1999, the Brazilian Central Bank has allowed the real/U.S. dollar exchange rate to float freely, which resulted in increasing exchange rate volatility. 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 the real to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. In the future, the real may fluctuate substantially against the U.S. dollar.
Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are compelling reasons to foresee a serious imbalance; temporary restrictions may be imposed on remittances of foreign capital abroad. Any such restrictions on remittances of foreign capital abroad may limit our ability to make distributions to holders of our ADRs. We cannot assure that such measures will not be taken by the Brazilian government in the future. Exchange rate fluctuations will affect the U.S. dollar equivalent of the price of our shares in reais on the São Paulo Stock Exchange, B3 S.A. – Brasil, Bolsa, Balcão, or “B3” as well as the U.S. dollar equivalent of any
distributions we make with respect to our shares, which will be made exclusively in reais. Exchange rate fluctuations may also adversely affect our financial condition. For further information on these risks, see “—D. Risk Factors—Risks Relating to Brazil and Macroeconomic Conditions in Brazil and Globally—Exchange rate volatility may have a material adverse effect on the Brazilian economy and on us.”
The following tables set forth the selling rate, expressed in reais per U.S. dollar (R$/U.S.$), for the periods indicated:
|(per U.S. dollar)|
|March 2019 (through March 15, 2019)||3.83||3.83||3.78||3.87|
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, the exchange rate for euro to real was R$4.4390 per €1.00.
Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur. As a result, the market price of our units and the American Depositary Receipts, or “ADRs”, could decline, and investors could lose all or part of their investment.
Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally
The Brazilian government has exercised significant influence over the Brazilian economy. The Brazilian government’s macroeconomic management strategies, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our securities.
The Brazilian government has frequently intervened in the Brazilian economy and has on occasion made significant changes in policy and regulations. In the past, the Brazilian government has adopted measures, including, among others, changes in regulations, price controls, capital controls, changes in the exchange rate regime and limitations on imports, which have affected Brazilian asset prices. Recently, the Brazilian government has adopted measures, including changes in tax policies and constraints that have affected Brazilian asset prices and the trading price of our securities.
We and the trading price of our securities may be adversely affected by changes in policy, laws, or regulations at the federal, state and municipal levels involving or affecting factors such as:
|·||liquidity of capital and lending markets;|
|·||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 affect the confidence of investors and the general public, and have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. 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.
In recent years, there has been significant political turmoil in connection with the impeachment of the former president (who was removed from office in August 2016) and ongoing investigations of her successor (who left office in January 2019) as part of the ongoing “Lava Jato” investigations. Presidential elections were held in Brazil in October 2018. We cannot predict which policies the new President of Brazil, who assumed office on January 1, 2019, may adopt or change during his mandate or the effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current policies may have a material adverse effect on us.
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 the real and 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.
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”), the U.S. Department of Justice, the Brazilian Federal Police and the Brazilian Federal Prosecutor’s Office, the Comptroller General of Brazil and other relevant governmental authorities, in connection with corruption allegations (the so called “Lava Jato” investigations). The Brazilian Federal Police is also investigating allegations of improper payments made by Brazilian companies to officials of the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais), or CARF, a tax appeals tribunal (the so-called “Operação Zelotes”). It is alleged that the purpose of such improper payments was to induce those officials to reduce or waive certain tax-related penalties imposed by the Brazilian Federal Revenue Authority, which were under appeal in the CARF. 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”, contracted by 3.5% in 2016 but increased by 1.0% in 2017 and 1.1% in 2018). In addition, although we have reduced our exposure to companies involved in the “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” investigations, we may also be materially adversely affected.
As a result of the allegations under the “Lava Jato” investigations and the economic downturn, Brazil was downgraded to non-investment grade status by S&P in September 2015, by Fitch 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 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. In addition, the “Lava Jato” investigations have also reached members of the executive and legislative branches of the Brazilian government, which has caused considerable political instability, and as a result, persistently poor economic conditions in Brazil could have a material adverse effect on us. It is difficult to predict the effects of such political instability, which may include further deteriorations in Brazil’s economic conditions.
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 the Plano Real (a set of measures designed to stabilize the Brazilian economy) in 1994 and until 2015, Brazil’s annual consumer price inflation levels were below 10%. However, in 2015, consumer price inflation increased above 10%, to 10.7%, while in 2017 and 2018 consumer price inflation decreased to 2.9% and 3.7%, respectively. The Brazilian government’s measures to fight inflation, principally through the Brazilian Central Bank, have had and may in the future have significant effects on the Brazilian economy and our business. 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 (basic interest rate) 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 de Política Monetária) of the Brazilian Central Bank, or COPOM, decided to lower the SELIC rate to 10.25%, 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. On February 6, 2019, the COPOM has decided to maintain the SELIC rate at 6.50%.
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, 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$419 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 2018, each additional percentage point change in inflation, would impact our personnel and other administrative expenses by approximately R$92 million and R$76 million, respectively.
Despite the Brazilian Central Bank’s maintenance of the SELIC rate, inflation has increased during 2018, reaching 3.75% for the 12-month period ending December 31, 2018, and decreasing to 0.75% for the period ending February 28, 2019.
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 the real, may trigger increases in inflation and adversely affect the performance of the Brazilian economy as a whole. Any of the aforementioned developments may adversely affect our asset quality. Furthermore, Brazil’s high rate of inflation, compounded by high and increasing interest rates, declining consumer spending and increasing unemployment, may have a material adverse impact on the Brazilian economy as a whole, as well as on us.
Exposure to Brazilian Federal Government debt could have a material adverse effect on us.
We invest in Brazilian Federal Government sovereign bonds. As of December 31, 2018, approximately 16.1% of our total assets, and 66.4% of our securities portfolio, consisted of debt securities issued by the Brazilian Government. Any failure by the Brazilian Government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on us.
Fluctuations in interest rates and other factors may affect our obligations under legacy employee pension funds.
We sponsor certain defined benefit pension plans and a health care plan that benefit certain of our former and current employees, most of which were inherited from Banespa (though we discontinued the use of defined benefit pension plans for our employees in 2005).
In order to determine the funded status of each legacy defined benefit pension plan and, consequently, the carried reserves necessary to pay future beneficiaries, we use certain actuarial techniques and assumptions, which are inherently uncertain and involve the exercise of significant judgment, including with respect to interest rates, which are a key assumption in determining our current obligations under the legacy pension plans as interest rates are used to calculate the present value of such obligations. For further information, see note 22 to our consolidated financial statements.
Changes in the present value of our obligations under our legacy defined benefit pension plans could cause us to have to increase contributions to reduce or satisfy the deficits, which would divert resources from use in other areas of our business. Any such increase may be due to factors over which we have no or limited control. Increases in our pension liabilities and obligations could have a material adverse effect on our business, financial condition and results of operations.
Decreases in interest rates can increase the present value of obligations under our legacy defined benefit pension plans, and may materially and adversely affect the funded status of our legacy defined benefit plans and require us to make additional contributions to these plans to meet our pension funding obligations.
Exchange rate volatility may have a material adverse effect on the Brazilian economy and on us.
The Brazilian currency has, during past decades, experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies.
From 2013 to 2014, the real depreciated 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, the real devalued at a much higher rate than in previous years. On September 24, 2015, the real fell to the lowest level since the introduction of the currency, at R$4.20 per U.S.$1.00. Overall in 2015, the real depreciated 47%, reaching R$3.91 per U.S.$1.00 on December 31, 2015. In 2016, the real faced continuing fluctuations, primarily as a result of Brazil’s political instability, but had appreciated 17.0% year-over-year against the U.S. dollar as of December 31, 2016 to R$3.26 per U.S.$1.00. In 2017, the real 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, the real continued to depreciate against the U.S. dollar with the exchange rate reaching R$3.88 per U.S.$1.00 as of December 31, 2018. On March 15, 2019, the exchange rate was R$3.83 per U.S.$1.00. There can be no assurance that the real will not substantially depreciate or appreciate further against the U.S. dollar.
In the year ended December 31, 2018, a variation of 1.0% in the exchange rate of reais to U.S. dollars would have resulted in a variation of income on our net foreign exchange position denominated in U.S. dollars of R$26 million.
Depreciation of the real relative to the U.S. dollar has created additional inflationary pressures in Brazil, which has led to increases in interest rates, limited Brazilian companies’ access to foreign financial markets and prompted the adoption of recessionary policies by the Brazilian government. Depreciation of the real may also, in the context of an economic slowdown, lead to decreased consumer spending, deflationary pressures and reduced growth of the Brazilian economy as a whole, and thereby harm our asset base, financial condition and results of operations. Additionally, depreciation of the real could make our foreign currency-linked obligations and funding more expensive, negatively affect the market price of our securities portfolios and have similar consequences for our borrowers. Conversely, appreciation of the real relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian balance of payments, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of the real could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.
Infrastructure, 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 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. Growth is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, the lack of a qualified labor force, and the lack of private and public investments in these areas, which limit productivity and efficiency. 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 2018, 2017 and 2016, there was an increase in volatility in all Brazilian markets due to, among other factors, uncertainties about how monetary policy adjustments in the United States would affect the international financial markets, the increasing risk aversion to emerging market countries, and the uncertainties regarding Brazilian macroeconomic and political conditions. These uncertainties adversely affected us and the market value of our securities.
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.
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 easing by the U.S. Federal Reserve and the uncertain impact of “Brexit.” 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. 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.
Part of our funding originates from repurchase agreements. These types of transactions 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 for the availability of funds. For example, if the quality of the Brazilian government securities used as collateral is adversely affected as a result of adverse conditions in financial and credit markets or other factors, the cost of these transactions could increase, making this source of funding inefficient for us.
If the size and/or liquidity of the Brazilian government bond and/or repurchase agreement markets decrease, or if there is increased collateral credit risk and we are unable to access capital and liquidity on financial terms acceptable to us or at all, our financial condition and the results of our operations may be adversely affected.
The exit of the United Kingdom (the “UK”) from the European Union could adversely impact global economic or market conditions.
On June 23, 2016, the UK electorate voted in a general referendum in favor of the UK’s exit from the European Union (so-called “Brexit”). On March 29, 2017, the UK gave formal notice under Article 50 of the Treaty on European Union of its intention to leave the European Union. The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations. The ongoing process of negotiations between the UK and the European Union will determine the future terms of the UK’s relationship with the European Union, including access to European Union markets, either during a transitional period or more permanently. Although the UK is due to leave the European
Union on March 29, 2019, we note that the withdrawal agreement has not been approved yet. Brexit could lead to potentially divergent laws and regulations as the UK determines which European Union laws to replace or replicate. Uncertainty regarding the terms of Brexit, and its eventual effects once implemented, could adversely affect global economic or market conditions and investor confidence. This could, in turn, adversely affect our business and/or the market value of our securities.
Risks Relating to the Brazilian Financial Services Industry and Our Business
The strong competitive environment in the Brazilian financial services market may adversely affect us, including our business prospects.
The Brazilian financial markets, including the banking, insurance and asset management sectors, are highly competitive. We face significant competition in all of our main areas of operation from other Brazilian and international banks, as well as state-owned institutions. In recent years, the competition has increased in the banking and insurance sectors.
Non-traditional providers of banking services, such as Internet-based e-commerce providers, mobile telephone companies and Internet search engines, as well as the increase in the availability of payment services using cryptocurrencies and/or 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, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.
In addition, if our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on us.
We are subject to substantial regulation and regulatory and governmental oversight, which could adversely affect us.
The Brazilian financial markets are subject to extensive and continuous regulatory control by the Brazilian government, principally by the Brazilian Central Bank, the CVM and the CMN which, in each case, materially affects our business. We have no control over the issuance of new regulations that may affect our operations, including in respect of:
|·||minimum capital requirements;|
|·||reserve and compulsory deposit requirements;|
|·||limits on investments in fixed assets;|
|·||lending limits and other credit restrictions, including compulsory allocations;|
|·||limits and other restrictions on fees;|
|·||limits on the amount of interest banks can charge or the period for capitalizing interest; and|
|·||accounting and statistical requirements.|
The regulation governing Brazilian financial institutions is continuously evolving, and the Brazilian Central Bank has reacted actively and extensively to developments in our industry.
Changes in regulations in Brazil and international markets may expose us to increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. Brazilian regulators are constantly updating prudential standards in accordance with the recommendations of the Basel Committee on Banking Supervision, in particular with respect to capital and liquidity, which could impose additional significant regulatory burdens on us. For example, future liquidity standards could require us to maintain a greater proportion of our assets in highly liquid but lower-yielding financial instruments, which would negatively affect our net interest margin. There can be no assurance that future changes in regulations or in their interpretation or application will not have a material adverse effect on us.
As some of the banking laws and regulations have been recently issued or become effective, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent 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 that may be deemed to be systemically important. In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements require a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands and we may face supervisory measures as a result.
We may also be subject to potential impacts relating to regulatory changes affecting our controlling shareholder, Santander Spain, due to continued significant financial regulatory reform in jurisdictions outside of Brazil that directly or indirectly affect Santander Spain’s businesses, including Spain, the European Union, the United States, and other jurisdictions. In Spain and in other countries in which Santander Spain’s subsidiaries operate (including Brazil), there is continuing political, competitive and
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 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 others 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”, 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 elsewhere and we cannot yet determine their effects on Santander Spain and, consequently, their effects on us, but regulatory changes may result in additional costs for us.
We are subject to potential supervision 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 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 Bank may increase the reserve and compulsory deposit or allocation requirements in the future or impose new requirements. Increases in reserve and compulsory deposit or allocation requirements reduce our liquidity to fund our loan portfolio and other investments and, as a result, may have a material adverse effect on us.
Compulsory deposits and allocations generally do not yield the same return as other investments and deposits because a portion of compulsory deposits and allocations:
|·||do not bear interest;|
|·||must be held in Brazilian federal government securities; and|
|·||must be used to finance government programs, including a federal housing program and rural sector subsidies.|
In recent years, the CMN and Brazilian Central Bank published several rules to implement Basel III in Brazil. This new set of regulations covers the revised definition of capital, capital requirements, capital buffers, credit valuation adjustments, exposures to central counterparties, leverage and liquidity coverage ratios, and treatment of systemically important financial institutions. No assurance can be given that the Basel III rules will be adopted, enforced or interpreted in a manner that will not have an adverse effect on us. Furthermore, in January 2017, the CMN issued a new rule by means of which the Brazilian Central Bank established the terms for segmentation for financial institutions, financial institution groups, and other institutions authorized to operate by the Brazilian Central Bank for proportional application of the prudential regulation, considering the size, international activity and risk profile of members of each segment. In February 2017, the Brazilian Central Bank published the initial categorization of financial institutions in the different segments according to the terms set forth in the new resolution. We have been categorized by the Brazilian Central Bank in segment 1, the highest level for application of regulation for banks in Brazil.
For more information on the rules implementing Basel III, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Capital Adequacy and Leverage—Basel” 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”, 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 corruption and sanctions laws and regulations are increasingly complex and detailed. 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-related activities. However, emerging technologies, such as cryptocurrencies and blockchain, could limit our ability to track the movement of funds. Our ability to comply with the legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability. These require implementation and embedding within our business effective controls and monitoring, which in turn requires ongoing changes to systems and operational activities. Financial crime is continually evolving and, as noted, is subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti-financial crime operations, we remain responsible and
accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight of third parties to whom we outsource certain tasks and processes, there remains a risk of regulatory breach.
Additionally, in 2015 and in early 2016, pursuant to a new resolution issued by the United Nations Security Council, as well as a recently enacted law and regulations issued by the Brazilian Central Bank for the implementation of the aforementioned resolution in Brazil, additional compliance requirements were imposed on us and other financial institutions operating in Brazil, which relate to the local 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 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.
In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree we rely upon our relevant counterparties to maintain and properly apply their own appropriate compliance measures, procedures and internal policies. Such measures, procedures and internal policies may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (or our relevant counterparties’) knowledge. If we are associated with, or even accused of 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 of data protection law penalties in the event of noncompliance with the terms and conditions of certain new European and Brazilian regulations.
On May 25, 2018, the Regulation (EU) 2016/279 of the European Parliament and of the Council of 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 Data Protection Regulation or GDPR) became directly applicable in all member states of the European Union. In addition to the GDPR, we will soon face new regulations from Brazilian authorities. The Brazilian General Data Protection Act (Law no.13.709/2018), or “GDPA” 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, will take effect in August 2020. The GDPA 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 new obligations on data controllers and rights for data subjects, including, among others: (1) accountability and transparency requirements, which require data controllers to demonstrate and record compliance with the GDPR and to provide detailed information to data subjects regarding processing; (2) enhanced data consent requirements, which includes “explicit” consent in relation to the processing of sensitive data; (3) obligations to consider data privacy as any new products or services are developed and limit the amount of information collected, processed, stored and its accessibility; (4) constraints on
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 are 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 GDPA 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 highest of 4% of annual worldwide turnover or €20 million and fines for other specified infringements of up to the highest of 2% of annual worldwide turnover or €10 million. The GDPR identifies a list of points to consider when imposing fines (including the nature, gravity and duration of the infringement). The GDPA 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 GDPA 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 GDPA 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.
We are exposed to risk of loss from legal and regulatory proceedings.
We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgments, regulatory proceedings, fines and penalties. The current regulatory and tax enforcement environment in Brazil reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.
We are from time to time subject to regulatory investigations and civil and tax claims and party to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending activities, relationships with our employees, economic plans and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of investigation or discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. The amount of our reserves in respect of these matters is substantially less than the total amount of the claims asserted against us, and, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results.
Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.
Disclosure controls and procedures 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 (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.
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 of 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 taxing authorities, and an incorrect interpretation by us of tax laws and regulations may have a material adverse effect on us.
The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities. We are subject to the income tax laws of Brazil. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, leading to disputes which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material adverse effect on us. 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.
Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.
Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums or commissions into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on us.
The credit quality of our loan portfolio may deteriorate and our loan losses reserves could be insufficient to cover our actual loan losses, which could have a material adverse effect on us.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted our results of operations and could do so in the future. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future (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 and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. Because many of these factors are beyond our control and there is no precise method for predicting loan and credit losses, we cannot assure that our current or future provisions for impairment losses will be sufficient to cover actual losses. If our assessment of and expectations concerning the abovementioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our provisions for impairment losses, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.
Economic uncertainty may lead to a contraction in our loan portfolio.
The recent slow growth rate of the Brazilian economy in 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 increase of the SELIC rate in 2016 have adversely affected the rate of growth of our loan portfolio in recent years. Ongoing economic uncertainty could adversely affect the liquidity, businesses and financial condition of our customers, as well as lead to a general decline in consumer spending, a rise in unemployment and an increase in household indebtedness. All of this could lead to a decrease in demand for borrowings in general, which could have a material adverse effect on our business.
Liquidity and funding risks are inherent in our business and since our principal sources of funds are short-term deposits, a sudden shortage of funds could cause an increase in costs of funding and an adverse effect on our revenues and our liquidity levels.
Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. Continued constraints in the supply of liquidity, including in interbank lending, has affected and may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements, as well as limit growth possibilities.
Our cost of obtaining funds is directly related to prevailing interest rates and to our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads 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 commercial deposits as our main source of funding. As of December 31, 2018, 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 as general economic conditions and the confidence of commercial depositors in the economy and in the financial services industry, and the availability and extent of deposit guarantees, as well as competition between banks or with other products, such as mutual funds, for deposits. Any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on economically appropriate and reasonable terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.
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” 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. At December 31, 2018, our LCR ratio was 131% above the 100% minimum requirement. The Net Stable Funding Ratio, or “NSFR” provides a sustainable
maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their activities. The NSFR, which must remain at a minimum of 100% beginning from October 1, 2018 according to CMN rules, stands at over 117.3% for us as of December 31, 2018.
Our cost of funding is affected by our credit ratings and any risks may have an adverse effect on our credit ratings and our cost of funds. Any downgrade in Brazil’s, our controlling shareholder’s, or our credit rating, would likely increase our cost of funding, requiring us to post additional collateral under some of our derivative contracts and adversely affect our interest margins and results of operations.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength, conditions that generally affect the financial services industry and the economic environment in which we operate. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Brazilian sovereign debt and the rating of our controlling shareholders. If Brazil’s sovereign debt or the debt of our controlling shareholder is downgraded, our credit rating would also likely be downgraded similarly.
Any downgrade in Brazil’s sovereign credit ratings, those of our controlling shareholder, or in our ratings, would likely increase our borrowing costs. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, such as subordinated securities, engage in certain longer-term and derivatives transactions, and retain our customers, particularly customers who need a minimum rating threshold in order to invest. 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 terminate 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 any downgrade of our long-term credit rating precipitates downgrades to our short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than any hypothetical examples, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress-testing scenarios and a portion of our total liquid assets is held against these risks, a credit rating downgrade could still have a material adverse effect on us.
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” 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)’s long-term debt in foreign currency is currently rated BB- with a stable outlook by S&P and Ba1 with a stable outlook by Moody’s.
S&P lowered Brazil’s credit rating in September 2015 from BBB- to BB+ (a non-investment grade rating), and then again in mid-February 2016 from BB+ to BB with a negative outlook, mainly due to the continuing weak economic conditions of Brazil, political instability, the ongoing “Lava Jato” investigations and uncertainty as to whether the Brazilian government will enact reforms in the 2016 federal budget to improve the country’s fiscal accounts and economic situation. 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. 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 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- by S&P and Fitch and Ba2 by Moody’s. In February 2019, S&P maintained Brazil’s sovereign credit rating at BB-. Any further downgrade in Brazil’s sovereign rating would likely increase our funding costs and adversely affect us, including our asset quality.
As a result of the lowering of Brazil’s sovereign credit rating, our long-term foreign currency credit rating was lowered during the course of 2015 and in early 2016. On August 12, 2015, Moody’s lowered our credit rating from Baa2 to Baa3, lowering it again on February 25, 2016 to Ba3 and in March and May 2017 it affirmed the rating at Ba3. On September 10, 2015, S&P lowered our credit rating from BBB- to BB+ (a non-investment grade rating), lowering it again on February 17, 2016 to BB 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 Ba1 with a stable outlook from BB with a negative outlook. We are currently rated as follows: BB- 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. 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 business, financial condition and results of operations.
Inadequate pricing methodologies for insurance, pension plan and premium bond products may adversely affect us.
We establish prices and make calculations in relation to our insurance and pension products based on actuarial or statistical estimates. The pricing of our insurance and pension plan products is based on models that include a number of assumptions and projections that may prove to be incorrect, since these assumptions and projections involve the exercise of judgment with respect to the levels and timing of receipt or payment of premiums, contributions, provisions, benefits, claims, expenses, interest, investment results, retirement, mortality, morbidity, and persistence. We could suffer losses due to events that are contrary to our expectations as a result of, among others, incorrect biometric and economic assumptions or the use of incorrect actuarial bases in the calculation of contributions and provisions.
Although the pricing of our insurance and pension plan products and the adequacy of the associated reserves are reassessed on a yearly basis, we cannot accurately determine whether our assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for the payment of benefits, claims, and expenses. Accordingly, the occurrence of significant deviations from our pricing assumptions could have an adverse effect on the profitability of our insurance and pension products. In 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 as force majeure events. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.
We are subject to market, operational and other related risks associated with our derivative transactions and our investment positions that could have a material adverse effect on us.
We enter into derivative transactions for trading purposes, as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral). We also hold securities in our own portfolio as part of our investment and hedging strategies.
Financial instruments, including derivative instruments and securities represented 87.4% of our total assets as of December 31, 2018. Any realized or unrealized future gains or losses from these investments or hedging strategies could have a significant impact on our income. These gains and losses,
which we account for when we sell or mark to market investments in financial instruments, can vary considerably from one period to another. If, for example, we enter into derivatives transactions to protect ourselves against decreases in the value of the real or in interest rates and the real instead increases in value or interest rates increase, we may incur financial losses. We cannot forecast the amount of gains or losses in any future period, and the variations experienced from one period to another do not necessarily provide a meaningful forward-looking reference point. Gains or losses in our investment portfolio may create volatility in net revenue levels, and we may not earn a return on our consolidated investment portfolio, or on a part of the portfolio in the future. Any losses on our securities and derivative financial instruments could materially and adversely affect our operating income and financial condition. In addition, any decrease in the value of these securities and derivatives portfolios may result in a decrease in our capital ratios, which could impair our ability to engage in lending activity at the levels we currently anticipate.
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, in 2017, the UK’s Financial Conduct Authority, or the “FCA”, announced that it will no longer persuade or compel banks to submit rates for the calculation of the London interbank offered rate, or “LIBOR”, benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021. This 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 including legal risks arising from potential changes required to documentation for new and existing transactions, financial risks arising from any changes in the valuation of financial instruments linked to benchmark rates, pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments, operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes, and conduct risks arising from the potential impact of communication with customers and engagement during the transition period. The replacement benchmarks, and the timing of and mechanisms for implementation have not yet been confirmed by central banks. 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. We employ a broad and diversified set of risk monitoring and risk mitigation techniques, which may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.
We use certain qualitative tools and metrics for managing market risk, including our use of value at risk, or “VaR,” and statistical modeling tools, which are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be
significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that are poorly developed, implemented or used, or as a result of the modeled outcome being misunderstood or the use of such information for purposes for which it was not designed. In addition, if existing or potential customers or counterparties believe our 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 commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human or IT systems errors. In exercising their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.
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, our regulators may require us to make changes to such models 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, which 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 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 may incur substantial costs and suffer other negative consequences, such as remediation costs (liabilities for
stolen assets or information, or repairs of system damage, among others), increased cybersecurity protection costs, lost revenues arising from the unauthorized use of proprietary information or the failure to retain or attract customers following an attack, as already mentioned, litigation and legal risks, increased insurance premiums, reputational damage affecting our customers and investors’ confidence, as well as damages to our competitiveness, stock price and long-term shareholder value.
We are also subject to regulation governing cybersecurity risks that is fragmented and constantly evolving. In April 2018, the CMN issued regulation on cyber risks and cloud storage applicable to financial services following the public consultation held in 2017. Pursuant to this new rule, financial institutions are now 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 plans to prevent and respond to cybersecurity incidents by May 2019, and fully compliant by December 2021. A failure to implement all or some of these new global and local regulations, that in some cases have severe sanctions regimes, could 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.
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 timely resolved or an attempted cyber incident or other security breach is successfully avoided or thwarted, normally substantial resources are expend 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.
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% of our loan portfolio is allocated to our largest debtor and 8.3% to our next 10 largest debtors. However, we cannot assure this will continue to be the case. If counterparty risks give rise to losses, this could materially and adversely affect our results of operations and financial condition.
The financial problems faced by our customers could adversely affect us.
Market turmoil and economic recession could materially and adversely affect the liquidity, credit ratings, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. We have credit exposure to borrowers which have entered or may shortly enter 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 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 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.
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 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.
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 compliance failures, unethical behavior and the activities of customers and counterparties. Further, negative publicity regarding us may result in harm to our prospects.
Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.
We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure, or perceived failure, to adequately address conflicts of interest could affect the willingness of 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 believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims. We cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:
|·||manage efficiently the operations and employees of expanding businesses;|
|·||maintain or grow our existing customer base;|
|·||assess the value, strengths and weaknesses of investment or acquisition candidates, including local regulation that can reduce or eliminate expected synergies;|
|·||finance and integrate strategic investments or acquisitions;|
|·||align our current information technology systems adequately with those of an enlarged group;|
|·||apply our risk management policy effectively to an enlarged group; and|
|·||manage a growing number of entities without over-committing management or losing key personnel.|
Any failure to manage growth effectively could have a material adverse effect on our operating results, financial condition and prospects.
In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.
Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, could have a material adverse effect on us.
Goodwill impairments may be required in relation to acquired businesses.
We have made business acquisitions in the past and may make further acquisitions in the future. It is possible that the goodwill, which has been attributed, or may be attributed, to these businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in their underlying profitability, asset quality and other relevant matters. Impairment testing in respect of goodwill is performed annually, or more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. Goodwill impairment does not, however, affect our regulatory capital. There can be no assurances that we will not have to write down the value attributed to goodwill in the future, which would adversely affect our results and net assets.
We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.
Our continued success depends in part on the continued service of key members of our senior executive team and other key employees. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of our strategy. The successful implementation of our strategy and culture depends on the availability of skilled and appropriate management, both at our head office and in each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately, or loses one or more of its key senior executives or other key employees and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.
In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.
We rely on third parties and affiliates for important products and services.
Third-party vendors and certain affiliated companies provide key components of our business infrastructure such as loan and deposit servicing systems, back office and business process support, information technology production and support, internet connections and network access. Relying on these third parties and affiliated companies can be a source of operational and regulatory risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting the vendors and other parties that interact with these service providers. As our interconnectivity with these third parties and affiliated companies increases, we face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs. In addition, certain problems caused by these third parties or affiliated companies could affect our ability to deliver products and services to customers. Replacing these third-party vendors could also entail delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure such arrangements. Restructurings could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, operations and financial condition.
Risks Relating to Our Controlling Shareholder, Our Units and American Depositary Receipts (ADRs)
Our ultimate controlling shareholder has a great deal of influence over our business and its interests could conflict with ours.
Santander Spain, our ultimate controlling shareholder, currently owns, directly and indirectly, approximately 89.5% of our total capital (not including the shares held by Banco Madesant – Sociedade Unipessoal). Due to its share ownership, our controlling shareholder has the power to control us and our subsidiaries, including the power to:
|·||elect a majority of our directors that appoint our executive officers, set our management policies and exercise overall control over our company and subsidiaries;|
|·||influence the appointment of our principal officers;|
|·||declare the payment of any dividends;|
|·||agree to sell or otherwise transfer its controlling stake in our company; and|
|·||determine the outcome of substantially all actions requiring shareholder approval, including amendments of our 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. Our corporate governance model was further amended in 2015 to reflect certain new requirements imposed on our parent company, Santander Spain, by the European Central Bank, the Bank of Spain and regulators in different jurisdictions. See “Item 16G. Corporate Governance.”
We operate as a stand-alone subsidiary within the Santander Group. Our controlling shareholder has no liability for our banking operations, except for the amount of its holdings of our capital stock and for other specific limited circumstances under Brazilian law. The interests of Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain will limit other stockholders’ ability to influence corporate matters. As a result, we may take actions that our other shareholders do not view as beneficial.
Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange, or “NYSE”, limiting the protections afforded to investors.
We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (i) a majority of the board of directors consists of independent directors, (ii) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (iii) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities and (iv) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Although we have similar practices, they do not entirely conform to the NYSE requirements, therefore we currently use these exemptions and intend to continue using them. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.
The liquidity and market prices of the units and the ADRs may be adversely affected by the cancelation of units or substantial sale of units and shares in the market.
Holders of units may present these units or some of these units for cancellation in Brazil in exchange for the common shares and preferred shares underlying these units. If unit holders present a significant number of units for cancellation in exchange for the underlying common shares and preferred shares, the liquidity and price of the units and ADRs may be materially and adversely affected.
Also, sales of a substantial number of our units, 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, the aggregate market capitalization of the B3 was equivalent to approximately R$3.2 trillion (U.S.$820.7 billion) and the top ten stocks in terms of trading volume accounted for approximately 54.3% of all shares traded on B3 in the year ended December 31, 2018. In contrast, as of December 31, 2018, the aggregate market capitalization of the NYSE was approximately U.S.$25.8 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 analysts. Furthermore, if one or more of the analysts who cover us downgrade our ADRs, our shares or our industry, change their views regarding the shares of any of our competitors, or other companies in our sector, or publish inaccurate or unfavorable research about our business, the market price of our ADRs and/or shares could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our ADR and/or share price or trading volume to decline.
The economic value of your investment may be diluted.
We may, from time to time, need additional funds and we may issue additional units or shares. Any additional funds obtained by such a capital increase may dilute your interest in our company.
Discontinuation of the current corporate governance practices may negatively affect the price of our ADRs and units.
After completion of the voluntary exchange offers by Santander Spain in Brazil and in the United States (respectively, the “Brazilian Exchange Offer” and the “U.S. Exchange Offer”) for the acquisition of up to the totality of our shares that were not held by the Santander Group at that time, we are no longer subject to the obligations of the special listing segment of B3 known as Corporate Governance Level 2 (the “Level 2 Segment”). Currently, we voluntarily comply with certain of the corporate governance requirements for companies listed on the Level 2 Segment.
Discontinuation, in whole or in part, of our existing corporate governance practices or minimum protections may adversely affect your rights as a security holder and may result in a decrease of the price of our shares, units and ADRs.
Holders of our units and our ADRs may not receive any dividends or interest on stockholders’ equity.
According to our By-Laws, we must generally pay our shareholders at least 25.0% of our annual net income as dividends or interest on stockholders’ equity, as calculated and adjusted under Brazilian Corporate Law, or “adjusted net income”, which may differ significantly from our net income as determined under IFRS. This adjusted net income may be used to increase capital, used to absorb losses or otherwise retained as allowed under Brazilian Corporate Law and may not be available to be paid as dividends or interest on stockholders’ equity. Additionally, Brazilian Corporate Law allows a publicly traded company, like ours, to suspend the mandatory distribution of dividends and interest on stockholders’ equity in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability. We paid R$5.3 billion, R$6.3 billion 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, 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 future. We are also subject to Brazilian banking regulations that may limit the payment of dividends or interest on stockholders’ equity. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—History of Payment of Dividends and Interest Attributable to Stockholders’ Equity.”
Holders of ADRs may find it difficult to exercise voting rights at our stockholders’ meetings.
Holders of ADRs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our By-Laws and Brazilian Corporate Law. Holders of ADRs may exercise voting rights with respect to the units represented by ADRs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADR holders. For example, we are required to publish a notice of our stockholders’ meetings in specified newspapers in Brazil. Holders of our units will be able to exercise their voting rights by attending a stockholders’ meeting in person or voting by proxy. By contrast, holders of ADRs will receive notice of a stockholders’ meeting by mail from the ADRs depositary following our notice to the depositary requesting the depository to do so. To exercise their voting rights, holders of ADRs must instruct the ADR depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of 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.”
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 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 than reais. Under Brazilian exchange control limitations and according to Brazilian laws, an obligation in Brazil to pay amounts denominated in a currency other than reais may be satisfied in Brazilian currency only at the exchange rate, as determined by the Brazilian Central Bank or competent court, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the units or ADRs.
Holders of ADRs may be unable to exercise preemptive rights with respect to our units underlying the ADRs.
Holders of ADRs will be unable to exercise the preemptive rights relating to our units underlying ADRs unless a registration statement under the Securities Act is effective with respect to 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.
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), 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. Our website is https://www.ri.santander.com.br. 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.
The following figure summarizes the key milestones of our history in Brazil.
The Santander Group was founded in Spain in 1857 and has expanded globally through a number of acquisitions and the integration of acquired businesses.
In 1957, the Santander Group first entered the Brazilian market through an operating agreement with Banco Intercontinental do Brasil S.A. Since the 1990s, the Santander Group has sought to establish its presence in Latin America, particularly in Brazil. In 1970, the Santander Group opened a representative office in Brazil, followed by its first branch in 1982. We have continued to pursue this strategy through organic growth, as well as acquisitions, among which the most notable are the following:
|·||In November 2000, the Santander Group acquired Banespa, a bank owned by the State of São Paulo, and became one of Brazil’s largest financial groups.|
|·||On July 24, 2008, Santander Spain took indirect share control of Banco Real, which it then absorbed into the Santander Group to further consolidate its investments in Brazil. On August 29, 2008, the acquisition by Santander Brasil of Banco Real’s share capital was approved through a share exchange transaction (incorporação de ações), and Banco Real became a wholly-owned subsidiary of Santander Brasil, before being merged into Santander Brasil on April 30, 2009.|
Since October 7, 2009, our units, common and preferred shares have been listed and traded on the B3 and our ADRs representing American Depositary Shares, or “ADSs” registered with the SEC under the Securities Act have been listed and traded on the NYSE. 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
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.
Investment in Super Pagamentos e Administração de Meios Eletrônicos S.A.
On December 12, 2014, we, through Aymoré CFI, acquired shares issued by Super Pagamentos e Administração de Meios Eletrônicos S.A., or “Super”, representing 50% of Super’s total and voting capital. Super is a Brazilian digital service provider that offers online payment accounts, prepaid cards and access to simplified financial services.
On January 4, 2016, Aymoré CFI informed the sellers of its decision to exercise the call option for the shares representing the remaining 50% of Super’s total voting capital owned by the sellers, for a value of approximately R$113 million. The transaction was completed on March 10, 2016, following receipt of approval 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., an entity of the PSA group dedicated to the distribution of insurance products in Brazil.
The joint venture adds the network of PSA Group’s distributors in Brazil to the distribution channels of Santander Brasil for the offering of financial and insurance products, especially in the vehicle-financing sector.
Establishment of Credit Intelligence Bureau
On January 20, 2016, we entered into a non-binding memorandum of understanding with Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A., for 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 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. The necessary regulatory authorizations, including by the Brazilian Central Bank and the CADE, have already been granted. We estimate that the CIB will become 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 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 operations in the first half of 2019.
The formation of the insurance brokerage company remains subject to regulatory approval. We expect to receive this approval during the course of 2019.
Partnership with American Airlines Inc.
On December 9, 2016, Santander Brasil and American Airlines Inc. entered into a 10-year commercial participation agreement for the marketing and issuance of co-branded credit cards, with the purpose of offering AAdvantage® miles to their respective 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 subsidiary Atual Companhia Securitizadora de Créditos Financeiros, 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.
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 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 when the documentation to form Santander Auto S.A. was executed. On January 11, 2019, SUSEP granted Santander Auto the 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 issued 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.
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 offer to our clients.
Formation of BEN Beneficios
On June 11, 2018, we incorporated BEN Beneficios, an entity fully held by Santander Brasil, whose purpose is to create, supply and administer various types of vouchers and tickets used for the provision of 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 during the first quarter of 2019.
Formation of Esfera Fidelidade S.A.
On August 14, 2018, we incorporated Esfera Fidelidade S.A., an entity fully held by Santander Brasil, whose purpose is to develop and manage Santander Brasil’s customer loyalty programs. The company began operations in November 2018.
Discontinuation of Projections Disclosure
On August 22, 2018, we informed the market that we have decided to cease disclosing projections (guidance), including with regards to our delinquency ratio, efficiency ratio, status of commissions, indicators regarding our base of loyal customers and return on equity indicators.
On November 1, 2018, our board of directors approved, in continuation of the buyback program set to expire on November 5, 2018, a buyback program of units and ADRs issued by us, directly or through our branch in the Cayman Islands, to be held in treasury or subsequently sold. The buyback program will cover the acquisition of up to 37,753,760 units or ADRs, representing a combination of 37,753,760 common and 37,753,760 preferred shares, corresponding to approximately 1% of our share capital. The term of the buyback program is up to 12 months beginning November 6, 2018, expiring on November 5, 2019.
Issuance of Notes
On November 5, 2018, our board of directors approved the issuance, through our Cayman Islands branch, of debt instruments to form part of our Tier 1 and Tier 2 regulatory capital in the aggregate amount of U.S.$2.5 billion, pursuant to an offering made to non-U.S. Persons under Regulation S of the U.S. Securities Act of 1993, as amended, or the “Notes Offer”.
Our board of directors also approved the redemption of instruments issued to form part of our Tier 1 and Tier 2 regulatory capital, in accordance with the board resolution of January 14, 2014. The redemption were carried out with funds raised through the Notes Offer.
On December 18, 2018, the Brazilian Central Bank authorized the transactions contemplated in the Notes Offer and the redemption, which were completed on January 29, 2019.
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 2018, 2017 and 2016, total investments in IT were R$1,552 million, R$1,132 million and R$895 million, respectively.
In 2018, 2017 and 2016, we continually improved our technology platform by means of investments in our digital applications, core systems and infrastructure renewal. Over the last 18 months, we have adopted 97 new tools and technologies in several areas ranging from business services to Antifraud, Cyber Security, AI (Artificial Intelligence), AI Ops (Artificial Intelligence for IT Operations) and RPA (Robotic Process Automation).
We have continued our migration towards cloud-based computing in order to provide improved IT services management, flexibility and cost optimization. For example, in 2018 we made the Microsoft Office 365 platform available in cloud format for more than 43,400 users, allowing greater collaboration between teams, increased productivity, simplified internal processes and improved mobility. For further discussion regarding our technology infrastructure see “—B. Business 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.”).
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:
|·||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 practice already implemented in other countries, including with regards to products, services, internal controls and risk management; and|
|·||develop our employees’ skills through local and international training and development, as well as by allowing them to gain international experience in other offices of the Santander Group.|
Our goal 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 way to grow in a profitable, recurring and sustainable manner is by providing excellent services to enhance customer satisfaction levels and attract more customers, making them more loyal. Our actions are based on establishing close and long-lasting relationships 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:
|·||Increase customer preference and loyalty by offering targeted, simple, digital and innovative products and services through a multichannel platform. Our active customer base totaled 24.2 million customers as of December 31, 2018, a 12% increase over our customer base as of December 31, 2017. We define an active customer as a customer who uses the products and services supplied by Santander Brasil on a regular basis. As of December 31, 2018, we had 5.2 million loyal customers, an increase of 25% as compared to December 31, 2017. We define loyal customers as (1) active account holders who use at least three other products or services offered by Santander Brasil on a regular basis, and (2) have processed at least five transactions through Santander Brasil in the preceding 60 days. The exact minimum number of products or services which a customer must use in order to be classified as a loyal customer depends upon the customer’s segment (i.e. Private Banking, Santander Select, Santander Van Gogh or Santander Especial) and the type of product or service consumed. As of December 31, 2018, we had 11.4 million digital customers, a 33% increase compared to December 31, 2017. We define a digital customer as a customer who uses the digital platforms of Santander Brasil on a regular basis. We believe this increase is a result of our focus on constantly improving our customers’ experience and satisfaction levels through our service-focused culture and the technological transformation of our channels, such as the new Internet banking and mobile banking for individuals and companies, 100% digital account opening portal and the Santander Way card app, among others. For more details on the channels, refer to “—Our Business—Service Channels.”|
|·||Improve the profitability, recurrence and sustainability of our results by growing in businesses with greater revenue diversification, aiming to strike a balance between loans, funding and services, while maintaining a preemptive risk management approach and rigorous cost control. In 2018, 2017 and 2016, our net interest income and net fee income amounted to R$56.1 billion (net interest income of R$41.9 billion and net fee income of R$14.1 billion), R$47.7 billion (net interest income of R$34.9 billion and net fee income of R$12.7 billion) and R$41.6 billion (net interest income of R$30.6 billion and net fee income of R$11.0 billion), respectively, driven, in each case, by customer revenues (loan and funding) and service revenues, as a result of our stronger portfolio of products and services and greater transactional activity by our customers. Our default rate, increased by 5% from 6.7% in December 2017 to 7.0% in December 2018.|
|·||Be disciplined with capital and liquidity to preserve our solidity, face regulatory changes and seize growth opportunities. Our Basel capital adequacy ratio, calculated in accordance with the regulations and guidance of the Brazilian Central Bank, totaled 15.1% at the end of 2018, higher than the sum of the minimum regulatory capital and capital conservation requirements.|
|·||Achieve profitable market share gains through our robust portfolio, optimize the ecosystem and launch new ventures, consistently improving the customer experience. In the past four years, we have managed to reposition our organization by implementing a clearly defined strategy, which allowed us to significantly increase our market share in strategic products and achieve a new level of profitability with a positive contribution from both net interest income and fees. In addition, we continue to expand our spectrum of new businesses that are complementary to our ecosystem with the establishment of new subsidiaries and partnerships such as the Return Entities, BEN Benefícios, PI DTVM and Santander Auto, among others.|
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.
Recent Business Developments
In recent years, our commercial banking segment has accounted for an increasingly large portion of our net interest income and our net fee and commissions income, as demonstrated in the following table.
|For the Year Ended December 31,|
|Net interest income||Net fee and commissions income|
|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, as well as to the improvement in customer experience and satisfaction. In this vein, we have tailored our products and services, which allowed us to gradually expand our customer base. Among the initiatives put in place to achieve this goal, we highlight the following:
|·||Digital strategy. We have implemented a new method of collaborative work in our organization based on the “Agile” methodology, which is commonly used in IT. Our new work method involves the formation of multidisciplinary teams with employees from our business and technology areas, endowed with the necessary autonomy to adapt to changing circumstances and requirements. With this new method of work, we have been able to put in place several digital tools, so that customers can access our services through a variety of digital and non-digital channels. These tools include: (i) providing a wide range of services across all channels according to customers' choices and/or needs; (ii) giving customers autonomy to meet all their needs through digital channels; and (iii) integrating all service channels to ensure that customers have an integrated experience, regardless of the channel chosen.|
|·||Net promoter score, or NPS. In 2017 we introduced the NPS as the leading metric of customer satisfaction, and in the beginning of 2018, we were pioneering in the disclosure of this index to the market. After each interaction with Santander Brasil (e.g., purchasing a product, a service or communicating with us through one of our customer service channels), our customers are asked to rank this interaction on a scale from zero (which would mean that the customer would not recommend the applicable product or service to others) or ten (which would mean that the customer would recommend the product or service to others). NPS is one of the compensation metrics that impacts virtually every area of the organization, including the administrative and commercial areas, which reinforces our commitment to excellence in service. We ended 2018 with an NPS of 57 points, an increase of 14 points relative to 2017. This rise in satisfaction can also be seen in the expansion of our loyal customer base.|
|·||Operational excellence. With the goal of fine-tuning the customer's journey and boosting efficiency, we are transforming our operational model, which will have an industrial approach. In 2018, we already made some changes, so that we now have an end-to-end view of the customer experience, reduced manual activities and dispersion, as well as greater cost transparency. With these changes, we have already obtained notable results, such as decrease in the time needed to acquire certain products and increase in the number of agreements issued.|
|·||Optimization of commercial tools. We have simplified day-to-day operations of branch staff, so they can spend more time meeting customer needs. As part of this initiative, we provided our employees with a new 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 reduces 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 changes in the compensation 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 mind, throughout the period, we established a clear and horizontal communication of top leadership with employees, promoting meritocracy and diversity. The Santander Academy encourages employees to assume a proactive role in technical training and has 67% of total employees who are internal multipliers. As a result, in 2018, we were recognized for the third consecutive year as one of the best companies to work for in Brazil, according to the GPTW (Great Place to Work) survey. In addition to refining our internal culture, we have repositioned the Santander Brazil brand by adding value to the customer and innovating in the Brazilian banking financial industry.|
We operate along two segments through which we offer our 24.2 million active individual, SME and large corporate customers a complete portfolio of products and services:
|·||Commercial Banking Segment. In the Commercial Banking segment, we focus on building long-term relationships with our account holder and non-account holder customers. Customers in our Commercial Banking segment include individuals and companies (except for global corporate customers, which are dealt with within our Global Wholesale Banking segment). Revenue from this segment is generated by the provision of banking and financial products and services to our account holder and non-account holder customers, including essential checking and savings account services, priority services (such as withdrawals, debit cards, deposits and transfers), credit cards, foreign exchange services, investments and loans and financing.|
|·||Global Wholesale Banking Segment. Our Global Wholesale Banking segment offers financial services and structured solutions for our global corporate customers, principally local and multinational corporations, and carries out proprietary trading activities. Our Global Wholesale Banking segment offers a wide range of national and international services specifically tailored to the needs of each customer.|
The following chart sets forth our operating segments and their main focus.
|· Retail Banking||· Santander Corporate & Investment Banking (“SCIB”)|
|· Individuals||· Proprietary Trading|
|· SMEs (annual gross revenues up to R$200 million)|
|· Corporate (annual gross revenues in excess of R$200 million, other than global corporate customers)|
|· Consumer Finance|
Our Commercial Banking and Global Wholesale Banking segments are strongly integrated, which enables us to capitalize on each segment’s strengths to the benefit of the other. We are able to offer joint solutions to customers in each of our segments, such as for example, offering integrated solutions to (i) large retailers and their respective points of sale and (ii) large companies and their employees.
The following table presents the breakdown of our net interest income and profit before tax by operating segment:
|For the Year Ended December 31,|
|Net interest income||Operating profit before tax|
|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|
|(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 2018, 2017 and 2016 amounted to gains of R$5,867 million, expenses of R$810 million and gains of R$6,140 million, respectively.|
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|
|Total Credit Portfolio||321,933||287,829||268,438||11.8%||7.2%|
|(1)||For purposes of loan portfolio presentation, “corporate” includes companies with annual gross revenues exceeding R$200 million, including our Global Corporate Banking customers.|
As of December 31, 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.”
The services we provide to individuals are currently as follows:
|·||Private Banking Business serves a select group of customers with at least R$5.0 million in assets available for investment. Our goal is to offer our customers a complete and tailor-made portfolio of onshore and offshore financial products and services, investment advice, loans and asset management through a dedicated manager for investments and banking services.|
|·||Santander Select serves customers with a monthly income above R$20,000, or a monthly income above R$10,000 and R$30,000 in investments, or R$ 300,000 in investments without a proven source of income. Our goal is to offer a value proposition with differentiated products and services, exclusive service spaces, relationship managers that serve a small number of customers and asset management advisory services.|
|·||Santander Select Direct serves Santander Select customers who look for more flexible service hours, from 8:00 a.m. to 10:00 p.m., and who prefer using a digital interface. This segment complements our offering to high-income individuals and broadens our capillarity by also catering to regions where we do not have a physical presence.|
|·||Santander Van Gogh serves customers with a monthly income from R$4,000 to R$10,000, or with investments above R$40,000. Our objective is to understand the needs of our customers at each stage of their life and provide them with financial advice through a multichannel relationship, including financial products and services as well as financial advice.|
|·||Santander Especial serves customers who earn 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.|
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|
|(1)||Including loans to individuals in the consumer finance segment, the auto loan portfolio totaled R$40,9 billion as of December 31, 2018, R$33,1 billion as of December 31, 2017 and R$26,7 billion as of December 31, 2016.|
|(2)||Includes Banco Olé Bonsucesso Consignado S.A.’s portfolio payroll loans from the agreement between Santander Brasil and Banco Bonsucesso.|
Small and Medium Enterprises
We serve SMEs through our Santander Negócios e Empresas brand. Our current classification model for SMEs is as follows:
|·||Empresas Núcleos (Core Companies). Companies with annual revenues between R$30 million and R$200 million. Our service model is based on dedicated relationship managers, a team of|
experts for more complex demands and loan managers specializing in risk management for each segment. We also provide specialized services to multinationals and other major corporates in order to meet their specific needs.
|·||Empresas Polo (Hub Companies). Companies with annual revenues between R$3 million and R$30 million. We offer these customers a comprehensive range of products and services in a user-friendly fashion principally through a relationship manager based at each customer’s offices. We also have committees specific to these customers in order to provide our customers with credit products.|
|·||Negócios Agência (Branches Business). Companies with annual sales of up to R$3 million. We offer these customers a simple banking solution through an integrated account (Santander Conta Integrada) that combines a corporate account with a payment terminal to provide benefits for the user, who must simply concentrate MasterCard and Visa credit card sales in the Getnet terminal and receipts in a Santander Brasil current account. We believe that this results in greater commercial efficiency as customers receive our products and services through a single point of access with access to standardized and automatically priced products delivered with the assistance of preapproved risk models and an automated decision-making system.|
|·||Negócios Direct (Direct Business). Companies with annual revenues of up to R$300,000. We serve these customers principally through a relationship manager available through online channels. We believe that this improves service availability and simplicity for our customers, including through extended service hours (8:00 a.m. to 8:00 p.m., Monday through Friday). We also offer these customers a full range of other online banking services.|
In recent years, we have developed products specifically for SMEs, including industry-specific 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|
|Working capital loans||12,687||12,359||12,695||328||2.7|
|Account overdraft loans||1,819||1,820||1,734||(1)||(0.0)|
|(1)||Does not include consumer finance products.|
|(2)||Includes credit cards, mortgage finance products and other products.|
|(3)||Includes SMEs with annual gross revenues up to R$200 million.|
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|
|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|
|(1)||Source: Brazilian Central Bank.|
Our corporate customer segment comprises large companies that have annual gross revenues greater than R$200 million (except for our Santander Corporate & Investment Banking customers). We focus on fostering a close relationship with our corporate customers by providing them with customer-tailored services.
Global Wholesale Banking
Santander Corporate & Investment Banking
Santander Corporate & Investment Banking, or “SCIB,” is the global business unit that covers those customers that, due to their size and complexity, require tailored services or high-value-added wholesale products. In this segment, we provide a wide range of domestic and international financial services to large Brazilian and multinational companies. Our customers in the SCIB segment benefit from the global structure of services provided by the Santander Group with its worldwide integrated wholesale banking network and global services solutions, combined with its local market expertise and provision of integrated services.
Our product and service portfolio ranges from basic to tailor-made and highly complex solutions in the following areas:
|·||Global Transaction Banking, which includes the sale and management of local and global transactional banking products, which includes local loans, commercial finance (confirming), transfers of BNDES on-lending, trade finance, guarantees, structured loans, cash management solutions 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 (DCM), 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 (M&A) and equity capital markets transactions, including IPOs 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.|
The SCIB team is dedicated to customer coverage comprising a range of industries, including telecommunications, retail, aviation, real estate and logistics, power, construction and infrastructure, natural resources, food, agribusiness and financial institutions. We are one of the leading banks in capital markets and financial advisory services in the Brazilian and international markets as evidenced by the awards we have received, the principal among which are listed in the table below.
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
1st place in Trade Finance Bank, according to Febraban
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 we hold 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 seal. It now has all B3 qualification seals
Santander Corretora has ranked 1st place in stock picking since 2012, according to Valor Econômico
|Clients Treasury||1st place in the Foreign Exchange Rankings by the Brazilian Central Bank since 2014|
|Best Treasury in Brazil in 2017, according to Euromoney|
Project Finance with Seaborn Networks won the Greenfield Deal of the Year 2016 award by World Finance magazine
Project Finance with Seaborn Networks won the Perfect 10 ECA Finance Deal of the Year 2016 award by Trade & Export Finance
Top Financial institution, ECA deals including commercial tranches: Santander 3rd place, award by Trade & Export Finance
1st place Financial Advisor for Project Finance in Brazil and Americas 2018, according to Dealogic
Leader in Fixed Income, according to ANBIMA
Leader in Project Finance Advisory for the 8th time since 2008, according to ANBIMA
Our proprietary trading division is responsible for the management of our proprietary books and liquidity positions.
Principal Products and Services Provided to Our Customers
Credit and Debit Cards
We operate in the credit and debit card market issuing credit and debit cards to our customers (including both account and non-account holders). We endeavor to offer credit and debit cards compatible with the income level and lifestyle of each of our customers. Most of our credit and debit card customers are individuals. Our revenues from credit and debit cards include administration fees, interest on unpaid balances, annuity fees and withdrawal fees.
Holders of credit cards issued by Santander Brasil have access to the Esfera rewards program, which offers exclusive deals and discounts with more than 300 partners such as Cinépolis, FastShop and Casas Bahia, among others. In addition, holders of credit cards also have access to Bonus Esfera, which enables customers to exchange their Esfera reward points for certain products, services and travel benefits.
Our credit card holders also have access to our Santander Way mobile application, which is an online credit card tool allowing customers, among other things, to track their credit card use online. With more than 4.8 million unique users, Santander Way is a highly ranked payment app, with 4.8 stars on the App Store and 4.6 stars on Google Play. In 2017, we launched Santander Pass, a credit card using near-field communication technology, which allows for contactless payments. We offer three devices (a bracelet, a sticker and a tag for watches) linked to our customers’ cards to simplify our customers’ user experience. As of 2018, non-account holders are able to sign up for the credit card at our branches and to access “Supercrédito”, a line of personal loans, though Santander Way.
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 also have partnerships and associations with brands such as Dufry, Shell, Vivo and Smiles (which was launched recently) to offer exclusive benefits to our customers.
We have also launched two -innovative credit cards in the market:
|·||“Play,” which is aimed at college students and has a dynamic credit limit that increases according to customers’ usage and payment history; and|
|·||“1|2|3,” which is aimed at customers with higher incomes (R$1,500 per month and above) and Santander Van Gogh customers. “1|2|3” allows users to earn points from our Esfera rewards program (each U.S. dollar spent equals one point in domestic transactions, two points in online transactions and three points in international transactions).|
In January 2017, the CMN enacted a new resolution establishing that credit card bills and the debt balance of other forward-paying products may be used as revolving credit only until the following bill. Thereafter, financial institutions must offer customers another type of financing on more favorable conditions than those typically found in the credit card market. In order to comply with the resolution, we offer customers a solution that automatically converts the balance of any revolving credit outstanding after the relevant bill into an installment loan. See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Credit Cards.”).
The following table sets forth certain key financial and operating data regarding our credit card business for the periods indicated.
|As of and For the Year Ended December 31,||Change between 2017 and||Change between 2016 and|
|Credit card portfolio market share(1)||13.3%||12.1%||11.2%||1.2 p.p||0.9 p.p|
|Credit card portfolio (R$ billion) (2)||30.9||25.1||21.1||23.1%||19.0%|
|Total card turnover (R$ billion) (2)||201.6||168.3||140.2||19.8%||19.9%|
|Credit card turnover (R$ billion) (2)||137.1||111.9||92.2||22.5%||21.4%|
|Total card transactions (in millions) (2)||2,338.2||1,987.6||1,651.5||17.6%||20.4%|
|Credit card transactions (in millions) (2)||1,206.1||992.9||810.7||21.5%||22.5%|
|Participation of credit card in the household consumption – Market overview (2) (3) (%)||21.6%||20.2%||18.7%||1.4 p.p||1.5 p.p|
|(1)||Source: Brazilian Central Bank, as of December, 2018.|
|(2)||Source ABECS – “Monitor bandeiras”. In 2018 the methodology began to include all acquisitions and for better comparison the 2017 and 2016 values were restated.|
|(3)||Source: Data for 2018 is based on ABECS – “Monitor bandeiras” data for the nine-month period ended September 30, 2018 as data for the year ended December 31, 2018 was not available as of the date of this annual report. For comparison purposes, the difference between September 30, 2018 and September 30, 2017 would be: 1.4 p.p.|
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 to choose 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.
|As of December 31,||Change between 2017 and||Change between 2016 and|
|Market share in origination (1)||12.2%||12.1%||9.8%||0.1 p.p||2.3 p.p|
|Payroll loan portfolio (R$ billion)||33.8||25.5||18.9||32.5%||35.0%|
|(1)||Source: Brazilian Central Bank, as of December 31, 2018 and December 31, 2017, as applicable.|
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.
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 2017 and 2018||Change between 2016 and 2017|
|(in R$ billions, except percentages)|
|Mortgage loan portfolio||36.3||34.8||36.6||4.3%||(5.0%)|
|Individual sector mortgage loans||31.4||28.2||27.3||11.3%||3.4%|
|Loan to value(1) – Production (% quarterly average)||60.6%||58.6%||55.9%||2 p.p||2.7 p.p|
|Loan to value(2) – Portfolio (%)||48.7%||46.4%||48.1%||2.3 p.p||(1.7)p.p|
|(1)||Ratio between loans and the value of the collateral, excluding home equity.|
|(2)||As of 2017, the LTV guarantee is calculated at market value. In the previous years it was calculated based on the value of the collateral registered in the contract. For better comparison, the 2016 value was restated.|
Superdigital is our digital payment solution that allows customers to manage their daily financial activities entirely online in a user-friendly interface through a pre-paid account. Superdigital is an evolution of ContaSuper, which we acquired in 2016.
Superdigital customers can easily and rapidly (i) make withdrawals in the “Banco24Horas” ATM network; (ii) send and receive money from any bank; (iii) recharge mobile phones; (iv) carry out foreign exchange transactions in up to 10 currencies; and (v) reload public transportation ticket cards through an app. In addition to all these features, customers also receive an international MasterCard credit card to make purchases in physical and online stores and have access to the Santander Esfera and MasterCard Surpreenda programs, which offer a series of benefits and promotions.
The following table sets forth certain key financial and operating data regarding our Superdigital business for the periods indicated.
|For the Year Ended December 31,||Change between 2017 and 2018||Change between 2016 and 2017|
|Total customers (thousands)||1,899.1||1,287.2||810.7||47.5%||58.8%|
With the strategy of making increasing investments in agribusiness, we kept expanding our network of Agro stores across the country and offering a full range of products and services geared towards the sector. In 2018 alone, we inaugurated 7 new stores, totaling 21 units located in key agricultural regions of Brazil. These stores are staffed by teams with agribusiness experience and the expertise needed to offer a differentiated service, with Agro-specific products, alongside conventional banking products.
This model has shown to be the best way to get increasingly closer to producers. Every single store opened has performed beyond expectations, which is illustrated by the fact that, of all stores inaugurated in 2017, three of them have turned into traditional branches, expanding their scope of services.
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 2017 and 2018||Change between 2016 and 2017|
|Number of agribusiness-focused stores||21||14||-||7||14|
|Agribusiness loan portfolio (R$ billion)||11.8||11.5||8.9||2.6%||29.1%|
Merchant Acquiring Market | Getnet
Getnet is a technology company that offers solutions, both physically and digitally, to people and businesses. The acquisition of Getnet, which was completed in 2014, gave us more flexibility, and enabled us for create more complete and tailor-made solutions for our customers, integrating its services with those offered by Santander Bank. According to a 2017 Nilson report, Getnet is Latin America’s third largest merchant acquiring company and the second largest e-commerce acquiring company, in both cases based on the number of transactions.
Through Getnet, we are able to offer a wide array of payment solutions for 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, amounts that can be anticipated, 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; (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.
Corroborating the high quality of our products and services, we have received several important certifications, as outlined below:
|·||Tier IV– international seal that shows the data center is fault-tolerant, allowing for the occurrence of any unplanned activity while still maintaining operations – It is the only certification of its kind awarded in Latin America;|
|·||PCI – the highest recognition in data security for the card payment industry;|
|·||PIN Visa 2.0 – enhances validation methods and improves consistency with compliance assessments;|
|·||ISO 27.001 – attests to the excellence of processes and security in information confidentiality, integrity and availability;|
|·||ISO 10.002 – recognizes excellence in the treatment of complaints in electronic means of payment;|
|·||ISO 9.001 – a norm setting out a quality management system and the requirements for its implementation;|
|·||Facebook seal – awarded to the fastest and most consistent fan pages. To obtain the seal, the company must responded 90% of its members and in less than 15 minutes.|
|·||Reclame Aqui’s RA1000 Seal, given to companies with excellent service levels of service and to after-sales commitment.|
The following table sets forth certain key financial and operating data regarding our merchant acquiring business for the periods indicated.
|As of and For the Year Ended December 31,||Change between 2017 and||Change between 2016 and|
|(R$ millions, except as otherwise indicated)|
|Market share of total turnover(1)||13.9%||11.5%||9.5%||2.4 p.p||2.1 p.p|
|Number of debit transactions (thousand)||1,245,269||840,171||592,937||48.2%||41.7%|
|Number of credit transactions (thousand)||893,519||743,263||654,090||20.2%||13.6%|
|(1)||Source: Data for 2018 is based on ABECS - Acquirers data for the nine-month period ended September 30, 2018. Data for the year ended December 31, 2018 was not available as of the date of this annual report. For comparison purposes, the difference between September 30, 2018 and September 30, 2017 would be: 2.6 p.p|
Prospera Santander Microcrédito 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, such as property finance, consortium and investment services.
Webmotors is the first and biggest technology company focused on Automotive buy and sell solutions for dealers, OEMs and Private sellers, holding the biggest online automotive classified of Brazil.
It has over 30 million visits every month with more than 450 thousand cars listed. The solutions are built to help users on every step of the vehicles buy and use journey, focused on management, pricing and CRM for the dealers; Media and data for the OEMs; Content, search, buying and paying solutions for the consumers.
WebCasas is a digital channel to hire Real Estate Credit on the internet, in Brazil, Santander is the unique bank with this system. The client simulates, approves credit and tracks all process online. The documents can be sent on website and the client needs to go to bank branch just for sign the contract.
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.
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. As of December 31, 2018, customer deposits amounted to R$304.2 billion, representing 61.1% of total funding, which amounted to R$497.5 billion.
For more information, refer to “Item 5. Review and Operating and Financial Outlook—B. Liquidity and Capital Resources—Liquidity and Funding.”
We create investment products through a qualified advisory process that seeks to understand our customers’ investment profile. This analysis allows us to map out solutions for our customers’ short-, medium- and long-term objectives.
Our portfolio is composed of a wide range of products, which are distributed and offered at our branches and digital channels, including investment funds, time deposits, real estate credit notes, agricultural credit notes, financial letters and structured notes certificates, and other products such as equities, derivatives, exchange traded funds, real estate funds and public securities. Additionally, our partnership with Zurich Santander allows us to offer a wide range of private pension plans.
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.
The main focus of our service channels is to provide our customers a full range of services across all channels, according to their choices and/or needs. The availability of digital service channels gives our customers the necessary autonomy to meet most of their needs through digital channels. This enables our branch employees to focus on customer service and the provision of advice rather than operational tasks. Our investment in digital channels has been important in developing this strategy.
Physical Distribution Network
Our distribution network provides integrated financial services and products to our customers through a variety of channels, including branches and mini-branches and ATMs. The following table presents our physical distribution network as of the dates indicated.
|As of December 31,|
Our branch network offers our customers our entire portfolio of products and services with personal and customized customer service. As of December 31, 2018, we had a network of 2,283 full service branches throughout Brazil, 84% of which were concentrated in the Southeast and South regions.
The table below shows the geographic distribution of our branch network as of the dates indicated.
|As of December 31,|
|North and Midwest||7%||6%||6%|
We offer daily banking services to our SME and corporate customers and their employees through our Mini-branches - located on their sites, as well as in hospitals and universities. Our Mini-branches are generally exclusive sale points at customers’ sites. We believe that the presence of Mini-branches 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.
We operate an extensive network of 13,641 ATMs, including those located in our branches and Mini-branches. In addition, our customers have access to the “Banco24Horas” network, which operates 23,049 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.
Our call centers provide our customers with the opportunity to make inquiries, execute payment transactions and apply for products and services, such as personal loans. Our call centers are also an important distribution channel that offers our customers additional products and services.
As of December 31, 2018 our call centers served approximately 10.4 million customers and employed approximately 5,411 people.
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 have recently made improvements to our digital channels, including:
|·||Internet Banking. We have revised our Internet banking service with a view to simplifying it. The home screen now features the most important services, such as checking account, credit card, investments and personal loans, as well as the option to choose favorite features. We have also added a search engine, which helps customers find features that are not frequently used, such as income reports.|
|·||Santander App. We frequently update and improve our app, which can be downloaded on mobile devices and smartphones from the Apple Store and the Google Play store. Our app provides a graphical and consolidated view of a customer’s investment portfolio, in addition to allowing customers to make investments in mutual funds, fixed income products and others (as well as to withdraw funds from the same). We also provide corporate and SME customers the possibility of making transfers and payments, of checking their ContaMax accounts, of simulating, contracting and canceling working capital loans, of accessing the automatic prepayment of card receivables, of using certain chat functions and of unlocking and registering a new access passwords. The continuous evolution of our app has also produced the following services and benefits for our customer:|
|·||OnePay. Focused on foreign exchange. This service is available through the Santander App and enables customers to transfer funds to foreign countries in various currencies.|
|·||Santander On “Financial control”. Beginning in 2018, the Santander App has made it easier to visualize details on financial commitments with the bank and information on Taxpayer ID (“CPF”) regularity in a simple and transparent way. It is a pioneer functionality in the sector and it is an evidence of a bank that cares about its customers financial health and financial education.|
|·||Authorized Direct Debit, or “DDA”. Authorized direct debit allows customers to receive printed payment slips and make payments simply and safely through the Santander App or internet banking.|
|·||Mortgages. The Santander App allows customers to be redirected to Webcasas, an exclusive website to simulate and enter into mortgage loans.|
The following table provides certain key operating information with regards to our digital channels as of the dates indicated.
|For the Year Ended|
|Number of digital customers(1)||11.4||8.6||6.4|
|Number of digital channel transactions(2)||5,049||3,699||3,151|
|Number of customers with biometric registration||8.6||7.7||6.6|
|(1)||We define digital customers as customers who have used at least one of the digital channels made available by Santander Brasil (i.e., mobile banking and internet banking) in the preceding 30 days.|
|(2)||Refers to transactions carried out through internet banking, mobile banking and other digital platforms.|
Internet banking and mobile banking transactions accounted for around 80.6% of all transactions in 2018, compared to 73.9% in 2017 and 69.4% in 2016. 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|
|(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.|
|·||Superdigital. Our digital payment platform is available online and through our mobile app.|
|·||Santander Financiamentos. We have made it possible for customers to simulate and enter into auto loans via our website as well as through our online app.|
|·||Autocompara. Autocompara allows customers to obtain insurance quotes from six different insurance companies and purchase the best offer through Autocompara’s website.|
|·||Esfera. Our reward and discount program can be accessed through a dedicated website and mobile app.|
|·||SantanderWay. SantanderWay is an app that allows customers to manage all their Santander Brasil cards through a digital channel.|
|·||ID Santander. ID Santander is a feature designed to increase transaction security across our corporate internet banking and Santander Empresas apps. Individual customers receive ID Santander at the time they sign up for the Santander App.|
|·||Getnet app. The Getnet app enables customers to manage credit and debit card sales on Getnet terminals, among other services.|
Technology and Infrastructure
We continue to invest in new technologies, methods and processes to accelerate our digital transformation and the integration of our different IT specialty teams into one single team. To this end, over the course of 2018, we have taken several approaches to transform the way IT operates and supports our business.
We have recently concluded the integration of Isban and Produban into Santander Tecnologia, which has begun to work effectively as one entity. This has brought significant gains in engagement and a simplification in our IT processes. In order to transform the way our IT works, we have sought to empower our IT team to follow real-time information as it becomes available, to monitor and correct IT issues in a proactive way and to focus on IT from a customer perspective (business services). In order to achieve the above, we have revisited key processes such as:
|·||IT Governance: Project Portfolio Management, Demand Management, Enterprise Architecture, Financial / Budget Management, Vendor Management and Service Level Management.|
|·||IT Operation: Incident and Problem Management, Release Management and Capacity Management.|
Additionally, by using local and global tools, we have deployed critical digital components to allow application reuse, as well as the development of business and technical projects. Some examples of these tools include: Services Hub, Digital Folder, Fast Data Architecture, Web Multichannel Architecture and Data Lake. These procedural and technological advances were fundamental steps toward reaching our main goal: to deliver innovating technological solutions and services to our customers, through physical channels (our network of branches) and digital channels (internet and mobile banking).
Other digital transformation initiatives and improvements in our operational capabilities were deployed during 2018:
|·||Cybersecurity: we have continued to deploy modern cybersecurity solutions to protect our technological assets, to seek to prevent unauthorized devices from accessing our computer networks and to protect our business and our customers from breaches of security and from the hacking of sensitive or confidential data.|
|·||Antifraud: in the field of fraud prevention, we have deployed antifraud orchestration tools in order to continue improving our digital identity assessments as well as our real-time responsiveness, speed, scalability and time to market.|
|·||HR (Human Resources) Transformation: We have adopted a new Human Resources platform (Workday) which comprises features, such as: work-time management, team information and personalized alerts. Additionally, improvements have been made to the application “Santander Pessoas”, allowing employees to clock in and out from anywhere, and analyze their payment vouchers and daily work hours.|
|·||E-commerce (digital onboarding, credit accounts): we have increased by five times the number of monthly checking accounts opened digitally, by taking actions to simplify our customer’s experiences. These included rationalizing the number of steps required to open a new checking account, simplifying the identity verification process, deploying new risk policies and systemic integrations with credit bureaus.|
|·||Private Cloud: In order to support our business growth and to increase the availability of services provided to our customers, we have deployed Santander’s Private Cloud, which supplies IaaS (Infrastructure as a Service), PaaS (Platform as a Service) and Big Data services, distributed in two different regions in our Data Centers. Beginning in 2019, we plan to upgrade our current solution (Cloud 1.0) to a more sophisticated and scalable platform (Cloud 2.0).|
|·||BPM (Business Process Management): Through the PEGA platform, we have deployed a set of BPM solution modules, which apply to the following processes: Assets, Guarantees, Transactional Services (such as cash settlement), bank collection, manufacturing, treasury and cards. This platform has allowed us to optimize our backoffice processes, increase productivity, leverage standardization, quality and scalability.|
|·||RPA (Robotic Process Automation): In 2018, we deployed a new platform robotic process automation system, or RPA, a business process automation technology based on artificial intelligence. With the equivalent artificial intelligence of operating robots, this new platform improves our documentation, automation and business process capabilities and brings a relocation of FTEs (full time workers), as well as a 73% reduction in time to process requests from our internal users (such as our staff and management) and our external customers.|
|·||AI (Artificial Intelligence): In November 2018, we launched our new AI virtual assistant to support our branches and call center employees to better address customer requests, by clarifying doubts related to 34 different product families and services. This has led to a significant increase in self-service requests.|
|·||AI Ops (Artificial Intelligence for IT Operations): In 2018, we defined data storage standards for AI Ops, began the mobile and internet digital channels standardization process and applied self-service recovery principles based on behavior deviation (early detection). Such initiatives have helped us to identify application and network performance anomalies earlier and to accelerate diagnosis and resolution times, mitigating any risk of services’ disruption to our clients.|
|·||Channel Transformation (Branches, Call Center and IVR):|
|o||Branches and Call Center: we have deployed new service platforms: “Portal Certo C2” for branch users (i.e., managers and other attendants) and “Portal Certo C3,” for contact center users. These were developed using modern standards and technologies, and are intended to provide a quick and intuitive platform to access our products and services.|
|o||Interactive Voice Response (IVR): a new humanized IVR was deployed for individual callers. This IVR is based on conversation dialog mechanisms designed to replicate human language, allowing it to deliver an intuitive service experience that anticipates callers’ needs and enables them to interact with the system naturally. We expect that these features will improve customer self-service experience, minimizing the need for human intervention. The primary benefits include a higher level of customer satisfaction and lower operating costs.|
|·||ATM Recyclers: as part of our branch transformation strategy, we began testing and planning the replacement of the current ATMs with the new ATM Recyclers. This equipment enables the recognition of false banknotes, cash deposits and checks (without envelopes), as well as the re-use of cash deposited by customers to satisfy the withdrawals of other customers, reducing cash transportation logistics and security costs.|
|·||Product Digitization (Agribusiness and BNDES – Brazilian Development Bank): we have put in place an agronomic data register that allows data storage for future contract negotiations and credit analysis. This also enables us to make information available more easily to regulatory agencies while also permitting us to access to and use of historical data.|
In order to accelerate the transformation of our digital processes we have finished large scale adoption of agile and devops. As of December 31 2018, we had more than 1,700 professionals working on 200 agile teams, applying continuous integration techniques, which improves the synergy between our development team (coding and testing) and operations team (deployment). Throughout 2018, we have made significant progress in automating our application’s development life cycle and product deployment, achieving more control, scalability and resilience. Additionally, we have improved our applications’ security rules validation techniques, by adopting specialized tools aligned to DevSecOps’ standards (the combination of cultural philosophies, practices, and tools that increases our organization's ability to deliver applications and services at high velocity in order to respond to market conditions and customers’ feedback at a rapid pace).
Communications and Marketing
We strive to improve the way people relate to their chosen financial institution. And it is this goal that drives our communications and marketing strategies. Our history has been one of transformations, and recently that has required us to make changes to how we interact with our customers. In 2018, in order to establish clear and direct communication with our customers, and to provide solutions to the complex needs of our individual and business customers, we have continued to change the way we use the tools available to us, including marketing and social networking. Some of the important actions we took, and recognitions we received, in 2018 include:
|·||We deal with sensitive issues such as NPL and the “special check” (overdraft line of credit) – which has nothing “special”. We stimulate awareness in making credit and responsible use of money.|
|·||Concerned with the financial education of our clients, we explain, in a simple and precise way, what are CDB, CDI and IOF. We present in a didactic and transparent way the real impact that each acronym may have on the customer life.|
|·||We also went to the media to advertise important offers from the Bank. We communicated the end of the load fee on all our pension products to every customer. We announced the reduction of our mortgage loan rate, leading the market to reposition itself.|
|·||Reinforcing our willingness to break paradigms, we held the second edition of the "Black Week Santander", an unparalleled campaign in the market. There were more than 40 discount offers on products and services such as mortgage loans and auto financing.|
|·||Campaigns such as Rick Prospera, São Paulo Fashion Week and Preparadão Universia (an association for 7,000 students at the Gymnasium of Ibirapuera), boosted the Bank's presence in social networks.|
|·||We have also been garnering increasing visibility on social media. In 2018, our content received 225 million views, especially during the months of August and October with the Rick Prospera, São Paulo Fashion Week and Preparadão campaigns.|
|·||Overall, we received more than 2 million likes, comments and shares in our social networks, a 272% increase compared to 2017. The amount of positive comments remained high, representing 75.7% of the total.|
|·||At the end of 2018, there were 6.3 million total users connected to Santander Brasil pages. The LinkedIn profile saw the most significant fan base growth, experiencing an increase of 332% and 255,000 new followers. Instagram Brazil had the second largest growth, with a 107% rise and 58,400 new users.|
|·||We also broke paradigms by transforming an iconic and historic São Paulo skyscraper into a pole of culture, leisure and entrepreneurship (with the highest skating rink in the country). In its first year, Farol Santander has received more than 300,000 visitors.|
|·||Farol also hosted its first vertical race: a challenge of 578 steps. Throughout 2018, we encouraged the public to put on running shoes and organized more than 60 events (in 20 states) from Santander Track & Field Run Series, the largest street racing circuit in Latin America.|
|·||We believe in the power of the sport to inspire and turn people into champions. For this reason, we became the new official sponsor of the UEFA Champions League, the biggest football competition on the planet, which every year engages millions of passionate fans all over the world.|
|·||We promoted in 2018 ‘The Santander´s Incredible Talent Show’, stimulating the protagonism and artistic talent of our team of collaborators. The five finalists, voted on, presented themselves to 5,000 colleagues at our Annual celebration.|
Recognition comes in many forms. With "Black Week Santander", we won last year the Gran Effie, the top prize of the Brazilian version of the Effie Awards, one of the most prestigious honors in the advertising world.
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 to Brazil of the 21st Century by promoting the efficient and strategic use of natural capital, stimulating the development of human potential and fostering the economic growth in a resilient and inclusive manner.
Efficient and Strategic Use of the Natural Capital
By December 31, 2018, the total disbursement related to the socio-environmental business covering Santander Financimentos, Responsible Agribusiness, Corporate, Retail (Particular and Corporate clients), Project Finance and Santander Corporate and Investment Banking totaled approximately R$2 billion.
More than R$1.4 billion of our total socio-environmental disbursement was directed to contribute to a cleaner energy matrix fostering the renewable, eolic, and photovoltaic energy, as well as small hydroelectric power plants through a full portfolio of financial solutions. In 2018, we announced a new credit offer to purchase equipment for generating solar energy, CDC Solar, with the purpose to boost the expansion of the solar energy market distributed in the country.
In relation to the Responsible Agribusiness, we have our own financing lines and lines of the National Bank for Economic and Social Development to modernize the agriculture sector with productive techniques of low carbon and less socio-environmental impacts disbursing R$396.1 million in 2018 by these lines. We promote training events in subjects as good practices related to soil, water, waste, energy and climate change, and the Brazilian Forest Code and Environmental Rural Registry, in 2018, about 230 people were trained. In partnership with Bunge and The Nature Conservancy (TNC), we have announced the development of a financing mechanism for soy producers of the Brazilian Cerrado. The program is intended to promote the agricultural production without deforestation or conversion of native vegetation, promoting long-term loans to producers committed to meet this approach.
We also have other socio-environmental credit and finance products for the purchase of equipment such as rainwater harvesting, water, and sewage treatment and adjustments for accessibility.
Development of Potentials
Our commitment to the development of potentials begins with our employees. Guided by our corporate culture and internal policies, we offer opportunities supporting the development and professional growth, seeking to build a culture of delivering results, respect, innovation, inclusion and diversity, an issue that is part of the five principles of our Code of Ethical Conduct.
We contributed to the promotion of the rights of children, adolescents and elderly by two programs. Through the Amigo de Valor Program, Santander, as well as employees and clients direct a part of the due income tax to the Funds for the Rights of Children and Adolescents. In 2018, this program raised funds totalizing about R$14 million, which were directed to 67 projects in Brazil. Through the Parceiro do Idoso Program, which stimulates the allocation of due income tax resources of legal entities to strengthen the elderly protection system, approximately R$5.8 million were raised and directed to 15 projects in Brazil.
Through Santander Universities Program, we offer initiatives focused on granting national and international scholarships, programs for the development of entrepreneurs and internship and employment programs in partnership with Universia. On December 31, 2018, more than 4,600 scholarships were granted with investment of R$29.9 million.
Another important initiative to support education is Universia, the leading university network in Ibero-America. Universia has been sponsored by the Santander Group since its founding. In Brazil, there are 403 universities participating, 465 employment websites with over 326,000 job positions. In 2018, Universia Brazil recruited 3,084 students for internship positions and had over 15.2 million single users in its website.
Resilient and Inclusive Economy
Prospera Santander Microcrédito is oriented to formal and informal microentrepreneurs with the purpose of generating work and income. By means of a 100% digitalized service process, in addition to products intended to improve the business management, clients have access to services previously not available to them, such as property finance, consortium, and investments. As a result, in 2018, we disbursed more than R$1 billion (a 49% increase compared to our disbursements in the year ended December 31, 2017). We closed the year with more than 250 thousand active clients. Through the Parceiros em Ação Program, we trained more than 2,000 entrepreneurs, clients and non-clients, in low-income communities where Prospera Santander Microcredit is present.
Socio-Environmental Responsibility Policies
Our Socio-Environmental Responsibility Policy or PRSA meets the provisions of CMN Resolution no. 4.327/ 14 and SARB Regulation no. 14 of Febraban, it defines guidelines and consolidates specific policies for socio-environmental practices in business and relationships with the interested parties. These practices include socio-environmental opportunities, impacts and risk management related to subjects, such as suitability in granting and using credits, management of suppliers and socio-environmental risk analysis. We have the Senior Group of our PRSA, integrated by the vice-presidents of risks, human resources, communication, marketing, institutional relationships and sustainability, and the Compliance Officer. This Group is involved in the decision-making related to the PRSA and operates as a connection with the Executive Committee.
Our sustainability strategy and practices have been recognized by the inclusion of the Bank in the ninth consecutive year in the portfolio of Corporate Sustainability Index – ISE of B3. ISE highlights the companies with an accredited commitment to social responsibility and corporate sustainability. Other accreditations in 2018 include:
|·||The inclusion of Santander Brasil as an integral part of the FTSE4Good Index Series;|
|·||The inclusion of Santander Brasil in the Vigeo Eiris Best Emerging Markets Performers Ranking;|
|·||With the case of Prospera Santander Microcrédito, we are accredited by UN as an important contributor to reach the Sustainable Development Goals;|
|·||Highlight on Guia Exame de Sustentabilidade promoted by "Revista Exame"; and|
|·||Accredited by CDP (Carbon Disclosure Project) as one of the major Brazilian leaders in climate changes, which achieved the major index among the companies of the financial sector.|
In 2018, our practices contributed to the inclusion of Santander Group in the Dow Jones Sustainability Index (DJSI) one year more (third best bank in the world and the first in Europe).
Plastic Free Program
In February 2019, Santander Brazil announced to the market the decision to reduce the plastic consumption in the bank, by launching the #Desplastifique.
A study about the consumption of plastic at Santander Brazil pointed out that in 2018 almost 283 tons of plastic were consumed. Single-use products, those quickly discarded such as water glasses and bottles, were almost 73% of the total. Therefore, that is the reason why this will be the main focus of the project on phase one.
The implementation plan is based on three main pillars: a. Awareness, actions related to employee awareness; b. Influence, actions led by leadership; and c. Manifest, actions related to exposing the theme to society. Moreover, among the main actions, there will be engagement and communication initiatives such as bottles and mugs distribution by answering a quiz, as well as campaigns during “Santander week”, comprising lectures, plastic waste collection in different regions, etc.
The initial objective is to reduce the consumption of single-use plastic in administrative buildings by the end of 2019 and expand to the all branches by 2020. Santander has already contributed to reducing water, light and paper consumption in recent years and this program is another step toward becoming and even more responsible bank.
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
In Brazil, ownership of trademarks can be acquired only through a validly approved registration with the National Institute of Intellectual Property (Instituto Nacional de Propriedade Industrial, or “INPI”), the agency responsible for registering trademarks, patents and designs in Brazil. After registration, the owner has exclusive rights of use of the trademark throughout Brazil for a ten-year period that can be successively renewed for equal periods.
As of the date of this annual report, we own 568 trademarks in Brazil, 351 of which are owned by Santander Brasil, with the remaining 217 owned by other companies of the Group.
The major trademarks we use, including, among others, the “Santander” and “Banco Santander” brands, are owned by the Santander Group. One of the Santander Group’s affiliates granted us a license to use such brands. All material trademarks for our business are registered or have been submitted to INPI by us or by the Santander Group.
We also own the principal domain names used in our business, which include:
Our Intellectual Property department monitors social media pages for any unauthorized use of our trademarks. Also, our internet domain names are registered and monitored by the Santander Group in accordance with its policies, and the registration and creation by us of internet domain names are subject to the prior approval of our Intellectual Property department.
In the last few decades, the Brazilian financial system has experienced significant structural changes, following the evolution of the country’s economic environment and developing a solid framework, for both legal and financial supervision.
The consolidation of the Brazilian financial sector in the recent past, with the merger of large banks and the privatization of state-owned banks, led to increased competition in the Brazilian market for banking and financial services. According to the Brazilian Central Bank, in November 2018, there were 135 universal banks, 19 commercial banks and 12 investment banks, along with several brokers, leasing companies and other financial institutions operating in Brazil. Between 2011 and 2016, the Brazilian economy grew less than in prior years, with a contraction in 2015 and 2016, while delinquency rates, inflation and currency depreciation increased. Consequently, financial institutions operating in Brazil intensified their efforts to reduce their exposure to credit risk by increasing their provisions for credit losses, moving their credit portfolio from products with larger spreads (and therefore, increased credit risk) to products with lower risks (and therefore, lower spreads) and shifting to a more conservative product mix. Since 2017, the Brazilian economy began to recover with GDP growing by 1.3% in 2018.
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 75.4% of the credit and 71.1% of the deposits available in the country in September 2018, according to the Brazilian Central Bank and the financial statements of the aforementioned banks.
See also, “Item 3. Key Information—D. Risk Factors— Risks Relating to the Brazilian Financial Services Industry and Our Business—The strong competitive environment in the Brazilian financial services market may adversely affect us, including our business prospects.”
Despite the privatizations and consolidations in the banking industry, the Brazilian government still controls commercial banks at both the state and federal levels. In addition to their significant roles as credit providers (with a 51.7% market share) and deposit takers (with a 41.8% market share, according to the Brazilian Central Bank, the state-owned banks also act as regional development agencies, with a strong position in markets such as housing and rural credit.
The three main financial institutions controlled by the federal government are:
|·||Banco do Brasil, a full-service bank that offers a wide range of products to the public and private sectors, and runs public rural loans programs. It is the main financial agent of the Brazilian government;|
|·||Caixa Econômica Federal, a full-service bank, mainly involved in deposit taking, housing credit and urban infrastructure development; and|
|·||BNDES, a development bank that offers credit lines of medium and long-term financing at|
competitive interest rates to the private sector, especially the industrial sector. It operates with direct or indirect financing, through the transfer of resources to other state or privately owned financial institutions.
We consider two privately owned financial institutions to be our main competitors: Bradesco and Itaú Unibanco. Both have established brands and distribution capacity throughout the country, competing in every category of banking activity. Furthermore, we also face competition from local and regional banks that operate with commercial banking products in specific niches. In the Global Wholesale Banking, our competitors also include global financial institutions focused on investment banking services, which fill this role as a result of their experience in complex and structured operations, as well as their distribution network throughout Europe, North America and Asia.
The following table shows the market share of the four leading financial institutions in Brazil at the dates indicated:
|Santander Brasil||Bradesco||Itaú Unibanco||Banco do Brasil|
|(1)||According to the IF report of the Brazilian Central Bank in September 2018.|
|(2)||According to the Brazilian Central Bank, reported and presented in accordance with BR GAAP (September 2018).|
Brazilian Credit Market
The Brazilian credit market is based on two types of loans:
|·||mandatory or earmarked credit, which is subject to government-controlled interest rates and follows rules for funding and destination defined by law; and|
|·||market-based credit, which is not subject to any constraints regarding interest rates, funding or resource allocation.|
By the end of December 2018, 54.1% of the R$ 3.26 billion of total credit outstanding in Brazil was market-based credit, of which 53.7% were loans to individuals and 46.3% were corporate and SME loans:
|For the year ended December 31,|
|Total outstanding loans||3,259||3,086||3,105|
|Corporate and SME||815||732||747|
Source: Brazilian Central Bank.
Credit to Individuals
According to the Brazilian Central Bank, the total outstanding market-based credit for individuals increased at an average annual compounded rate, or “CAGR” of 5.0% between December 2013 and December 2018, reaching R$947.4 billion, or 29.1% of total loans in Brazil.
The following table shows the evolution of the main retail credit products offered to individuals:
|For the year ended December 31,|
|2018||2017||2016||CAGR between December 2016 and December 2018|
|(R$ billion, except for percentages)|
|Mortgage loans (individuals only)||592.3||565.1||534.4||5.3%|
|Agricultural loans (individuals only)||192.4||176.2||162.5||8.8%|
Source: Brazilian Central Bank.
Despite the economic recession in 2015 and 2016, the housing and real estate financing market continued to grow. According to the Brazilian Central Bank, the ratio of mortgage loans to GDP increased from 4.3% in December 2011 to 9.3% in September 2018. Government financing for housing and real estate accounts for approximately 27.8% of the retail credit market in Brazil, according to the Brazilian Central Bank. As of December 31, 2018, our market share was 5.7%.
Historically, the costs of market-based loans in Brazil have always been high due to the higher cost of the intermediation activity and high default rates. Payroll loans are a safer and more attractive type of market-based loan for individuals. As its payments are deducted directly from the borrower’s paycheck, it is considerably less risky and, therefore, has lower interest rates than unsecured consumer credit, and presented a CAGR of 15.2% between December 2013 and December 2018. As of December 31, 2018, payroll loans accounted for approximately 18.8% of the retail credit market in Brazil. As of December 31, 2018, we had 10.0% of the market share in payroll loans, according to the Brazilian Central Bank.
The auto loan market has very competitive interest rates and the market’s ability to access a low-cost source of funding is an important advantage. Thus, this market has been dominated by the large retail banks, which gradually assumed the business from the automakers’ lending arms. As this product is secured by the asset being financed, it tends to have lower default rates than other market-based products. The auto financing portfolio increased 18.7% in 2018 as a result of an improvement in the economic conditions in Brazil. As of December 31, 2018, we had a 24.1% market share according the Brazilian Central Bank.
The credit card market has relatively high default rates and, as a result, higher interest rates than other market-based products. The Brazilian Central Bank has been implementing measures to turn the product more competitive, reducing the cost to consumers. This market is dominated by the large retail banks, operating their own labels associated with international labels (such as Visa and MasterCard). As of December 31, 2018, we had 13.3% of the market share in credit cards in terms of turnover, according to the Brazilian Central Bank.
Corporate and SME Credit
The reduction of the SELIC rate, between 2016 and 2018, caused changes in the credit market for non-financial corporations, with a reduction in financial costs and new opportunities for raising funding. In this period, domestic demand for private securities increased and risk premiums declined, reducing the cost of funding for companies in the capital market. This movement allowed certain companies to exchange bank loans and international issues for debentures and commercial notes.
According to the Brazilian Central Bank data, the amount of loans granted to companies increased at a CAGR of 0.1% between December 2013 and December 2018, reaching R$1.4 trillion, or 45.1% of the total lending in Brazil. The main corporate products are BNDES loans and working capital loans, which account for 13.6% and 9.1%, respectively, of total loans in the country according to the Brazilian Central Bank.
According to ANBIMA, the asset management industry in Brazil increased at a CAGR of 13.4% between December 2013 and December 2018, reaching R$4.6 trillion of total assets. Retail funds represent 15.5% of this total and the open pension funds 17.7%. The largest players in the market are the large financial conglomerates but in recent years, the market is changing. The presence of new players, which operate digitally and with open platform, enabled a broader product offering that has been well accepted by customers. In response, the largest banks have been implementing similar services focused on this market.
As of December 31, 2018, we had a 5.4% market share with regard to assets under administration, according to ANBIMA.
REGULATION AND SUPERVISION
The basic institutional framework of the Brazilian financial system was established by Law 4,595, of December 31, 1964, as amended from time to time, 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
The CMN oversees the Brazilian monetary, credit, budgetary, fiscal and public debt policies. The board of the CMN is composed of the president of the Brazilian Central Bank, the Minister of Planning and the Minister of Finance and is chaired by the Minister of Finance. Pursuant to the Banking Reform Law, the CMN is the highest regulatory entity within the Brazilian financial system, authorized to regulate the credit operations of Brazilian financial institutions, to regulate the Brazilian currency, to supervise Brazil’s reserves of gold and foreign exchange, to determine Brazilian savings and investment policies and to regulate the Brazilian capital markets with the purpose of promoting the economic and social development of Brazil. In this regard, the CMN also oversees the activities of the Brazilian Central Bank and the CVM.
Brazilian Central Bank
The Brazilian Central Bank is responsible for implementation of the CMN policies related to foreign currency and credit, regulation of Brazilian financial institutions, including as regards the minimum capital and compulsory deposit requirements, disclosure of the transactions carried out by financial institutions, as well as their financial information and monitoring and regulation of foreign investments in Brazil. The Brazilian Central Bank has committees to address specific issues, noteworthy among which is the COPOM, which has the purpose of adopting measures to fulfill the inflation targets defined by the CMN and establishing monetary policy guidelines. The activity of the COPOM in the control of inflation targets includes the definition of the target for the SELIC Rate (the average rate for daily financing, backed by federal instruments, as assessed under the Special Settlement and Custody System) and publication of reports on the Brazilian economic and financial environment and projections for the inflation rate.
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).
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.
Principal Limitations and Obligations of Financial Institutions
In line with leading international standards of regulation, Brazilian financial institutions are subject to a series of limitations and obligations. In general, such limitations and obligations concern the offering of credit, the concentration of risk, investments, operating procedures, loans and other transactions in foreign currency, the administration of third-party funds and micro-credit. The restrictions and requirements for banking activities, established by applicable legislation and regulations, include the following:
|·||No financial institution may operate in Brazil without the prior approval of the Brazilian Central Bank. In December 2017, the CMN enacted a new rule establishing that all such requests submitted to the Brazilian Central Bank must be approved within 12 months (subject to suspension of the term in some instances). In addition, foreign entities must be expressly authorized by a presidential decree to hold equity in a banking entity in Brazil;|
|·||A Brazilian financial institution may not hold direct or indirect equity interests in any company located in Brazil or abroad without prior approval of the Brazilian Central Bank. In addition, the corporate purpose of the company in which the financial institution invests shall be complementary or subsidiary to the activities carried out by the financial institution. The following do not depend on such prior approval: (i) equity interests typically held in the investment portfolios of investment banks, development banks, development agencies (agências de fomento) and full-service banks with investment or development portfolios and (ii) temporary equity interests not registered as permanent assets of the financial institution;|
|·||Brazilian financial institutions must submit for prior approval by the Brazilian Central Bank the corporate documents that govern their organization and operation, including but not limited to those related to capital increases, transfer of headquarters, opening, transfer or closing of branches (whether in Brazil or abroad), election of the members of the statutory bodies and any corporate restructuring or alteration in the composition of their equity control. In December 2017, the CMN enacted a new rule establishing all requests of change of control submitted to the Brazilian Central Bank must be approved within 12 months and all requests for changes to organizational documents mentioned above must be approved within three months (in both cases subject to suspension of the term in some instances);|
|·||Brazilian financial institutions must fulfill minimum capital and compulsory deposit requirements and must 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 cannot lend more than 25% of its Regulatory Capital (patrimônio de referência) to a single person or group;|
|·||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 of Resolution No. 4,693 in October 2018, to: (i) transactions with a counterparty that has an officer 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. Accordingly, beginning in January 2019, when CMN Resolution No. 4,693 became effective, financial institutions have only been authorized to enter into credit transactions with related parties upon compliance with certain requirements as set out in the resolution. In summary, the resolution requires that any such transactions shall be carried out on an arm’s-length basis and must comply with the following thresholds for the institution’s net asset value (as adjusted by accumulated revenues and expenses and by deducting interest held in other domestic and foreign financial institutions), as measured on the credit transaction’s approval date and referring to the financial statements of the penultimate month to the approval date: (i) 10% for the sum of all of the related party transactions entered into by the financial institution, (ii) 1% for transactions with the same individual; and (iii) 5% for transactions with the same legal entity. CMN Resolution No. 4,693 defines “related parties” as: (i) the individuals and legal entities that control an institution, (ii) the officers and members of an institution’s statutory bodies, (iii) the spouse, partner and relatives, up to the second degree, of any of the preceding individuals, (iv) the individuals and legal entities holding qualified interests of 15% or more in an institution’s capital, and (v) the legal entities in which an institution either directly or indirectly holds qualified interest of 15% or more, in which it holds effective operational control or in which it has prevalence in decision making regardless of equity interest or the number of representatives the institution has on the legal entity’s board of directors or as officers. It defines “credit transactions” as including: (i) loans and financings, (ii) advanced payments, (iii) financial leases, (iv) any type of personal guarantees, (v) availability of credit lines and other credit commitments, (vi) credit transactions with funds pending disbursement, (vii) interbank deposits, and (viii) deposits and investments abroad with financial institutions or equivalent institutions. This rule also establishes certain additional permitted related party credit transactions and requires that the financial institutions subject to this new rule create a related parties transaction policy.|
|·||The total amount of the funds applied in permanent assets of the financial institutions cannot exceed 50% of their adjusted stockholders’ equity;|
|·||Brazilian financial institutions must comply with anti-money laundering and anti-corruption regulations;|
|·||Brazilian financial institutions must implement policies and internal procedures to control their systems of financial, operating and management information, as well as their conformity to all applicable regulations;|
|·||Brazilian financial institutions must implement a policy for remuneration of board members and executive officers that is compatible with their risk management policies. At least 50% of the variable compensation must be paid in stock or instruments based on stock and at least 40% of the variable compensation must be deferred for payment at least three years in the future;|
|·||The Banking Reform Law and specific regulations enacted by the CMN provide for the imposition of penalties on financial institutions in certain situations where applicable requirements, controls and requisites have not been observed. In addition, the Brazilian Central Bank may cancel the financial institution’s authorization to operate if the Brazilian Central Bank identifies at any time, in relation to a given financial institution: (i) habitual non-performance of the transactions considered to be essential for financial institutions, (ii) operational inactivity, (iii) non-establishment at the address provided to the Brazilian Central Bank, (iv) non-remittance to the Brazilian Central Bank for a period of more than four months, without acceptable justification, of the consolidated financial statements required by the applicable regulations, and (v) non-accomplishment of the business plan. 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; and|
|·||In March 2018, the CMN enacted a new rule that prevents consumer banks, multiservice banks with commercial portfolios and savings banks from inhibiting in any way the offering of the following products or services by payment institutions and other institutions authorized by the Brazilian Central Bank to provide such services: (i) authorized debits by accountholders in any of the aforementioned institutions; (ii) issuance of payment slips (boletos de pagamento), a payment method widely adopted in Brazil which allows payment by means of a clearance receipt; (iii) electronic funds transfer (transferência eletrônica disponível - TED) and credit order documents (documentos de ordem de crédito - DOC), two categories of wire transfers available in Brazil with the most relevant difference among them being the time for settlement of the applicable order. The rule also creates certain requirements for permitting the authorization of debits into accounts (item (i)) through payment institutions.|
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
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’ 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.
On December 16, 2010, the Basel Committee issued the Basel III framework, which supplements and amends Basel II. Basel III includes higher minimum capital requirements and new conservation and counter cyclical buffers capital requirements, revised risk-based capital measures and the introduction of a new leverage ratio and two liquidity standards. As with other Basel directives, the Basel III framework will not be self-effectuating and will be implemented gradually by each country through legislation or regulation to be imposed upon that country’s home banks. Basel III is currently being implemented in Brazil and its implementation is expected to conclude on January 1, 2022, according to the agreed international timeframe.
Regulatory Capital will continue to be composed of two tiers.
Tier I capital will have to reach a minimum index of 6.0% (according to the schedule established by the Brazilian Central Bank), divided into two portions: (i) Principal Capital consisting mainly of corporate capital and profit reserves (shares, units of ownership, reserves and earned income) of at least 4.5%, and (ii) Supplementary Capital consisting mainly of hybrid securities and capital instruments authorized by the Brazilian Central Bank (but excluding amounts relating to funding instruments issued by other local or foreign financial institutions) and any of our own shares purchased by us and the integration of which into the Supplementary Capital is permitted. To improve the quality of the capital of financial institutions, Basel III restricts the acceptance of financial instruments that fail to demonstrate effective capability of absorbing losses and requires the reduction of assets that in certain situations could jeopardize the financial institution’s capital value due to the instruments’ low liquidity, dependence on future profits for realization or difficulty of value measurement.
Current hybrid instruments and subordinated debt approved by the Brazilian Central Bank as additional capital requirements or Tier II are expected to be maintained if they also comply with requirements introduced by Basel III, including the mandatory conversion clauses into equity or write-off upon the occurrence of triggering events provided for in the regulations. The instruments that do not comply with Basel III rules have been gradually reduced since January 1, 2013 and shall continue to be so reduced until they do not consist of any portion of our Regulatory Capital as from January 1, 2022.
In accordance with the Basel III standards, the Brazilian Central Bank created the Premium Principal Capital (Adicional de Capital Principal), which corresponds to additional capitals (buffers) that create additional capital reserves to be used in periods of stress. In accordance with CMN regulation, the Brazilian Central Bank is entitled to establish the percentage of the Premium Principal Capital within certain minimum and maximum limits previously set forth by the CMN, the final minimum and maximum limits being 2.5% and 5%, respectively, of the risk weighted asset ratio.
On December 29, 2014, the Brazilian Central Bank established that the amount of the Premium Principal Capital shall start at 0.625% of the risk weighted asset ratio as of January 1, 2016, and shall increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.
In 2015, the CMN and the Brazilian Central Bank enacted a set of rules which determine that the Premium Principal Capital will be equivalent to the sum of the Capital Conservation Buffer (Adicional de Conservação de Capital Principal), the Countercyclical Buffer (Adicional Contracíclico de Capital Principal), and the Systemic Relevance Premium Principal Capital (Adicional de Importância Sistêmica de Capital Principal). The regulation establishes the minimum requirements and methods to calculate each of them separately. The Conservation Buffer and the Countercyclical Buffer will compose the Premium Principal Capital of all financial institutions and institutions authorized to operate by the Brazilian Central Bank (except for those expressly waived from complying with Regulatory Capital requirements). The Systemic Relevance Premium Principal Capital will only apply to multiple banks, commercial banks, investment banks and saving banks (caixas econômicas).
The Basel III minimum capital index 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 on 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, 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|
|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%|
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.
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; or (b) which perform relevant international activities, irrespective of the size of the institution;
(ii) Segment 2 comprises multiservice banks, commercial banks, investment banks, foreign exchange banks and savings banks with (a) an asset base lower than 10% of Brazil’s GDP; and (b) other institutions with an asset base equivalent to or greater than 1% of Brazil’s GDP;
(iii) Segment 3 comprises institutions with an asset base lower than 1% and equivalent to or greater than 0.1% of Brazil’s GDP;
(iv) Segment 4 comprises institutions with an asset base lower than 0.1% of Brazil’s GDP; and
(v) Segment 5 comprises (a) institutions with an asset base lower than 0.1% of Brazil’s GDP that applies a simplified optional method for the verification of reference equity’s minimum requirements, except for multiservice banks, commercial banks, investment banks, foreign exchange banks and savings bank; and (b) institutions not subject to the verification of reference equity.
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
In February 2017, the CMN enacted a new rule, which unifies and expands the Brazilian regulation on risk and capital management for Brazilian financial institutions and other institutions authorized to operate by the Brazilian Central Bank. The new rule is also an effort to incorporate into Brazilian regulation new recommendations from the Basel Committee on Banking Supervision. The rule provides that risk management must be conducted through an integrated effort by the relevant entity (i.e., not only must risks be analyzed on an individual basis, but financial institutions and other institutions authorized to operate by the Brazilian Central Bank must also control and mitigate the adverse effects caused by the interaction between different risks). It also expands the rules and requirements on risk management governance and the competence and duties of the risk management officer.
The rule sets out different structures for risk and capital management which are applicable for different risk profiles, based on the risks profiles set out in the applicable regulation. This means that a financial institution of limited systemic importance can have a simplified structure of management, while institutions of larger complexity have to follow stricter protocols and implement the new rules until a closer deadline (180 days). Certain provisions of the new rule became effective on the date it was published and others will become effective within 360 days of such date.
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 33% 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.
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, 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.
In September 2016, the CMN enacted a rule, which amends the regulation on repurchase transactions involving fixed-income securities. The recent changes to the regulation amend the list of the types of securities that may be subject to repurchase transactions by expressly including obligations issued by the International Finance Corporation and certain securities issued by leasing companies (Letras de Arrendamento Mercantil). It also removes the possibility of the Brazilian Central Bank adding to the list any securities not expressly listed in the regulation.
“Trading” and “available for sale” securities are to be marked-to-market with effects in income and stockholders’ equity, respectively. Securities classified as “held to maturity” are recorded at amortized cost. Derivatives are marked-to-market and recorded as assets and liabilities in the balance sheet. Changes in the market value of derivatives are generally recognized in income with certain modifications, if these are designated as hedges and qualify for hedge accounting under the regulations issued by the Brazilian Central Bank. Securities and derivatives in the “held to maturity” portfolio may be hedged for accounting purposes but their increase or decrease in value as derived from the marked-to-market accounting method should not be taken into account.
In this respect, on 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. All exposures subject to capital requirements are considered for purposes of this rule. The rule establishes the criteria for measurement of the exposures, definition of related parties, the acknowledgment of credit risk mitigators and a requirement to report compliance with the applicable limitations. The 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
In August 2017, the Brazilian Congress converted Provisional Measure No. 775, issued by the President of Brazil in April 2017, into Law No. 13,476. The new law consolidates the provisions on creation of liens over financial assets and securities. On the same day, the CMN issued a new rule to regulate the provisions set by Law 13,476 and consolidate the regulation on centralized deposit and registry of financial assets and securities issued or owned by financial institutions and other institutions authorized to operate by the Brazilian Central Bank. Law No. 13,476 became effective on March 1, 2018.
In February 2018, the CMN enacted a rule amending rule CMN Rule No. 4,593/2017, which regulates the registration and deposit of financial instruments and securities by financial institutions as well as the provision of custody services by such institutions. Specifically, the new rule exempts from registration instruments representing credit operations of the financial institutions mentioned in Article 1 of CMN Rule No. 4,638/2018. The new rule also postpones the effective date of the mandatory deposit of financial instruments and securities of financial institutions in centralized deposit systems and the requirements for institutions providing custody services for such instruments.
Brazilian Payment and Settlement System
The rules for the settlement of payments in Brazil are based on the guidelines adopted by the Bank of International Settlements, or “BIS,” and the current Brazilian Payment and Settlement System (Sistema Brasileiro de Pagamentos e Compensação or the “SPB”). The Brazilian Central Bank and CVM (in relation to transactions with securities) have the power to regulate and supervise this system. SPB is composed of systems for the clearing of checks, clearing and settlement of debit and credit electronic orders, transfer of funds and other financial assets, clearing and settlement of transactions involving securities, clearing and settlement of transactions carried out in commodities and futures, and others, collectively designated as Financial Market Infrastructures, as well as the payment arrangements and payment institutions.
Within the scope of SPB, the Brazilian Central Bank operates the Reserves Transfer System, 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 interbank transfers of funds are not only settled by STR but also by the Funds Transfer System (Sitraf), the Deferred Settlement System for Interbank Credit Orders (Siloc) and the Centralizer Clearance for Checks (Compe), which are also part of SPB.
Treatment of Overdue Debts
The Brazilian Central Bank requires financial institutions to classify credit transactions in accordance with their level of credit risk and to make provisions according to the level attributed to each transaction. Such credit classifications shall be determined in accordance with criteria set forth from time to time by the Brazilian Central Bank, relating to the conditions of the debtor and the guarantor and the transaction terms. Where there are several credit transactions involving the same customer, economic group or group of companies, the credit risk must be determined by analyzing the particular credit transaction of such customer or group that represents the greatest credit risk to the financial institution.
Credit transactions of up to R$50,000 may be classified either by the financial institution’s own evaluation method or according to the number of days such transaction is past due, whichever is the more stringent. Credit classifications are required to be reviewed (i) monthly, in the event of a delay in the payment of any installment of principal or interest, in accordance with the maximum risk classifications; (ii) every six months, in the case of transactions involving the same customer, economic group or group of companies, the amount of which exceeds 5% of the adjusted net worth of the financial institution in question; and (iii) once every 12 months, in all circumstances, except in the case of credit transactions with a customer whose total liability is lower than R$50,000, the classification of which may be reviewed as provided above. Such R$50,000 limit may be amended by the Brazilian Central Bank from time to time.
The provisions set forth above are not applicable to our IFRS consolidated financial statements, which are based on the criteria described under “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies—Impairment Losses on Financial Assets.”
Credit Performance Information – Positive Registration
Brazilian law regulates databases containing credit performance information of individuals and legal entities. Dissemination of information from these databases is subject to the express request or authorization of the institution’s corresponding customers. Databases managed by a group of entities that jointly have net equity equal or higher than R$70 million (excluding any amounts relating to the interest holding among such entities) may receive credit performance information.
Collection of Bank Fees
The collection of bank fees and commissions is extensively regulated by the rules that seek standardization of the collection of bank fees and of the costs of credit transactions for individuals. According to these rules, bank services to individuals are divided into the following four groups: (i) essential services; (ii) priority services; (iii) special services; and (iv) specific or differentiated services. Banks are not able to collect fees in exchange for supplying essential services to individuals with regard to checking accounts, such as (i) supplying a debit card; (ii) supplying 10 checks per month to 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. In the case of these exclusively electronic deposit and savings accounts, banks are 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 on-lending of funds from the real estate financial system) is governed by the specific provisions found in the laws and regulations relating to such services. The regulation authorizes financial institutions to charge fees for the performance of specific services, provided either that the account holder or user is informed of the conditions for use and payment or that the fee and charging method are defined in the contract. Some of the specific services, among others, are (i) approval of signatures; (ii) management of investment funds; (iii) rental of safe deposit boxes; (iv) courier services; (v) custody and brokerage services, (vi) endorsement of customers debts (aval, or guarantee); and (vii) foreign currency exchange.
It is worth pointing out: (i) the prohibition against charging fees in cases of adhesion contracts 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.
The banking regulations also have specific rules relative to the charging of credit card fees, the publication of information in the card invoices and the obligation to provide a package of basic services upon offering credit cards to customers. Credit card holders must pay monthly at least 15% of outstanding credit card balances. This minimum payment does not apply to credit cards with payment by means of direct payroll deductions.
Revolving credit for financings of credit card bills may only be extended to customers until the due date of the following credit card bill. After this term, financial institutions must offer customers another type of financing 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 was not repaid in a timely manner.
Payment Agents and Payment Arrangements
Since 2014, the CMN and the Brazilian Central Bank have powers to regulate payment mechanisms, players and transactions. The regulation issued by the Brazilian Central Bank, determines, among other aspects: (i) consumer protection, 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.
In March 2018, the CMN enacted a set of new rules establishing, among others, the regulatory cost reduction by decreasing the maximum limit for the interchange fee in purchase domestic payment arrangements and checking accounts, in order to improve the competition.
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 such as recording (i) whether the physical document that originated the digital version was an original or a copy, (ii) the parameters to validate the document and select the technology used to ensure the security of the electronic documents, as well as the parameters to select the documents and (iii) as well as the parameters to select the documents that will continue being kept as hard documents on the institution’s files.
Anti-Money Laundering Regulations
Under the Brazilian Anti-Money Laundering Law, it is a crime to conceal or dissimulate the nature, origin, location, availability, transaction or ownership of assets, rights or amounts resulting, directly or indirectly, from any criminal offense, as well as their use in economic or financial activity and 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 Council of Control of Financial Activities (Conselho de Controle de Atividades Financeiras or “COAF”), which operates under the jurisdiction of the Ministry of Finance. The purpose of the COAF is to investigate, examine, identify and impose administrative sanctions in respect of any suspicious occurrences of illicit activities related to money laundering in Brazil. The COAF is composed of individuals with recognized competence in this area, appointed by the Minister of Finance, all of whom are nominated by each of the following entities: (i) the Brazilian Central Bank; (ii) the CVM; (iii) the SUSEP; (iv) the National Treasury Attorney-General’s Office; (v) the Brazilian Federal Revenue; (vi) the Federal Intelligence Agency; (vii) 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.
Brazilian anti-money laundering legislation and applicable regulation issued by the CMN and the Brazilian Central Bank established that financial institutions must, among others:
|·||keep up-to-date records regarding their permanent customers (including registration data, statements of purpose and nature of transactions, their financial capacity, as well as the verification of characterization of customers as politically exposed individuals);|
|·||adopt policies, procedures and internal controls;|
|·||record transactions involving Brazilian and foreign currency, securities, metals or any other asset that may be converted into money, including specific registries of issuances or recharging of prepaid cards;|
|·||keep records of transactions or groups of turnover of funds carried out by individuals or entities belonging to the same group or financial conglomerate, in a total amount that exceeds R$10,000 in a calendar month or which reveal a pattern of activity, amount or form that suggests a scheme to avoid identification, control and registration;|
|·||review transactions or proposals the features of which may indicate criminal intentions; and|
|·||keep records of every transfer of funds related to, among others (a) deposits, wire transfers and checks, and (b) the issuance of checks and payment orders, in amounts that exceed R$1,000.|
Brazilian financial institutions must inform COAF in the manner established by the Brazilian Central Bank, by the day following the date on which any of the following transactions, proposed or carried out, were verified:
|·||transactions carried out or services provided, whose amount equals or is greater than R$10,000 and for which, considering the parties involved, the amounts, the forms of execution, the instrument used or the lack of economic or legal bases could characterize the existence of evidence of the crimes provided for in the Brazilian Anti-Money Laundering Law;|
|·||transactions carried out or services rendered that, based on their frequency, amount or form, could be aimed at deceiving the identification, control and record mechanisms;|
|·||transactions carried out by or services rendered to, regardless of their amount, the persons that recognizably have perpetrated or attempted to perpetrate terrorist acts or have participated in them or facilitated their practice, as well as the existence of funds that belong to or are directly or indirectly controlled by them or by entities that belong or are directly or indirectly controlled by such persons, as well as by persons and entities acting on their behalf or under their orders; and|
|·||any acts that are believed to be financing terrorism.|
These communications must be made without providing knowledge thereof to the parties involved.
The records referred to above must be kept for five to ten years, depending on the nature of the information, from the end of the relationship with the customer.
Failure to comply with any of the obligations indicated above can subject the financial institution and its officers and directors to penalties that range from fines (not above 200% of the transaction amount or the real profit obtained or that would be obtained by carrying out the transaction or the amount of R$20 million) to the declaration of its officers and directors as ineligible to exercise any position at a financial institution and/or the cancellation of the financial institution’s operating license.
Government officials and auditors from the Brazilian Federal Revenue Service may also inspect an institution’s documents, books and financial registry in certain circumstances.
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 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.
Financial institutions must also maintain specific records of transactions in cash (deposit, withdrawal, withdrawal by means of a prepaid card, request of provision for withdrawal or TED) by financial institutions of an amount equal to or greater than R$50,000. The regulations also provide for a minimum of three business days prior communication for withdrawals and cash payments of an amount equal to or greater than R$50,000.
Brazilian Anti-Corruption Law
Law No. 12,846 of August 1, 2013, Brazil’s new anti-corruption law, or “Brazilian Anti-Corruption Law”, entered into force on January 29, 2014. This law aims at fulfilling international commitments assumed by Brazil as a result of the ratification of various anti-corruption treaties, as well as meeting the population’s demands for the creation of more effective mechanisms to fight corruption at the public administration level. The Brazilian Anti-Corruption Law establishes that legal entities will have strict liability regardless of fault or willful misconduct for acts against the public administration carried out in their interest or for their benefit. Although known as the Anti-Corruption Law, this Law encompasses not only performance of acts of corruption but also performance of other injurious acts contrary to the Brazilian or foreign public administration.
Corporations that violate the Brazilian Anti-Corruption Law’s provisions will be subject to heavy penalties, some of which may be imposed through administrative proceedings and others solely through judicial channels. The Brazilian Anti-Corruption Law also creates a leniency program under which self-disclosure of violations and cooperation by corporations might result in the reduction of fines and other sanctions.
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. The internal procedures developed and implemented for this purpose by financial institutions must be structured in such a way as to enable the identification of politically exposed individuals, as well as the origin of the funds involved in the transactions of such customers. One option is to verify the compatibility between the customer’s transactions and the net worth stated in such customer’s file.
Politically exposed individuals are public agents and their immediate family members, spouses, life partners and stepchildren who occupy or have occupied a relevant public office or position over the past five years in Brazil or other countries, territories and foreign jurisdictions.
Brazilian financial and payment institutions shall also maintain the secrecy of their banking operations and services provided to their customers. The only circumstances in which information about customers, services or transactions of Brazilian financial and payment institutions may be disclosed to third parties are the following:
|·||the disclosure of information with the express consent of the interested parties;|
|·||the exchange of information between financial institutions for record purposes;|
|·||the supplying to credit reference agencies of information based on data from the records of issuers of bank checks drawn on accounts without sufficient funds and defaulting debtors; and|
|·||the occurrence or suspicion that criminal or administrative illegal acts have been performed, in which case the financial institutions and the credit card companies may provide the pertinent authorities with information relating to such criminal acts when necessary for the investigation of such acts.|
Complementary Law 105/01 also allows the Brazilian Central Bank or the CVM to exchange information with foreign governmental authorities, provided that a specific treaty has previously been executed.
The government of the Federal Republic of Brazil and the government of the United States of America executed an agreement on March 20, 2007, by means of which these governments established rules for the exchange of information relating to tax, 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 Provisional Measure No. 869, issued by the President of Brazil in December 2018, or “MP 869/2018”. As amended by the MP 869/2018, the GDPA will take effect in August 2020 (the original effective date was February 2020, but MP 869/2018 postponed it for six months).
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, MP 869/2018 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 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
In April 2018, the CMN also issued regulations regarding cyber risks and cloud storage applicable to financial services following the public consultation held in 2017. According to these new rules, financial institutions must now 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 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 on 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;|