Company Quick10K Filing
Banco Santander
20-F 2019-12-31 Filed 2020-03-06
20-F 2018-12-31 Filed 2019-03-26
20-F 2017-12-31 Filed 2018-04-09
20-F 2016-12-31 Filed 2017-03-28
20-F 2015-12-31 Filed 2016-04-29
20-F 2014-12-31 Filed 2015-04-30
20-F 2013-12-31 Filed 2014-04-30
20-F 2012-12-31 Filed 2013-03-29
20-F 2011-12-31 Filed 2012-03-30
20-F 2010-12-31 Filed 2011-04-08
20-F 2009-12-31 Filed 2010-06-09

BSBR 20F Annual Report

Part I
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
Part II
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]
Item16A.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
Part III
Item 17.Financial Statements
Item 18.Financial Statements
Item 19.Exhibits
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.	
EX-2.5 dp123082_ex0205.htm
EX-12.1 dp123082_ex1201.htm
EX-12.2 dp123082_ex1202.htm
EX-13.1 dp123082_ex1301.htm
EX-13.2 dp123082_ex1302.htm
EX-15.1 dp123082_ex1501.htm

Banco Santander Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 dp123082_20f.htm FORM 20-F

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                           to                          .

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report                                  

 

Commission file number: 001-34476

 

BANCO SANTANDER (Brasil) S.A.
(Exact name of Registrant as specified in its charter)

 

SANTANDER (BRAZIL) BANK, INC.
(Translation of Registrant’s name into English)

 

Federative Republic of Brazil
(Jurisdiction of incorporation)

 

Avenida Presidente Juscelino Kubitschek, 2,041 and 2,235 – Bloco A
Vila Olímpia
São Paulo, SP 04543-011
Federative Republic of Brazil

 

(Address of principal executive offices)

 

Mercedes Pacheco, Managing Director – Senior Legal Counsel
Banco Santander, S.A.
New York Branch
45 E. 53rd Street
New York, New York 10022
(212) 350-3604
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class 

Trading Symbol 

Name of each exchange on which registered 

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

SANB11

New York Stock Exchange* 

Common Shares, no par value SANB3 New York Stock Exchange*
Preferred Shares, no par value SANB4 New York Stock Exchange*
American Depositary Shares, each representing one unit (or a right to receive one unit) which is composed of 1 common share, no par value, and 1 preferred share, no par value, of Banco Santander (Brasil) S.A.

BSBR


New York Stock Exchange

  

*Not for trading purposes, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the Securities

 

 

and Exchange Commission.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

Title of Class

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

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Title of Class

Number of Shares Outstanding

Common shares 3,818,695,031
Preferred shares 3,679,836,020

 

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

 

Yes No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes No

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes No

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes No

 

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

 

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

 

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

 

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

 

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

 

U.S. GAAP

 

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

 

Other

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes No

 

 

 

table of contents

 

Page

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION 7
FORWARD-LOOKING STATEMENTS 9
PART I 11
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 11
1A. Directors and Senior Management 11
1B. Advisers 11
1C.  Auditors 11
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 11
2A. Offer Statistics 11
2B. Method and Expected Timetable 11
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 51
4A. History and Development of the Company 51
4B. Business Overview 55
4C. Organizational Structure 121
4D. Property, Plant and Equipment 123
ITEM 4A. UNRESOLVED STAFF COMMENTS 124
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 124
5A. Operating Results 124
5B. Liquidity and Capital Resources 148
5C. Research and Development, Patents and Licenses, etc. 152
5D. Trend Information 152
5E. Off-Balance Sheet Arrangements 153
5F. Contractual Obligations 153
5G. Safe Harbor 154
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 154
6A Board of Directors and Board of Executive Officers 154
6B. Compensation 167
6C. Board Practices 172
6D. Employees 179
6E. Share Ownership 180
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 182
7A.   Major Shareholders 182

 

 

 

7B. Related Party Transactions 183
7C. Interests of Experts and Counsel 184
ITEM 8. FINANCIAL INFORMATION 184
8A. Consolidated Statements and Other Financial Information 184
8B. Significant Changes 194
ITEM 9. THE OFFER AND LISTING 194
9A.  Offering and Listing Details 194
9B. Plan of Distribution 197
9C.  Markets 197
9D.  Selling Shareholders 200
9E.   Dilution 200
9F.   Expenses of the Issue 200
ITEM 10. ADDITIONAL INFORMATION 200
10A. Share Capital 201
10B. By-Laws 202
10C. Material Contracts 212
10D. Exchange Controls 212
10E.    Taxation 214
10F.    Dividends and Paying Agents 222
10G.    Statement by Experts 222
10H.   Documents on Display 223
10I.  Subsidiary Information 223
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 223
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 246
12A. Debt Securities 246
12B. Warrants and Rights 246
12C. Other Securities 246
12D. American Depositary Receipts 246
PART II 248
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 248
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 248
ITEM 15. CONTROLS AND PROCEDURES 248
15A.    Disclosure Controls and Procedures 248
15B.   Management’s Annual Report on Internal Control over Financial Reporting 248
15C.    Audit Report of the Registered Public Accounting Firm 249
15D.    Changes in Internal Control over Financial Reporting 249
ITEM 16. [RESERVED] 249
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 249

 

 

 

 

 

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

General

 

In this annual report, the terms “Santander Brasil,” the “Bank,” “we,” “us,” “our,” “our company” and “our organization” mean Banco Santander (Brasil) S.A. and its consolidated subsidiaries, unless otherwise indicated. References to “Banco Real” mean Banco ABN AMRO Real S.A. and ABN AMRO Brasil Dois Participações S.A. and their respective consolidated subsidiaries, unless otherwise indicated. References to “Banespa” mean Banco do Estado de São Paulo S.A. – Banespa, one of our predecessor entities. The term “Santander Spain” means Banco Santander, S.A. References to “Santander Group” mean the worldwide operations of the Santander Spain conglomerate, as indirectly controlled by Santander Spain and its consolidated subsidiaries, including Santander Brasil.

 

All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” are to United States (or “U.S.”) dollars. All references to “euro,” “euros” or “” are to the common legal currency of the member states participating in the European Economic and Monetary Union. References to “CI$” are to Cayman Islands dollars. References to “£” are to United Kingdom pounds sterling. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian currency.

 

Solely for the convenience of the reader, we have translated certain amounts included in “Item 3. Key Information—A. Selected Financial Data” and elsewhere in this annual report from reais into U.S. dollars using the exchange rate as reported by the Brazilian Central Bank (Banco Central do Brasil), or the “Brazilian Central Bank,” as of December 31, 2019, which was R$4.0307 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, 2019, 2018 and 2017, and for the years ended December 31, 2019, 2018 and 2017. Such consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or “IFRS”, as issued by the International Accounting Standards Board, or “IASB” and interpretations issued by the IFRS Interpretation Committee, or “IFRIC”. Our consolidated financial statements as of and for the years ended December 31, 2019, 2018 and 2017 have been audited by PricewaterhouseCoopers Auditores Independentes, or “PwC.” PwC is an independent registered public accounting firm, whose report is included herein.

 

IFRS differs in certain significant aspects in comparison with the generally accepted accounting principles in the United States, or “U.S. GAAP”. IFRS also differs in certain significant aspects in comparison with the Brazilian GAAP (as defined below). Appendix I to our audited consolidated financial statements for the years ended December 31, 2019, 2018 and 2017, included herein, contains information relating to certain differences between IFRS and Brazilian GAAP.

 

Under Brazilian law, we are required by the Brazilian Central Bank to prepare consolidated financial statements according to IFRS. However, we will also continue to prepare statutory financial statements in accordance with accounting practices established by Law No. 6,404, dated December 15, 1976, as amended by Law 11,638, or the “Brazilian Corporate Law” and standards established by the

 

7 

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.

 

8 

FORWARD-LOOKING STATEMENTS

 

This annual report contains estimates and forward-looking statements subject to risks and uncertainties, principally in “Item 3. Key Information—D. Risk Factors,” “Item 5. Operating and Financial Review and Prospects” and “Item 4. Information on the Company—B. Business Overview.” 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 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 future relationship of the United Kingdom with the European Union;

 

·increasing competition and consolidation in the Brazilian financial services industry;

 

·extensive regulation by the Brazilian government and the Brazilian Central Bank, among others;

 

·changes in reserve requirements;

 

·changes in taxes or other fiscal assessments;

 

·potential losses associated with 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;

 

9 

·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.

 

10 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

1A.Directors and Senior Management

 

Not applicable.

 

1B.Advisers

 

Not applicable.

 

1C.Auditors

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

2A.Offer Statistics

 

Not applicable.

 

2B.Method and Expected Timetable

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

3A.Selected Financial Data

 

Financial information for Santander Brasil as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 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 the related notes and “Item 5. Operating and Financial Review and Prospects” included within this annual report.

 

Income Statement Data

 

   For the Year Ended December 31,
   2019  2019  2018  2017  2016  2015
   (in millions of U.S.$)(1)  (in millions of R$)
Interest and similar income   18,072    72,841    70,478    71,418    77,146    69,870 
Interest expense and similar charges   (7,076)   (28,520)   (28,557)   (36,472)   (46,560)   (38,533)
Net interest income   10,996    44,321    41,921    34,946    30,586    31,337 
Income from equity instruments   5    19    33    83    259    143 
Income from companies accounted for by the equity method   37    149    66    72    48    116 
Fee and commission income   5,059    20,392    17,728    15,816    13,548    11,797 
Fee and commission expense   (1,161)   (4,679)   (3,596)   (3,094)   (2,571)   (2,314)
Gains (losses) on financial assets and liabilities (net)   611    2,463    (2,783)   969    3,016    (20,002)

 

11 

 

Exchange differences (net)   (692)   (2,789)   (2,806)   605    4,575    10,084 
Other operating income (expenses)   (275)   (1,108)   (1,056)   (672)   (625)   (347)
Total income   14,580    58,769    49,507    48,725    48,837    30,814 
Administrative expenses   (4,203)   (16,942)   (16,792)   (16,121)   (14,920)   (14,515)
Depreciation and amortization   (593)   (2,392)   (1,740)   (1,662)   (1,483)   (1,490)
Provisions (net)(2)   (913)   (3,682)   (2,000)   (3,309)   (2,725)   (4,001)
Impairment losses on financial assets (net)(3)   (3,317)   (13,370)   (12,713)   (12,338)   (13,301)   (13,634)
Impairment losses on other assets (net)   (33)   (131)   (508)   (457)   (114)   (1,221)
Gains (losses) on disposal of assets not classified as non-current assets held for sale   3    11    (25)   (64)   4    781 
Gains (losses) on non-current assets held for sale not classified as discontinued operations   2    10    182    (260)   87    50 
Operating profit before tax   5,526    22,273    15,910    14,514    16,384    (3,216)
Income taxes   (1,400)   (5,642)   (3,110)   (5,376)   (8,919)   13,050 
Consolidated Profit for the Year   4,126    16,631    12,800    9,138    7,465    9,834 
(1)Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2019, for reais into U.S. dollars of R$4.0307 to U.S.$1.00.

 

(2)Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits. For further discussion, see notes 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,
   2019  2018  2017  2016  2015
Basic and Diluted Earnings per 1,000 shares               
From continuing and discontinued operations(1)            
Basic Earnings per shares (reais)               
Common Shares   2,094.83    1,604.34    1,133.43    929.93    1,236.96 
Preferred Shares   2,304.32    1,764.78    1,246.77    1,022.92    1,360.66 
Diluted Earnings per shares (reais)                         
Common Shares   2,094.83    1,604.34    1,132.44    929.03    1,235.79 
Preferred Shares   2,304.32    1,764.78    1,245.69    1,021.93    1,359.36 
Basic Earnings per shares (U.S. dollars) (2)                         
Common Shares   519.72    414.05    342.63    285.34    316.78 
Preferred Shares   571.69    455.45    376.90    313.87    348.46 
Diluted Earnings per shares (U.S. dollars) (2)                         
Common Shares   519.72    414.05    342.33    285.06    316.48 
Preferred Shares   571.69    455.45    376.57    313.57    348.13 
From continuing operations                         
Basic Earnings per shares (reais)                         
Common Shares   2,094.83    1,604.34    1,133.43    929.93    1,236.96 
Preferred Shares   2,304.32    1,764.78    1,246.77    1,022.92    1,360.66 
Diluted Earnings per shares (reais)                         
Common Shares   2,094.83    1,604.34    1,132.44    929.03    1,235.79 
Preferred Shares   2,304.32    1,764.78    1,245.69    1,021.93    1,359.36 
Basic Earnings per shares (U.S. dollars) (2)                         
Common Shares   519.72    414.05    342.63    285.34    316.78 
Preferred Shares   571.69    455.45    376.90    313.87    348.46 
Diluted Earnings per shares (U.S. dollars) (2)                         
Common Shares   519.72    414.05    342.33    285.06    316.48 
Preferred Shares   571.69    455.45    376.57    313.57    348.13 
                          
Dividends and interest on capital per 1,000 shares (undiluted)                         

 

12 

 

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

 

(2)Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2019, for reais into U.S. dollars of R$4.0307 to U.S.$1.00.

 

(3)Average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and each of the month-end balances of the 12 subsequent months.

 

Balance Sheet Data

 

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

 

13 

 

Deposits from the Brazilian Central Bank and deposits from credit institutions   24,629    99,271    99,023    79,375    78,634    69,451 
Customer deposits   83,488    336,515    304,198    276,042    247,445    243,043 
Marketable debt securities   18,285    73,702    74,626    70,247    99,843    94,658 
Subordinated debts   -      -      9,886    519    466    8,097 
Debt Instruments Eligible to Compose Capital   2,525    10,176    9,780    8,437    8,312    9,959 
Other financial liabilities   13,786    55,566    49,783    44,261    36,879    32,073 
Hedging derivatives   50    201    224    163    311    2,377 
Provisions(3)   4,052    16,332    14,696    13,987    11,776    11,410 
Tax liabilities   2,719    10,960    8,075    8,248    6,095    5,253 
Other liabilities   2,709    10,921    9,095    8,014    8,199    6,850 
Total liabilities   164,991    665,028    632,270    558,615    549,581    525,559 
Stockholders’ equity   23,994    96,711    91,882    87,425    85,435    83,532 
Other Comprehensive Income   (21)   (86)   (879)   (774)   (1,348)   (4,132)
Non-controlling interests   145    583    593    437    726    435 
Total Stockholders’ Equity   24,117    97,209    91,595    87,088    84,812    79,835 
Total liabilities and stockholders’ equity   189,108    762,237    723,865    645,703    634,393    605,395 
Average interest-bearing liabilities*   121,861    491,187    463,388    416,816    408,067    400,008 
Average total stockholders’ equity*   23,777    95,836    89,263    87,868    84,283    81,475 
*The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and for each of the month-end balances of the 12 subsequent months.

 

(1)Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2019, for reais into U.S. dollars of R$4.0307 to U.S.$1.00.

 

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

 

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

 

Selected Consolidated Ratios (*)

 

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

 

*The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: 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, refer to “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets.”

 

(2)Basel capital adequacy ratio is 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

 

14 

Supervision—Capital Adequacy and Leverage – Basel.”

 

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

 

(4)In 2019, including the debt instruments accounted for in the loans and receivables, the ratio is 96.8%. For 2018 the ratio was 78.1%. The debt instruments amount was not material in preceding years.

 

(5)In 2019, including the debt instruments accounted for in the loans and receivables the ratio is 5.8%. For 2018, the ratio was 6.3%. The debt instruments amount was not material in preceding years.

 

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

 

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

 

(*) The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months.

 

(1) “Net yield” is defined as net interest income divided by average interest earning assets.

 

(2) “Adjusted return on average stockholders’ equity,” “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” and “Impaired assets as a percentage of stockholders’ equity excluding goodwill” are non-GAAP financial measures which adjust “Return on average stockholders’ equity,” “Average stockholders’ equity as a percentage of average total assets” and “Impaired assets as a percentage of stockholders’ equity,” to exclude the goodwill arising from the acquisition of Banco Real in 2008, Getnet Adquirência e Serviços para Meios de Pagamento S.A., or “GetNet” and Super Pagamentos e Administração de Meios Eletrônicos Ltda., or “Super”, both in 2014, Banco Olé Consignado S.A. (current name of Banco Consignado S.A.) in 2015, and BW Guirapá I S.A. in 2016. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding the substantial impact of the R$27 billion goodwill arising from the acquisition of Banco Real during the year ended December 31, 2008, the R$1.1 billion goodwill arising from the acquisition of GetNet and Super both during 2014, the acquisition of an interest in Banco Olé Consignado S.A. in 2015. Accordingly, we believe that the non-GAAP financial measures presented are useful to investors. The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill.

 

(3) Credit risk exposure is the sum of the amortized cost amounts of loans and advances to customers (including impaired assets), guarantees and documentary credits. We include off-balance sheet information in this measure to better demonstrate our total managed credit risk. The reconciliation of the measure to the most comparable IFRS measure is disclosed in the table of non-GAAP financial measures presented immediately after these notes.

 

(4) Total funding is the sum of financial liabilities at amortized cost, excluding other financial liabilities. For a breakdown of the components of total funding, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Liquidity and Funding.”

 

(5) Adjusted efficiency ratio excludes the effect of the hedge for investments held abroad. This exclusion affects the income tax, gains (losses) on financial assets and liabilities and exchange rate differences line items but does not affect the “Net profit from continuing operations” line item because the adjustment to gains (losses) on financial assets and liabilities and exchange rate difference is offset by the adjustment to income tax. Our management believes that the adjusted efficiency ratio provides a more consistent framework for evaluating and conducting business, as a result of excluding from our revenues the effect of the volatility caused by possible gains and losses on our hedging strategies for tax purposes. For more details, see the table below.

 

   For the Year Ended December 31,
   2019  2018  2017  2016  2015
   (in millions of R$, except percentages)
Effects of the hedge for investments held abroad   1,264    5,867    810   (6,140)   10,919 
Efficiency ratio   28.8%   33.9%   33.1%   30.6%   47.1%
Adjusted efficiency ratio   28.2%   30.3%   32.5%   34.9%   34.8%

 

15 

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

 

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

 

The information in the table below presents the calculation of specified non-GAAP financial measures to the most directly comparable IFRS financial measures. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding the substantial impact of the R$1.1 billion goodwill arising from the acquisition of GetNet and Super both during 2014, the acquisition of Banco Olé Bonsucesso Consignado S.A. in 2015 and the significance of other factors affecting stockholders’ equity and the related ratios. The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill, as set forth in the above tables. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.

 

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

 

16 

 

Impaired assets as a percentage of stockholders’ equity excluding goodwill:                         
Impaired assets   23,426    22,426    19,145    18,887    18,599 
Stockholders’ equity   97,209    91,595    87,088    84,813    79,835 
Goodwill   28,375    28,378    28,364    28,355    28,333 
Stockholders’ equity excluding goodwill   68,834    63,217    58,724    56,458    51,502 
Impaired assets as a percentage of stockholders’ equity excluding goodwill   34.0%   35.5%   32.6%   33.5%   36.1%
Impaired assets as a percentage of loans and receivables:                         
Loans and advances to customers, gross   347,257    321,933    287,829    268,438    267,266 
Impaired assets   23,426    22,426    19,145    18,887    18,599 
Impaired assets as a percentage of loans and receivables   6.7%   7.0%   6.7%   7.0%   7.0%
Impaired assets as a percentage of credit risk exposure:                         
Loans and advances to customers, gross   347,257    321,933    287,829    268,438    267,266 
Guarantees   44,313    42,260    42,645    33,265    43,611 
Credit risk exposure   391,569    364,182    330,474    301,703    310,887 
Impaired assets   23,426    22,426    19,145    18,887    18,599 
Impaired assets as a percentage of credit risk exposure   6.0%   6.2%   5.8%   6.3%   6.0%
Loans and advances to customers, net as a percentage of total funding:                         
Loans and advances to customers, gross   347,257    321,933    287,829    268,438    267,266 
Impairment losses(1)   20,557    20,242    15,409    16,435    15,233 
Total Funding(2)   519,664    497,513    434,620    434,502    425,209 
Loans and advances to customers, net as a percentage of total funding(2)   62.4%   60.6%   62.7%   58.0%   59.3%
(*)The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months.

 

(1)Provision for impairment losses of loans and advances to customers.

 

(2)Total funding is the sum of financial liabilities at amortized cost, excluding the other financial liabilities.

 

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,
   2019  2018  2017  2016  2015
   (in millions of R$, except as otherwise indicated)
Efficiency ratio               
Administrative expenses   16,942    16,792    16,121    14,920    14,515 
Total income   58,769    49,507    48,725    48,837    30,814 
of which:                         
Gains (losses) on financial assets and liabilities (net) and exchange differences (net)   (326)   (5,589)   1,574    7,591    (9,918)
Efficiency ratio   28.8%   33.9%   33.1%   30.6%   47.1%
Total Income   58,769    49,507    48,725    48,837    30,814 
Effects of the hedge for investments held abroad   1,264    5,867    810   6,140    (10,919)
Total income excluding effects of the hedge for investments held abroad   57,505    43,640    47,915    42,697    41,733 
Administrative expenses   16,942    16,792    16,121    14,920    14,515 
Efficiency ratio adjusted for effects of the hedge for investments held abroad   29.5%   38.5%   33.6%   34.9%   34.8%

 

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

 

The information in the table below presents the calculation of specified non-GAAP financial measures from each of their most directly comparable IFRS financial measures. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding effects of the hedge for investments held abroad. The limitation associated with the exclusion of effects of the hedge for investments held abroad is that it has the effect

 

17 

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

Adjusted Gains/losses on financial assets and

liabilities (net) plus exchange differences (net)

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

 

Exchange Rates

 

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer 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 American Depositary Receipts, or “ADRs”. We cannot assure that such measures will not be taken by the Brazilian government in the future. Exchange rate fluctuations will affect the U.S. dollar equivalent of the price of our shares 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.”

 

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

 

    Period-end Average(1) Low High
    (per U.S. dollar)
Year:          
2015   3.90 3.34 2.57 4.19
2016   3.26 3.48 3.12 4.16
2017   3.31 3.19 3.05 3.38
2018   3.87 3.68 3.14 4.19
2019   4.03 4.11 4.02 4.22
Month Ended:          
August 2019   4.15 4.03 3.84 4.17
September 2019   4.16 4.12 4.06 4.19
October 2019   4.02 4.09 3.99 4.18
November 2019   4.24 4.16 3.99 4.26
December 2019   4.03 4.11 4.02 4.22
January 2020   4.28 4.15 4.02 4.28
February 2020   4.50 4.34 4.24 4.50
March 2020 (through March 5, 2020)   4.62 4.53 4.49 4.62

 

Source: Brazilian Central Bank.

 

(1)Represents the average of the exchange rates at the close of each business day during the period.

 

Our parent company, Santander Spain, reports its financial condition and results of operations in euros. As of December 31, 2019, the exchange rate for euro to real was R$4.4097 per €1.00.

 

3B.Capitalization and Indebtedness

 

Not applicable.

 

3C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

3D.Risk Factors

 

The below risks could materially and adversely affected the financial and operational state of our Company, and as result, could impact the investment of our shareholders.

 

Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally

 

The Brazilian government has exercised significant influence over the Brazilian economy. The Brazilian government’s macroeconomic management strategies, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our securities.

 

The Brazilian government has frequently intervened in the Brazilian economy and has on occasion made significant changes in policy and regulations. In the past, the Brazilian government has adopted measures, including, among others, changes in regulations, price controls, capital controls, changes in the exchange rate regime, and limitations on imports, which have affected Brazilian asset prices. Recently, the Brazilian government has adopted measures, including changes in tax policies, and constraints that have affected Brazilian asset prices and the trading price of our securities.

 

We and the trading price of our securities may be adversely affected by changes in policy, laws or regulations at the federal, state and municipal levels involving or affecting factors such as:

 

·interest rates;

 

·currency volatility;

 

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·inflation;

 

·reserve requirements;

 

·capital requirements;

 

·liquidity of capital and lending markets;

 

·non-performing loans;

 

·tax policies;

 

·the regulatory framework governing our industry;

 

·exchange rate controls and restrictions on remittances abroad; and

 

·other political, social and economic developments in or affecting Brazil.

 

Uncertainty over whether the Brazilian government will implement changes in policy or regulation creates instability in the Brazilian economy, increasing the volatility of the Brazilian securities markets, which may have an adverse effect on us and our securities. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and our securities. The overall trend of the Brazilian political and economic arenas may also affect the business of the Brazilian financial industry.

 

We are not able to fully estimate the impact of global and Brazilian political and macroeconomic developments and economic regulatory policy changes on our business and lending activity, nor are we able to predict how current or future measures implemented by regulatory policy-makers may impact our business. In addition, due to the current political instability, there exists substantial uncertainty regarding future economic policies and we cannot predict what policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our business or financial performance. Any changes in regulatory capital requirements for lending, reserve requirements, or product and service regulations, among others, or continued political uncertainty may materially adversely affect our business.

 

Political instability in Brazil may adversely affect Brazil’s economy and investment levels, and have a material adverse effect on us.

 

Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy by impacting the confidence of investors and the general public, which has historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.

 

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.

 

There are uncertainties regarding the ability of the current government to implement policies and reforms, as well as external perception regarding the Brazilian economy and political environment, all of which could have a negative impact on our business and the price of our securities. In addition, the revocation of the income tax exemption on the payment of dividends, which, if enacted, would increase the tax expenses associated with any dividend or distribution by Brazilian companies, could impact our capacity to receive future cash dividends or distributions net of taxes from our subsidiaries. Any such new policies or changes to current policies may have a material adverse effect on us.

 

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.

 

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

 

Ongoing investigations relating to corruption and diversion of public funds that are being conducted by the Brazilian federal police as well as other Brazilian and non-Brazilian regulators and law enforcement officials may adversely affect the growth of the Brazilian economy and could have a material adverse effect on us.

 

Certain Brazilian companies active in the oil and gas, energy, construction, and infrastructure sectors are facing investigations by the CVM, the U.S. Securities and Exchange Commission, or the “SEC,” the U.S. Department of Justice, the Brazilian Federal Police and the Brazilian Federal Prosecutor’s Office, the Comptroller General of Brazil, and other relevant governmental authorities, in connection with corruption allegations (the Lava Jato investigations). The Brazilian Federal Police ins also investigating allegations of improper payments made by Brazilian companies to officials of the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais), or “CARF”, 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 3.3% in 2016 but increased by 1.3% in 2017 and 2018 and 1.1% in 2019). 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. 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.

 

The Brazilian government’s measures to fight inflation, principally through the Brazilian Central Bank, that have had significant effects on the Brazilian economy and our business, and can continue to do so. Tight monetary policies with 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 rate (the basic interest rate in Brazil) was lowered to 13.75%, and in January 2017, the SELIC rate was further lowered to 13.0%, and to 12.25% in February 2017. In May 2017, the Monetary Policy Committee (Comitê de Política Monetária) of the Brazilian Central Bank, or “COPOM”, decided to lower the SELIC rate to 10.25%, then lowering it to 9.25% in July 2017, to 7.50% in October 2017 and to 7.0% in December 2017. In February 2018, the COPOM lowered the SELIC rate to 6.75% and then to 6.50% in March 2018 and kept throughout the year 2018. In 2019, the

 

21 

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

 

The majority of our income, expenses, assets and liabilities are directly tied to interest rates. Therefore, our results of operations and financial condition are affected by inflation, interest rate fluctuations and related government monetary policies, all of which may materially and adversely affect the growth of the Brazilian economy, our loan portfolios, our cost of funding and our income from credit operations. We estimate that, in 2019, a 1.0% increase or decrease in the basic interest rate would have resulted in a decrease or increase, respectively, in our net interest income of R$334 million. Any changes in interest rates may negatively impact our business, financial condition and results of operations. In addition, increases in base interest rates may adversely affect us by reducing the demand for our credit and investment products, increasing funding costs, and increasing in the short run the risk of default by our customers.

 

Inflation adversely affects our personnel and other administrative expenses that are directly or indirectly tied to inflation indexes, generally the consumer price index (Índice de Preços ao Consumidor – Amplo), or “IPCA,” and the general index of market prices (Índice Geral de Preços-Mercado), or “IGPM.” For example, considering the amounts in 2019, each additional percentage point change in inflation would impact our personnel and other administrative expenses by approximately R$93 million and R$76 million, respectively.

 

Inflation has increased during 2019, reaching 4.31% for the 12-month period ending December 31, 2019 (compared to 3.75% in 2018), as a result of the current market conditions.

 

Inflation, government measures to curb inflation, and speculation related to possible measures regarding inflation may significantly contribute to uncertainty regarding the Brazilian economy and weaken investors’ confidence in Brazil. Future Brazilian governmental actions, 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 these actions may adversely affect our asset quality. Furthermore, Brazil’s high rate of inflation, compounded by high and increasing interest rates, declining consumer spending and increasing unemployment, may have a material adverse impact on the Brazilian economy as a whole, as well as on us.

 

Exposure to Brazilian federal government debt could have a material adverse effect on us.

 

We invest in Brazilian federal government sovereign bonds. As of December 31, 2019, approximately 17.8% of our total assets, and 78.4% of our securities portfolio, consisted of debt securities issued by the Brazilian federal government. Any failure by the Brazilian Government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on us.

 

Fluctuations in interest rates and other factors may affect our obligations under legacy employee pension funds.

 

We sponsor defined benefit pension plans and a healthcare plan that 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. For further information, refer to note 22 to our consolidated financial statements.

 

22 

Changes in the present value of our obligations under our legacy defined benefit pension plans could require us to increase contributions, which would divert resources from use in other areas of our business. Any such increase may be due to factors over which we have no or limited control. Increases in our pension liabilities and obligations could have a material adverse effect on our business, financial condition and results of operations.

 

Decreases in interest rates can increase the present value of obligations under our legacy defined benefit pension plans, and may materially and adversely affect the funded status of our legacy defined benefit plans and require us to make additional contributions to these plans to meet our pension funding obligations.

 

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

 

Exchange rate volatility may have a material adverse effect on the Brazilian economy and on us.

 

The Brazilian currency has experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. The Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system.

 

Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rate among the real, the U.S. dollar and other currencies. From 2013 to 2014, the real depreciated against the U.S. dollar due to a decrease in commodities prices, reaching R$2.34 per U.S.$1.00 on December 31, 2013 and R$2.65 per U.S.$1.00 on December 31, 2014. During 2015, due to the poor economic conditions in Brazil, including as a result of political instability, the real devalued at a much higher rate than in previous years. On September 24, 2015, the real depreciated to R$4.20 per U.S.$1.00. Overall, in 2015, the real depreciated 47% against the U.S. dollar, 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. In 2019, the real continued to depreciate against the U.S. dollar, with the exchange rate reaching R$4.03 per U.S.$1.00 as of December 31, 2019. On March 5, 2020, the exchange rate was R$4.50 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, 2019, 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$1,264 million.

 

23 

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 and 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 gross domestic product, or “GDP” growth has fluctuated over the past few years, with a contraction of 3.5% in 2016 and growth of 1.0% and 1.1% in 2017 and 2018, respectively, and a growth of 1.0% in 2019. Growth is limited by the lack of private and public investments, resulting in potential energy shortages and deficient transportation, declining logistics and telecommunication sectors, and a lack of a qualified labor force. In addition, the growth and performance of the Brazilian economy may be impacted by other factors such as nationwide strikes, natural disasters or other disruptive events. Any of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could limit growth, increase delinquency rates and ultimately have a material adverse effect on us.

 

Developments and the perception of risk in other countries may adversely affect the Brazilian economy and market price of Brazilian issuers’ securities.

 

The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, European countries (including Spain, where Santander Spain, our controlling shareholder, is based), and in other Latin American and emerging market countries. Although economic conditions in Europe and in the United States may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these countries may have an adverse effect on the market value of securities of Brazilian issuers. In particular, investor perceptions of the risks associated with our securities may be affected by perception of risk conditions in Spain. Additionally, crises in other emerging market countries may diminish investor interest in securities of Brazilian issuers, including our securities. This could adversely affect the market price of our securities, restrict our access to capital markets and compromise our ability to finance our operations in the future on favorable terms, or at all.

 

In 2019, 2018 and 2017, there was an increase in volatility in all Brazilian markets due to, among other factors, uncertainties about how monetary policy adjustments in the United States would affect the international financial markets and the increasing risk aversion to emerging market countries. 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.

 

24 

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

 

The global macroeconomic environment is facing challenges, including the economic slowdown in China and the Eurozone, the end of funding by the U.S. Federal Reserve, the uncertain impact of Brexit and potential adoption of U.S. tariffs on steel imported from Brazil and Argentina. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States. There have been concerns over conflicts, unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in volatility in oil and other markets. The United States and China have recently been involved in controversy over trade barriers in China that threatened a trade war between the countries and have implemented or 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 while also creating a more volatile economy, limiting potential access to capital and liquidity. In addition, any global economic slowdown or uncertainty may result in volatile conditions in the global financial markets, which could have a material adverse effect on us, including on our ability to access capital and liquidity on financial terms acceptable to us, if at all. Any such adverse effect on capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

 

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

 

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

 

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

 

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

 

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

 

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

 

25 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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The strong competitive environment in the Brazilian financial services market may adversely affect us, including our business prospects.

 

The Brazilian financial markets, including the banking, insurance and asset management sectors, are highly competitive, with this competition increasing in recent years. We face significant competition in all of our main areas of operation from other Brazilian and international banks, as well as state-owned institutions including through portability of loans.

 

Non-traditional providers of banking services, such as Internet-based e-commerce providers, mobile telephone companies and Internet search engines, as well payment services for 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 our profitability, as well as limit our ability to increase our customer base and expand our operations, and increasing competition for investment opportunities.

 

In addition, if our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities, or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on us.

 

We are subject to extensive regulation and regulatory and governmental oversight, which could adversely affect our business, operations and financial condition.

 

The Brazilian financial markets are subject to extensive and continuous regulatory control by the Brazilian government, principally by the Brazilian Central Bank, the CVM and the CMN, which, in each case, materially affects our business. We have no control over the issuance of new regulations that may affect our operations, including in respect of:

 

·minimum capital requirements;

 

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·reserve and compulsory deposit requirements;

 

·limits on investments in fixed assets;

 

·lending limits and other credit restrictions, including compulsory allocations;

 

·limits and other restrictions on interest rates and fees;

 

·limits on the amount of interest banks can charge or the period for capitalizing interest; and

 

·accounting and statistical requirements.

 

The regulation governing Brazilian financial institutions is continuously evolving, and the Brazilian Central Bank has reacted actively and extensively to developments in our industry.

 

Changes in regulations in Brazil and international markets may expose us to increased compliance costs and limit 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 those, which may be deemed to be systemically important. In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements require a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands, and we may face supervisory measures as a result.

 

We may also be subject to potential impacts relating to regulatory changes affecting our controlling shareholder, Santander Spain, due to continued significant financial regulatory reform in jurisdictions outside of Brazil that directly or indirectly affect Santander Spain’s businesses, including Spain, the European Union, the United States and other jurisdictions. In Spain and in other countries in which Santander Spain’s subsidiaries operate (including Brazil), there is continuing political, competitive and regulatory scrutiny of the banking industry. Political involvement in the regulatory process, in the behavior and governance of the banking sector and in the major financial institutions in which the local governments have a direct financial interest, and in their products and services, and the prices and other terms they apply to them, is likely to continue. Changes to current legislation and their implementation through regulation (including additional capital, leverage, funding, liquidity and tax requirements), policies (including fiscal and monetary policies established by central banks and financial regulators, and changes to global trade policies), and other legal and regulatory actions may impose additional

 

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regulatory burdens on Santander Group, including Santander Brasil, in these jurisdictions. In the European Union, these reforms could include changes relating to capital requirements, liquidity and funding, or other 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 outcome of any financial regulatory reforms in the European Banking Union, the United States or other jurisdictions, and we cannot yet determine their effects on Santander Spain and, consequently, their effects on us, but regulatory changes may result in additional costs for us.

 

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

 

Our business and operations are subject to increasingly significant rules and regulations set by the Brazilian Central Bank, the CVM, and the CMN, that are required to conduct banking and financial services business. These apply to business operations, affect financial returns, and include reserve and reporting requirements, and conduct-of-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 , as well as determined compulsory allocation requirements to finance government programs, with these changes continuing to be a potential area of risk as they may increase the reserve and compulsory deposit or allocation requirements in the future or impose new requirements, which as a result could reduce our liquidity to fund our loan portfolio and other investments and, as a result, may have a material adverse effect on us.

 

Compulsory deposits and allocations generally do not yield the same return as other investments and deposits because a portion of compulsory deposits and allocations:

 

·do not bear interest;

 

·must be held in Brazilian federal government securities; and

 

·must be used to finance government programs, including a federal housing program and rural sector subsidies.

 

In recent years, the CMN and Brazilian Central Bank published several rules to implement Basel III in Brazil. This new set of regulations covers the revised definition of capital, capital requirements, capital buffers, credit valuation adjustments, exposures to central counterparties, leverage and liquidity coverage ratios, and treatment of systemically important financial institutions. No assurance can be

 

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given that the Basel III rules will be adopted, enforced or interpreted in a manner that will not have an adverse effect on us. Furthermore, in January 2017, the CMN issued a new rule by means of which the Brazilian Central Bank established the terms for segmentation for financial institutions, financial institution groups, and other institutions authorized to operate by the Brazilian Central Bank for proportional application of the prudential regulation, considering the size, international activity and risk profile of members of each segment. 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, anti-corruption and sanctions laws and regulations are increasingly complex and detailed. The Basel Committee is now introducing guidelines to strengthen the interaction and cooperation between prudential and AML/CFT supervisors. Compliance with these laws and regulations requires automated systems, sophisticated monitoring and skilled compliance personnel.

 

We 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 and therefore, present a risk to our Company. Our ability to comply with the legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability. These require implementation and embedding within our business effective controls and monitoring, which in turn requires ongoing changes to systems and operational activities. Financial crime is continually evolving and, as noted, is subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti-financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight of third parties to whom we outsource certain tasks and processes, there remains a risk of regulatory breach.

 

Additionally, in 2015 and early 2016, pursuant to a new resolution issued by the United Nations Security Council, as well as a recently enacted law and regulations issued by the Brazilian Central Bank for the implementation of the aforementioned resolution in Brazil, additional compliance requirements were imposed on us and other financial institutions operating in Brazil, which relate to the local

 

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enforcement of sanctions imposed by the United Nations Security Council resulting from certain resolutions. We believe we already have the control and compliance procedures in place to satisfy such additional compliance requirements. However, we continue to evaluate their impact on our control and compliance procedures and whether adjustments will need to be made to our control and compliance procedures as a result.

 

If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of licenses.

 

The reputational damage to our business and global brand would be severe if we were found to have breached AML, anti-bribery, anti-corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ data and bank products and services from being accessed or used for illegal or improper purposes.

 

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

 

In addition, we rely upon our relevant counterparties to a large degree to maintain and appropriately apply their own appropriate compliance measures, procedures and internal policies. Such measures 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 increasing scrutiny and regulation from data protection laws, including penalties in the event of noncompliance with the terms and conditions of certain new European and Brazilian regulations.

 

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

 

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

 

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

 

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

 

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

 

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

 

We are exposed to risk of loss from legal and regulatory proceedings.

 

We face risk of loss from legal and regulatory proceedings, including tax proceedings that could subject us to monetary judgments, fines and penalties. The current regulatory and tax enforcement environment in Brazil reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.

 

We are from time to time subject to regulatory investigations and civil and tax claims and party to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending activities, relationships with our employees, economic plans, and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of investigation or discovery, and we cannot state accurately what the eventual outcome of these pending matters will be. The amount of our reserves in respect to 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 highly uncertain matter may become material to our operating results. As of December 31, 2019, we had provisions for taxes, other legal contingencies and other provisions for R$11,366 million. See more information in note 23 to our audited consolidated financial statements included in this annual report.

 

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

 

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

 

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forms.

 

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

 

We are subject to review by tax authorities, and an incorrect interpretation by us of tax laws and regulations may have a material adverse effect on us.

 

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities. We are subject to the income tax laws of Brazil. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, leading to disputes, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material adverse effect on us. The interpretations of Brazilian taxing authorities are unpredictable and frequently involve litigation, which introduces further uncertainty and risk as to tax expense.

 

Changes in taxes and other fiscal assessments may adversely affect us.

 

The Brazilian government regularly enacts reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in tax rates and, occasionally, enactment of temporary levies, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business. Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing credit portfolio.

 

Changes in tax policy, including the creation of new taxes, may occur with relative frequency and such changes could have an adverse effect on our financial position or operating results. For example, in 2011, the Brazilian government established the Tax on Financial Transactions (the “IOF Tax”). It applied at a rate of 1.0% per day on the notional value of increased foreign exchange exposure, but has currently reduced the rate to zero with respect to foreign exchange. The IOF Tax rates applicable to local loans to individuals and legal entities have been frequently adjusted (both increases and decreases) in recent years. The currently applicable IOF Tax rates applicable to local loans are approximately 1.5% for legal entities and 3.0% for individuals, but could change in the future. We cannot estimate the impact that a change in tax laws or tax policy could have on our operations. For example, the IOF Tax is a tool used by the Brazilian government to regulate economic activity, which does not directly impact our results of operations, though changes in the IOF Tax can impact our business volumes generally.

 

Also, the Brazilian Congress may discuss broad tax reforms in Brazil to improve the efficiency of allocation of the economic resources, as proposed by the executive branch of the Brazilian federal government. Major tax reforms in Brazil have been discussed over the last few years. We cannot predict if tax reforms will be implemented in the future. The effects of these changes, if enacted, and any other changes that could result from the enactment of additional tax reforms, cannot be quantified.

 

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

 

Our fixed-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 terms 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 loss reserves could be insufficient to cover our 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 to a wide range of our businesses. Non-performing or low credit quality loans can negatively impacted our results of operations as the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future (the credit quality of which may turn out to be worse than we had anticipated), or other factors, including factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Brazil and globally. If we were unable to control the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

 

Our provisions for impairment losses are based on our current assessment, as well as expectations, concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities 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. As many of these factors are beyond our control and there is no infallible method for predicting loan and credit losses, we cannot assure you that our current or future provisions for impairment losses will be sufficient to cover actual losses. If our assessment of and expectations concerning the abovementioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, or if the future actual losses exceed our estimates of expected losses, we may be required to increase our provisions for impairment losses, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

 

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

 

The recent slow growth rate of the Brazilian economy in 2019, 2018 and 2017 and recession in 2016, a slowdown in the growth of customer demand, an increase in market competition, changes in governmental regulation, and a decrease of the SELIC rate since 2017 have adversely affected the rate of growth of our loan portfolio in recent years. Ongoing economic uncertainty could adversely affect the liquidity, businesses and financial condition of our customers, as well as lead to a general decline in consumer spending, a rise in unemployment and an increase in household indebtedness. All of this could lead to a decrease in demand for borrowings in general, which could have a material adverse effect on our business.

 

Liquidity and funding risks are inherent in our business and since our principal sources of funds are short-term deposits, a sudden shortage of funds could cause an increase in costs of funding and an adverse effect on our revenues and our liquidity levels.

 

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific

 

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factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. Constraints in the supply of liquidity, including in interbank lending, can materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations, our growth potential and our ability to fulfill regulatory liquidity requirements.

 

Our cost of obtaining funds is directly related to prevailing interest rates and to our credit spreads, with increases in these factors increasing the cost of our funding. Credit spread variations are market-driven and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

 

Disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us. If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.

 

We rely primarily on retail deposits as our main source of funding. As of December 31, 2019, 80.6% of our customer deposits had remaining maturities of one year or less, or were payable on demand, while 31.6% of our assets have maturities of one year or more, resulting in a mismatch between the maturities of liabilities and the maturities of assets. The ongoing availability of this type of funding is sensitive to a variety of factors beyond our control, including: general economic conditions, the confidence of retail depositors in the economy and in the financial services industry, the availability and extent of deposit guarantees, as well as competition for deposits between banks or with other products. Any of these factors could significantly increase the amount of retail deposit withdrawals in a short period of time, thereby reducing our ability to access retail 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. The observations in this disclosure (exercise with daily balances for October, November and December 2019) the institution had a LCR of 126.7%, above the 100% minimum requirement. The Net Stable Funding Ratio, or “NSFR,” provides a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their activities. The NSFR, which must remain at a minimum of 100% beginning from October 1, 2018 according to CMN rules, stands at over 112.3% for us as of December 31, 2019.

 

Our cost of funding is affected by our credit ratings, and any risks may have an adverse effect on both variables. Any downgrade in (i) the rating of Brazil’s, (ii) our controlling shareholders, or (iii) our credit rating would likely increase our cost of funding, requiring us to post additional collateral under some of our derivative and other contracts and adversely affect our interest margins and operations results.

 

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our long-term debt are based on a number of factors, including our financial strength, conditions that 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 were downgraded, our credit rating would also likely be downgraded to a similar degree.

 

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Any downgrade in Brazil’s sovereign credit ratings, those of our controlling shareholder, or in our ratings, would likely increase our borrowing costs. For example, a ratings downgrade could adversely affect our ability to sell or market some of our products, such as subordinated securities, engage in certain longer-term and derivatives transactions, and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain derivative contracts and other financial commitments, we may be required to maintain a minimum credit rating or risk termination of such contracts or require the posting of collateral. Any of these results of a ratings downgrade could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

 

While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and interrelated factors and assumptions, including market conditions at the time of any downgrade, whether the downgrade of our long-term credit rating indirectly downgrades 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: the credit rating agency issuing the downgrade, any management or restructuring actions that could be taken to reduce cash outflows, and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress-testing scenarios and a portion of our total liquid assets is held against these risks, a credit rating downgrade could still have a material adverse effect on us.

 

Santander Spain’s long-term debt is currently rated investment grade by the major rating agencies: A2 stable outlook by Moody’s, A with a stable outlook by Standard & Poor’s Ratings Services, or “S&P,” 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 Brasil’s long-term debt in foreign currency is currently rated BB- with a stable outlook by S&P and Ba3 with a stable outlook by Moody’s.

 

S&P lowered Brazil’s credit rating in September 2015 from BBB- to BB+ (a non-investment-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 January 2018, Brazil was further downgraded by S&P to BB- with a stable outlook 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). Brazil’s sovereign rating is currently rated by the three major risk rating agencies as follows: BB- (stable) by S&P and Fitch, and Ba2 (stable) by Moody’s. Any further downgrade in Brazil’s sovereign rating would likely increase our funding costs and adversely affect us, including our asset quality.

 

As a result of the lowering of Brazil’s sovereign credit rating, our long-term foreign currency credit rating was lowered during the course of 2015 and in early 2016. On August 12, 2015, Moody’s lowered our credit rating from Baa2 to Baa3, lowering it again on February 25, 2016 to Ba3, and in March and

 

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May 2017 it affirmed the rating at Ba3. On September 10, 2015, S&P lowered our credit rating from BBB- to BB+ (a non-investment-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 BB- with a stable outlook from BB- with a negative outlook. We are currently rated as follows: Ba1 by S&P and Ba3 by Moody’s, both with a stable outlook. Any further downgrade in our long-term debt in foreign currency would likely increase our funding costs and adversely affect our interest margins and results of operations.

 

We cannot assure that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies that have a negative outlook with respect to us or our controlling shareholder, there can be no assurances that such agencies will revise such outlooks upward. Our failure to maintain favorable ratings and outlooks would likely increase our cost of funding and adversely affect our interest margins and results of operations.

 

The effectiveness of our credit risk management is affected by the quality and scope of information available in Brazil.

 

In assessing customers’ creditworthiness, we rely largely on the credit information available from our own internal databases, certain publicly available customer credit information, information relating to credit contracted, which is provided by the Brazilian Central Bank and other sources. Due to limitations in the availability of information and the developing information infrastructure in Brazil, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information. In addition, we cannot assure that our credit scoring systems collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly. Without complete, accurate and reliable information, we have to rely on other publicly available resources and our internal resources, which may not be effective. As a result, our ability to effectively manage our credit risk and subsequently our allowances for impairment losses may be materially adversely affected.

 

Our hedging strategy may not be able to prevent losses.

 

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

 

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

 

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

 

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

 

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

 

Social and environmental risks may have a material adverse effect on us.

 

As part of the risk analysis we undertake with respect to our customers, we take into account environmental factors (such as soil and water contamination, vegetation suppression, or lack of environmental authorizations) as well as social factors (such as the existence of working conditions akin to slavery). Any failure by us to identify and accurately assess these factors and the potential risks to us before entering into proposed transactions with our customers may result in damage to our image and reputation, as well as have a material adverse effect on our business, results of operations and financial condition.

 

The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

 

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including, among others, macroeconomic factors globally and in Brazil, as well 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 may face significant challenges in possessing and realizing value from collateral with respect to loans in default.

 

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

 

We are subject to market, operational and other related risks associated with our derivative transactions and our investment positions that could have a material adverse effect on us.

 

We enter into derivative transactions for trading purposes, as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral). We also hold securities in our own portfolio as part of our investment and hedging strategies.

 

Financial instruments, including derivative instruments and securities represented 86.7% of our total assets as of December 31, 2019. Any realized or unrealized future gains or losses from these investments or hedging strategies could have a significant impact on our income. These gains and losses, which we account for when we sell or mark to market investments in financial instruments, can vary considerably from one period to another. If, for example, we enter into derivatives transactions to protect ourselves against decreases in the value of 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

 

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

 

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

 

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

 

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

 

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

 

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems, among others. We employ a broad and diversified set of risk monitoring and risk mitigation techniques, which may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we may fail to identify or anticipate.

 

We use certain qualitative tools and metrics for managing market risk, including our use of value at risk, or “VaR,” and statistical modeling tools, which are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not

 

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take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions, which may lead management to, based on models that are poorly developed, implemented or used, or as a result of the modeled outcome, misunderstand or misuse 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. 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 retail bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human or IT systems errors. In exercising their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.

 

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

 

Failure to effectively implement, consistently monitor or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.

 

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

 

We face various cybersecurity risks, including but not limited to: penetration of our information technology systems and platforms by ill-intentioned third parties, infiltration of malware (such as computer viruses) into our systems, contamination (whether intentional or accidental) of our networks and systems by third parties with whom we exchange data, unauthorized access to confidential customer and/or proprietary data by persons inside or outside our organization, and cyber-attacks causing systems degradation or service unavailability that may result in business losses.

 

We may not be able to successfully protect our information technology systems and platforms against such threats. We have seen in recent years computer systems of companies and organizations being targeted, not only by cyber criminals, but also by activists and rogue states. We have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of our information technology systems used to service our customers.

 

If we fall victim to successful cyber-attacks or experience cybersecurity incidents in the future, we

 

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may incur substantial costs and suffer other negative consequences, such as remediation costs (liabilities for 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 increasing scrutiny and regulation governing cybersecurity risks. Such regulation is fragmented and constantly evolving. See “Item 4B—Business Overview—Regulation and Supervision—Regulations on Cybersecurity”. We could be adversely affected if new legislation or regulations are adopted or if existing legislation or regulations are modified such that we are required to alter our systems or require changes to our business practices or policies. A failure to implement all or some of these new global and local regulations, that in some cases have severe sanctions regimes, could also have a material adverse effect on us. If we fail to effectively manage our cybersecurity risk, for example, by failing to update our systems and processes in response to new threats, this could harm our reputation and adversely affect our operating results, financial condition and prospects through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets. Furthermore, upon a failure to comply with applicable law and regulation, we may be ordered to change our business practices, policies or systems in a manner that adversely impacts our operating results.

 

In addition, we may also be subject to cyber-attacks against critical infrastructures of Brazil. Our information technology systems are dependent on such critical infrastructure, and any cyber-attack against such critical infrastructure could negatively affect our ability to service our customers. As we do not operate such critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack. See “Item 4. Information on the Company—B. Business Overview.”

 

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

 

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

 

We are subject to counterparty risk in our business.

 

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us, or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries.

 

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional customers. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

 

If these risks give rise to losses, this could materially and adversely affect us. We have a diversified loan portfolio, with no specific concentration exceeding 10% of total loans. Furthermore, currently, 0.9% of our loan portfolio is allocated to our largest debtor and 6.9% to our next 10 largest debtors.

 

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However, we cannot assure this will continue to be the case. If counterparty risks give rise to losses, this could materially and adversely affect our results of operations and financial condition.

 

We face risks related to market concentration.

 

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

 

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

 

The financial problems faced by our customers could adversely affect us.

 

Market turmoil and economic recession could materially and adversely affect the liquidity, credit ratings, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets, and result in decreased demand for borrowings in general. We have credit exposure to borrowers which have entered or may shortly enter into bankruptcy or similar proceedings. We may experience material losses from this exposure.

 

In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on us.

 

We engage in transactions with related parties that others may not consider to be on an arm’s- length basis.

 

We and our affiliates have entered into a number of services agreements pursuant to which we render and/or receive services, such as administrative, accounting, finance, treasury, legal services and others from (or provide such services to) related parties. We are likely to continue to engage in transactions with such related parties (including our controlling shareholder) that others may not consider to be on an arm’s-length basis. Future conflicts of interests may arise between us and any of our affiliates, or among our affiliates, which may not be resolved in our favor. See “Item 7. Major Shareholders and Related Party Transactions.”

 

Changes in accounting standards could impact reported earnings.

 

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

 

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

 

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

 

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

 

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

 

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

 

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

 

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.

 

Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures or security breaches could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our operating results, financial condition and prospects. Further, our business is exposed to risk from potential non-compliance with policies, employee misconduct, or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented such that the data we hold is incomplete, not recoverable or not securely stored. In addition, we may be required to report events related to information security issues (including any cyber security issues), events where customer information may be compromised, unauthorized access and other security

 

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breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or delivered to our customers with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us. In addition, if we cannot maintain an effective and secure electronic data and information management system or we fail to maintain complete physical and electronic records, this could result in regulatory sanctions and serious reputational and financial harm to us.

 

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

 

Damage to our reputation could cause harm to us.

 

Maintaining a positive reputation is critical to protect our brand, attract and retain customers, investors and employees and conduct business transactions with counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, including the possibility of fraud perpetrated by our employees, litigation or regulatory enforcement, failure to deliver minimum standards of service and quality, dealings with sectors that are not well perceived by the public, ratings downgrades, significant fluctuations in our share price, dealing with customers in sanctions lists, rating downgrades, significant variations in the price of our ADRs throughout the year, compliance failures, unethical behavior, and the activities of customers and counterparties, including activities that negatively affect the environment. 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 can offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims. We cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

 

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·manage efficiently the operations and employees of expanding businesses;

 

·maintain or grow our existing customer base;

 

·assess the value, strengths and weaknesses of investment or acquisition candidates, including local regulation that can reduce or eliminate expected synergies;

 

·finance and integrate strategic investments or acquisitions;

 

·align our current information technology systems adequately with those of an enlarged group;

 

·apply our risk management policy effectively to an enlarged group; and

 

·manage a growing number of entities without over-committing management or losing key personnel.

 

Any failure to manage growth effectively could have a material adverse effect on our operating results, financial condition and prospects.

 

In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.

 

Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, could have a material adverse effect on us.

 

Goodwill impairments may be required in relation to acquired businesses.

 

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

 

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

 

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

 

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

 

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

 

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

 

Risks Relating to Our Controlling Shareholder, Our Units and American Depositary Receipts (ADRs)

 

Our ultimate controlling shareholder has a great deal of influence over our business and its interests could conflict with ours.

 

Santander Spain, our ultimate controlling shareholder, currently owns, directly and indirectly, approximately 89.5% of our total capital (not including the shares held by Banco Madesant – Sociedade Unipessoal). Due to its share ownership, our controlling shareholder has the power to control us and our subsidiaries, including the power to:

 

·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. Our corporate governance model was further amended in 2015 to reflect certain new requirements imposed on our parent company, Santander Spain, by the European Central Bank, the Bank of Spain and regulators in different jurisdictions. See “Item 16G. Corporate Governance.”

 

We operate as a stand-alone subsidiary within the Santander Group. Our controlling shareholder has no liability for our banking operations, except for the amount of its holdings of our capital stock and for other specific limited circumstances under Brazilian law. The interests of Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain

 

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will limit other stockholders’ ability to influence corporate matters. As a result, we may take actions that our other shareholders do not view as beneficial.

 

Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange, or “NYSE”, limiting the protections afforded to investors.

 

We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (i) a majority of the board of directors consists of independent directors, (ii) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (iii) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, and (iv) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Although we have similar practices, they do not entirely conform to the NYSE requirements; therefore, we currently use these exemptions and intend to continue using them. Accordingly, you will not have the same protections provided 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 cancellation 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, 2019, the aggregate market capitalization of the B3 was equivalent to approximately R$ 4.8 trillion (U.S.$1.2 trillion), and the top ten stocks in terms of trading volume accounted for approximately 36% of all shares traded on B3 in the year ended December 31, 2019. In contrast, as of December 31, 2019, the aggregate market capitalization of the NYSE was approximately U.S. 24.1 trillion. Although any of the outstanding shares of a listed company may trade on the B3, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, government entities or a principal shareholder. The relative volatility and limited liquidity of the Brazilian securities markets may substantially limit your ability to sell the units or ADRs at the time and price you desire and, as a result, could negatively impact the market price of these securities.

 

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

 

The trading market for our ADRs and our shares has been affected in part by the research and reports that industry and financial analysts publish about us or our business. We do not control these

 

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analysts. Furthermore, if one or more of the analysts 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 stops providing reports or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our ADR and/or share price or trading volume to decline.

 

The economic value of your investment may be diluted.

 

We may, from time to time, need additional funds and we may issue additional units or shares. Any additional funds obtained by such a capital increase may dilute your interest in our company.

 

Discontinuation of the current corporate governance practices may negatively affect the price of our ADRs and units.

 

After completion of the voluntary exchange offers by Santander Spain in Brazil and in the United States (respectively, the “Brazilian Exchange Offer” and the “U.S. Exchange Offer”) for the acquisition of up to all 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 or 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$10.8 billion, R$6.6 billion and R$6.3 billion (R$2.90, R$1.77 and R$1.68 per unit, respectively) as dividends and interest on stockholders’ equity (considering gross value) in 2019, 2018 and 2017, respectively, in accordance with our dividend policy, but there can be no assurance that dividends and interest on stockholders’ equity will be paid in the future. We are also subject to Brazilian banking regulations that may limit the payment of dividends or interest on stockholders’ equity. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—History of Payment of Dividends and Interest Attributable to Stockholders’ Equity.”

 

Holders of ADRs may find it difficult to exercise voting rights at our stockholders’ meetings.

 

Holders of ADRs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our By-Laws and Brazilian Corporate Law. Holders of ADRs may exercise voting rights with respect to the units represented by ADRs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADR holders. For example, we are required to publish a notice of our 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 depositary to do so. To

 

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exercise their voting rights, holders of ADRs must instruct the ADR depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of ADRs than for holders of our units or shares. If the ADR depositary fails to receive timely voting instructions for all or part of the ADRs, the depositary will assume that the holders of those ADRs are instructing it to give a discretionary proxy to a person designated by us to vote their ADRs, except in limited circumstances.

 

Holders of ADRs also may not receive the voting materials in time to instruct the depositary to vote the units underlying their ADRs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADRs or for the manner of carrying out those voting instructions. Accordingly, holders of ADRs may not be able to exercise voting rights, and they will have little, if any, recourse if the units underlying their ADRs are not voted as requested.

 

Holders of ADRs could be subject to Brazilian income tax on capital gains from sales of ADRs.

 

Law 10,833 of December 29, 2003 provides that the disposal of assets located in Brazil by a nonresident to either a Brazilian resident or a nonresident is subject to taxation in Brazil, regardless of whether the disposal occurs outside or within Brazil. This provision results in the imposition of income tax on the gains arising from a disposal of our units by a nonresident of Brazil to another nonresident of Brazil. It is unclear whether ADRs representing our units, which are issued by the ADR depositary outside Brazil, will be deemed to be “property located in Brazil” for purposes of this law. We believe ADRs do not qualify as property located in Brazil and, thus, should not be subject to Brazilian income tax. Nevertheless, there is no judicial guidance as to the application of Law 10,833 of December 29, 2003 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADRs between non-residents of Brazil. However, in the event that the disposition of assets is interpreted to include a disposition of our ADRs, this tax law would accordingly impose withholding taxes on the disposition of our ADRs by a nonresident of Brazil to another nonresident of Brazil. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations.”

 

Any gain or loss recognized by a U.S. taxpayer will generally be treated as U.S. source gain or loss. A U.S. taxpayer would not be able to credit any Brazilian tax imposed on the disposition of our units or ADRs against such person’s U.S. federal income tax liability, unless such credit can be applied (subject to applicable limitations) against tax due on other income of such person from foreign sources. See “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations for U.S. Holders.”

 

Our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the United States.

 

Issuers of securities in Brazil are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in other countries, including the United States. In particular, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with IFRS as issued by the IASB and Brazilian GAAP, both of which differ from U.S. GAAP in a number of respects. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner with which you are not familiar.

 

Investors may find it difficult to enforce civil liabilities against us or our directors and officers.

 

The majority of our directors and officers reside outside of the United States. In addition, all or a substantial portion of our assets and the assets of our directors and officers are located outside of the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADRs, none of our directors or officers has consented to service

 

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

 

Judgments of Brazilian courts with respect to our units or ADRs will be payable only in reais.

 

Our By-Laws provide that we, our shareholders, our directors and officers and the members of our fiscal council shall submit to arbitration any and all disputes or controversies that may arise amongst ourselves relating to, or originating from, the application, validity, effectiveness, interpretation, violations and effects of violations of the provisions of Brazilian Corporate Law, our By-Laws, the rules and regulations of the CMN, the Brazilian Central Bank and the CVM, as well as other rules and regulations applicable to the Brazilian capital markets and the rules and regulations of the Arbitration Regulation of the Market Arbitration Chamber. However, in specific situations, including whenever precautionary motions are needed for protection of rights, the dispute or controversy may have to be brought to a Brazilian court. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the units or ADRs, we will not be required to discharge our obligations in a currency other 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.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

4A.History and Development of the Company

 

General

 

We are a publicly held corporation (sociedade 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 and the website is https://www.santander.com.br/ri. In addition, the SEC maintains a website at www.sec.gov that contains information filed by us electronically. The information contained on our website, any website mentioned in this annual report or any website directly or indirectly linked to these websites, is not part of, and is not incorporated by reference in, this annual report and you should not rely on such information.

 

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

 

History

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Santander Brasil Timeline

 

In 1957, the Santander Group entered the Brazilian market for the first time through an operating agreement with Banco Intercontinental do Brasil S.A. In 1970, the Santander Group opened a representative office in Brazil, followed by its first branch in 1982. The foundation of Santander Brasil was in 1985 through an acquisition of a local bank.

 

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

 

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

 

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

 

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

 

Important Events

 

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

 

Sale of equity stake in Super Pagamentos e Administração de Meios Eletrônicos S.A.

 

On February 28, 2020, we sold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Super Pagamentos e Administração de Meios Eletrônicos S.A. (“Superdigital”). We received consideration of R$270 million for our interest in Superdigital. As a result, we are no longer a shareholder of Superdigital.

 

Put option of the remaining equity interest in Banco Olé 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.

 

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On January 31, 2020, Santander Brasil and the shareholders of Bosan Participações S.A. (holding company whose single asset are the shares representing 40% of the corporate capital of Banco Olé) have entered into the definitive agreements and performed the closing acts related to the purchase and sale of all shares issued by Bosan, upon transferring Bosan’s shares to Santander Brasil and the payment to the sellers of the total price of R$1,608,772,783,47. As a result, Santander Brasil became, directly and indirectly, the holder of all shares issued by Banco Olé.

 

Establishment of Credit Intelligence Bureau

 

On January 20, 2016, we entered into a non-binding memorandum of understanding with Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A., for creation of a credit intelligence bureau, Gestora de Inteligência de Crédito S.A., or “CIB”. The CIB was structured as a corporation and each of Santander Brasil, Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A. have a 20% ownership stake in the corporation.

 

The purpose of the CIB is to develop a database that, in conformity with applicable laws, will collect, reconcile and handle the credit information of registered individuals and legal entities who expressly authorize the inclusion of their credit information on the CIB’s database. 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. The CIB became 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 to provide, respectively, auto finance and insurance brokerage services and products to consumers through the Hyundai dealerships in Brazil.

 

Aymoré CFI holds a 50% equity stake in Banco Hyundai Capital Brasil S.A., while Hyundai Capital holds the remaining 50% equity interest.

 

On February 21, 2019, the Brazilian Central Bank granted Banco Hyundai Capital Brasil S.A. the authorization to operate as a banking entity. Banco Hyundai Capital Brasil S.A. began operating in the first half of 2019.

 

On April 30, 2019, the Brazilian Central Bank authorized the formation of the insurance brokerage company. The insurance brokerage company was incorporated on July 2, 2019 and began operating in November 2019.

 

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, 2019, Atual Companhia Securitizadora de Créditos Financeiros, or “Atual,” informed the remaining shareholders of the Return Entities´ of its decision to exercise its call option for shares representing the remaining 30% of the Return Entities’ total voting capital owned for a value of approximately R$17 million. The transaction was completed on November 1, 2019. As a result of this transaction, Atual currently owns 100% of the Return Entities’ issued and outstanding share capital. The Return Entities are active in the credit recovery intelligence sector, providing services such as credit portfolio evaluation and pricing, collection, management and recovery of non-performing loans.

 

Joint Venture with HDI Seguros

 

On December 20, 2017, we entered into binding agreements with HDI Seguros for the formation

 

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

 

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

 

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

 

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

 

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

 

Formation of BEN Beneficios

 

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

 

Acquisition of residual equity stake in Getnet

 

On December 19, 2018, the minority shareholders of Getnet exercised their right to sell all of their shares to Santander Brasil, or the “Put Option”, pursuant to the Shares’ Purchase and Sale Agreement and Other Covenants executed between the parties on April 4, 2014, or “SPA”. On the exercise date of the 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 the transaction closed on February 25, 2019. As a result Santander Brasil currently owns 100% of Getnet’s issued and outstanding share capital.

 

Sale of equity stake in CIBRASEC – Companhia Brasileira de Securitização

 

On July 24, 2019, we completed the sale to ISEC Securitizadora S.A. (“ISEC”) of our entire equity interest in CIBRASEC – Companhia Brasileira de Securitização (“Cibrasec”), corresponding to 4,000 common shares and 50 Class A preferred shares, representing in the aggregate approximately 9.72% of Cibrasec’s total capital stock. The transaction was effected pursuant to the Shares Purchase and Other Covenants Agreement executed on the same date by Santander Brasil, the other shareholders of Cibrasec, ISEC and Cibrasec, as intervening party. We received consideration of R$ 9.8 million for our interest in Cibrasec. As a result, we are no longer a shareholder of Cibrasec.

 

Projections Disclosure

 

On October 8, 2019, we informed the market that we have decided to disclose projections (guidance) with respect to certain of our indicators for the year of 2022. While we believe that the projections, which we intend to disclose, are based on reasonable assumptions made by our management, such projections are nevertheless subject to significant uncertainties and matters outside of our control, including: the future average growth of our loan portfolio, return on equity (ROE), cost

 

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to income (end of term), the future average growth in the number of our active customers and our Prospera (microcredit) customers.

 

Buyback Program

 

On November 1, 2019, our board of directors approved, in continuation of the buyback program set to expire on November 5, 2019, a buyback program of units and ADRs issued by us, directly or through our branch in the Cayman Islands, to be held in treasury or subsequently sold. The buyback program will cover the acquisition of up to 37,256,072 units or ADRs, representing a combination of 37,256,072 common and 37,256,072 preferred shares, corresponding to approximately 1% of our share capital. The term of the buyback program is up to 12 months beginning November 5, 2019, and expiring on November 4, 2020.

 

Issuance of Notes

 

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

 

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

 

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

 

Capital Expenditures and Divestitures

 

Our main capital expenditures include investments in our Information Technology (“IT”) platform. Our IT platform focuses on our customers and supports our business model. In 2019, 2018 and 2017, total investments in IT were R$1,858 million, R$1,276 million and R$1,132 million, respectively.

 

In 2019, we realized meaningful transformations in our operations and technologic infrastructure, through the implementation of various and modern solutions in the areas of Artificial Intelligence (Machine Learning, AIOPs), Micro Services, BPM, Block Chain, Cybernetic Insurance, Facial Recognition, MultiCloud, among others. The application of these new technologies allowed the renovation of our digital channels for continually improve the experience of interaction between clients and the bank, searching for offer services more and more practical and intuitive, besides makes possible the launch of products all digital and innovative in the areas of Credit, Consortium, Payments, Agribusiness, Investments, in a way to serve the demands and expectations of the modern client.

 

In the physical service’s scope (Branch, PABs and PAEs), applying new functionalities, including: biometry for clients PJ in transactions with card, purchase and payment of exchange by digital treasure, administration of single line for a more efficient organization of the service and recognition of preferential clients in the totem of branches, searching for more security, agility and service’s personalization. For more details about our infrastructure of Technology, consult the item “ B. Business Overview - Technology and Infrastructure”.

 

Our major divestiture in the past three fiscal years and until the date of this annual report was the sale 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.”).

 

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4B.Business Overview

  

Our Strategy

 

Our strategy is to endeavor to grow in a profitable, recurring and sustainable manner by providing services with excellence and consistently strive to enhance customer satisfaction levels, expand our customer base and increase the loyalty of our customers.

 

To accomplish this goal, we have been deeply focused on understanding how the Brazilian market works to address its demands effectively. As a consequence of our initiatives, Santander Brasil has made substantial progress in all key business areas, highlighted by a remarkable ROE evolution in the last five years. We believe we have been able to redirect our efforts toward a customer-centric business model with efficiency and risk model accuracy.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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business and technology areas, who are given autonomy to make decisions rapidly. Thanks to that, we have been able to offer products and services, as well as add system updates through all our available channels quickly. These tools include: (i) providing a wide range of services across all channels according to customers' choices and/or needs; (ii) giving customers the ability to meet all their needs through digital channels; and (iii) integrating all service channels to ensure that customers have a homogeneous experience, regardless of the channel chosen.

 

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

 

•        Greater empowerment and incentives for branch staff. We have sought to decentralize the management of branch resources. Branch managers are now responsible for managing the expenses of their branches, and each branch has its own results report. This gives branch employees and managers a higher sense of autonomy and responsibility, as well as the feeling of being part of their own branch's success. Additionally, we have made some adjustments to the 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, we have established clear and horizontal communication of senior management with employees, promoting meritocracy and diversity. In line with this practice, Santander Academy encourages our staff to assume a proactive role in their technical training and has been attended by 75% of total employees, who act as internal multipliers. As a result, in 2019, we were recognized for the fourth consecutive year as one of the Best Companies to Work for in Brazil, according to the GPTW (Great Place to Work) survey.