20-F 1 dp146764_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, 2020

 

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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

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

 

U.S. GAAP

 

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

 

Other

 

 

 

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

 

Item 17 Item 18
   

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

 

Yes No

 

table of contents

 

Page

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION 7
FORWARD-LOOKING STATEMENTS 9
PART I 12
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 12
1A.   Directors and Senior Management 12
1B.   Advisers 12
1C.   Auditors 12
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 12
2A.   Offer Statistics 12
2B.   Method and Expected Timetable 12
ITEM 3. KEY INFORMATION 12
3A.   Selected Financial Data 12
3B.   Capitalization and Indebtedness 21
3C.   Reasons for the Offer and Use of Proceeds 21
3D.   Risk Factors 21
ITEM 4. INFORMATION ON THE COMPANY 64
4A.   History and Development of the Company 64
4B.   Business Overview 71
4C.   Organizational Structure 147
4D.   Property, Plant and Equipment 149
ITEM 4A. UNRESOLVED STAFF COMMENTS 149
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 149
5A.   Operating Results 149
5B.   Liquidity and Capital Resources 181
5C.   Research and Development, Patents and Licenses, etc. 185
5D.   Trend Information 185
5E.   Off-Balance Sheet Arrangements 186
5F.   Contractual Obligations 187
5G.   Safe Harbor 187
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 187
6A.   Board of Directors and Board of Executive Officers 185
6B.   Compensation 201
6C.   Board Practices 206
6D.   Employees 214
6E.   Share Ownership 216
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 217
7A.   Major Shareholders 217

 

 

7B.   Related Party Transactions 219
7C.   Interests of Experts and Counsel 220
ITEM 8. FINANCIAL INFORMATION 220
8A.   Consolidated Statements and Other Financial Information 220
8B.   Significant Changes 230
ITEM 9. THE OFFER AND LISTING 230
9A.   Offering and Listing Details 230
9B.   Plan of Distribution 237
9C.   Markets 237
9D.   Selling Shareholders 237
9E.   Dilution 237
9F.   Expenses of the Issue 237
ITEM 10. ADDITIONAL INFORMATION 237
10A. Share Capital 237
10B.  By-Laws 237
10C.  Material Contracts 249
10D.  Exchange Controls 249
10E.  Taxation 250
10F.  Dividends and Paying Agents 258
10G.  Statement by Experts 259
10H.  Documents on Display 259
10I.   Subsidiary Information 259
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 259
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 282
12A.    Debt Securities 282
12B.    Warrants and Rights 282
12C.    Other Securities 282
12D.   American Depositary Receipts 282
PART II 284
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 284
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 284
ITEM 15. CONTROLS AND PROCEDURES 284
15A.   Disclosure Controls and Procedures 284
15B.   Management’s Annual Report on Internal Control over Financial Reporting 284
15C.   Audit Report of the Registered Public Accounting Firm 285
15D.   Changes in Internal Control over Financial Reporting 285
ITEM 16. [RESERVED] 285
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 285

 

 

ITEM 16B. SANTANDER BRASIL’S CODE OF ETHICAL CONDUCT 286
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 286
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 287
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 287
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 288
ITEM 16G. CORPORATE GOVERNANCE 288
ITEM 16H. MINE SAFETY DISCLOSURE 291
PART III 292
ITEM 17. FINANCIAL STATEMENTS 292
ITEM 18. FINANCIAL STATEMENTS 292
ITEM 19. EXHIBITS 292

 

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

 

All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” 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, 2020, which was R$5.1967 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, 2020, 2019 and 2018, and for the years ended December 31, 2020, 2019 and 2018. 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, 2020, 2019 and 2018 have been audited by PricewaterhouseCoopers Auditores Independentes, an independent registered public accounting firm, whose report and unqualified opinion is included herein.

 

IFRS differs in certain significant aspects in comparison with the generally accepted accounting principles in the United States, or “U.S. GAAP”. 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, 2020, 2019 and 2018, included herein, contains information relating to certain differences between IFRS and Brazilian GAAP.

 

7 

As required by the Brazilian Central Bank and Brazilian law, we must prepare consolidated financial statements in accordance with IFRS. However, we also continue to prepare statutory financial statements in accordance with accounting practices and standards established by: (i) Law No. 6,404 of December 15, 1976, as amended by Law 11,638 (“Brazilian Corporate Law”); (ii) the National Monetary Council (Conselho Monetário Nacional), or “CMN”; (iii) the Brazilian Central Bank including the regulatory reports set forth in the Standard Chart of Accounts for Brazilian Financial Institutions (Plano Contábil das Instituições do Sistema Financeiro Nacional), (iv) the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários), or “CVM”, to the extent that such practices do not conflict with the rules of the Brazilian Central Bank; (v) the Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis), to the extent that such practices are approved by the Brazilian Central Bank; (vi) the National Council of Private Insurance (Conselho Nacional de Seguros Privados); and (vii) the Superintendence of Private Insurance (Superintendência de Seguros Privados, “SUSEP”), which is the insurance commissioner, responsible for the supervision and control of the insurance, open private pension funds and capitalization markets in Brazil. 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” for additional information.

 

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:

 

·the COVID-19 pandemic and other actual or potential epidemics, pandemics, outbreaks, or other public health crises, which could have an adverse impact on our business (see “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Financial Services Industry and Our Business—The current global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations,” “Item 4. Information on the Company—A. History and Development of the Company—Important Events—Impact of COVID-19” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Financial Condition and Results of Operations—Impact of COVID-19”);

 

·the impact of the COVID-19 pandemic on general economic and business conditions in Brazil, Latin America and globally and any restrictive measures imposed by governmental authorities in response to the outbreak;

 

·our ability to implement, in a timely and efficient manner, any measure necessary to respond to, or reduce the impacts of the COVID-19 pandemic on our business, operations, cash flow, prospects, liquidity and financial condition;

 

·general economic, political, social and business conditions in Brazil, including the impact of the current international economic environment and the macroeconomic conditions in Brazil, and the policies of the administration of Brazil which took office on January 1, 2019;

 

·exposure to various types of inflation and interest rate risks, and the Brazilian government’s 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;

 

9 

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

 

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

 

·changes in reserve requirements;

 

·changes in taxes or other fiscal assessments;

 

·potential losses associated with an increase in the level of nonperforming loans or non-performance by counterparties to other types of financial instruments;

 

·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 our controlling shareholder;

 

·restrictions on the distribution of dividends to holders of our shares and ADRs representing American Depositary Shares (or “ADSs”);

 

·the effectiveness of our credit risk management policies;

 

·our ability to adequately manage market and operational risks;

 

·potential deterioration in the value of the collateral securing our loan portfolio;

 

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

 

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

 

·our ability to protect personal data;

 

·our ability to protect ourselves against cybersecurity risks;

 

·our ability to protect our reputation;

 

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

 

·our ability to manage the growth of our operations;

 

·our ability to successfully and effectively integrate acquisitions or to evaluate risks arising from asset acquisitions; and

 

·other risk factors as set forth under “Item 3. Key Information—D. Risk Factors” in this annual report.

 

10 

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.

 

11 

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

 

The following tables set forth the selected financial information of Santander Brasil as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 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 “Item 5. Operating and Financial Review and Prospects”, as well as our audited consolidated financial statements and the related notes thereto included within this annual report.

 

12 

Income Statement Data

 

   For the Year Ended December 31,
   2020  2020  2019  2018  2017  2016
   (in millions of U.S.$)(1)  (in millions of R$)
Interest and similar income   12,080    62,775    72,841    70,478    71,418    77,146 
Interest expense and similar charges   (3,528)   (18,332)   (28,520)   (28,557)   (36,472)   (46,560)
Net interest income   8,552    44,443    44,321    41,921    34,946    30,586 
Income from equity instruments   6    34    19    33    83    259 
Income from companies accounted for by the equity method   22    112    149    66    72    48 
Fee and commission income   3,965    20,607    20,392    17,728    15,816    13,548 
Fee and commission expense   (843)   (4,378)   (4,679)   (3,596)   (3,094)   (2,571)
Gains (losses) on financial assets and liabilities (net)   2,501    12,998    2,463    (2,783)   969    3,016 
Exchange differences (net)   (4,753)   (24,701)   (2,789)   (2,806)   605    4,575 
Other operating income (expenses)   (168)   (873)   (1,108)   (1,056)   (672)   (625)
Total income   9,283    48,242    58,769    49,507    48,725    48,837 
Administrative expenses   (3,293)   (17,115)   (16,942)   (16,792)   (16,121)   (14,920)
Depreciation and amortization   (496)   (2,579)   (2,392)   (1,740)   (1,662)   (1,483)
Provisions (net)(2)   (319)   (1,657)   (3,682)   (2,000)   (3,309)   (2,725)
Impairment losses on financial assets (net)(3)   (3,358)   (17,450)   (13,370)   (12,713)   (12,338)   (13,301)
Impairment losses on other assets (net)   (16)   (85)   (131)   (508)   (457)   (114)
Gains (losses) on disposal of assets not classified as non-current assets held for sale   44    231    11    (25)   (64)   4 
Gains (losses) on non-current assets held for sale not classified as discontinued operations   15    77    10    182    (260)   87 
Operating profit before tax   1,860    9,664    22,273    15,910    14,514    16,384 
Income taxes   729    3,787    (5,642)   (3,110)   (5,376)   (8,919)
Consolidated Profit for the Year   2,588    13,451    16,631    12,800    9,138    7,465 
(1)Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2020, for reais into U.S. dollars of R$5.1967 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 21 and 22 to our consolidated financial statements.

(3)Credit loss allowance less recovery of loans previously written off.

 

13 

Earnings and Dividend per Share Information

 

   For the Year Ended December 31,
   2020  2019  2018  2017  2016
Basic and Diluted Earnings per 1,000 shares               
From continuing and discontinued operations(1)                         
Basic Earnings per shares (reais)                         
Common Shares   1,713.45    2,094.83    1,604.34    1,133.43    929.93 
Preferred Shares   1,884.80    2,304.32    1,764.78    1,246.77    1,022.92 
Diluted Earnings per shares (reais)                         
Common Shares   1,713.45    2,094.83    1,604.34    1,132.44    929.03 
Preferred Shares   1,884.80    2,304.32    1,764.78    1,245.69    1,021.93 
Basic Earnings per shares (U.S. dollars) (2)                         
Common Shares   329.72    519.72    414.05    342.63    285.34 
Preferred Shares   362.69    571.69    455.45    376.90    313.87 
Diluted Earnings per shares (U.S. dollars) (2)                         
Common Shares   329.72    519.72    414.05    342.33    285.06 
Preferred Shares   362.69    571.69    455.45    376.57    313.57 
From continuing operations                         
Basic Earnings per shares (reais)                         
Common Shares   1,713.45    2,094.83    1,604.34    1,133.43    929.93 
Preferred Shares   1,884.80    2,304.32    1,764.78    1,246.77    1,022.92 
Diluted Earnings per shares (reais)                         
Common Shares   1,713.45    2,094.83    1,604.34    1,132.44    929.03 
Preferred Shares   1,884.80    2,304.32    1,764.78    1,245.69    1,021.93 
Basic Earnings per shares (U.S. dollars) (2)                         
Common Shares   329.72    519.72    414.05    342.63    285.34 
Preferred Shares   362.69    571.69    455.45    376.90    313.87 
Diluted Earnings per shares (U.S. dollars) (2)                         
Common Shares   329.72    519.72    414.05    342.33    285.06 
Preferred Shares   362.69    571.69    455.45    376.57    313.57 
                          
Dividends and interest on capital per 1,000 shares (undiluted)                         
Common Shares (reais)    1,693.28    1,378.87    841.68    801.63    666.21 
Preferred Shares (reais)    1,631.71    1,516.76    925.85    881.80    732.83 
Common Shares (U.S. dollars)(2)   325.84    342.09    217.22    242.33    204.42 
Preferred Shares (U.S. dollars)(2)   313.99    376.30    238.94    266.57    224.86 
Weighted average share outstanding (in thousands) – basic                         
Common Shares   3,800,140    3,802,303    3,807,386    3,822,057    3,828,555 
Preferred Shares   3,664,666    3,663,444    3,668,527    3,683,145    3,689,696 
Weighted average shares outstanding (in thousands) – diluted                         
Common Shares   3,800,140    3,802,303    3,807,386    3,825,313    3,832,211 
Preferred Shares   3,664,666    3,663,444    3,668,527    3,686,401    3,693,352 
(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, 2020, for reais into U.S. dollars of R$5.1967 to U.S.$1.00.

 

14 

Balance Sheet Data

 

   As of December 31,
   2020  2020  2019  2018  2017  2016
   (in millions of U.S.$)(1)  (in millions of R$)
Assets                  
Cash and balances with the Brazilian Central Bank(2)   3,876    20,149    20,127    19,464    20,642    26,285 
Financial assets held for trading(2)   -    -    -    -    86,271    131,245 
Financial Assets Measured At Fair Value Through Profit Or Loss   11,719    60,900    32,342    43,712    -    - 
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading   18,948    98,467    57,021    68,852    -    - 
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss   95    500    171    917    -    - 
Other financial assets at fair value through profit or loss   -    -    -    -    1,692    1,711 
Available-for-sale financial assets   -    -    -    -    85,823    57,815 
Financial Assets Measured At Fair Value Through Other Comprehensive Income   21,117    109,740    96,120    85,437    -    - 
Held to maturity investments   -    -    -    -    10,214    10,048 
Loans and receivables(2)   -    -    -    -    368,729    333,997 
Financial Assets Measured At Amortized Cost (2)   106,784    554,925    474,681    429,731    -    - 
Hedging derivatives   143    743    340    344    193    223 
Non-current assets held for sale   210    1,093    1,325    1,380    1,155    1,338 
Investments in associates and joint ventures   211    1,095    1,071    1,053    867    990 
Tax assets   7,902    41,064    33,599    31,566    28,826    28,753 
Other assets   1,390    7,222    5,061    4,800    4,578    5,104 
Tangible assets   1,835    9,537    9,782    6,589    6,510    6,646 
Intangible assets   5,920    30,766    30,596    30,019    30,202    30,237 
Total assets   180,153    936,201    762,237    723,865    645,703    634,393 
Average total assets*   164,453    854,615    735,507    685,531    637,511    605,646 
Liabilities                              
Financial liabilities held for trading   14,941    77,643    -    -    49,323    51,620 
Financial Liabilities Measured At Fair Value Through Profit Or Loss Held For Trading   -    -    46,065    50,939    -    - 
Financial Liabilities Measured At Fair Value Through Profit Or Loss   1,354    7,038    5,319    1,946    -    - 
Financial liabilities at amortized cost   136,103    707,289    575,230    547,295    478,881    471,579 
Deposits from the Brazilian Central Bank and deposits from credit institutions   25,335    131,657    99,271    99,023    79,375    78,634 
Customer deposits   85,788    445,814    336,515    304,198    276,042    247,445 
Marketable debt securities   10,945    56,876    73,702    74,626    70,247    99,843 
Subordinated debts   -    -    -    9,886    519    466 
Debt Instruments Eligible to Compose Capital   2,525    13,120    10,176    9,780    8,437    8,312 
Other financial liabilities   11,512    59,823    55,566    49,783    44,261    36,879 
Hedging derivatives   28    145    201    224    163    311 
Provisions(3)   2,658    13,815    16,332    14,696    13,987    11,776 
Tax liabilities   1,949    10,130    10,960    8,075    8,248    6,095 
Other liabilities   2,704    14,051    10,921    9,095    8,014    8,199 
Total liabilities   159,738    830,112    665,028    632,270    558,615    549,581 
Stockholders’ equity   20,437    106,205    96,711    91,882    87,425    85,435 
Other Comprehensive Income   (82)   (428)   (86)   (879)   (774)   (1,348)
Non-controlling interests   60    313    583    593    437    726 
Total Stockholders’ Equity   20,415    106,090    97,209    91,595    87,088    84,812 
Total liabilities and stockholders’ equity   180,153    936,201    762,237    723,865    645,703    634,393 
Average interest-bearing liabilities*   110,345    573,429    491,187    463,388    416,816    408,067 
Average total stockholders’ equity*   19,538    101,531    95,836    89,263    87,868    84,283 
*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, 2020, for reais into U.S. dollars of R$5.1967 to U.S.$1.00.

(2)In the fiscal year ended December 31, 2018, as a result of the implementation of IFRS 9, the balances related loans and receivables, assets held for trading, held to maturity, available for sale and compulsory deposits on time deposits were reclassified to new accounts prescribed by IFRS 9.

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

 

15 

Selected Consolidated Ratios (*)

 

   As of and for the Year Ended December 31,
   2020  2019  2018  2017  2016
             (%)           
Profitability and performance                         
Return on average total assets   1.6    2.3    1.9    1.4    1.2 
Asset quality                         
Impaired assets as a percentage of loans and advances to customers (gross)(1)   5.5    6.7    7.0    6.7    7.0 
Impaired assets as a percentage of total assets(1)   2.5    3.1    3.1    3.0    3.0 
Impairment losses to customers as a percentage of impaired assets(1) (4)   103.8    87.8    90.3    80.5    87.0 
Impairment losses to customers as a percentage of loans and advances to customers (gross) (5)   5.8    5.9    6.3    5.4    6.1 
Derecognized assets as a percentage of loans and advances to customers (gross)   3.7    4.3    3.5    4.7    4.3 
Impaired assets as a percentage of stockholders’ equity(1)   21.8    24.3    24.5    22.0    22.3 
Capital adequacy                         
Basel capital adequacy ratio(2)   15.3    15.0    15.1    15.8    16.3 
Efficiency                         
Efficiency ratio(3)   35.5    28.8    33.9    33.1    30.6 
*The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and for each of the month-end balances of the 12 subsequent months.

(1)Impaired assets include all loans and advances past due by more than 90 days and other doubtful credits. For further information, see 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.

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

(4)In 2020, including the debt instruments accounted for as financial assets measured at amortized cost, the ratio is 110.6%. For 2019 the ratio was 96.8%. The debt instruments amount was not material in preceding years.

(5)In 2020, including the debt instruments accounted for as financial assets measured at amortized cost, the ratio is 6.1%. For 2019 the ratio was 5.8%. The debt instruments amount was not material in preceding years.

 

16 

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

 

   As of and for the Year Ended December 31,
   2020  2019  2018  2017  2016
    (%) 
Profitability and performance                         
Net yield (1)   6.0    6.8    6.9    6.4    6.2 
Return on average stockholders’ equity (2)   13.2    17.4    14.3    10.4    8.9 
Adjusted return on average stockholders’ equity (2)   18.4    24.7    21.0    15.4    13.3 
Average stockholders’ equity as a percentage of average total assets (2)(*)   11.9    13.0    13.0    13.8    13.9 
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill (2)(*)   8.8    9.6    9.3    9.8    9.7 
Asset quality                         
Impaired assets as a percentage of credit risk exposure (3)   5.0    6.0    6.2    5.8    6.3 
Impaired assets as a percentage of stockholders’ equity excluding goodwill (2)(3)   29.8    34.4    35.5    32.6    33.5 
Liquidity                         
Loans and advances to customers, net as a percentage of total funding (4)   76.3    62.9    60.6    62.7    58.0 
Efficiency                         
Adjusted efficiency ratio(5)   27.7    28.2    30.3    32.5    34.9 

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

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

(2) “Adjusted return on average stockholders’ equity,” “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” and “Impaired assets as a percentage of stockholders’ equity excluding goodwill” are non-GAAP financial measures which adjust “Return on average stockholders’ equity,” “Average stockholders’ equity as a percentage of average total assets” and “Impaired assets as a percentage of stockholders’ equity,” to exclude the goodwill arising from the acquisition of Banco Real in 2008, Getnet Adquirência e Serviços para Meios de Pagamento S.A., or “GetNet” and Super Pagamentos e Administração de Meios Eletrônicos Ltda., or “Super”, both in 2014, Banco Olé Bonsucesso Consignado S.A. (the current name of Banco Bonsucesso Consignado S.A.) 60% in 2015 and the remaining 40% in 2020, and BW Guirapá I S.A. in 2016. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding the substantial impact of the R$27 billion goodwill arising from the acquisition of Banco Real during the year ended December 31, 2008, the R$1.1 billion goodwill arising from the acquisition of GetNet and Super both during 2014, the acquisition of an interest in Banco Olé Bonsucesso Consignado S.A. in 2015. Accordingly, we believe that the non-GAAP financial measures presented are useful to investors. The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill.

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

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

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

 

   For the Year Ended December 31,
   2020  2019  2018  2017  2016
   (in millions of R$, except percentages)
Effects of the hedge for investments held abroad   13,583    1,264    5,867    (810)   (6,140)
Efficiency ratio   35.5%   28.8%   33.9%   33.1%   30.6%
Adjusted efficiency ratio   27.7%   28.2%   30.3%   32.5%   34.9%

17 

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. See “Item 4. Information on the Company—4A. History and Development of the Company—Important Events.” The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill, as set forth in the above tables. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.

 

18 

   As of and for the Year Ended December 31,
   2020  2019  2018  2017  2016
   (in millions of R$, except as otherwise indicated)
Return on average stockholders’ equity:                         
Consolidated profit for the year   13,451    16,631    12,800    9,138    7,465 
Average stockholders’ equity (*)   101,531    95,836    89,263    87,868    84,283 
Return on average stockholders’ equity (*)   13.2%   17.4%   14.3%   10.4%   8.9%
Adjusted return on average stockholders’ equity(*):                         
Consolidated profit for the year   13,451    16,631    12,800    9,138    7,465 
Average stockholders’ equity(*)   101,531    95,836    89,263    87,868    84,283 
Average goodwill(*)   28,513    28,213    28,176    28,360    28,343 
Average stockholders’ equity excluding goodwill(*)   73,018    67,623    61,087    59,508    55,940 
Adjusted return on average stockholders’ equity(*)(3)   18.4%   24.6%   21.0%   15.4%   13.3%
Average stockholders’ equity as a percentage of average total assets(*):                         
Average stockholders’ equity(*)   101,531    95,836    89,263    87,868    84,283 
Average total assets(*)   854,615    735,507    685,531    637,511    605,646 
Average stockholders’ equity as a percentage of average total assets(*)   11.9%   13.0%   13.0%   13.8%   13.9%
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*):                         
Average stockholders’ equity(*)   101,531    95,836    89,263    87,868    84,283 
Average goodwill(*)   28,513    28,213    28,176    28,360    28,343 
Average stockholders’ equity excluding goodwill(*)   73,018    67,623    61,087    59,508    55,940 
Average total assets(*)   854,615    735,507    685,531    637,511    605,646 
Average goodwill(*)   28,513    28,213    28,176    28,360    28,343 
Average total assets excluding goodwill(*)   826,102    707,294    657,355    609,151    577,334 
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*)   8.8%   9.6%   9.3%   9.8%   9.7%
Impaired assets as a percentage of stockholders’ equity:                         
Impaired assets   23,176    23,426    22,426    19,145    18,887 
Stockholders’ equity   106,090    97,209    91,595    87,088    84,813 
Impaired assets as a percentage of stockholders’ equity   21.8%   24.1%   24.5%   22.0%   22.3%
Impaired assets as a percentage of stockholders’ equity excluding goodwill:                         
Impaired assets   23,176    23,426    22,426    19,145    18,887 
Stockholders’ equity   106,090    97,209    91,595    87,089    84,813 
Goodwill   28,360    28,375    28,378    28,364    28,355 
Stockholders’ equity excluding goodwill   77,730    68,834    63,217    58,724    56,458 
Impaired assets as a percentage of stockholders’ equity excluding goodwill   29.8%   34.0%   35.5%   32.6%   33.5%
Impaired assets as a percentage of loans and receivables:                         
Loans and advances to customers, gross   417,822    347,257    321,933    287,829    268,438 
Impaired assets   23,176    23,426    22,426    19,145    18,887 
Impaired assets as a percentage of loans and receivables   5.5%   6.7%   7.0%   6.7%   7.0%
Impaired assets as a percentage of credit risk exposure:                         
Loans and advances to customers, gross   417,822    347,257    321,933    287,829    268,438 
Guarantees   48,282    44,313    42,260    42,645    33,265 
Credit risk exposure   466,115    391,569    364,182    330,474    301,703 
Impaired assets   23,176    23,426    22,426    19,145    18,887 
Impaired assets as a percentage of credit risk exposure   5.0%   6.0%   6.2%   5.8%   6.3%
Loans and advances to customers, net as a percentage of total funding:                         
Loans and advances to customers, gross   417,822    347,257    321,933    287,829    268,438 
Impairment losses(1)   24,054    20,557    20,242    15,409    16,435 
Total Funding(2)   647,465    519,664    497,512    434,620    434,502 
Loans and advances to customers, net as a percentage of total funding(2)   60.8%   62.9%   60.6%   62.7%   58.0%
(*)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 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,
   2020  2019  2018  2017  2016
   (in millions of R$, except as otherwise indicated)
Efficiency ratio                         
Administrative expenses   17,115    16,942    16,792    16,121    14,920 
Total income   48,242    58,769    49,507    48,725    48,837 
of which:                         
Gains (losses) on financial assets and liabilities (net) and exchange differences (net)   (11,703)   (326)   (5,589)   1,574    7,590 
Efficiency ratio   35.5%   28.8%   33.9%   33.1%   30.6%
Total Income   48,242    58,769    49,507    48,725    48,837 
Effects of the hedge for investments held abroad   13,583    1,264    5,867    (810)   (6,140)
Total income excluding effects of the hedge for investments held abroad   61,825    60,033    55,374    47,915    42,697 
Administrative expenses   17,115    16,942    16,792    16,121    14,920 
Efficiency ratio adjusted for effects of the hedge for investments held abroad   27.7%   28.2%   30.3%   33.6%   34.9%

19 

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

 

The information in the table below presents the calculation of specified non-GAAP financial measures from each of their most directly comparable IFRS financial measures. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding effects of the hedge for investments held abroad. The limitation associated with the exclusion of effects of the hedge for investments held abroad is that it has the effect of excluding a portion of gains/losses on financial assets and liabilities (net) plus exchange differences (net) line item which is offset by excluding a portion in the Income tax line item. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.

 

   As of and for the year ended December 31,
   2020  2019  2018  2017  2016
   (in millions of R$, except as otherwise indicated)
                
Gains/losses on financial assets and liabilities (net) plus exchange differences (net)   (11,703)   (326)   (5,589)   1,574    7,591 
Effects on hedge for investment held abroad   13,583    1,264    5,867    (810)   (6,140)
Adjusted Gains/losses on financial assets and liabilities (net) plus exchange differences (net)   (25,286)   (1,590)   (11,456)   764    1,451 
Total Income   48,242    58,769    49,507    48,725    48,837 
Effects on hedge for investment held abroad   13,583    1,264    5,867    (810)   (6,140)
Adjusted Total Income   61,825    60,033    55,374    47,915    42,697 
Operating profit before tax   9,664    22,273    15,910    14,514    16,384 
Effects on hedge for investment held abroad   13,583    1,264    5,867    (810)   (6,140)
Adjusted Operating profit before tax   23,247    23,537    21,777    13,704    10,244 
Income Tax   3,787    (5,642)   (3,110)   (5,376)   (8,919)
Effects on hedge for investment held abroad   (13,583)   (1,264)   (5,867)   810    6,140 
Adjusted Income tax   (9,796)   (6,906)   (8,897)   (4,566)   (2,779)
Operating profit before tax – Commercial Banking   4,666    18,375    12,397    11,220    12,652 
Effects on hedge for investment held abroad   13,583    1,264    5,867    810    6,140 
Adjusted Operating Profit before tax – Commercial Banking   18,249    19,639    18,264    12,030    6,512 

 
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 exchange rate volatility. However, the Brazilian Central Bank has intervened occasionally to moderate exchange rate volatility. 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.

 

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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 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 “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil and Macroeconomic Conditions in Brazil and Globally—Exchange rate volatility may have a material adverse effect on the Brazilian economy and on us.”

 

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

 

   Period-end  Average(1)  Low  High
   (per U.S. dollar)
Year:            
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 
2020   5.20    5.16    4.02    5.94 
Month Ended:                    
September 2020   5.64    5.40    5.25    5.65 
October 2020   5.77    5.63    5.52    5.78 
November 2020   5.33    5.42    5.28    5.69 
December 2020   5.20    5.15    5.06    5.28 
January 2021   5.48    5.36    5.16    5.51 
February 2021 (through February 24, 2021)   5.42    5.41    5.34    5.50 

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, 2020, the exchange rate for euro to real was R$ 6.3779 per €1.00.

 

3B. Capitalization and Indebtedness

 

Not applicable.

 

3C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

3D. Risk Factors

 

This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. You should carefully read and consider the following risks, along with the other information included in this Annual Report on Form 20-F. The risks described below are not the only ones we face. Additional risks that we do not presently consider material, or of which we are not currently aware, may also affect us. Our business, results of operations or financial condition could be impacted if any of these risks materialize and, as a result, the market price of our Units and of our ADRs could be affected.

 

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Summary of Risk Factors

 

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

 

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

 

·Inflation, government efforts to control inflation, and changes in interest rates may hinder the growth of the Brazilian economy and could have an adverse effect on us.

 

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

 

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

 

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

 

·Infrastructure, labor force deficiency and other factors in Brazil may impact economic growth and have a material adverse effect on us.

 

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

 

Summary of Risks Relating to the Brazilian Financial Services Industry and Our Business

 

·The current global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.

 

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

 

·We may not be able to detect or prevent money laundering and other criminal activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

 

·We are subject to increasing scrutiny and regulation from data protection laws. Failure to protect personal information could adversely affect us.

 

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

 

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

 

·Changes in taxes and other fiscal assessments may adversely affect us. Furthermore, we are subject to review by tax authorities, and an incorrect interpretation by us of tax laws and regulations may have a material adverse effect on us.

 

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

 

·The credit quality of our loan portfolio may deteriorate and our loan loss reserves could be insufficient to cover our loan losses, which could have a material adverse effect on us.

 

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

 

·The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio. We may face significant challenges in possessing and realizing value from collateral with respect to loans in default.

 

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

 

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

 

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

 

·We are subject to counterparty risk in our business.

 

·Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.

 

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

 

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

 

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

 

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

 

·Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange, or “NYSE”, limiting the protections afforded to investors. Furthermore, our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the U.S.

 

·The liquidity and market prices of the units and the ADRs may be adversely affected by the cancellation of units or substantial sale of units and shares in the market.

 

·The relative volatility and limited liquidity of the Brazilian securities markets may negatively affect the liquidity and market prices of the units and the ADRs.

 

·Holders of our units and our ADRs may not receive any dividends or interest on stockholders’ equity, may be unable to exercise preemptive rights with respect to our units underlying the ADRs, and may find it difficult to exercise voting rights at our shareholders’ meetings.

 

·Investors may find it difficult to enforce civil liabilities against us, our directors or officers. In addition, judgments of Brazilian courts with respect to our units or ADRs will be payable only in reais.

 

·Holders of ADRs and could be subject to Brazilian income tax on capital gains from sales of ADRs. Furthermore, if you exchange your ADRs for their underlying Units, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad.

 

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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;

 

·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.

 

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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 Brazil’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.

 

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.

 

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 are 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, then increased by 1.3% in 2017 and 2018, 1.1% in 2019 and it is estimated to have contracted by 4.1% in 2020). 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.

 

25 

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. Further downgrading of Brazil’s credit rating could reduce the trading price of units and ADRs. Various major Brazilian companies were also downgraded. Such downgrades have further worsened the conditions of the Brazilian economy and the condition of Brazilian companies, especially those relying on foreign investments. 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, 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.

 

Since mid-2016, the Brazilian base interest rate, or SELIC, has been on a downward trend. The SELIC rate reached a high as 14.25% as of October, 2016, before decreasing to 13.75% p.a. by the end of 2016. The SELIC rate fell further to 7.00% p.a. by the end of 2017, and to 6.50% p.a. in March 2018. The SELIC rate remained at this level until June 2019, when it resumed its downward trend, ending 2019 at 4.50% p.a. As a result of the negative economic impact of the COVID-19 pandemic, the SELIC rate continued fall during 2020, and reached a historical low at 2.00% p.a. in August 2020, which is the current level as of the date of this report.

 

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 2020, a 1.0% increase or decrease in the base interest rate would have resulted in a decrease or increase, respectively, in our net interest income of R$432 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, such as 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 2020, each additional percentage point change in inflation would impact our personnel and other administrative expenses by approximately R$94 million and R$77 million, respectively.

 

26 

Inflation has increased slightly during 2020, reaching 4.52% for the 12-month period ended December 31, 2020 (compared to 4.31% in 2019), mainly as a result of temporary supply shocks affecting the prices of foodstuffs.

 

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 bonds. As of December 31, 2020, approximately 20.5% of our total assets, and 83.4% 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 for 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 21 to our consolidated financial statements.

 

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 lifetime medical assistance plan. However, in 2020, there were two factors that contributed to the reduction of our provisions when compared to 2019: first, the greater-than-average profitability of investments indexed to the IGPM, and secondly, a reduction of medical expenses.

 

As of December 31, 2020, our provisions for pensions and other obligations totaled R$14 million. For additional information, see note 21 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.

 

27 

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. As a result of fluctuations in commodity prices, international developments and periods of progress and setbacks on the domestic front—such as during the presidential impeachment process in 2016, or the approval of the national pension system reform in 2019—the real has weakened over the last few years. After having ended 2013 with an exchange rate of R$2.34 per U.S.$1.00, the real/U.S. dollar exchange rate was R$2.65 per U.S.$1.00 on December 31, 2014, depreciating further to R$3.91 per U.S.$1.00 on December 31, 2015. Despite the instability caused by a change in Brazil’s presidency, the real appreciated 17.0% year-on-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, but continued to depreciate in the following years, reaching R$3.88 per U.S.$1.00 as of December 31, 2018, and R$4.03 per U.S.$1.00 as of December 31, 2019. In May 2020, in response to the turbulence and uncertainty caused by the COVID-19 pandemic, the exchange rate almost surpassed the level of R$6.00 per U.S.$1.00, but finished the year at R$5.20 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, 2020, 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$2.55 million.

 

Past episodes of depreciation of the real relative to the U.S. dollar created additional inflationary pressures in Brazil, which 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 hinder export-driven growth. Depending on the circumstances, either a 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, labor force 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 being followed by a three-year streak of growth in 2017 (1.0%), 2018 (1.1%) and 2019 (1.0%). For 2020, based on our internal estimates, we expect that Brazilian GDP declined by 4.1% as a result of the impacts of the COVID-19 pandemic. Growth has been 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.

 

28 

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 2020, 2019 and 2018, 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. In 2020, the fallout of the COVID-19 pandemic has also affected the performance of Brazilian markets. These uncertainties adversely affected us and the market value of our securities.

 

In addition, we continue to be exposed to disruptions and volatility in the global financial markets because of their effects on the financial and economic environment, particularly in Brazil, such as a slowdown in the economy, an increase in the unemployment rate, a decrease in the purchasing power of consumers and the lack of credit availability. We lend primarily to Brazilian borrowers, and these effects could materially and adversely affect our customers and increase our non-performing loans, resulting in increased risk associated with our lending activity and requiring us to make corresponding revisions to our risk management and loan loss reserve models.

 

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 the UK’s withdrawal from the European Union and, more recently, the economic setbacks derived from the COVID-19 pandemic. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States. 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.

 

29 

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 January 31, 2020 the UK ceased to be a member of the EU, on withdrawal terms which established a transition period until December 31, 2020, during which the UK continued to be treated as an EU member state and applicable EU legislation continued to be in force. A trade deal was agreed between the UK and the EU prior to the end of the transition period and the new regulations came into force on January 1, 2021. The trade deal, however, did not include agreements on certain areas, such as financial services and data adequacy. Hence, some uncertainty remains around the terms of the UK's relationship with the EU and the lack of a fully comprehensive trade agreement may negatively impact the economic growth of both regions. By the same token, an adverse effect on the UK and the EU may hit the wider global economy or market conditions and investor confidence. This could, in turn, have a material adverse effect on our operations, financial condition and prospects and/or the market value of our securities.

 

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

 

The current global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.

 

Since December 2019, a disease caused by a new strain of coronavirus, or COVID-19, spread in the People’s Republic of China and progressively to the rest of the world, mainly to Europe, Latin America (including Brazil) and the United States, among others. The outbreak was declared a public health emergency of international concern and a global pandemic by the World Health Organization.

 

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Countries around the world have responded to the COVID-19 pandemic by adopting a variety of measures in an attempt to contain the spread and impact of COVID-19, including imposing mass quarantines or other containment measures, shelter-in-place orders and medical screenings, restricting travel, limiting public gatherings and suspending most economic activities. These measures have resulted in a severe decrease of global economic activity and falls in production and demand, which has led to sharp declines in the GDP of those countries that are most affected by the pandemic, and is expected to continue to have an overall negative impact on global GDP in 2020 and 2021. Other consequences include increased unemployment levels, sharp decreases and high volatility in the stock markets, disruption of global supply chains, exchange rate volatility, steady customer draws on lines of credit, decline in real estate prices, and uncertainty in relation to the future impact in regional and global economies in the medium and long term. These measures have also negatively impacted, and could continue to negatively impact, businesses, market participants, our counterparties and customers, and the global economy for a prolonged period of time. Furthermore, it is unclear how the macroeconomic business environment or societal norms may be impacted after the pandemic. The post-COVID-19 environment may undergo unexpected developments or changes in the financial markets, fiscal, tax and regulatory environments as well as customer and corporate client behavior which could have an adverse impact on our business.

 

Many governments and regulatory authorities, including central banks, have acted, and may further act, to provide relief from the economic and market disruptions resulting from the COVID-19 pandemic, including providing fiscal and monetary stimuli to support the global economy, lowering federal funds rates and interest rates, and granting partial or total deferral (grace period) of principal and/or interest payments due on loans. It is difficult to predict how effective these and other measures taken to mitigate the economic effects of the pandemic will be. For more information on the measures taken by the Brazilian Central Bank to combat the COVID-19 pandemic, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulatory Developments Related to COVID-19.”

 

Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued material adverse effect on our business and results of operations, which could include, but is not limited to (i) a continued decreased demand for our products and services; (ii) protracted periods of lower interest rates and resulting pressure on our margins; (iii) further material impairment of our loans and other assets including goodwill; (iv) decline in value of collateral; (v) constraints on our liquidity due to market conditions, exchange rates and customer withdrawal of deposits and continued draws on lines of credit; and (vi) downgrades to our credit ratings. See also “Our cost of funding is affected by our credit ratings and any risks may have an adverse effect on our credit ratings and our cost of funds. Any downgrade in Brazil’s, our controlling shareholders, or our credit rating, would likely increase our cost of funding, requiring us to post additional collateral under some of our derivative and other contracts and adversely affect our interest margins and results of operations.”

 

Additionally, unprecedented movement in economic and market drivers related to the COVID-19 pandemic impact the performance of financial models including credit loss models, capital models, traded risk models and models used in the asset/liability management process. This has required additional monitoring and adjustments to comply with the guidance and recommendations of standard setters, regulators and supervisors, particularly for credit loss models. It also has resulted in the use of mitigants for model limitations, such as adjustments to model outputs to reflect consideration of management judgment. The performance and usage of models has been and may continue to be impacted by the consequences of the COVID-19 pandemic. While it is too early to be entirely certain of the magnitude of change required for our models, it is likely that capital, credit risk and other models will need to be adjusted. The effectiveness of our models will depend in large part on the depth and length of the economic downturn.

 

Moreover, our operations will continue to be impacted by risks from remote working arrangements or bans on non-essential activities. For example, some of our branches in Brazil have been closed and others have been functioning with reduced hours for a significant period of time. During 2020, we had more than half of our total workforce working remotely, which has increased cybersecurity risks given greater use of computer networks outside the corporate environment. If we become unable to successfully operate our business from remote locations including, for example, due to failures of our technology infrastructure, increased cybersecurity risks, or governmental restrictions that affect our operations, this could result in business disruptions that could have a material and adverse effect on our business.

 

We may also be adversely affected by measures taken by the Brazilian and other governments to mitigate the effects of the COVID-19 pandemic. For example, a temporary suspension on dividends and other distributions was enacted in Brazil through Resolution No. 4,820, limiting the distributions to shareholders 30% of adjusted net profit (following amendments enacted on December 23, 2020). As a result, we only distributed R$3,837 million as dividends and interest on equity in 2020 compared to R$10,800 million in 2019.

 

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If the COVID-19 pandemic continues to adversely affect the global economy and/or adversely affect our business, financial condition, liquidity or results of operations, it may also increase the likelihood and/or magnitude of other risks described in this “Risk Factors” section.

 

For more information about specific measures that we have adopted and potential impacts on our business operations, see “Item 4. Information on the Company—A. History and Development of the Company—Important Events—Impact of COVID-19” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Financial Condition and Results of Operations—Impact of COVID-19.”

 

Our growth, asset quality and profitability, among others, may be adversely affected by a slowdown in Brazil, as well as volatile macroeconomic and political conditions.

 

During 2020, most world economies faced severe recession as a result of COVID-19 which could lead major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies to experience significant difficulties, including runs on deposits, the need for government assistance or the need to reduce or cease providing funding to borrowers (including to other financial institutions).

 

Volatile conditions in the global financial markets could also have a material adverse effect on us, including on our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

 

In particular, we face, among others, the following risks related to the economic downturn and volatile conditions:

 

·Reduced demand for our products and services.

 

·Increased regulation of our industry. Compliance with such regulation will continue to increase our costs and may affect the pricing for our products and services, increase our conduct and regulatory risks related to non-compliance and limit our ability to pursue business opportunities.

 

·Inability of our borrowers to timely or fully comply with their existing obligations. Macroeconomic shocks may negatively impact the income of our customers, both retail and corporate, and may adversely affect the recoverability of our loans, resulting in increased loan losses. 

 

The process we use to estimate losses inherent in our credit exposure requires complex judgements, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan loss allowances.

 

The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.

 

The recoverability of our loan portfolios and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Brazil. See “—The credit quality of our loan portfolio may deteriorate and our loan loss reserves could be insufficient to cover our loan losses, which could have a material adverse effect on us.”

 

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In addition, we are exposed to sovereign debt in Brazil. Recessionary conditions in Brazil would likely have a significant adverse impact on our loan portfolio and sovereign debt holdings and, as a result, on our financial condition, cash flows and results of operations.

 

Our revenues are also subject to risk of deterioration from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps, tax and monetary policies.

 

The economy of Brazil has experienced significant volatility in recent decades. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the Brazilian economy to which we lend. In addition, Brazil is affected by commodities price fluctuations, which in turn may affect financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. Negative and fluctuating economic conditions, such as slowing or negative growth and a changing interest rate environment, could impact our profitability by causing lending margins to decrease and credit quality to decline and leading to decreased demand for higher margin products and services. In particular, the recent political and social instability in Chile could have a negative impact on the economy of Brazil and may have a material adverse effect on us.

 

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 as payment services for block-chain technologies, may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive prices 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 distributed ledger, artificial intelligence and/or biometrics, to provide services such as cryptocurrencies and payments, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies and mobile banking platforms could negatively impact the value of our investments in bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in demand toward internet and mobile banking may necessitate changes to our retail distribution strategy. Our failure to swiftly and effectively implement changes to our distribution strategy could have an adverse effect on our competitive position.

 

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In particular, we face the challenge to compete in an ecosystem where the relationship with the consumer is based on access to digital data and interactions. This access is increasingly dominated by digital platforms who are already eroding our results in very relevant markets such as payments. This privileged access to data can be used as a leverage to compete with us in other adjacent markets and may reduce our operations and margins in core businesses such as lending or wealth management. The alliances that our competitors are starting to build with major technology companies can make it more difficult for us to successfully compete with them and could adversely affect us.

 

Increasing competition could also require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on our profitability, as well as limit our ability to increase our customer base and expand our operations, further increasing competition for investment opportunities.

 

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

 

Our ability to maintain our competitive position depends, in part, on the success of new products and services that we offer to our customers, as well as our ability to offer products and services that meet the customers’ needs throughout their entire life cycle, and we may not be able to manage emerging risks as we expand our range of products and services, which could have a material adverse effect on us.

 

The success of our operations and our profitability depends, in part, on the success of new products and services we offer our customers and our ability to offer products and services that meet the customers’ needs during their entire life cycle. However, our customers’ needs and/or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our customers’ changing needs and/or desires. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs and/or desires of our customers, we may lose them, which could in turn materially and adversely affect us. In addition, the cost of developing products is likely to affect our results of operations.

 

As we expand the range of our products and services, some of which may be at an early stage of development certain regional markets where we operate, we will be exposed to new and potentially increasingly complex risks, such as conduct risk arising from relationships with customers, and development expenses. Our employees and risk management systems, as well as our experience and that of our partners may not be sufficient to enable us to properly manage such risks. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

 

While we have successfully increased our customer service levels in recent years, should these levels ever be perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

 

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

 

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

 

·minimum capital requirements;

 

·reserve and compulsory deposit requirements;

 

·limits on investments in fixed assets;

 

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

 

·limits and other restrictions on interest rates and fees;

 

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

 

·accounting and statistical requirements.

 

The regulations governing Brazilian financial institutions are 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. Regulations 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.

 

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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, in their products and services, and the prices and other terms applied to them, is likely to continue. Changes to current legislation and their implementation through regulation (including additional capital, leverage, funding, liquidity and tax requirements), policies (including fiscal and monetary policies established by central banks and financial regulators, and changes to global trade policies), and other legal and regulatory actions may impose additional regulatory burdens on Santander Group, including Santander Brasil, in these jurisdictions. In the European Union, these reforms could include changes relating to capital requirements, liquidity and funding, or 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, which 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.

 

We are subject to regulation on a consolidated basis and may be subject to liquidation or intervention on a consolidated basis.

 

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We operate in a number of credit and financial-services-related sectors through entities under our control. For certain purposes related to regulation and supervision, the Brazilian Central Bank treats us and our subsidiaries and affiliates as a single financial institution. While our consolidated capital base provides financial strength and flexibility to our subsidiaries and affiliates, their individual activities could indirectly put our capital base at risk. Any investigation or intervention by the Brazilian Central Bank, particularly in the activities carried out by any of our subsidiaries and affiliates, could have a material adverse impact on our other subsidiaries and affiliates and, ultimately, on us. If we or any of our financial subsidiaries become insolvent, the Brazilian Central Bank may carry out an intervention or liquidation process on a consolidated basis rather than conduct such procedures for each individual entity. In the event of an intervention or a liquidation process on a consolidated basis, our creditors would have claims to our assets and the assets of our consolidated financial subsidiaries. In this case, claims of creditors of the same nature held against us and our consolidated financial subsidiaries would rank equally in respect of payment. If the Brazilian Central Bank carries out a liquidation or intervention process with respect to us or any of our financial subsidiaries on an individual basis, our creditors would not have a direct claim on the assets of such financial subsidiaries, and the creditors of such financial subsidiaries would have priority in relation to our creditors in connection with such financial subsidiaries’ assets. The Brazilian Central Bank also has the authority to carry out other corporate reorganizations or transfers of control under an intervention or liquidation process.

 

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; 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.

 

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—Basel III” 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 Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT supervisors). Compliance with these laws and regulations requires automated systems, sophisticated monitoring and skilled compliance personnel.

 

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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 recently enacted laws and regulations issued by the Brazilian Central Bank requiring the implementation of the aforementioned resolution in Brazil, additional compliance requirements were imposed on us and other financial institutions operating in Brazil, which relate to the local enforcement of sanctions imposed by the United Nations Security Council resulting from certain resolutions. We believe we already have the control and compliance procedures in place to satisfy such additional compliance requirements. However, we continue to evaluate their impact on our control and compliance procedures and whether adjustments will need to be made to our control and compliance procedures as a result.

 

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

 

The reputational damage to our business and global brand would be severe if we were found to have breached AML, anti-bribery, 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.

 

Furthermore, 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 benefit of R$83 million (approximately U.S.$25 million) for us. On October 23, 2018, the officer was formally indicted and asked to present his defense. On November 5, 2018 the officer in question presented his defense. The proceedings are currently 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 heavily on our relevant counterparties to maintain and 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 “blocked 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.

 

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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 “GDPA,” (Lei Geral de Proteção de Dados) was approved in the Federal Official Gazette on August 14, 2018 and, as amended by the Law No. 13,853/2019, took effect in September 2020. Law No. 13,853/2019 also set up the National Data Protection Authority for purposes of monitoring, implementing and supervising compliance with the GDPA in Brazil. The GDPA also brings about deep changes in the conditions for personal data processing, with a set of rules to be observed in activities such as collection, processing, storage, use, transfer, sharing and erasure of information concerning identified or identifiable natural persons in Brazil.

 

Although a number of basic existing principles have remained the same, the GDPR has introduced extensive new obligations on data controllers and rights for data subjects. The GDPA applies to 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 GDPA will apply irrespective of industry or business when dealing with personal data and is not restricted to data processing activities performed through digital media and/or on the internet.

 

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

 

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

 

For more information on the rules implementing GDPA, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision— Other Applicable Laws and Regulations—Data Protection Requirements.”

 

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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, we cannot state with certainty 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, 2020, we had provisions for taxes, other legal contingencies and other provisions of R$9,887 million. See more information in note 22 to our audited consolidated financial statements included in this annual report.

 

We may face operational difficulties under the Brazilian instant payment scheme.

 

On November 16, 2020, the Brazilian Central Bank instituted its instant payment scheme (“PIX”), as well as the Instant Payment System (“SPI”), which enables participants to settle electronic transfers of funds in real time and available for 24 hours a day, seven days a week and every day in the year.

 

As a direct participant of the PIX, we may face operational issues, as well as difficulties in adapting to the requirements established by the PIX payment scheme regulations and by the other applicable rules, mainly related to the minimum level of service to be provided on a recurring basis to customers. As a result, we may be the target of administrative sanctions and/or judicial claims, either by the Brazilian Central Bank itself or as a result of complaints brought by our customers. Furthermore, as a consequence of potential administrative sanctions or judicial claims, we may face difficulties in retaining customers in relation to Santander SX, our solution for our customers to access PIX, which may have a material adverse effect on our financial results, as well as our reputation.

 

In addition, the Brazilian Central Bank may issue new and stricter rules applicable to PIX participants, including new operational capacity requirements. The imposition by the Brazilian Central Bank of new requirements may adversely affect our operations.

 

For more information related to the PIX and the SPI, see “Item 4. Information on the Company—B.—Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Brazilian Payment and Settlement System.” For more information related to Santander SX, see “Item 4. Information on the Company—B. Business Overview—Our Portfolio of Products and Services—Customer Solutions—Santander SX.”

 

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 us in reports filed or submitted under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

 

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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 tax 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 tax 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 tax 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”), which used to be charged at 1.0% per day over the notional value of increased foreign exchange exposure, but has currently been reduced to zero with respect to foreign exchange. The IOF Tax rates applicable to local loans of individuals and legal entities have been frequently adjusted (both increases and decreases) in recent years. The currently applicable IOF Tax rates applicable to local loans are approximately 1.5% for legal entities and 3.0% for individuals but could change in the future. We cannot estimate the impact that a change in tax laws or tax policy could have on our operations. For example, the IOF Tax is a tool used by the Brazilian government to regulate economic activity, which does not directly impact our results of operations, though changes in the IOF Tax can impact our business volumes generally.

 

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

 

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

 

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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 impact 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, including as a result of the COVID-19 pandemic. In response to COVID-19, with the purpose of helping our customers from the credit perspective and foster their economic resilience, we have implemented several actions, including (i) providing liquidity and credit facilities to customers facing hardship; (ii) granting payment deferrals in outstanding loans; (iii) focus credit risk management on those economic sectors more affected by the pandemic; (iv) focus on collections and recoveries readiness; and (v) quantifying the provision overlay on the expected credit losses as a result of the macroeconomic shock. 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.

 

On December 31, 2020, our credit risk (which includes gross loans and advances to customers, guarantees and documentary credits) amounted to R$466,104 million (compared to R$391,569 million as of December 31, 2019).

 

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

 

The recent slow growth rate of the Brazilian economy in 2020, 2019 and 2018, as well as 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, as well as a recession in 2016 have adversely affected the rate of growth of our loan portfolio in recent years. Ongoing economic uncertainty could adversely affect the liquidity, businesses and financial condition of our customers, as well as lead to a general decline in consumer spending, a rise in unemployment and an increase in household indebtedness. All of this could lead to a decrease in demand for borrowings in general, which could have a material adverse effect on our business.

 

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

 

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including overreliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation, including as a result of the COVID-19 pandemic. Constraints in the supply of liquidity, including in interbank lending, can materially and adversely affect the cost of funding of our business, and extreme liquidity constraints may affect our current operations, our growth potential and our ability to fulfill regulatory liquidity requirements.

 

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, 2020, 82.0% of our customer deposits had remaining maturities of one year or less, or were payable on demand, while 48.9% of our assets had 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 arise, this could have a material adverse effect on our operating results, financial condition and prospects.

 

Central banks around the world have taken extraordinary measures to increase liquidity in the financial markets as a response to the financial crisis and the COVID-19 crisis. If current credit facilities are rapidly removed or significantly reduced, this could have a material adverse effect on our ability to access liquidity and on our funding costs.

 

Additionally, our activities could be adversely impacted by liquidity tensions arising from generalized drawdowns of committed credit lines to our customers.

 

Our ability to manage our funding base may also be affected by changes to the regulation on compulsory reserve requirements in Brazil. For more information on the rules on compulsory reserve requirements, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Compulsory Reserve Requirements.”

 

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We cannot assure that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected. Finally, the implementation of internationally accepted liquidity ratios might require changes in business practices that affect our profitability. The liquidity coverage ratio, or “LCR,” 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. For the observations in this disclosure (exercised with daily balances for October, November and December 2020), the institution had an LCR of 170.7%, above the 100% minimum requirement. The Net Stable Funding Ratio, or “NSFR,” provides a sustainable maturity structure of assets and liabilities so 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 118.6% for us as of December 31, 2020.

 

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.

 

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 rating downgrade could adversely affect our ability to sell or trade 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 negative outlook by Standard & Poor’s Ratings Services, or “S&P,” and A- with a negative outlook by Fitch Ratings Ltd., or “Fitch”. In April 2018, following the upgrade of the Spanish sovereign debt rating, S&P and Moody’s upgraded their ratings of Santander Spain from A- to A and from A3 to A2, respectively, and in July 2018, Fitch confirmed its rating and outlook. In 2019, the agencies maintained their 2018 analysis, considering, in some cases, a positive rating depending Santander Spain’s performance in 2019. However, due to the crisis caused by the COVID-19 pandemic and the macroeconomic deterioration in 2020, S&P and Fitch revised the outlook to negative, while Moody’s maintained its rating and outlook.

 

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Our long-term debt in foreign currency is currently rated BB- with a stable outlook by S&P and Ba1 with a stable outlook by Moody’s.

 

S&P lowered Brazil’s credit rating in September 2015 from BBB- to BB+ (a non-investment-grade rating), and then again in mid-February 2016 from BB+ to BB with a negative outlook, mainly due to the continuing weak economic conditions of Brazil, political instability, the ongoing Lava Jato investigations, and uncertainty as to whether the Brazilian government will enact reforms in the 2016 federal budget to improve Brazil’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 Brazil. In February 2018, Fitch further downgraded Brazil to BB-. Moody’s lowered Brazil’s credit rating from Baa2 to Baa3 (the lowest investment grade rating) in August 2015, and then to Ba2 (a non-investment-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 May 2017, it affirmed the rating of Ba1. 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, we were downgraded by S&P to BB- with a stable outlook from BB with a negative outlook. We are currently rated as follows: BB- by S&P and Ba1 by Moody’s, both with a stable outlook. Any further downgrade in our long-term debt in foreign currency would likely increase our funding costs and adversely affect our interest margins and results of operations.

 

We cannot assure that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies that have a negative outlook with respect to us or our controlling shareholder, there can be no assurances that such agencies will revise such outlooks upward. In general, the future evolution of our ratings will be linked, to a large extent, to the macroeconomic outlook and to the impact of the COVID-19 pandemic (including, for example, additional waves, new lockdowns, etc.) on our asset quality, profitability and capital, as well as on the rating of Santander Spain. Our failure to maintain favorable ratings and outlooks would likely increase our cost of funding and adversely affect our interest margins and results of operations.

 

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

 

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

 

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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 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.

 

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

 

If we are unable to recover sums owed to us under secured loans in default through extrajudicial measures such as restructurings, our last recourse with respect to such loans may be to enforce the collateral secured in our favor by the applicable borrower. Depending on the type of collateral granted, we either have to enforce such collateral through the courts or through extrajudicial measures. However, even where the enforcement mechanism is duly established by the law, Brazilian law allows borrowers to challenge the enforcement in the courts, even if such challenge is unfounded, which can delay the realization of value from the collateral. In addition, our secured claims under Brazilian law will in certain cases rank below those of preferred creditors such as employees and tax authorities. As a result, we may not be able to realize value from the collateral, or may only be able to do so to a limited extent or after a significant amount of time, thereby potentially adversely affecting our financial condition and results of operations.

 

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 88.1% of our total assets as of December 31, 2020. As of December 31, 2020, the notional value of derivatives in our books amounted to R$2,752,683 million (with a market value of R$28,871 million of debit balance and R$31,980 million of credit balance).

 

Any realized or unrealized future gains or losses from these investments or hedging strategies could have a significant impact on our income. These gains and losses, which we account for when we sell or mark to market investments in financial instruments, can vary considerably from one period to another. If, for example, we enter into derivatives transactions to protect ourselves against decreases in the value of the real or in interest rates and the real instead increases in value or interest rates increase, we may incur financial losses. We cannot forecast the amount of gains or losses in any future period, and the variations experienced from one period to another do not necessarily provide a meaningful forward-looking reference point. Gains or losses in our investment portfolio may create volatility in net revenue levels, and we may not earn a return on our consolidated investment portfolio, or on a part of the portfolio in the future. Any losses on our securities and derivative financial instruments could materially and adversely affect our operating income and financial condition. In addition, any decrease in the value of these securities and derivatives portfolios may result in a decrease in our capital ratios, which could impair our ability to engage in lending activity at the levels we currently anticipate.

 

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

 

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

 

Interest rate, equity, foreign exchange rate and other types of indices, which are deemed to be “benchmarks,” including those in widespread and long-standing use, have been the subject of ongoing international, national and other regulatory scrutiny and initiatives and proposals for reform. Some of these reforms are already effective while others are still to be implemented or are under consideration. These reforms may cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated.

 

Any of the benchmark reforms which have been proposed or implemented, or the general increased regulatory scrutiny of benchmarks, could also increase the costs and risks of administering or otherwise participating in the setting of benchmarks and complying with regulations or requirements relating to benchmarks. Such factors may have the effect of discouraging market participants from continuing to administer or contribute to certain benchmarks, trigger changes in the rules or methodologies used in certain benchmarks or lead to the disappearance of certain benchmarks.

 

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Any of these developments, and any future initiatives to regulate, reform or change the administration of benchmarks, could result in adverse consequences to the return on, value of and market for loans, mortgages, securities, derivatives and other financial instruments whose returns are linked to any such benchmark, including those issued, funded or held by Santander Brasil. Various regulators, industry bodies and other market participants in the U.S. and other countries have worked to develop, introduce and encourage the use of alternative rates to replace certain benchmarks. A transition away from the widespread use of certain benchmarks to alternative rates has begun and will continue over the course of the next few years. There is no assurance that these new rates will be accepted or widely used by market participants, or that the characteristics of any of these new rates will be similar to, or produce the economic equivalent of, the benchmarks that they seek to replace. If a particular benchmark were to be discontinued and an alternative rate has not been successfully introduced to replace that benchmark, this could result in widespread dislocation in the financial markets, engender volatility in the pricing of securities, derivatives and other instruments, and suppress capital markets activities, all of which could have adverse effects on Santander Brasil’s results of operations. In addition, the transition of a particular benchmark to a replacement rate could affect hedge accounting relationships between financial instruments linked to that benchmark and any related derivatives, which could adversely affect Santander Brasil’s results.

 

On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority, or the “FCA,” which regulates the London interbank offered rate, or “LIBOR,” announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicated that the continuation of LIBOR on the current basis could not be guaranteed after 2021. On December 4, 2020, ICE Benchmark Administration Limited, which administers LIBOR, published a consultation on its intention to cease the publication of most LIBOR settings as of the end of December 2021, except for the publication until June 30, 2023 of certain U.S. dollar LIBOR settings. Therefore, after 2021 most LIBOR settings may cease to be calculated. The Bank of England is publishing a reformed Sterling Overnight Index Average, , comprised of a broader set of overnight Sterling money market transactions, which has been selected by the Working Group on Sterling Risk-Free Reference Rates as the alternative rate to Sterling LIBOR. In addition, the Federal Reserve Bank of New York now publishes three reference rates based on overnight U.S. Treasury repurchase agreement transactions, including the Secured Overnight Financing Rate, or “SOFR,” which has been recommended as the alternative to U.S. dollar LIBOR. Furthermore, the European Money Market Institute, or “EMMI,” announced the discontinuation of the EONIA after 3 January 2022 and that from 2 October 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. Many unresolved issues remain, such as the timing of the successor benchmarks’ introduction and the transition of a particular benchmark to a replacement rate, which could result in widespread dislocation in the financial markets, engender volatility in the pricing of securities, derivatives and other instruments, and suppress capital markets activities. 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 of a decrease in revenues of products linked to indices that will be replaced; (iv) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (v) operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes; (vi) conduct risks arising from the potential impact of communication with customers and engagement during the transition period and (vii) litigation risks regarding our existing products and services, which could adversely impact our profitability. 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. We may also be adversely affected if the change restricts our ability to provide products and services or if it necessitates the development of additional information technology systems.

 

The changes provided for in Phase 2 of the LIBOR reform address issues that may affect the financial statements during the reform of a reference interest rate, including the effects of changes in contractual cash flows or hedging relationships resulting from the replacement of a rate with an alternative reference rate (substitution issues). The effective date of application of this amendment is January 1, 2021. Our contracts linked to LIBOR are being reviewed between the parties and will be updated with the respective alternative rates disclosed, plus a spread. Management estimates that the updated cash flows will be economically equivalent to the original, and does not expect material impacts related to this replacement.

 

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Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, 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 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.

 

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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 increasingly targeted, and the techniques used to obtain unauthorized, improper or illegal access to information technology systems have become increasingly complex and sophisticated. Furthermore, such techniques change frequently and are often not recognized or detected until after they have been launched and can originate from a wide variety of sources, including not only cyber criminals, but also 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 disrupt our electronic systems used to service our customers.

 

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

 

We are also subject to increasing scrutiny and regulation governing cybersecurity risks. Such regulation is fragmented and constantly evolving. See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—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 or other damages, litigation expenses, regulatory penalties and fines and/or through the loss of assets. Furthermore, upon a failure to comply with applicable law and regulation, we may be ordered to change our business practices, policies or systems in a manner that adversely impacts our operating results.

 

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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, 1.3% of our loan portfolio is allocated to our largest debtor and 6.5% to our next 10 largest debtors. However, we cannot assure this will continue to be the case. If counterparty risks give rise to losses, this could materially and adversely affect our results of operations and financial condition.

 

Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us and our profitability.

 

The COVID-19 pandemic has caused high market volatility which may materially and adversely affect us and our trading and banking book.

 

Market risk refers to the probability of variations in our interest income/(charges) or in the market value of our assets and liabilities due to volatility of interest rate, inflation, exchange rate or equity price. Changes in interest rates affect the following areas, among others, of our business:

 

·interest income / (charges);

 

·the volume of loans originated;

 

·credit spreads;

 

·the market value of our securities holdings;

 

·the value of our loans and deposits; and

 

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·the value of our derivatives transactions.

 

Interest rates are sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies and domestic and international economic and political conditions. Variations in interest rates could affect the interest earned on our assets and the interest paid on our borrowings, thereby affecting our interest income/(charges), which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. In addition, costs we incur as we implement strategies to reduce interest rate exposure could increase in the future (which, in turn, will impact our results).

 

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities.

 

Due to the historically low interest rate environment in Brazil in recent years, the rates on many of our interest-bearing deposit products have been priced at or near zero or negative, limiting our ability to further reduce rates and thus negatively impacting our margins. If the current low interest rate environment in Brazil persists in the long run, it may be difficult to increase our interest income / (charges), which will impact our results.

 

We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.

 

We are also exposed to equity price risk in our investments in equity securities in the banking book and in the trading portfolio. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results.

 

Market conditions have resulted and could result in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

 

In the past, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads, including as a result of the COVID-19 pandemic. We have material exposures to securities, loans and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.

 

In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgements and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

 

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We face risks related to market concentration.

 

Concentration risk is the risk associated with potential high financial losses triggered by significant exposure to particular component of risk, whether it be related to a particular counterparty, industry or geographic concentration. Examples of such risks include significant exposure to a single counterparty, to counterparties operating in the same economic sector or geographical region, or to financial instruments that depend on the same index or currency.

 

We believe that an excessive concentration with respect to a particular risk factor could generate a relevant financial loss for us, especially if the risk is one described in this annual report. We recognize the importance of this risk and the potential impacts that may affect our portfolio and results of operations.

 

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

 

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 nonperforming loan ratios, impair our loan and other financial assets, and result in decreased demand for borrowings in general. We have credit exposure to borrowers that 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. For further information about developments in financial accounting and reporting standards see note 1 to our consolidated financial statements included elsewhere in this annual report.

 

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Our financial statements are based in part on assumptions and estimates which impact the results of our operations.

 

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of financial assets measured at amortized cost, goodwill impairment, valuation of financial instruments, impairment of financial assets measured at fair value through other comprehensive income, deferred tax assets provision, and pension obligation for liabilities.

 

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

 

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

 

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

 

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.

 

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Although we have procedures and controls in place to safeguard personal and other confidential or sensitive information in our possession, unauthorized access or disclosures could subject us to legal actions and administrative sanctions, as well as damages and reputational harm that could materially and adversely affect our operating results, financial condition and prospects. Further, our business is exposed to risk from employees’ potential non-compliance with policies, misconduct, negligence or fraud, which could result in regulatory sanctions and serious reputational and 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, events where customer information may be compromised, unauthorized access to our systems and other security breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or delivered to our customers with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us. If we cannot maintain effective and secure electronic data and information, management and processing systems or if we fail to maintain complete physical and electronic records, this could result in disruptions to our operations, claims from customers, regulators, employees and other parties, violations of applicable privacy and other laws, regulatory sanctions and serious reputational and financial harm to us. Moreover, as a result of the COVID-19 pandemic, we have increased the number of employees working remotely, which may increase the vulnerability of our systems and impact our ability to conduct business.

 

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, service providers and other 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 customers 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.

 

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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:

 

·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.

 

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

 

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

 

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

 

Past performance of our loan portfolio may not be indicative of future performance; changes in the profile of our business may adversely affect our loan portfolio. In addition, the value of any collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

 

Our historical loan loss experience may not be indicative of our future loan losses. While the quality of our loan portfolio is associated with the default risk in the sectors in which we operate, changes in our business profile may occur due, among other factors, to our organic growth, merger and acquisition activity, changes in local economic and political conditions, a slowdown in customer demand, an increase in market competition, changes in regulation and in the tax regimes applicable to the sectors in which we operate and, to a lesser extent, other related changes in countries in which we operate and in the international economic environment. In addition, the market value of any collateral related to our loan portfolio may fluctuate, from the time we evaluate it at the beginning of the trade to the time such collateral can be executed upon, due to the factors related to changes in economic, political or sectorial factors beyond our control, and we may be unable to realize the full value of the collateral securing our loan portfolio.

 

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

 

Climate risk is as a transversal risk that can be an aggravating factor for the types of traditional risks managed by Santander: credit, market, operational (including reputational risk).

 

In order to identify the vulnerability of the Santander Group’s exposures to climate change, we have adopted the classifications used by TCFD (Task-Force on Climate-Related Financial Disclosures), and we consider that there are two primary sources of climate change related financial risks: physical and transition.

 

Physical risks resulting from climate change can be event-driven (acute) or long-term shifts (chronic) in climate patterns:

 

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·Acute physical risks include increased severity of extreme weather events, such as drought, hurricanes, or floods.

 

·Chronic physical risks include changes in precipitation patterns and extreme variability in weather patterns, rising mean temperatures, chronic heat waves or rising sea levels.

 

Transition risks refer to actions brought on to address mitigation and adaptation requirements related to climate change, and they can fall into various categories such as policy, technology, and market changes:

 

·Policy actions generally fall into two categories—those that attempt to constrain actions that contribute to the adverse effects of climate change and those that seek to promote adaptation to climate change. The risk associated with and the financial impact of policy changes depend on the nature and timing of the policy change.

 

·Technology risk arises from improvements or innovations to support the transition to a lower-carbon, energy efficient economic system that can have a significant impact on companies to the extent that new technology displaces old systems and disrupts some parts of the existing economic system.

 

·Market risk may manifest through shifts in supply and demand for certain commodities, products, and services, as climate-related risks and opportunities are increasingly taken into account.

 

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. 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 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.

 

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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, 2020, the aggregate market capitalization of the B3 was equivalent to approximately R$ 5.1 trillion (U.S.$1.0 trillion), and the top ten stocks in terms of trading volume accounted for approximately 34% of all shares traded on B3 in the year ended December 31, 2020. In contrast, as of December 31, 2020, the aggregate market capitalization of the NYSE was approximately U.S.28.6 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 uncertainties caused by the outbreak of COVID-19 had an adverse impact on the global economy and global capital markets, including in Brazil, during the course of 2020. As a result of this volatility, the B3’s circuit breaker mechanism was triggered eight times during March 2020. The prices of most of the securities traded on the NYSE and the B3, including the price of our securities, was adversely affected by the COVID-19 pandemic. Impacts similar to those described above may reoccur, which may result in volatility in the prices of our securities traded on the NYSE and on the B3. We cannot assure you that the price of our securities will not fall below the lowest levels at which our securities traded during the ongoing pandemic.

 

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The relative volatility and limited liquidity of the Brazilian securities markets may substantially limit your ability to sell the units or ADRs at the time and price you desire and, as a result, could negatively impact the market price of these securities.

 

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

 

The trading market for our ADRs and our shares has been affected in part by the research and reports that industry and financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts 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$$3.3 billion, R$10.8 billion, and R$6.6 billion and R$6.3 billion (R$0.89, R$2.90, R$1.77 and R$1.6877 per unit, respectively) as dividends and interest on stockholders’ equity (considering gross value) in 2020, 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, including, since April 2020, a temporary restriction on dividend distributions and other payments as a result of measures taken by the Brazilian Central Bank to combat the COVID-19 pandemic’s effect on the Brazilian financial sector (see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulatory Developments Related to COVID-19—Temporary Suspension of Dividend Distributions and Other Payments.” Also, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—History of Payment of Dividends and Interest Attributable to Stockholders’ Equity.”

 

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

 

Holders of ADRs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our By-Laws and Brazilian Corporate Law. Holders of ADRs may exercise voting rights with respect to the units represented by ADRs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADR holders. For example, we are required to publish a notice of our stockholders’ meetings in specified newspapers in Brazil. Holders of our units will be able to exercise their voting rights by attending a stockholders’ meeting in person or voting by proxy. By contrast, holders of ADRs will receive notice of a stockholders’ meeting by mail from the ADRs depositary following our notice to the depositary requesting the depositary to do so. To exercise their voting rights, holders of ADRs must instruct the ADR depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of ADRs than for holders of our units or shares. If the ADR depositary fails to receive timely voting instructions for all or part of the ADRs, the depositary will assume that the holders of those ADRs are instructing it to give a discretionary proxy to a person designated by us to vote their ADRs, except in limited circumstances.

 

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

 

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

 

Law No. 10,833 of December 29, 2003 provides that the disposal of assets located in Brazil by a nonresident to either a Brazilian resident or a nonresident is subject to taxation in Brazil, regardless of whether the disposal occurs outside or within Brazil. This provision results in the imposition of income tax on the gains arising from a disposal of our units by a nonresident of Brazil to another nonresident of Brazil. It is unclear whether ADRs representing our units, which are issued by the ADR depositary outside Brazil, will be deemed to be “property located in Brazil” for purposes of this law. We believe ADRs do not qualify as property located in Brazil and, thus, should not be subject to Brazilian income tax. Nevertheless, there is no judicial guidance as to the application of Law no. 10,833 of December 29, 2003 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADRs between nonresidents 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.

 

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

 

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

 

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

 

The majority of our directors and officers reside outside of the United States. In addition, all or a substantial portion of our assets and the assets of our directors and officers are located outside of the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADRs, none of our directors or officers has consented to service of process in the United States or to the jurisdiction of any U.S. court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.

 

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

 

Our By-Laws provide that we, our shareholders, our directors and officers and the members of our fiscal council shall submit to arbitration any and all disputes or controversies that may arise amongst ourselves relating to, or originating from, the application, validity, effectiveness, interpretation, violations and effects of violations of the provisions of Brazilian Corporate Law, our By-Laws, the rules and regulations of the CMN, the Brazilian Central Bank and the CVM, as well as other rules and regulations applicable to the Brazilian capital markets and the rules and regulations of the Arbitration Regulation of the Market Arbitration Chamber. However, in specific situations, including whenever precautionary motions are needed for protection of rights, the dispute or controversy may have to be brought to a Brazilian court. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the units or ADRs, we will not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations and according to Brazilian laws, an obligation in Brazil to pay amounts denominated in a currency other than reais may be satisfied in Brazilian currency only at the exchange rate, as determined by the Brazilian Central Bank or competent court, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then-prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the units or ADRs.

 

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Holders of ADRs may be unable to exercise preemptive rights with respect to our units underlying the ADRs.

 

Holders of ADRs will be unable to exercise the preemptive rights relating to our units underlying ADRs unless a registration statement under the Securities Act is effective with respect to the shares for which those rights are exercisable or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of units or ADRs. We may decide, at our discretion, not to file any such registration statement. If we do not file a registration statement or if we and the ADR depositary decide not to make preemptive rights available to holders of units or ADRs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will be allowed to lapse.

 

As a holder of ADRs you will have different shareholders’ rights than do shareholders of companies incorporated in the United States and certain other jurisdictions.

 

Our corporate affairs are governed by our By-Laws and by Brazilian Corporate Law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Brazil.

 

Under Brazilian Corporate Law, holders of the ADRs are not our direct shareholders and will have to exercise their voting rights through the depositary. Therefore, holders of ADRs may have fewer and less well-defined rights to protect their interests relative to actions taken by our board of directors or the holders of our common shares under Brazilian law than under the laws of other jurisdictions outside Brazil.

 

Although Brazilian Corporate Law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in Brazil, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the preferred shares underlying ADRs.

 

If you exchange your ADRs for their underlying Units, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad.

 

Brazilian law requires that parties obtain registration with the Brazilian Central Bank in order to remit foreign currencies, including U.S. dollars, abroad. The Brazilian custodian for the Units must obtain the necessary registration with the Brazilian Central Bank for payment of dividends or other cash distributions relating to the Units or after disposal of the Units. If you exchange your ADRs for the underlying Units, however, you may only rely on the custodian’s certificate for five business days from the date of exchange. Thereafter, you must obtain your own registration in accordance with the rules of the Brazilian Central Bank and the CVM, in order to obtain and remit U.S. dollars abroad after the disposal of the Units or the receipt of distributions relating to the Units. If you do not obtain a certificate of registration, you may not be able to remit U.S. dollars or other currencies abroad and may be subject to less favorable tax treatment on gains with respect to the Units. For more information, see “Item 10.D. Exchange Controls.”

 

If you attempt to obtain your own registration, you may incur expenses or suffer delays in the application process, which could delay your receipt of dividends or distributions relating to the Units or the return of your capital in a timely manner. The custodian’s registration and any certificate of foreign capital registration you may obtain may be affected by future legislative changes. Additional restrictions applicable to you, to the disposal of the underlying Units or to the repatriation of the proceeds from disposal may be imposed in the future.

 

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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 our 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 that operates countrywide. We operate in both the retail and wholesale segments with high-added value offers, which allows us to provide our products and services to individuals, small and medium enterprises, and large corporate customers.

 

We are part of the Santander Group, a financial institution founded in Spain in 1857, and that has expanded globally through numerous acquisitions. Under the Santander Group’s business model each major unit is autonomous and self-sufficient in terms of capital and liquidity. However, our relationship with the Santander Group allows us to:

 

·access the Santander Group’s global operation network, using the operational synergies with the Santander Group to enhance our ability to provide global products and services to our customers, while reducing technology development costs;

 

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

 

·assimilate best practices with respect to products, services, internal controls and risk management, that were implemented by the Santander Group internationally; and

 

·develop our employees’ skills by means of local and international training and development initiatives, including international experiences at Santander Group’s offices worldwide.

 

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

 

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Santander Brasil Timeline

 

In 1957, the Santander Group 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.

 

Since the 1990s, the Santander Group established its presence in Latin America, particularly in Brazil, by capitalizing on organic growth and 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 that resulted in the Santander Group becoming one of Brazil’s largest financial groups.

 

·On July 24, 2008, Santander Spain took an indirect share control of Banco Real, which was then absorbed into the Santander Group in order to further consolidate its investments in Brazil. Santander Brasil’s acquisition of Banco Real’s share capital was approved through a share exchange transaction on August 29, 2008, which resulted in Banco Real becoming 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 symbols: “SANB11”, “SANB3” and “SANB4”, respectively. Our ADRs have been registered with the SEC under the Securities Act and are listed and traded on the NYSE under the symbol “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 our entire equity interest in Super Pagamentos e Administração de Meios Eletrônicos S.A., or “Superdigital,” to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, for the amount of R$270 million as consideration. As a result of such transaction, we are no longer a shareholder of Superdigital.

 

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. On January 31, 2020, Santander Brasil and the shareholders of Bosan Participações S.A. (a holding company whose single asset is the shares representing 40% of the corporate capital of Banco Olé) entered into the definitive agreements and performed the closing acts related to the purchase and sale of all shares issued by Bosan, upon the transfer of Bosan’s shares to Santander Brasil and payment of the total price of R$1,608.8 million to the sellers. As a result, Santander Brasil became, both directly and indirectly, the holder of all shares issued by Banco Olé.

 

Merger of Banco Olé Consignado S.A. into Banco Santander (Brasil) S.A.

 

Following the acquisition of the remaining equity interest over Banco Olé Consignado S.A., through the holding company Bosan Participações S.A. (together referred to as “Olé Companies”), the shareholders of Santander Brasil and the Olé Companies approved the merger of Olé Companies into Santander Brasil, as provide by the general meetings held on August 31, 2020. As a result, the Olé Companies ceased to exist and were succeeded by Santander Brazil. The incorporation of the Olé Companies is under the process of ratification by the Brazilian Central Bank.

 

Establishment of the Credit Intelligence Bureau

 

On January 20, 2016, we entered into a non-binding memorandum of understanding with Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A., for the creation of a Credit Intelligence Bureau (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. has a 20% equity interest in the corporation.

 

The purpose of the CIB is to develop a database that, in compliance with the applicable law, will collect, reconcile and process the credit information of registered individuals and legal entities who expressly authorize the inclusion of their credit information on such database. On April 14, 2017, the definitive documents were executed by CIB’s shareholders. The necessary regulatory authorizations, including those issued by the Brazilian Central Bank and by 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 financing and insurance brokerage services and products to consumers through the Hyundai dealerships in Brazil.

 

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Aymoré CFI owns a 50% equity interest in Banco Hyundai Capital Brasil S.A., and Hyundai Capital owns 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 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 and effectively started its operations on October 2019.

 

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

 

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

 

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

 

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

 

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Purchase of Equity Interest in Gira – Gestão Integrada de Recebíveis do Agronegócio S.A.

 

On August 11, 2020, Santander Brasil executed a share purchase and sale agreement and other covenants with the shareholders of Gira (Gestão Integrada de Agronegócio S.A. or “Gira”) to acquire 80% of Gira’s share capital. Gira is a technology company that operates in the management of agribusiness receivables and whose platform has the potential to make agricultural credit transactions more secure. This increased layer of security is achieved through the use of applications, such as geolocation of productive areas, capture and analysis of agronomic data and permanent monitoring of production performance for sites involved in credit transactions. Gira’s solutions also include the review and digital registration of collateral provided under commercial contracts and continuous observation of crop development as a way of monitoring risks. The applicable regulatory approvals were received on December 18, 2020 and the closing of the transaction took place on January 8, 2021.

 

Formation of BEN Beneficios

 

On June 11, 2018, we incorporated BEN Beneficios, Benefícios e Serviços S.A. (“Ben”) 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 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 Adquirência e Serviços para Meios de Pagamentos S.A., or “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 transaction was approved by the Brazilian Central Bank on February 18, 2019 and closed on February 25, 2019. As a result, Santander Brasil currently owns 100% of Getnet’s issued and outstanding share capital.

 

Proposal to Spin Off Getnet

 

On February 25, 2021, further to the Material Facts disclosed on November 16, 2020 and February 2, 2021, we announced that our Board of Directors approved a separation from our merchant payment business, which is undertaken by our subsidiary, Getnet, in order to concentrate the technology and payments businesses of Santander Group within PagoNxt, a new technology-focused global payment platform. Following the potential spin-off of our equity interest held in Getnet, or the “Spin-Off,” which will be resolved upon by our shareholders in an extraordinary shareholders’ meeting, our shareholders would become direct shareholders in Getnet on a pro rata basis. Accordingly, our shareholders immediately prior to the Spin-Off would hold a percentage of equity interest in Getnet in the same proportion as they held in Santander Brasil prior to the Spin-Off. After the approval of the Spin-off by our extraordinary shareholders’ meeting, our shares and units will be traded with the right to receive the shares and units issued by Getnet until the record date, which, once determined, will be disclosed to the market by means of a Notice to Shareholders.

 

Sale of equity stake in CIBRASEC – Companhia Brasileira de Securitização

 

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

 

Purchase of Equity Interest over Toro Controle e Participações S.A.

 

On September 29, 2020 Santander Brasil’s subsidiary, PI DTVM , entered into an investment and other covenant agreement with the shareholders of Toro Controle e Participações S.A. , or “Toro Controle” to invest in Toro Controle. Toro Controle, an investment platform, operating as a securities broker focused on the retail market was founded in Belo Horizonte in 2010. Toro Controle is the holding company of Toro Corretora de Títulos e Valores Mobiliários Ltda, or “Toro Corretora,” and Toro Investimentos S.A., or “Toro Investimentos.” We refer to Toro Controle, Toro Corretora and Toro Investimentos as “Toro,” Upon completion of the transaction, PI DTVM will hold 60% of Toro Controle’s share capital.

 

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In addition, PI DTVM and Toro Corretora will combine their market experiences to develop a complete platform of fixed and variable income products. This platform will be based on shared expertise, technology and operate in the growing Brazilian investment market. The completion of the transaction is subject to the execution of certain customary agreements between the parties, the fulfillment of customary conditions precedent and the receipt of certain regulatory approvals, including the approval of the Brazilian Central Bank.

 

Buyback Program

 

On February 2, 2021, our board of directors approved the continuation of the buyback program (previously set to expire on November 4, 2020) of our units and ADRs. Our units and ADRs will be acquired either directly or through our branch in the Cayman Islands, to be held in treasury or subsequently sold. The buyback program will cover the acquisition of up to 36,956,402 units or ADRs, representing a combination of 36,956,402 common and 36,956,402 preferred shares, corresponding to approximately 1% of our share capital. The term of the buyback program is up to 18 months beginning on February 3, 2021 and expiring on August 2, 2022.

 

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 Offering”.

 

In addition, our board of directors also approved the redemption of debt instruments issued to form part of our Tier 1 and Tier 2 regulatory capital, as set out in the board’s resolution of January 14, 2014. The proceeds from the Notes Offering were used to fund this redemption.

 

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

 

Disclosure of Projections

 

On July 29, 2020, we informed the market that we will no longer disclose guidance, as previously announced in the material fact dated October 8, 2019. This decision comes in response to the ongoing uncertainty with respect to the impact of the COVID-19 pandemic on our business, financial condition, assets, liquidity, cash flows and results of operations, as well as on the macroeconomic environment in Brazil and globally.

 

Capital Expenditures and Divestitures

 

Our main capital expenditures include investments in our information technology platform. Our information technology platform focuses on our customers and supports our business model. In 2020, 2019 and 2018, total investments in information technology were R$1,432 million, R$1,858 million and R$1,276 million, respectively.

 

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In 2020, 2019 and 2018, we continually improved in our technology platforms by means of investment in our digital applications, including through the implementation of new solutions in the areas of artificial intelligence (machine learning, AIOPs), micro services, blockchain technology, cyber insurance, facial recognition and cloud-based technologies, among others. The application of these new technologies improved our interaction with our customers enabled us to provide solutions across credit, consortium, payroll loan, insurance, private banking, cards,  payments, agribusiness, investments to better address client needs. We also continued to invest in our physical distribution network (branches, PABs and PAEs), including: biometric identification for corporate customers, digital purchase and payment of exchange, among other initiatives. For more details about our technology and infrastructure, see the item “—B. Business Overview—Technology and Infrastructure”.

 

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

 

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

 

For more information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Other Factors Affecting the Comparability of Our Results of Operations”.

 

Impact of COVID-19

 

We are closely monitoring the evolution of the COVID-19 pandemic in Brazil and globally, in order to take preventive measures to minimize the spread of the virus, ensure the continuity of operations and safeguard the health and safety of our personnel. Based on the information available as of the date of this annual report, we present below a summary of the main effects of the COVID-19 pandemic on our business and results of operations:

 

·As the COVID-19 pandemic escalated in Brazil starting March 2020, we adjusted our operations to be able to continue providing our products and services to our customers while ensuring the health and safety of our employees. As part of these measures we transitioned our administrative office staff into remote working arrangements from March 17,2020 to May 25, 2020, and we had up to 80% of our employees working from home in that period. From May 25, 2020 we begin a phased return to our offices in compliance with strict hygiene and social distancing procedures.

 

·We supported our employees throughout the COVID-19 pandemic by offering them and their dependent remote medical care through an agreement with a leading Brazilian hospital. We also provided advance payment of thirteenth salary installments in April 2020 (these are normally paid in December of each year).

 

·Since March 2020, our branches have been operating with reduced service hours; from 9:00 a.m. to 2:00 p.m. from March 2020 to July 2020 and then from 9:00 a.m. to 3:00 p.m. through to the date of this annual report. We also adopted a staggered entry system in branches with heavy customer traffic in order to reduce the total number of customers in the branch at any given time. We also reserved the period from 9:00 am to 10:00 am for customers who would are more vulnerable to COVID-19. To provide continuous service and meet the increased demand of our call centers, we temporarily relocated retail employees to our call centers to help deal with the increased demand for remote banking services. In line with our commitment to clear customer communication, we launched the “Overcome Together” and “Santander Supports You” websites, which gathered resources and initiatives related to our business.

 

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·We offered individual, microentrepreneur and SME customers the possibility of deferring their loan payments for up to 60 days. In May 2020, we allowed an extension for an additional 30 days, as a result of which our deferred loan portfolio reached a total of R$ 49.8 billion as of June 30, 2020 and R$40.6 million as of December 31, 2020. At the same time we continuously monitored our loan quality indicators, which remained at acceptable levels throughout the COVID-19 pandemic and through to the date of this annual report. We also participated in government programs that granted special credit lines for businesses, particularly in retail, including CMN Resolution No. 4,846, which was published on August 24, 2020 and regulated lending under the Emergency Employment Support Program, initially established by Provisional Measure No. 944/2020. For more information, see “—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulatory Developments Related to COVID-19” As a result, our total portfolio balance of government-sponsored loans reached R$14 billion as of December 31, 2020. It is worth noting that these government-sponsored credit lines were created in 2020 to minimize the negative effects of the pandemic.

 

·The onset of COVID-19 had a negative impact on our net fee and commission income, especially in the first half of 2020, due to a lower volume of customer transactions, which adversely affected the total amounts we were able to charge in credit and debit card fees. As a result, we experienced reductions in the growth rates of our net fee and commission income and of our net interest income from the six months ended June 30, 2019 to the six months ended June 30, 2020, as compared to the growth rates of our net fee and commission income and of our net interest income from the six months ended June 30, 2018 to the six months ended June 30, 2019. These reductions were due to the abovementioned lower transaction volumes, a higher share of global wholesale banking in the loan portfolio, alongside a shift in the product mix, with a decreased share of higher risk products, such as credit cards and overdrafts. For more information, see “Item 5. Operating and Financial Review and Prospectus—A. Operating Results—Results of Operations for the Years Ended December 31, 2020, 2019 and 2018—Results of Operations—Net Interest Income ” and “Item 5. Operating and Financial Review and Prospectus—A. Operating Results— Results of Operations for the Years Ended December 31, 2020, 2019 and 2018—Results of Operations—Net Fee and Commission Income.”

 

·In 2020, we constituted an additional provision in the amount of R$3,200 million. This provision was calculated based on the analysis of the potential macroeconomic effects and took into account not only quantitative and qualitative indicators, but also the adequate and accurate identification of risks and a collective assessment of exposures. For more information, see “Item 5. Operating and Financial Review and Prospectus—5A. Operating Results—Results of Operations—Impairment Losses on Financial Assets (Net).”

 

·In 2020, the National Monetary Council, or “CMN,” and the Brazilian Central Bank introduced measures to minimize the impact of COVID-19 on the financial system. With respect to liquidity, these changes included: (i) a reduction in the time deposit reserve requirement from 31% to 17%; and (ii) an increase in the additional limit on the reserve requirement treated as High Quality Liquidity Assets from 15% to 30%, ensuring greater liquidity in a stress scenario. In addition, a temporary suspension on dividends and other distributions was enacted through Resolution No. 4,820, limiting the distributions to shareholders 30% of adjusted net profit (following amendments enacted on December 23, 2020). As a result, we only distributed R$3,837 million as dividends and interest on equity in 2020 compared to R$10,800 million in 2019. The CMN also published Resolution No. 4,783, which temporarily reduced the capital conservation buffer (where all rates relate to the total amount of risk-weighted assets) required from financial institutions from 2.5% to 1.25%, leading our Basel ratio to reach 15.3% as of December 31, 2020. For more information, see “—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulatory Developments Related to COVID-19” and “—4B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Compulsory Reserve Requirements.”

 

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·We experienced an increase in digital business. Specifically, we recorded an increase of 151% in the number of new contracts originated through digital channels in December 2020 as compared to January and February 2020.

 

See also “Item 3. Key Information—3D. Risk Factors—Risks Relating to the Brazilian Financial Services Industry and Our Business—The current global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Financial Condition and Results of Operations—Impact of COVID-19.”

 

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 to consistently strive to enhance customer satisfaction levels, expand our customer base and increase the loyalty of our customers.

 

To achieve this goal, we have been deeply focused on understanding how the Brazilian market works to address its demands effectively. In line with this approach, we have sought to identify our different types of customers and their specific needs. Accordingly, we adopted a strategy that is based on serving our customers wherever and whenever they want through multi-channel (digital and/or physical) solutions that provide a customized and innovative portfolio of services and products.

 

We endeavor to be pioneers and anticipate market trends to capture business opportunities over the years.

 

In 2016 we began our commercial transformation, which consisted of implementing new work models and simplifying and digitizing our processes, and introduced a culture of innovation, while also providing further vehicle loans at a time when the market was moving in the opposite direction. In 2017 we focused on the quality of the services we provide and placed customer satisfaction at the center of our strategy, which is reflected in the implementation of the net promoter score, or NPS, as a measure of customer satisfaction. In 2018, we were pioneers in bringing an industrial approach to costs into the banking sector, covering three key fronts: organization, technology and culture. We believe this strategy has already yielded results and will allow us to further refine our productivity and customer experience. In 2019, we expanded our Santander ecosystem with new businesses and reduced our exposure to the card market, as we concentrated on lower-risk products. Finally, in 2020 we focused on supporting our customers through a challenging time period, by providing relevant products, while also focusing on efficiency and responding swiftly to market trends, as illustrated by the launch of SX, which set ourselves apart from the Brazilian Central Bank’s instant payment solution, PIX, by offering exclusive benefits to customers. We have also launched new disruptive products into the market such as Sim, emDia, Santander Auto and Ben. As a result of this strategic repositioning, we have been able to realize substantial growth in all our key business areas, as evidenced by the evolution of our return on equity, or ROE, in recent years (for further information see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures—Reconciliation of Non-GAAP Ratios to Their Most Directly Comparable IFRS Financial Measures—Return on average stockholders’ equity”).

 

Similarly, we believe that our positioning, combined with a culture that values our people, promotes diversity, encourages speed in execution and fosters innovation, prepares us for this new cycle and allows us to keep anticipating market trends.

 

We believe our core business has the potential to grow through innovation and technology, and by delivering a higher service level to our customers. Our products and businesses include, among others, payments (i.e. payment platforms), auto and consumer goods loans through Santander Financiamentos, mortgages, payroll and agribusiness loans, as well as investments, in addition to the products and services we offer through our wholesale segment.

 

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In order to strengthen our ecosystem, we have launched new businesses which continue to mature, such as (i) Ben, which reached breakeven in May 2020 and expanded its customer base in 2020 to 217 thousand cards alongside 1.4 thousand human resources customers and 338 thousand partner merchants; (ii) Sim, which achieved positive net profit in 2020 after 15 months of operation and a loan portfolio of R$700 million as of December 31, 2020; (iii) emDia, which had four million customers as of December 31, 2020 and R$46 million in credit recovered volume in 2020, and (iv) Santander Auto, which reached a penetration rate of 16% of Santander Financiamentos’ contracts leading to the issuance of more than R$100 million in premiums during 2020. More recently, in September 2020, we announced the acquisition of Toro Corretora to complement our PI DTVM investment platform, thereby expanding our product offering. The completion of the transaction is subject to the execution of certain customary agreements between the parties, the fulfillment of customary conditions precedent and the receipt of certain regulatory approvals, including approval by the Brazilian Central Bank.

 

Our growth is based on a commitment to asset quality, which we believe is demonstrated by the performance of certain quality indicators such as our cost of risk, which we believe remains at controlled levels despite the current macroeconomic scenario. It is worth noting that since 2019, we have focused on expanding our lower-risk products, particularly those that are collateralized. As a result, we believe that our loan quality indicators are at appropriate levels. Similarly, collateralized loans represent a significant portion of our loan portfolio to individuals, accounting for approximately 76% of our loan portfolio as of December 31, 2020 (four percentage points higher than December 31, 2019). The collateralized loans includes payroll loans.

 

We believe that our business was able to adapt swiftly to the changing environment in 2020 in order to meet the needs of our customers. We offered a plan to defer loan repayment installments to customers who fulfilled certain requirements. We provided special lines of credit, including through government programs, for the corporate and small and medium enterprise, or SME, segments. We believe that all these initiatives strengthened our customers’ loyalty and helped us achieve better control of our risk indicators. As a result of our actions, we reached the highest NPS level in our history in 2020, recording an NPS score of 63 points in 2020 (compared to 56 points in 2019), which we believe is evidence of our commitment to customers.

 

We acknowledge our responsibility as a financial institution to support society and contribute to Brazil’s economic growth. This attitude is embedded into our culture and is transversal to our business. In 2020, we held two events focused on supporting society at the onset the pandemic through our “Amigo de Valor” program, one in the first half of the year, and another one in the second half, raising an aggregate of approximately R$23 million (including donations from employees, customers and Santander Brasil, with R$7 million raised in the first edition and R$15.7 million raised in the second edition). We also hosted a donation marathon for the “Mães da Favela” project with the participation of customers and employees, which generated positive results: R$7.2 million was raised (including donations from employees, customers and Santander Brasil) to support more than 20,000 families.

 

Additionally, we encouraged other initiatives, such as volunteering to provide remote assistance to the elderly under the “Parceiro do Idoso” program, and the offer of special products to healthcare professionals. Finally, together with our private bank peers, we donated 5 million rapid COVID-19 tests, 17.7 million face masks and R$20 million to purchase computerized tomography scanners. Finally, we also donated a total of R$100 million to contribute to the fight against COVID-19.

 

Below are the main commercial initiatives that we have undertaken in recent years:

 

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Net promoter score or NPS. We introduced the NPS as our primary metric for customer satisfaction in 2017 and, in 2018, we were pioneers in disclosing our score to the market. After each interaction with Santander Brasil, our customers are randomly selected to rate their experience using the NPS methodology. Nowadays, the NPS is part of our compensation (profit sharing) metrics, affecting virtually every department and position level at the organization, including the administrative and commercial departments. In 2020, despite the ongoing COVID-19 pandemic, we achieved our highest level of customer satisfaction, with an NPS of 63 points, rising 7.5 points over the immediately preceding 12 months. This performance contributed to the sustainable growth of our customer base, which saw a net increase of 1.8 million active customers in the 12 months ended December 31, 2020.

 

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, which is commonly used in information technology. We believe this methodology has allowed us to offer more suitable products and services, as well as quickly perform system updates through all our available channels. In 2020, we strengthened our digital channels by improving the availability of services. We also launched GENTE, our virtual assistant, which was developed by drawing on the diverse talents and experiences of our employees. Customers can access GENTE through WhatsApp, our web portal, mobile banking and our Santander Way app, gaining quick access to advice and transaction assistance. GENTE has already achieved notable metrics, such as 37.7 million of interactions with approximately 70% accuracy and achieving an NPS of 76 points on mobile banking for individual customers between May 2020 and January 2021. All these initiatives illustrate the growing importance of digital channels, which account for 29% of new active customer acquisitions in retail and 74.4% of total bank financial transactions in 2020, 11.2 p.p. higher than a year ago. E-commerce sales grew 41.1% in 2020, compared to 2019.

 

Countryside expansion. With the objective of being closer to customers, we have been expanding our physical presence to strategic regions in Brazil’s countryside. These dedicated stores cater to customers in the agricultural sector more effectively. One of our fronts in this initiative is to open additional Prospera Santander Microcredit stores to encourage entrepreneurship and promote financial education. As of December 2020, we had a total of 99 stores, reaching more than 543 thousand customers. Another front is Agribusiness, where we have reached a total of 40 Agro stores (with return in less than eighteen months), alongside the 300 sector-oriented branches.

 

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 generating their branch’s own results report. This independence gives branch employees and managers a stronger sense of autonomy and responsibility, as well as the feeling of being part of their own branch's success. In addition, 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.

 

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, in 2019, we launched a new service model for most of our low-income portfolio, through which we 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 increasing efficiency. Based on data as of December 31, 2020, these changes have already produced noteworthy results, including: (i) faster service, as the lead time to closing a mortgage loan declined by three days to 25 calendar days in the year ended December 31, 2020 as compared to December 31, 2019; (ii) higher efficiency, with 86.7% of credit card bills being issued in digital format or by e-mail in the year ended December 31, 2020, compared to 61.0% in the year ended December 31, 2019; (iii) more business, as the volume of transactions in the commodities portfolio increased significantly to 729 transactions in the year ended December 31, 2020 from 111 transactions in the year ended December 31, 2019; and (iv) better service, by reducing 96% of the amount of rework involved in opening business current accounts (process improvement) at our branches in the year ended December 31 , 2020 as compared to the year ended December 31, 2019.

 

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Strengthening our culture and our people. We believe that committed employees lead to a more sustainable business. 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, with 87% of total employees having attended the academy in 2020. In addition, employees who act as internal multipliers within the Company give 80% of the training. As a result, in 2020 we were recognized by GPTW (Great Place to Work) as one of the best companies to work for in Brazil in which we were ranked 22 positions ahead of the ranking achieved in 2016. We have also been ranked in the top 10 best companies to work for racial and ethnic minorities and women,. We promote and value diversity and, for this reason, we celebrate having women account for 29% of our executive leadership positions and 33% of our Board of Directors, while also having Black employees account for 25% of our total employees across our organization as of December 31, 2020. Moreover, we were recognized as the best company to work for in the financial sector by Exame Magazine’s Diversity 2020 Guide for the second consecutive year.

 

Finally, aligned with the Santander Group’s sustainable growth strategy, we have has made several public commitments to society, including: (i) having 30% of our leadership positions held by women by 2024 (today women account for 29% of leading roles at Santander Brasil) and; (ii) having 100% of our operations powered by renewable energy by 2025. Furthermore, we committed to eliminating single-use plastics consumption within our organization. Another equally important component in fulfilling our responsibilities to society is the “Prospera” microcredit program, aimed at helping Brazilians in low-income communities to prosper by giving them access to credit and financial products. This program contributed to placing us in the top spot among banks on Fortune magazine’s 2019 “Change the World” list.

 

In July 2020, along with two other private banks, we presented a plan to the Brazilian federal government dedicated to supporting sustainable development in the Amazon. This plan sets out 10 measures to protect the environment and support the development of the local economy by investing in sustainable infrastructure and protecting the rights of the region's population. We also promoted sustainable enterprises by: (i) leading and structuring the issuance of decarbonization credits (CBIO), resulting in Brazil’s first CBIO deal; (ii) conducting the first green financing in the Brazilian market – in other words, a loan with interest rates tied to sustainable goals; (iii) coordinating the world’s second sustainable-linked bond transaction, amounting to US$ 750 million; (iv) launching a R$ 5 billion credit line for new investments in water and sanitation; (v) relaunching the Ethical Fund, managed by Santander Asset Management, which uses a proprietary methodology with local and global analysis of sustainability criteria; and (vi) launching the ESG-focused Santander Go fund in partnership with asset manager Robeco, which invests in global equities on the basis of sustainability criteria.

 

As a result of all actions, we received the following 2020 awards:

 

·Best Bank in the Americas and Brazil (The Banker)

 

·Best Company in Social Responsibility (Prêmio Notáveis CNN 2020)

 

·Most Honored Company (Institutional Investor)

 

·Best Bank In Latin America And The World For SMEs (Euromoney Awards for Excellence 2020)

 

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·Among The Country’s Leading Companies On Climate Change (CDP)

 

·Part Of B3’s Corporate Sustainability Index (ISE B3)

 

·Best Infrastructure Bank In The Country (Latin Finance 2020)

 

·One Of The Best Companies To Work For (GPTW Brazil 2020)

 

Our Business

 

We provide our complete portfolio of products and services to our 27.9 million active customers as of December 31, 2020 through the following business segments:

 

·Commercial Banking: provides services and products to individuals and companies (except for global corporate customers who are managed by our Global Wholesale Banking). The revenue from this segment is derived from the banking and financial products and services available to our account and non-account holders.

 

·Global Wholesale Banking: offers a wide range of national and international tailored financial services and structured solutions for our global corporate customers, comprised mostly of local and multinational corporations.

 

We outline below the business divisions for each of our operating segments, as well as the breakdown of our net interest income and profit before tax by segment:

 

Commercial Banking

Global Wholesale Banking

·     Retail Banking ·     Santander Corporate & Investment Banking (“SCIB”)
Individuals  
SMEs  
·     Consumer Finance  
·     Corporate  

 

   For the Year Ended December 31,
   2020  2019  2018  2020  2019  2018
   Net interest income  Operating profit before tax
   (R$ millions)
Commercial Banking (1)   41,457    42,044    39,391    4,666    18,375    12,397 
Global Wholesale Banking   2,985    2,277    2,531    4,998    3,898    3,512 
Total   44,443    44,321    41,922    9,664    22,273    15,909 
(1)Profit before tax reported under commercial banking includes the effects of the hedge for investments held abroad (offset in the same amount in the “Income Tax” line). The effect of the hedge for investments held abroad in 2020, 2019 and 2018 amounted to loss of R$13.583 million, loss of R$1.264 million and loss of R$5,867 million, respectively.

 

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

 

   As of December 31,  Change between 2019  Change between 2018
   2020  2019  2018  and 2020  and 2019
   (R$ millions)
Individuals   174,042    156,177    133,603    11.4%   16.9%
Consumer Finance   51,637    48,421    40,964    6.6%   18.2%
SMEs   54,525    53,119    49,624    2.6%   7.0%
Corporate(1)   137,618    89,539    97,742    53.7%   -8.4%
Total Credit Portfolio   417,822    347,257    321,933    20.3%   7.9%
(1)For purposes of loan portfolio presentation, “corporate” includes companies with annual gross revenues exceeding R$200 million, including our Global Corporate Banking customers.

 

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Commercial Banking

 

Retail

 

Individuals

 

We have structured the individual customer service segment as follows:

 

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

 

·     Santander Select – is responsible for customers with a monthly income above R$20,000, or a monthly income above R$10,000 and R$30,000 in investments, or more than R$300,000 in investments. The offer here consists of a value proposition with differentiated products and services, exclusive service spaces, relationship managers who serve a small number of customers and provide asset management advisory services.

 

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

 

·     Santander Especial – is responsible for customers who earn up to R$4,000 per month. Our business model offers simple and efficient solutions with an attractive cost benefit to the customer, primarily through electronic channels.

 

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

 

Small and Medium Enterprises (SMEs)

 

We serve SMEs under the Santander Negócios e Empresas brand, with the following customer service segmentation model:

 

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

 

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

 

·Negócios Agência (Branch Businesses) - responsible for companies with annual revenues of up to R$3 million. We offer these customers a simple banking solution through an integrated account that combines a corporate account with a point of sale (POS) terminal hosted by Getnet. Through this arrangement, our customers receive benefits for using the Getnet terminal to process their credit card sales, with receipts being posted to a Santander Brasil checking account.

 

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·Empresas MEI (Individual Microentrepreneur) - responsible for companies with annual revenues of up to R$81 thousand. We offer these customers a simplified and cost-effective option through our Santander Conta MEI.

 

In addition, for companies with annual revenues of up to R$300 thousand, we also offer Negócios Direct (Direct Business). Under this segment, customers have direct access to a relationship manager who is available during extended service hours and via remote channels, such as telephone, e-mail or chat, as well as access to digital channels that facilitate the client’s day to day needs.

 

Consumer Finance

 

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

 

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

 

   As of December 31,  Change between 2019 and  Change between 2018 and
   2020  2019  2018  2020  2019
Individual consumer finance loan portfolio market share (1) (%)   25.1%  25.0%   25.4%   0.1 p.p    (0.4) p.p 
 
(1)Source: Brazilian Central Bank.

 

Corporate

 

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

 

Global Wholesale Banking

 

Santander Corporate & Investment Banking (SCIB)

 

SCIB is the global business unit that serves customers, who, due to their size and complexity, require tailored services or high-value-added wholesale products. In this segment, we provide a wide range of domestic and international financial services to large Brazilian and multinational companies. Our customer portfolio comprises a range of industries, including telecommunications, retail, aviation, real estate and logistics, power, construction and infrastructure, natural resources, food, agribusiness and financial institutions.

 

Our customers in the SCIB segment benefit from Santander Group’s global structure of services, which is supported by its worldwide-integrated wholesale banking network and global services solutions, as well as local market expertise and provision of integrated services.

 

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Our Portfolio of Products and Services

 

Payments

 

Credit and Debit Cards

 

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

 

In order to reach a greater number of customers and remain competitive, we launched the SX card in November 2020, as part of the SX strategy detailed below. This product benefits highly engaged and transactional customers, facilitating the exemption from annual card fees. In addition, we also took the opportunity with the SX card to launch a more modern and ambitious card design for our customers.

 

We also improved our digital journey to provide better customer self-service, which we believe is a key component for higher customer engagement and was especially important in this new cycle. A recent novelty is “Clique e Retire”, a new physical card delivery system that provides autonomy and agility by allowing customers to opt to collect their cards from self-service machines.

 

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

 

   As of and For the Year Ended December 31,  Change between 2019 and  Change between 2018 and
   2020  2019  2018  2020  2019
Credit card portfolio market share(1)   13.4%   12.9%   13.3%   0.5 p.p    (0.37) p.p 
Credit card portfolio (R$ billion) (2)   37.8    36.1    30.9    (100.0%)   16.8%
Total card turnover (R$ billion) (2)   242.0    236.4    201.6    2.4%   17.3%
Credit card turnover (R$ billion) (2)   158.7    161.0    137.1    (1.4%)   17.4%
Total card transactions (in millions) (2)   2,570.8    2,725.4    2,338.2    (5.7%)   16.6%
Credit card transactions (in millions) (2)   1,300.0    1,450.9    1,206.1    (10.4%)   20.3%
Participation of credit card in the household consumption – Market overview (2)(%)   24.3%   24.5%   23.1%   (0.24p.p)   2.94 p.p 
 
(1)Source: Brazilian Central Bank, as of December 31, 2020.

(2)Source ABECS – “Monitor bandeiras”. The data relating for the year ended December 31, 2018 has been revised as a consequence of the restatement of the methodology of monitoring issued by ABECS.

 

Santander Way

 

Santander Way is an app offered to our cardholders that allows them to manage their Santander Brasil cards at any time. This complete payment platform also works as a digital wallet, enabling customers to conduct instant contactless payments. The app is frequently updated with new features. Some of the most notable features launched in 2020 included: (i) extra loan and installment offers, (ii) virtual cards, (iii) functions for safer online purchases without a physical card, (iv) prepaid mobile recharges, and (v) chatbots for customer service. In 2020, we had 9 million active customers using Santander Way.

 

Superdigital

 

Superdigital is a digital, pre-paid solution that allows customers to manage their daily financial activities and pre-paid accounts entirely online through a user-friendly interface.

 

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Superdigital customers can easily and rapidly (i) make withdrawals in the “Banco24Horas” ATM network; (ii) send and receive money from any bank institution; (iii) recharge prepaid mobile phones; (iv) carry out foreign exchange transactions in up to 10 different currencies; and (v) recharge public transportation passes using an app. In addition to all these features, customers also receive an international MasterCard credit card to make purchases in physical and online stores, and gain access to our rewards and “MasterCard Surpreenda” programs, which offer a range of benefits and discounts.

 

On February 28, 2020, we sold our entire equity interest in Superdigital to Superdigital Holding Company, S.L. a company indirectly controlled by Santander Spain. For further information regarding this sale, see “See “Item 4. Information on the Company—4A. History and Development of the Company—Important Events.”

 

Merchant Acquiring Market | Getnet

 

Getnet is a technology company that offers solutions, both physically and digitally, to individuals and businesses. The acquisition of Getnet, which was completed in 2019, gave us more flexibility, and enabled us to create more complete and tailored solutions for our customers by integrating its services with the Bank.

 

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

 

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

 

   As of and For the Year Ended December 31,  Change between 2019 and  Change between 2018 and
   2020  2019  2018  2020  2019
   (R$ millions, except as otherwise indicated)
Market share of total turnover(1)   13.6%   11.3%   12.3%   2.3 p.p    (1.0p.p)
Debit turnover   105.8    80.9    73.4    30.8%   10.2%
Credit turnover   167.9    126.6    114.1    32.6%   11.0%
Number of debit transactions (thousand)   1,572,685    1,415,089    1,245,269    11.1%   13.6%
Number of credit transactions (thousand)   1,234,105    1,070,717    893,519    15.3%   19.8%
(1)Source: Data for 2020 is based on ABECS Monitor Bandeiras - Acquirers data for the nine-month period ended September 30, 2020. Data for the year ended December 31, 2020 was not available as of the date of this annual report. For comparison purposes, the difference between September 30, 2020 and September 30, 2019 would be: +2.3 p.p

 

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On February 25, 2021, further to the Material Facts disclosed on November 16, 2020 and February 2, 2021, we announced that our Board of Directors approved a separation from our merchant payment business, which is undertaken by our subsidiary, Getnet, in order to concentrate the technology and payments businesses of Santander Group within PagoNxt, a new technology-focused global payment platform. Following the potential spin-off of our equity interest held in Getnet, or the “Spin-Off,” which will be resolved upon by our shareholders in an extraordinary shareholders’ meeting, our shareholders would become direct shareholders in Getnet on a pro rata basis. Accordingly, our shareholders immediately prior to the Spin-Off would hold a percentage of equity interest in Getnet in the same proportion as they held in Santander Brasil prior to the Spin-Off. After the approval of the Spin-off by our extraordinary shareholders’ meeting, our shares and units will be traded with the right to receive the shares and units issued by Getnet until the record date, which, once determined, will be disclosed to the market by means of a Notice to Shareholders.

 

Esfera

 

Esfera is our loyalty program, which can be accessed through its own website and mobile app. Our loyalty platforms enable our credit card holders to exchange their reward points for many products, services and travel benefits, including exclusive deals and discounts with partners such as Cinépolis, FastShop and Casas Bahia, among others.

 

Ben

 

Ben is an employee benefits company that provides greater flexibility, purchasing power and quality of life to its users by creating, supplying and managing various types of employee benefit vouchers (e.g. meals, such as Vale Alimentação and Vale Refeição, as well as transportation) in the form of magnetic cards. These benefits are offered through an integrated digital platform.

 

Since 2019, Ben has provided transportation benefits in partnership with RB Serviços Empresariais LTDA.

 

Ben is currently working on sales partnerships and the development of new products, such as gift cards and other benefit options to expand its portfolio.

 

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

 

  

As of and For the Year Ended

December 31,

   2020  2019  2018
   (in R$ millions, except as otherwise indicated)
Card Purchases   946    560    - 
Number of Cards (in thousands)   217    98    1 
Number of Transactions (in thousands)   12,192    9,534    - 
Merchant accredited (in thousands)   338    253    4 

  

For further information, see also “Item 4. Information on the Company—A—History and Development of the Company—Important Events.”

 

Payroll Loans

 

Payroll loans support both account and non-account holders in the execution of projects and financial organization. Under these loans, monthly installments are deducted directly from the borrowers’ paychecks by their own employers, and then credited to Santander Brasil, significantly reducing our credit risk. We offer these payroll loans to our customers through our mobile banking platform and our branches. Our customers can refinance their payroll loans, as well as choose from other options to help them manage their debts. Furthermore, these loans are also offered to non-account holders through Olé Consignado. For further information on relevant events relating to Olé Consignado’s corporate events, see “Item 4. Information on the Company—A—History and Development of the Company—Important Events.”

 

The following table sets forth certain key financial and operating data regarding our payroll loans as of the dates indicated.

 

   As of December 31,  Change between 2019 and  Change between 2018 and
   2020  2019  2018  2020  2019
Market share in origination (1)   22.3%   13.2%    12.2%    9.09 p.p    1.01 p.p 
Payroll loan portfolio (R$ billion)   48.1        43.0       33.8        11.9%    27.1%
(1)Source: Brazilian Central Bank, as of December 31, 2020, December 31, 2019 and December 31, 2018, as applicable.

 

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SIM

 

SIM is a digital lending platform for individuals through which customers can apply, and be approved, for a loan completely online. After 15 months of operation, SIM has already achieved a positive net profit, a loan portfolio of R$700 million as of December 31, 2020 and a market share of 0.5%. as of December 31, 2020. SIM also has a high level of customer satisfaction, with an NPS of 80 points.

 

emDia

 

emDia is an online debt renegotiation platform. It provides customers with a simple platform to access debt renegotiation services on a 24/7 basis. As of December 31, 2020, emDia had 4 million customers and had contributed to the recovery of R$46 million in credit volume in 2020.

 

Mortgages

 

We offer long-term financing to our customers for real estate purchases, secured by deeds of trust. We consider mortgages to be a strategic product due to their lower risk (since the acquired property serves as collateral) and their ability to increase our customer loyalty (especially since we offer customers more attractive rates if they choose to bank with us). In this market, our customers, and those of our competitors, are primarily individuals.

 

We do not offer mortgage loans that do not meet prime lending regulatory standards, which means that (i) we do not finance more than 90% of the value of the property to be purchased, (ii) borrowers must meet certain minimum monthly income levels evidenced by recent payroll information and tax returns to confirm their employment status or other revenue sources, allowing us to evaluate their credit risk profile, and (iii) any other indebtedness added to the financing cannot exceed 35% of the borrower’s monthly gross income.

 

To facilitate the process for our customers, we provide a real estate digital platform where customers can obtain mortgages completely online. We were the first bank in Brazil to offer customers the opportunity to secure a mortgage without being physically present, except for the signing of the agreement and returning it duly registered. We have a partnership with the largest real estate platform in Brazil in order to improve our sales network and strengthen our digital presence.

 

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

 

   As of December 31,  Change between   Change between
   2020  2019  2018  2019 and 2020  2018 and 2019
   (in R$ billions, except percentages)
Mortgage loan portfolio   45.8    39.7    36.3    15.4%   8.3%
Individual sector mortgage loans   44.0    37.2    31.4    18.3%   18.4%
Loan to value(1) – Production (% quarterly average)   64.9%   62.9%   60.6%   2.00 p.p    2.31 p.p 
Loan to value – Portfolio (%)   52.2%   49.4%   48.7%   2.75 p.p    0.73 p.p 
 
(1)Ratio between loans and the value of the collateral, excluding home equity.

 

Home Equity

 

In our portfolio of loan products, we also offer a “home equity” financing product called “Use Casa”, where customers can receive a loan and provide real estate as collateral. This product enables customers to access financing to pursue their personal objectives. “Use Casa” experienced a marked increase in market share, achieving an overall market share of 29.5% in 2020 as compared to 20.5% in 2019.

 

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We do not offer home equity loans that do not meet prime lending regulatory standards, which means that (i) we do not finance more than 60% of the value of the property, (ii) borrowers must meet certain minimum monthly income levels evidenced by recent payroll information and tax returns to confirm their employment status or other revenue sources, allowing us to evaluate their credit risk profile, and (iii) any other indebtedness added to the financing cannot exceed 35% of borrowers’ monthly gross income.

 

To facilitate the process, customers can obtain home equity loans completely online through our real estate digital platform. When using this option, customers only need to be physically present when signing the contract and also when returning it once it is duly registered.

 

Tailored Products and Services

 

As mentioned above, we offer a complete set of services and products worldwide. In this way, we have a portfolio that ranges from basic to tailor-made and highly complex solutions in the following areas:

 

·     Global Transaction Banking - responsible for the sale and management of local and global transactional banking products, which includes local loans, commercial finance, transfers of BNDES on-lending, guarantees, structured loans and cash management solutions.

 

·     Global Transactional Services - responsible for sales and management of global transactional banking, trade finance, guarantees, structured loans, and funding from international banks.

 

·     Global Debt Financing - includes funding and financial advisory services related to projects, origination and distribution of fixed-income securities in the debt capital markets (DCM), financing of acquisitions and syndicated loans, other structured financing arrangements, subordinated debt and energy efficiency transactions.

 

·     Investment Banking - offers advisory services for mergers and acquisitions (M&A) and equity capital markets transactions, including initial public offerings and follow-on offerings.

 

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

 

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

 

·     Market Making - responsible for the pricing of customer deals originated by our sales force from corporate, institutional, private banking and retail segments. This department also conducts our proprietary trading activities.

 

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

 

Company Acknowledgments
Dealogic

First Quarter of 2020

 

#2 M&A LatAm - Deal Announced¹

#3 M&A Brasil - Deal Announced¹

#6 M&A Brasil - Volume Announced¹

#4 ECM Brasil - Deal Announced2

#11 ECM Brasil - Volume Announced2

#1 Global Financial Advisor - Deals Announced (Brasil in the International Markets)

#1 Global Renewables MLA - Deals & Volume Announced

#1 Global Renewables MLA - Deals Announced

#1 Americas MLA - Deals Announced

#1 Americas Financial Advisor - Deals Announced

#1 LatAm & Caribe MLA - Deals & Volume Announced

#2 Global Financial Advisor - Volume Announced (Brasil in the International Markets

#2 Americas Renewables MLA - Volume Announced

#2 Americas Financial Advisor - Volume Announced

#3 Americas MLA - Volume Announced

#1 Global ECA Financing Volume by MLA

#1 LatAm & Caribbean ECA Financing Volume by MLA

 

OBS:

GDF: Position 2019 FY

IB: (1) excludes fairness opinions / (2) Not included deals made in the EUA – YTD´20

 

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Global Finance

 

 

Best Provider of Short-Term Investments/Money for 2020

Market Funds in Latin America for 2020 

Best Trade Finance Bank in LatAm 2020

World´s Best Payment Hub Solution for 2020 

Best Supply Chain Finance Provider in LatAm 2019

Best Trade Finance Provider in LatAm 2019

Institutional Investors

#1 The Latin America Strategy Team                           

First Quarter of 2020 

 

#4 The Latin America Sales Team

# Sales Trading Institutional Team 

#5 Research Team

TMI Awards

Best Trade & Supply Chain Finance Bank in South America 2020

B3

#2 Derivatives                                                                  

October 2020

FX Markets

 

Best Bank for emerging LatAm currencies 2020

Best Bank for LatAm 2020 

Best Bank for USD/BRL 2020

Global Trade Review

Best Trade Finance Bank in LatAm 2020                      

First Quarter of 2020 

  Best Deal Award Route 2020
Best Supply Chain Bank 2020

Bond Radar

#1 DCM Distributed in the International Market        

Full Year 2020

  Brasil Bonds & Corporate Bonds

Trade Finance an IJ Global

 

Best Supply Chain Finance Bank 2020

Best Receivables Financier 2020 

PFI Awards

Global Adviser of the year                                              

First Quarter of 2020

Anbima

#3 DCM Distributed in the Local Markets                    

First Quarter of 2020

  #3 3 DCM Originated in Local Markets– Fixed Income Consolidation
  Project Finance                                                               Full Year 2019
  Financing advisory #1 Announced value and Nº Deals
Concession Auction Financial Advisor #2 Announced values and #2 Nº Deals
Structuring #5 Announced value #3 Nº Deals

Risk Net

 

Risk Solutions House of the Year 2020

Deals: Cosan (EDQ) / Syngenta (Special Sits)

 

Latin Finance

 

Financial Advisor of the 2020: LatAm

 

Bacen

#1 Total FX                                                                         

May 2020

The Banker

 

Most innovative investment bank of the year for structured finance 2019

 

 

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Customer Solutions

 

Santander SX

 

As required by the new Brazilian instant payment system, PIX, which was established by the Brazilian Central Bank, we developed Santander SX, a system that allows individual and corporate customers to instantly transfer money, at any time, free of charges, in a practical and safe way.

 

In the fourth quarter of 2020, we introduced SX. We believe that SX is complementary to the Brazilian Central Bank’s instant payment solutions, by offering exclusive benefits to customers, including 10 days of interest-free overdraft for individuals and five days for businesses. Since its launch in November 2020, we have processed more than 36 million PIX transactions (sent and received), totaling more than R$ 43 billion, through SX. More specifically, regarding the financial volume of PIX sent, we achieved a share of 15% in the fourth quarter of 2020, outperforming our regular market share in the credit market.

 

Agribusiness

 

Agribusiness remains one of our key areas of expansion, and we believe that expanding our agribusiness network will help broaden our reach into the Brazilian countryside to strategic areas in which we are not yet present. We provide a full range of products and services focused on the agribusiness sector. Our approach towards rural producers differs from the one taken with our other customers in that we offer a specialized relationship to our rural producers. We believe that a network of physical stores and digital solutions will result in a more agile and efficient communication with these customers.

 

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

 

   As of and For the Year Ended December 31,  Change between   Change between
   2020  2019  2018  2019 and 2020  2018 and 2019
                
Number of agribusiness-focused stores   40       34       21       6%     13% 
Agribusiness loan portfolio (R$ billion)   13.7    10.9    11.8    26.2%   (7.9)%) 

 

Microfinance

 

We believe that Prospera Santander Microfinance is a leading microcredit-oriented operation among privately owned banks in Brazil, based on market share and portfolio value. This product aims to support formal and informal microentrepreneurs by generating business and income. With a 100% digitalized service process, in addition to products intended to improve business management skills, we have customers who hire us for services previously not available to them, because they do otherwise have access to financial services, such as property finance, consortium and investment services.

 

   As of and For the Year Ended December 31,  Change between 2019 and  Change between 2018 and
   2020  2019  2018  2020  2019
Number of Prospera stores   99    100    45    (1.0%)   122.2% 
Microfinance loan portfolio (R$ billion)   1.3    1.2    0.7    8.3%   79.1%

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Webmotors

 

Webmotors is the first and largest Brazilian technology company focused on providing automotive purchase and sale solutions for dealers, original equipment manufacturers and private sellers, holding the largest online automotive listing in Brazil.

 

Webmotors received over 30.2 million visits each month and had an average of over 3.9 million vehicles listed in 2020. Through the Cockpit, a pioneering and disruptive platform for car dealers, which combines solutions for the entire chain described above, we offer the following solutions: business management/performance, buyer profile (CRM), data intelligence, predictive pricing models and market data (AutoGuru).

 

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

 

During 2020, we launched two service products, Car Delivery and “Troca com Troco” in partnership with Webmotors.

 

Through Car Delivery, customers seek virtual assistance through video calls, resolve concerns online, and receive their vehicle at home, sanitized and with all necessary support. “Troca com Troco” allows customers to sell their current financed vehicles while financing the purchase of a less expensive vehicle, and pocket the difference. This product allows the Bank to better manage credit exposure and control the credit quality of the portfolio with leading customer service.

 

Santander Auto

 

In 2019, we launched Santander Auto, a fully digital car insurance solution which relies on the use of big data analytics for pricing.

 

The Brazilian insurance market is characterized by: (i) low insurance penetration as a proportion of GDP; (ii) low technological evolution, dominated by companies with low innovation rates, still focused on financial results (due to a history of high interest rates); and (iii) retail brokers as the main distribution channel. As a result, the subscription process still requires that the customer complete a question form (approximately 40 questions). As a result, only approximately 20% of Brazilian vehicles are insured.

 

Actuarial techniques and behavioral models enable Santander Auto to make an insurance proposal, without making additional information requests from the customer, based on information already available to us.

 

During its first year of operation almost 110 thousand policies were sold, which represents a penetration rate of 16% (i.e., total insurance contracts sold as a percentage of the contracts relating for loans by Santander Financiamentos). These results are based on a pricing system based on information bureaus which provides have a more accurate price, which makes it possible to make an offer at the time the vehicle is purchased, and which enables customers to include insurance in their purchase with a single click. During 2020, we focused on consolidating our insurance offer, by ensuring that all customers have at least one insurance offer, while also covering the most diverse types of risk. We intend to expand the business through the optimization of our ecosystem and penetration in our customer base.

 

+ Negócios and + Vezes | Santander Financiamentos

 

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

 

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In 2020, approximately 15 million separate Brazilian individual taxpayer identification numbers were used to simulate vehicle leasing through the “+Negocios” platform, which makes us one of the most widely used platform in Brazil’s vehicle leasing market.

 

We also reformulated the “+Vezes” platform in 2020 to improve customer experience and the platform's stability. We also increased our sales force in this business through sales representatives giving us a presence throughout Brazil.

 

Cash Management

 

We offer cash management solutions to corporate customers and SMEs online through our Internet banking and mobile banking services.

 

Our revenues from cash management include fees charged for offering the following products: (i) collections, in which we assist customers in carrying out commercial transactions using printed or online payment slips; (ii) payments, consisting of simple and automatic management of our customers’ accounts payable activities through individual transactions or via electronic file transfer; (iii) payroll, which is intended to facilitate the management of salary and benefits payments to our customers’ employees via an online tool; (iv) collection of values, which consists of the payment of cash values and checks at the customer’s points of sale; and (v) custody, by which we perform the custody, control and deposit of predated checks up to the date of clearing.

 

In addition, we also provide other revenue-generating products which are structured and tailored to the customer’s operation.

 

Customer Funding

 

Our main sources of liquidity are customer funding through deposits and other bank funding instruments. These deposits, combined with equity and other instruments, enable us to meet most of our liquidity and legal reserve requirements.

 

For further information, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Liquidity and Funding.”

 

Investments

 

Our investment process for retail customers seeks to provide qualified guidance and help them achieve their financial objectives based on four major pillars:

 

·Client investment profile - We assess our customer’s situation to understand their level of financial knowledge, investment horizons, liquidity needs and the levels of risk they are willing to assume, among other factors. This analysis is reviewed periodically, according to the customer’s needs and local regulations.

 

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

 

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

 

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·Execution and implementation - To assure a successful execution of investment strategy, we provide a complete array of financial products, ranging from banking instruments, bonds, stocks, structured notes, investment funds with an open architecture and selected investment providers, real estate funds and exchange traded funds, among other capital markets instruments. Our partnership with Zurich Santander completes this offering with a wide range of private pension plans. Furthermore, our recent acquisition of Toro Corretora has further enhanced our PI DTVM investment platform by expanding our product offering. For more information regarding this acquisition, see “—A. History and Development of the Company—Important Events— Purchase of Equity Interest over Toro Controle e Participações S.A.”

 

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

 

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

 

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

 

Programa Avançar

 

We also have a non-financial solution, known as “Programa Avançar”, which is aimed at entrepreneurial customers. Through this solution, SMEs can access content and solutions related to management and innovation, internationalization, team building, and other topics relevant to businesses via a web platform. We see this program as a key component of our offering to Brazilian entrepreneurs.

 

In addition, we offer a digital account solution to these customers, especially individual entrepreneurs.

 

Similarly, we offer “Santander Copiloto”, an enterprise resource planning tool designed for our SME customers. This tool is integrated with the Santander Digital channels, and provides solutions such as e-commerce, sales point software and tax compliance.

 

Service Channels

 

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

 

Physical Distribution Network

 

Our distribution network provides integrated financial services and products to our customers. The following table presents our physical distribution network as of the dates indicated.

 

   As of December 31,
   2020  2019  2018
Branches     2,153      2,328    2  ,283 
Mini-branches     1,411      1,512      1,267 
Own ATMs   12,949    13,296    13,641 
Shared ATMs   23,798    23,780    23,049 

 

Branch Network

 

Our branch network offers our entire portfolio of products and services to our customers through a personal and customized approach. The table below shows the geographic distribution of our branch network as of the dates indicated.

 

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      As of December 31,
      2020 2019 2018
Northeast       9%   9%   8%
North and Midwest       7%   7%   7%
Southeast     70% 70% 71%
South     14% 14% 14%

 

PABs (Mini-branches)

 

We offer daily banking services to our SMEs, as well as corporate customers and their employees through our PABs (“Postos de Atendimento Bancário”), which are exclusive sales points located at our customers’ buildings, as well as in hospitals and universities. The presence of PABs in our customers’ offices strengthens our relationship and builds loyalty with those customers, who benefit from the convenience of conducting their banking transactions at their workplace.

 

ATMs

 

We operate an extensive network of 12,949 ATMs, including those located in our branches and mini-branches. In addition, our customers have access to the “Banco24Horas” network, which operates 23,798 ATM units. Through this network, our customers can access their accounts and conduct banking transactions, as well as purchase most of the products and services available in our portfolio.

 

Call Centers

 

Our call centers provide active Santander Brasil customers (account and single product holders) with consultation, financial transactions and product hiring services. This important distribution channel has a variety of customer self-service facilities. Our call centers received over 150 million contacts in 2020.

 

Digital Channels

 

Our digital channels include Internet banking, mobile banking and other digital solutions aimed at facilitating our customers’ access to the products and services that we offer. We highlight the following key features:

 

·OnePay – This service is available through the Santander App and enables customers to transfer funds to foreign countries in various currencies.

 

·Santander On “Financial control” – Through the Santander App, customers can access this service to view all of their commitments to us, as well as pending issues with the Brazilian tax authority (Receita Federal do Brasil), Serasa (a Brazilian credit bureau) and the Brazilian Central Bank, thereby enhancing the transparency of the credit relationship with Santander Brasil. Customers can easily access credit quality information and the use of debt with Santander, as well as easily update income data without having to present any payroll or tax documents, and readjust available limits.

 

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

 

   For the Year Ended
   December 31,
   2020  2019  2018
   (in millions)
Number of digital customers(1)     15.6    1  3.4    1  1.4 
Number of digital channel transactions(2)   5,262    4,311    4,073 
(1)We define digital customers as those who used at least one of Santander Brasil’s digital channels (e.g., mobile banking and internet banking) in the 30 days preceding the end of the applicable year.

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

 

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The following table provides an overview of the weight of each key distribution channel in our overall distribution system.

 

      For the Year Ended
      December 31,
      2020 2019 2018
      (%)
Internet banking     36.9 39.7 46.1
ATMs     5.9 8.9 10.4
Mobile(1)     48.0 39.0 34.5
Branch     2.2 4.1 5.2
IVR(2)     6.1 7.4 2.3
Call Center     0.8 0.9 1.4
 
(1)Refers to total transactions (account holder and unique product-holder).

 

(2)Interactive voice response is an automated telephone system in which a computer interacts with callers (who can use their voice or the telephone keypad to communicate with the computer), gathers information and transfers caller to the appropriate representative.

 

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

 

·Digital account opening – Customers can open an account with Santander Brasil entirely online.

 

·Artificial Intelligence GENTE – Launched in 2020, this solution offers a more personalized digital service that provides greater autonomy for our customers.

 

·LAB 033 – Launched in 2019, this is innovation laboratory is focused on creating new solutions that can support transformational projects across our organization.

 

·Santander Corretora App - A digital trading platform offered to our brokerage customers.

 

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

 

·Pi DTVM – Acting as a digital broker since 2019, this solution empowers customers to invest through a simple and intuitive digital platform. PI DTVM also provides market information and financial education tools.

 

Technology and Infrastructure

 

In 2020, we optimized our technology investments, in order to provide more efficiency, digitalization, security and quality to the products and services provided to our customers. In the challenging scenario brought by the COVID-19 pandemic, we took on the important role of serving as an ally to our customers and the Brazilian economy. Through sizeable investments in technology and enhancements to the capabilities of our channels and digital platforms, we were able to quickly face up to the new reality, while simplifying internal processes and business models.

 

We established a new technological innovation center (Lab 33) in the city of São Carlos (in the state of São Paulo) and built partnerships with local universities and technical schools in order to identify and recruit qualified talent. In addition to creating job opportunities in São Carlos, this innovation center resulted in the creation of other direct and indirect positions in our technology ecosystem. Furthermore, we boosted the agility and scalability of our software development and deployment processes, while increasing automation levels and adopting advanced cloud computing and artificial intelligence solutions. We have listed below a few other initiatives delivered throughout the year:

 

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·GENTE: in order to speed up and optimize the digital services provided to our customers, we released GENTE, a virtual self-service assistant that customers can use to search for information, ask questions, access account statements, review credit card limits, as well as to perform financial transactions such as transfers and invoices payments, all through the Santander Mobile App, our commercial portal, WhatsApp or Santander Way.

 

·Santander SX: as required by the Brazilian Central Bank, we developed Santander SX, an instant payments platform that allows individual and corporate customers to make money transfers that reach the recipient’s account in a just a few seconds 24 hours a day. Transactions can be performed from transactional account identifier directory (or “DICT”) keys, such as e-mail address, cell phone number, national tax number as well as static and dynamic QR codes.

 

·Individual Bank Account (Mobile): in order to enhance our customers’ experience, we improved our mobile app services by adding new consulting and sharing features to our individual account mobile app, including the ability to generate credit card invoices in portable document format, or “PDF”, check date and time of the last balance update, as well as view all charges and number of days the overdraft account was used.

 

·Corporate Bank Account (Mobile): in line with our sustainability goals, we launched a new digital service for our corporate customers that offers paperless processes and greater agility in opening new accounts, with a strong lead-time reduction from a few hours to just a few minutes to open an account. Since the launch of this new service, over 20,000 new corporate accounts have been opened using this service.

 

·Credit Cards: in addition to offering our customers the option of acquiring credit cards through our digital channels, we now provide new after-sales services, such as sending digital invoices and card passwords via text messages. In December 2020, over 74% of credit card invoices were made available via digital channels, while 91% of card passwords were sent via text messaging.

 

·Car Insurance: our car insurance services are offered through a 100% digital platform, where customers may perform simulations, request inspection services and sign-up for insurance contracts spanning over 12, 24 or 36 months. This new platform aims to boost sales through simple navigation, reduce average quotes and contract time, as well as increase the number of insurance contracts and total premium amount.

 

·Mortgage Services: we have improved the after-sales experience of our real estate loan customers. Our customers can access relevant information about their contract through a single page on our web portal, including total contract amount financed, balance due, overdue balance, interest rates and maturity date, as well as installment due payments.

 

·Security and Antifraud: we have expanded the types of electronic authentication methods available, so that our customers can validate transactions via biometry, QR code (Santander ID), Token ID and credit card passwords. We have also developed the fraud alert center, an antifraud solution designed to send alerts to customers about events identified while accessing our digital channels or any changes to the information registered in our databases. These actions contributed to protecting our business and our customers from sensitive information leaks or exposure.

 

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Communications and Marketing

 

We use and monitor several tools in order to communicate effectively with our customers. These include not only traditional media, such as television and printed media, but also the internet, mobile advertising and social networks.

 

Even though social isolation prevented in-person events in 2020, our customer outreach, conducted through direct communication across all available media, including social networks, remained unaffected. We regularly provided information through these channels, seeking to make a real and positive difference in the lives of our customers. Such information included guidance on how to access credit lines and other government-sponsored initiatives to combat the COVID-19 pandemic, as well as information on the solutions we introduced, such as our mortgage rate reduction, deferral of loan installment payments and vehicle financing with auto insurance, without inspection. Internally, we released more than 200 videos aimed at instructing our teams on how to best-serve our customers, and guidelines to prevent COVID-19 in the workplace. Externally, we ran more than 192 video advertisements on TV and social networks. Our communications campaign generated significant feedback, with more than 34,000 articles published in newspapers and magazines, as well as more than 20 stories featured in Brazilian national media outlets. On social media, we averaged 10 posts per day, with nearly 800 million impressions. We also launched new media formats on networks such as Spotify (podcast) and TikTok. Additionally, we conducted more than 150 live broadcasts and events where our senior management, as well as experts and government officials were invited to address several topics, including the current economic scenario, social investment, sustainability, diversity, women’s leadership, entrepreneurship, and culture and entertainment. The Third Edition of Global Citizen, organized in collaboration with newspaper Valor Econômico and featuring actress and activist Viola Davis and Esther Duflo, the youngest person ever to win the Nobel Prize in Economics, received more than one million views. Also, the 21st Annual Santander Conference focused on discussing actions to fight COVID-19, with the participation of major chief executive officers, public authorities and our leadership. The conference was broadcasted on YouTube, garnering a total of 6.1 million views.

 

Sustainability

 

In Brazil, sustainability governance is based on global guidelines, locally identified commitments and demands, and our local business strategy. Decision-making goes through the Board of Directors, the Executive Committee and the Sustainability Executive Superintendents. The Sustainability Committee is responsible for providing clarification and recommendations to the Board of Directors regarding the development of sustainability-related guidelines.

 

We have organized our activities to create what we believe to be one of the best financial platforms in Brazil and to serve as an agent for the transformation and prosperity of society. This involves promoting sustainability through our business, operations and relationships. We have directed our efforts to improve Brazil’s business environment, which allows people to live up to their full potential and strategically promote the use of Brazil’s natural capital.

 

This stance is present in the three pillars of our sustainability strategy, which reflects Brazil that we want to help build, together with our employees, customers, shareholders and society, while also contributing to the UN’s Sustainable Development Goals (“SDGs”): surrounding a Resilient and Inclusive Economy, the Development of Potential and the Efficient and Strategic use of Natural Resources.

 

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Resilient and Inclusive Economy

 

Our broad commercial activity allows us to advise and support all of our customers and projects. Our role is to be a facilitator and contribute to the generation of jobs and income, and the improvement of logistics and infrastructure for Brazil’s development.

 

Through this pillar, for example, we offer access to banking services, products and non-financial initiatives.

 

We have specific products to support micro entrepreneurs and SMEs, such as the “Prospera Santander Microfinanças”, “Programa Avançar” and “Parceiros em Ação” programs. Additionally, we increasingly seek to include the topic of financial management in the client's relationship with the Bank, using tools such as Santander On.

 

In 2020, by digitalizing our initiatives, we reached 156,000 participations in financial education initiatives. This number includes content for our social networks, as well as live streams and podcasts on personal financial management and investment. For the first time during the national financial education week, our customer services team, or “SAC,” offered personalized financial advice to customers.

 

Furthermore, Santander Brasil launched several benefits to support customers and companies during the COVID-19 pandemic, including the “A Gente Banca” program, as well as long term payroll loans, installment extensions, and service packages aimed at individual microentrepreneurs among others.

 

Development of Potentials

 

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

 

We work to create a culture of respect, inclusion and equity, where everyone can develop their talents with their unique attributes. Diversity is one of the five principles of our Code of Ethical Conduct. Our priorities are gender and racial equity, inclusion of LGBTI+ and people with disabilities, as well as diversity of experience and generational diversity. Since 2018, we have set inclusion targets for Afro-Brazilian employees in the bank and female employees in leadership, which in 2020, were 27.4% and 28%, respectively. As of December 31, 2020, our Afro-Brazilian and female employees accounted for 25.3% and 28.8%. Additionally, in 2020, we received two diversity awards from GPTW: one for our ethnic-racial practices and another, for the fourth time, as one of the best companies for women to work.

 

Through the Santander Universities Program, we offer initiatives focused on granting national and international scholarships, programs for entrepreneurial development, as well as internship and employment programs. On December 31, 2020, about 24,900 scholarships and entrepreneurships were granted with a total investment of about R$27.2 million.

 

We also contribute to the promotion of children and adolescents’ rights. Through the “Amigo de Valor” program, Santander Brasil, employees and customers may directly donate a part of their due income tax to the Funds for the Rights of Children and Adolescents (“Fundo dos Direitos da Criança e do Adolescente”). In 2020, this program raised R$15.7 million.

 

In 2020, we took several steps to support society during the COVID-19 pandemic:

 

·Between March and December 2020, we donated more than R$100 million to initiatives to mitigate the impact of COVID-19;

 

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·We raised R$3.5 million, and donated another R$3.5 million, out of the R$100 million mentioned above, to five hospitals to create new intensive care units and purchase personal protective equipment;

 

·In partnership with the other two main private banks in Brazil, we helped lower income women manufacture and distribute more than 17.7 million protective cloth masks. This initiative allowed us to help support their income during the pandemic while also providing masks to those in need;

 

·Our employees donated about 790 tons of food, clothes and hygiene products, to over 500 non-governmental organizations around Brazil, impacting more than 170 thousand people;

 

·Through our volunteering program, 83 volunteers interacted weekly with elderly people living in shelters supported by “Parceiros do Idoso” in order to give them company and support.

 

We also organized a 12-hour live festival, streamed on television and radio to help single mothers in deprived communities across Brazil and raised R$3.5 million to the support the “Mães da Favela” project. With our donation included, we are giving a total of more than R$7 million to more than 20,000 mothers through SuperDigital. Through this initiative, we can also introduce these families to our banking services.

 

Efficient and Strategic Use of Natural Resources

 

We are implementing changes that contribute towards the goal of helping Brazil make responsible and efficient use of its environmental resources and move towards a low-carbon economy. Our activities include, in addition to the responsible environmental management of our operations, financing and advising companies in the fields of infrastructure and renewable energy, and providing support for sustainable agribusiness.

 

In 2020, Santander Brasil made important public commitments towards Brazil’s sustainable development, such as the introduction of a R$5 billion credit line for new investments in water and sanitation, as well as the “Amazon Plan” that was launched in partnership with the two other private banks in Brazil. In addition, we believe we are at the forefront of environmental, social and governance matters, or ESG, in Brazil, evidenced by the offer of ESG-linked loans and Renovabio products to customers.

 

The total amount of environmental, social and governance, or ESG, financing which Santander Brasil provided through Santander Financiamentos, responsible agribusiness, corporate, retail (individual and corporate customers), project finance, Santander Corporate, and investment banking, including green bonds, totaled approximately R$27 billion.

 

Since 2002, we have adopted social and environmental parameters in risk analysis of credit concession for projects and companies. The assessment carried out by specialized professionals may result in conditions or restrictions for companies to operate with the Bank. For customers with revenues of over R$200 million, this analysis may also influence credit rating, affecting rates, limits, terms and guarantee requirements.

 

In relation to internal environmental management, we have been carbon neutral since 2010, by completely offsetting our Scope 1 and 2 emissions. Also, since 2013, we follow a methodology for selecting projects from which to purchase Verified Emission Reductions (“VERs”), to ensure the social and environmental benefits for that region. In recent years, we have been purchasing VERs from reforestation and renewable energy ventures.

 

In 2019, we committed publicly to:

 

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·reducing single-use plastic consumption at Santander Brasil, by launching the #Desplastifique program. The implementation plan started with administrative buildings, in 2019 and was scheduled to be completed during the course of 2020. However, due the COVID-19 pandemic, we expect that it will be fully implemented in all branches by the end of 2021; and

 

·powering 100% of our operations with renewable energy by 2025. In December 2020, approximately 47% of our consumed electricity was derived from renewable sources.

 

We improved our “Paperfree” program in 2020 to encourage digitalization, promote the use of rational resources and eliminate bureaucratic processes. The goal is to try to eliminate the use of postal stamps. As a result of the program, at our administrative buildings and stores, we collected and recycled around 72,000 stamps.

 

Socio-Environmental Responsibility Policy

 

Our Socio-Environmental Responsibility Policy, or “PRSA”, meets the requirements of CMN Resolution n° 4.327/14 and SARB Regulation 14 of FEBRABAN. These regulations define guidelines and consolidate specific policies for socio-environmental practices in business and relationships with certain parties. These practices include socio-environmental opportunities and impacts, and risk management such as suitability in granting and using credits, management of suppliers and socio-environmental risk analysis. In 2020, the vice-president of Legal Issues joined our PRSA Senior Group, which consists of our vice-presidents of Risks, Corporate, Human Resources, Finance and Communication, Marketing, Institutional Relationships and Sustainability, and officers of Agribusiness and Compliance. This Group is involved in decision-making related to the PRSA and operates in connection with our Executive Committee.

 

Competition and Industry Transformation

 

Currently, there are five commercial financial institutions at the forefront of the Brazilian financial industry in terms of assets: Santander Brasil, Bradesco, Itaú Unibanco, Banco do Brasil and Caixa Econômica Federal. Together, these financial institutions accounted for 73.2% of the credit and 75.2% of the deposits available in Brazil as of December 31, 2020, according to the Brazilian Central Bank and the financial statements of the aforementioned banks.

 

The following table shows the total loans and deposits of the five leading financial institutions in Brazil at the dates indicated:

 

   Santander Brasil  Bradesco  Itaú Unibanco  Banco do Brasil  Caixa Econômica Federal (2)  Financial System
   December 2020 (R$ billion)
 Total loans(1)    411.7    510.3    508.6    681.8    756.5    2,868.9 
 Total deposits(1)    384.9    545.3    786.6    437.0    512.9    2,666.7 

 

 

 
(1)According to the Brazilian Central Bank, reported and presented in accordance with Brazilian GAAP (December 2020).

 

(2)Represents total loans and deposits of Caixa Econômica Federal as of September 2020 because as of the date of this report, Caixa Econômica Federal had not disclosed the information for December 31, 2020.

 

Insurance Coverage

 

We maintain insurance policies that are renewed annually in order to protect our assets. All of our branches, affiliates and administrative buildings are insured against losses caused by fire, lightning, explosions and other risks. Such coverage establishes reimbursement for the asset replacement value.

 

In addition, we also maintain the following insurance policies:

 

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

 

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

 

·directors’ and officers’ insurance policy for our management against third-party complaints regarding management acts. There are insurance policies against crimes, employee dishonesty and damages arising out of public offerings; and

 

·policies against hacker attacks and cyber-crimes.

 

Dependence on Patents, Licenses, Contracts and Processes

 

The major trademarks we use, including, among others, the “Santander” trademark, are owned by Santander Investment Bank. Santander Brasil has a license to use this trademark. All trademarks of our business are registered or applied through the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial, or “INPI”), the agency responsible for registering trademarks, patents and designs in Brazil. After registration, the owner has exclusive rights to use of the trademark in Brazil for a 10-year period that can be successively renewed for equal periods.

 

As of the date of this annual report, we own a total of 553 trademarks in Brazil, with Santander Brasil owning over 123 of these trademarks, while the remaining are owned by other companies of the Santander Group.

 

REGULATION AND SUPERVISION

 

The basic institutional framework of the Brazilian financial system was established by Law 4,595, of December 31, 1964, as amended from time to time, or the “Banking Reform Law”. The Banking Reform Law created the CMN, responsible for establishing the general guidelines of monetary, foreign currency and credit policies, as well as regulating the institutions of the financial system.

 

Principal Regulatory Agencies

 

CMN

 

The CMN oversees the Brazilian monetary, credit, budgetary, fiscal and public debt policies. The board of the CMN is composed of the president of the Brazilian Central Bank, the Minister of Planning and the Minister of Finance, who also chairs the Board. Pursuant to the Banking Reform Law, the CMN is the highest regulatory entity within the Brazilian financial system, and is authorized to regulate the credit operations of Brazilian financial institutions, to regulate the Brazilian currency, to supervise Brazil’s gold reserves and foreign exchange, to determine Brazilian savings and investment policies and to regulate the Brazilian capital markets with the purpose of promoting the economic and social development of Brazil. In this regard, the CMN also oversees the activities of the Brazilian Central Bank and the CVM.

 

Brazilian Central Bank

 

The Brazilian Central Bank is responsible for the implementation of CMN policies related to foreign currency and credit, the regulation of Brazilian financial institutions, particularly in regards to the minimum capital and compulsory deposit requirements, as well as the disclosure of the transactions carried out by financial institutions and their financial information. The Brazilian Central Bank addresses specific issues through the Monetary Policy Committee (COPOM), a committee responsible for adopting measures to meet inflation targets defined by the CMN and establishing monetary policy guidelines. In order to meet inflation targets, the COPOM must set the target for the SELIC Rate (the average rate for daily financing, backed by federal instruments, as assessed under the Special Settlement and Custody System) and publish reports on the Brazilian economic and financial environment and projections for the inflation rate.

 

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CVM

 

The CVM is responsible for the implementation of CMN policies related to securities, with the purpose of regulating, developing, controlling and inspecting the securities market and its participants (companies with securities traded in the market, investment funds, investors, financial agents, such as custodians of instruments and securities, asset managers, independent auditors, consultants , as well as instruments and securities analysts).

 

Self-Regulating Entities

 

The Brazilian financial and capital markets are also subject to the regulation of self-regulating entities that are divided by field of activity. These self-regulating entities include, among others, the National Association of Investment Banks – ANBIMA, the Brazilian Association of Credit Card and Services Companies – ABECS, the Brazilian Banks Federation – FEBRABAN, the Brazilian Association of Publicly-Held Companies – ABRASCA and the B3.

 

Principal Limitations and Obligations of Financial Institutions

 

In line with leading international standards of regulation, Brazilian financial institutions are subject to a series of limitations and obligations. In general, such limitations and obligations concern the offering of credit, the concentration of risk, investments, operating procedures, loans and other transactions in foreign currency, the administration of third-party funds and micro-credit. The restrictions and requirements for banking activities, established by applicable legislation and regulations, include the following:

 

·No financial institution may operate in Brazil without the prior approval of the Brazilian Central Bank. In December 2017, the CMN enacted a new rule establishing that all such requests submitted to the Brazilian Central Bank must be approved within 12 months (subject to suspension of the term in some instances);

 

·A Brazilian financial institution may not hold direct or indirect equity interests in any company located in Brazil or abroad registered as permanent assets without prior approval of the Brazilian Central Bank. The corporate purpose of such company shall be complementary or subsidiary to the activities carried out by the financial institution;

 

·Brazilian financial institutions must submit for prior approval by the Brazilian Central Bank the corporate documents that govern their organization and operation, such as capital increases, transfer of headquarters, opening, transfer or closing of branches (whether in Brazil or abroad), election of the members of the statutory bodies and any corporate restructuring or alteration in the composition of their equity control. The requests for changes in control submitted to the Brazilian Central Bank must be approved within 12 months and requests for changes to organizational documents must be approved within three months (in both cases subject to suspension of the term in some instances);

 

·Brazilian financial institutions must fulfill minimum capital and compulsory deposit requirements and must comply with certain operational limits;

 

·A Brazilian financial institution may not own real estate, except for properties it occupies and subject to certain limitations imposed by the CMN. If a financial institution receives real estate, for example, in satisfaction of a debt, such property must be sold within one year, unless otherwise authorized by the Brazilian Central Bank;

 

·Brazilian financial institutions must comply with the principles of selectivity, guarantee, liquidity and risk diversification;

 

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·A Brazilian financial institution belonging to the S1 segment, as is the case of Santander Brasil, cannot lend more than 25% of its Tier 1 Regulatory Capital (patrimônio de referência) to a single person or a group and the maximum exposure to concentrated individual customers or group of connected customers of such Segment 1 financial institution is 600% of its Tier 1 Regulatory Capital (a concentrated individual client would mean, for the purpose of the proposed rule, as any one client to which exposure is equal to or higher than 10% of its Tier 1 Regulatory Capital);

 

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

 

·The total amount of funds applied in permanent assets of the financial institutions cannot exceed 50% of their adjusted stockholders’ equity;

 

·Brazilian financial institutions must comply with anti-money laundering and anti-corruption regulations;

 

·Brazilian financial institutions must implement policies and internal procedures to control their systems of financial, operating and management information, as well as their conformity to all applicable regulations;

 

·Brazilian financial institutions must implement a policy for remuneration of board members and executive officers that is compatible with their risk management policies; and

 

·The Banking Reform Law and specific regulations enacted by the CMN impose penalties on financial institutions in certain situations where applicable requirements, controls and requisites have not been observed. In addition, the Brazilian Central Bank may cancel the financial institution’s authorization to operate in certain situations. The cancellation of an authorization for operation of a financial institution may only occur upon the establishment and processing of the appropriate administrative proceeding by the Brazilian Central Bank.

 

Additionally, as part of the Santander Group and due to the global nature of our organization we are subject to related international rules.

 

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Capital Adequacy and Leverage – Basel

 

Current Requirements

 

The Brazilian Central Bank supervises the Brazilian banking system in accordance with the Basel Committee on Banking Supervision, or “Basel Committee”, guidelines and other applicable regulations. For this purpose, banks provide the Brazilian Central Bank with any information which it deems useful in performing its supervisory functions, which includes supervising changes in solvency and capital adequacy of banks.

 

The main principle that guides the directives set forth in the Basel Committee is that a bank’s own resources must cover its principal risks, including credit risk, market risk and operational risk.

 

Brazilian financial institutions are subject to capital measurement and standards based on a risk weighted asset ratio. The parameters of this methodology resemble the international framework for minimum capital measurements adopted by Basel III.

 

Basel III

 

On December 16, 2010, the Basel Committee issued the Basel III framework, which supplements and amends Basel II. Basel III includes higher minimum capital requirements, new conservation and countercyclical buffer capital requirements, revised risk-based capital measures and the introduction of a new leverage ratio, as well as two liquidity standards. The Basel III framework is being implemented gradually by each country through legislation or regulation to be imposed upon that country’s home banks, including Brazil.

 

Regulatory Capital is composed by Core Capital and two additional tiers:

 

Tier I capital will have to reach a minimum index of 6.0% (according to the schedule established by the Brazilian Central Bank), divided into two portions: (i) Core Capital consisting mainly of corporate capital and profit reserves (shares, units of ownership, reserves and earned income) of at least 4.5% of RWA, and (ii) Additional Tier I consisting mainly of perpetual hybrid securities and capital instruments authorized by the Brazilian Central Bank (but excluding amounts relating to funding instruments issued by other local or foreign financial institutions) and any of our own shares purchased by us and the integration of which into the Additional Tier I Capital is permitted. To improve the quality of the capital of financial institutions, Basel III restricts the acceptance of financial instruments that fail to demonstrate effective capability of absorbing losses and requires the reduction of assets that in certain situations could jeopardize the financial institution’s capital value due to the instruments’ low liquidity, dependence on future profits for realization or difficulty of value measurement.

 

There is also an additional 2% of Tier II capital requirement, for a total of 8% of minimum capital ratio. Current hybrid subordinated debt approved by the Brazilian Central Bank as additional capital requirements, or Tier II, are expected to be maintained if they also comply with requirements introduced by Basel III, including the mandatory conversion clauses into equity or write-off upon the occurrence of triggering events provided for in the regulations.

 

In accordance with the Basel III standards, the Brazilian Central Bank created the Additional Core Capital buffer (Adicional de Capital Principal), which is composed by the sum of three buffers:

 

·Core Capital Conservation buffer (Adicional de Capital Principal de Conservação), which was introduced to ensure that banks have an additional layer of usable capital that can be drawn down when losses are incurred. Whenever the buffer falls below 2.5%, automatic constraints on capital distribution (for example, dividends, share buybacks and discretionary bonus payments) will be imposed so that the buffer can be replenished.

 

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·Countercyclical capital buffer (Adicional Contracíclico de Capital Principal), which aims to protect the banking sector from periods of excess aggregate credit growth that have often been associated with the build-up of system-wide risks.

 

·Core Capital Systemic buffer (Adicional de Importância Sistêmica de Capital Principal), which is applicable to the S1 bank segment (banks with an asset base equivalent to over 10% of Brazil’s GDP or that engage in relevant international activity).

 

On March 16, 2020, due to the challenging macroeconomic environment resulting from the COVID-19 pandemic, the Brazilian Central Bank issued Resolution No. 4,783, which decreased the Conservation Buffer level (Adicional de Conservação de Capital Principal) in 2020 from 2.5% to 1.25%. This level will phase-in towards the 2019 level by 2022, as shown in the image below. This buffer change decreased the minimum Core Capital and Total Capital requirements, reaching 6.75% and 10.25%, respectively, as of December 31, 2020.

 

 

According to the new rules on regulatory capital in Brazil, the value of goodwill, intangible assets and some types of deferred tax assets, for the calculation of the capital base, was deducted in accordance with the “phase-in” for implementation of Basel III in Brazil, which was completed by January 1, 2019. The following table sets forth the percentage of required deductions for each year up to 2019:

 

Basel III Phase in
2016 2017 2018 2019 2020 2021
40% 60% 80% 100% 100% 100%
 

Source: Brazilian Central Bank; Resolution No. 4,192 of the Brazilian Central Bank of March 2013.

 

The Basel III rules also provide for the implementation of a leverage ratio calculated by dividing the Tier I capital by the bank’s total exposure. In early 2015, the Brazilian Central Bank issued a new regulation governing the calculation and reporting of the leverage ratio of Brazilian financial institutions in line with the Basel III rules, which became effective in October 2015. Financial institutions classified as segment 1 (S1), as is the case for Santander Brasil, or segment 2 (S2), for purposes of the application of prudential rules, are required to maintain a minimum RA of 3% as from January 1, 2018.

 

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Additionally, in order to enable the implementation of the Basel III framework in Brazil, certain legislative changes were made. Among others, Law No. 12,838, enacted on July 9, 2013, granted powers to the Brazilian Central Bank to limit the payment of dividends by financial institutions in case of non-compliance with the prudential capital requirements defined by the CMN.

 

In 2015, the CMN and the Brazilian Central Bank also issued a set of rules for the implementation of the liquidity coverage ratio or “LCR,” a short-term liquidity index. The purpose of the LCR is to demonstrate that financial institutions have sufficient liquid assets to make it through a stress scenario lasting one month. According to these rules, the largest Brazilian banks were required to maintain an LCR of at least 60% since October 2015. This ratio increased 10% annually until it reached 100% in 2019. The Brazilian Central Bank also released, in 2015, the local methodology for calculating the LCR so as to align the existing rules with the guidelines of the document “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” issued by the Bank for International Settlements in January 2013. In January 2017, the Brazilian Central Bank enacted a new rule amending the calculation method and procedures for disclosure of LCR information. The new regulation establishes a new possible stress scenario and, for purposes of LCR retail, includes spot and forward deposits.

 

As mentioned above, the LCR is a short-term liquidity ratio for a 30-day stress scenario. It represents the ratio of high-quality liquidity assets to net outflows. High Quality Liquidity Assets are composed mainly of Brazilian federal government bonds and reserve requirement returns. Net Outflows are mainly composed of losses on deposits, offset in part by Inflows, which are mainly credits.

 

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

 

Other Applicable Laws and Regulations

 

Consolidated Enterprise Level (conglomerado prudencial)

 

Financial institutions must submit to the Brazilian Central Bank, monthly and semiannually, consolidated financial statements based on the “consolidated enterprise level” (conglomerado prudencial) of which the financial institution is a member, which serve as the basis for calculation of the required Regulatory Capital of the Brazilian institutions. The “consolidated enterprise level” includes data relative to the financial institutions and other institutions authorized to operate by the Brazilian Central Bank, administrators of consortia, payment institutions and credit factoring companies, including real estate credit, or of credit rights, such as mercantile foment companies, securitization companies and specific purpose companies, located in Brazil or abroad, as well as other legal entities headquartered in Brazil that have equity participation in the mentioned entities as their exclusive business purpose.

 

On January 29, 2020, the CMN published Resolution No. 4,818, which requires financial institutions categorized as S1, S2 and S3 to publish IFRS financial statements. The requirement is already in force for publicly held financial institutions and financial institutions which are leaders of a prudential conglomerate, and will come into effect for all remaining financial institutions on January 1, 2022.

 

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Segmentation for the Proportional Application of Prudential Regulation

 

In January 2017, the CMN enacted a resolution establishing segmentation for financial institutions, financial institution groups, and other institutions authorized to operate by the Brazilian Central Bank for the purposes of proportional application of the prudential regulation. The segmentation is based on the size, international activity and risk profile of members of each segment. Pursuant to the resolution, the segments are as follows:

 

·Segment 1 comprises multiservice banks, commercial banks, investment banks, foreign exchange banks and savings banks with (a) an asset base equivalent or superior to 10% of Brazil’s GDP; or (b) which perform relevant international activities, irrespective of the size of the institution;

 

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

 

·Segment 3 comprises institutions with an asset base lower than 1% and equivalent to or greater than 0.1% of Brazil’s GDP;

 

·Segment 4 comprises institutions with an asset base lower than 0.1% of Brazil’s GDP; and

 

·Segment 5 comprises institutions with an asset base lower than 0.1% of Brazil’s GDP, that apply a simplified optional method for verifying the regulatory capital’s minimum requirements, except for multiservice banks, commercial banks, investment banks, foreign exchange banks and savings banks.

 

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

 

Regulation of Risk and Capital Management Structure

 

The rules enacted by the CMN and the Brazilian Central Bank provide that risk management must be conducted through an integrated effort by the relevant entity (i.e., not only must risks be analyzed on an individual basis, but must also control and mitigate the adverse effects caused by the interaction between different risks). The rules set out different structures for risk and capital management, which are applicable for different risk profiles. This means that a financial institution of limited systemic importance can have a simplified structure of management, while institutions of larger complexity have to follow stricter protocols.

 

Compulsory Reserve Requirements

 

Currently, the Brazilian Central Bank imposes a series of compulsory reserves requirements. Financial institutions must deposit these reserves with the Brazilian Central Bank. The Brazilian Central Bank uses these reserve requirements as a mechanism to control the liquidity of the Brazilian financial system for both monetary policy and risk mitigation purposes. Reserves imposed on time deposits, demand deposits and saving accounts represent almost the entirety of the amount that must be deposited at the Brazilian Central Bank.

 

·     Time Deposits (CDBs). The Brazilian Central Bank imposes a reserve requirement of 17% in relation to time deposits. Financial institutions must deposit an amount equivalent to the surplus of (i) R$3.6 billion for financial institutions with consolidated Tier 1 capital under R$3 billion; (ii) R$2.4 billion for financial institutions with consolidated Tier 1 capital between R$3 billion and R$10 billion; (iii) R$1.2 billion for financial institutions with consolidated Tier 1 capital between R$10 billion and R$15 billion; and (iv) zero for financial institutions with a Regulatory Capital greater than R$15 billion.

 

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

 

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

 

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

 

Asset Composition Requirements

 

Permanent assets (defined as property and equipment other than commercial leasing operations, unconsolidated investments and deferred charges) of Brazilian financial institutions may not exceed 50% of their adjusted net equity, calculated in accordance with the criteria established by the Brazilian Central Bank.

 

Brazilian financial institutions, as a general rule, may not have more than 25% of their Tier 1 Regulatory Capital allocated to credit and leasing transactions and guarantees extended to the same customer or group of customers acting jointly or representing the same economic interest. In addition, Brazilian financial institutions must comply with an exposure limit of 25% of their Regulatory Capital in connection with underwriting for or investments in securities of the same entity, its affiliates, or controlled or controlling companies. Repurchase transactions executed in Brazil are subject to operational capital limits based on the financial institution’s Regulatory Capital, as adjusted in accordance with Brazilian Central Bank regulations. A financial institution may carry out repurchase transactions in an amount of up to 30 times its Regulatory Capital. Within that limit, repurchase transactions involving private securities may not exceed five times the Regulatory Capital. Limits on repurchase transactions involving securities backed by Brazilian governmental authorities vary in accordance with the type of security involved in the transaction and the perceived risk of the issuer as determined by the Brazilian Central Bank.

 

The regulation issued by the Brazilian Central Bank with respect to the classification and valuation of securities and derivative financial instruments — including government securities — owned by financial institutions, based on the investment strategy of the financial institution, determined that securities and derivatives are to be classified into three categories: (i) trading; (ii) available for sale; and (iii) held to maturity.

 

“Trading” and “available for sale” securities are to be marked-to-market with effects in income and stockholders’ equity, respectively. Securities classified as “held to maturity” are recorded at amortized cost. Derivatives are marked-to-market and recorded as assets and liabilities in the balance sheet. Changes in the market value of derivatives are generally recognized in income with certain modifications, if these are designated as hedges and qualify for hedge accounting under the regulations issued by the Brazilian Central Bank. Securities and derivatives in the “held to maturity” portfolio may be hedged for accounting purposes but their increase or decrease in value as derived from the marked-to-market accounting method should not be taken into account.