6-K 1 bsbr20210326_6k1.htm BSBR20210326_6K1


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
 
For the month of March, 2021

Commission File Number: 001-34476
 
BANCO SANTANDER (BRASIL) S.A.
(Exact name of registrant as specified in its charter)
 
Avenida Presidente Juscelino Kubitschek, 2041 and 2235
Bloco A – Vila Olimpia
São Paulo, SP 04543-011
Federative Republic of Brazil

 

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F: Form 20-F ___X___ Form 40-F _______

 Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): 

Yes _______ No ___X____

 Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): 

Yes _______ No ___X____

 Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934: 

Yes _______ No ___X____

 If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):  N/A

 
 

 

 
 

 

 

SUMMARY

 

 

1. Message from the Chairman of the Board of Directors 3
2. Call Notice 4
3. Participation of shareholders in the OGM 6
3.1. In-person Participation 6
3.2. Participation by Proxy 7
3.3. Remote Voting Participation 7
3.4. ADS holders 10
4. Matters to be resolved at the OGM 11
   
EXHIBIT I: POWER OF ATTORNEY 15
   
EXHIBIT II: COMMENTS OF THE MANAGEMENT TO THE FINANCIAL CONDITION OF THE COMPANY (Pursuant to item III of article 9 of CVM Instruction 481) 17
   
EXHIBIT III: BOARD PROPOSAL FOR ALLOCATION OF NET PROFIT FOR THE FISCAL YEAR (Pursuant to item II of the sole paragraph of article 9, Annex 9-1-II to CVM Instruction 481) 119
   
EXHIBIT IV: PROPOSAL FOR ELECTION OF THE COMPANY'S BOARD OF DIRECTORS (Information on compliance with items 12.5 to 12.10 of Appendix 24 of CVM Instruction 480, pursuant to Annex A of CVM Instruction 552) 127
   
EXHIBIT V: ITEM 13 of Annex 24 of CVM Instruction 481 (Pursuant to item II of Article 12 to CVM Instruction 481) 137

 

 

 

 

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1. Message from the Chairman of the Board of Directors

 

Dear Shareholder,

 

It is with great pleasure that I invite you, a shareholder of Banco Santander (Brasil) S.A. (“Santander Brasil” or “Company”), to participate in our Ordinary General Meeting (“OGM”), to be held on April 30, 2021, at 3:00 P.M.

 

Besides this Management Proposal (“Proposal”) a Manual for Participation in the OGM (“Manual”) was prepared to assist you in understanding the matters presented, providing a conscious and reasoned decision-making process, anticipating possible clarifications and voting guidelines.

 

Pursuant to the Call Notice made available, we shall take resolutions on the following matters:

 

(i) To TAKE the management accounts, to examine, discuss and vote on the Company’s Financial Statements related to the fiscal year ended on December 31, 2020, accompanied by the Management Report, the balance sheet, other parts of the financial statements, external auditors’ opinion and the Audit Committee Report;

(ii) To DECIDE on the allocation of net income for the year 2020 and the distribution of dividends;

(iii) To FIX the number of members that will compose the Board of Directors in the mandate from 2021 to 2023;

(iv) To ELECT the members of the Company's Board of Directors for a term of office from 2021 to 2023; and

(v) To FIX the annual global compensation of the Company´s management and members of Audit Committee.

 

As established by the Brazilian Securities and Exchange Commission (CVM), in order to facilitate its analysis and evaluation of the matters to be resolved, this Proposal includes exhibits containing the information made available in addition to the Call Notice.

 

We are at your disposal to clarify any questions through the emails acionistas@santander.com.br oriented at non-financial individual and corporate investors and ri@santander.com.br for institutional investors.

 

We hope that this Proposal and the Manual fulfills its purpose in assisting your decision making. Your participation is essential for the Company.

 

Sincerely,

Álvaro Antônio Cardoso de Souza

Chairman of the Board of Directors

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2. Call Notice of Meeting

[to be published in the newspaper “Valor Econômico” in editions of March 29, 30 and 31, 2021; and in the “Official Gazette of the State of São Paulo”, in editions of March 27, 30 and 31, 2021]

 

BANCO SANTANDER (BRASIL) S.A.

Publicly-Held Company of Authorized Capital

CNPJ/ME 90.400.888/0001-42 - NIRE 35.300.332.067

 

NOTICE OF MEETING – ORDINARY GENERAL MEETING - Shareholders are hereby invited to attend the Ordinary General Meeting (“OGM”) to be held on April 30, 2021, at 3:00 PM, at the principal place of business of Banco Santander (Brasil) S.A. (“Santander Brasil” or “Company”), located at Avenida Presidente Juscelino Kubitschek No. 2235 and 2014 – 2nd mezzanine, Vila Olímpia, São Paulo/SP, to resolve upon the following Agenda:

 

(i) To TAKE the management accounts, to examine, discuss and vote on the Company’s Financial Statements related to the fiscal year ended on December 31, 2020, accompanied by the Management Report, the balance sheet, other parts of the financial statements, external auditors’ opinion and the Audit Committee Report;

 

(ii) To DECIDE on the allocation of net income for the year 2020 and the distribution of dividends;

 

(iii) To FIX the number of members that will compose the Board of Directors in the mandate from 2021 to 2023;

 

(iv) To ELECT the members of the Company's Board of Directors for a term of office from 2021 to 2023; and

 

(v) To FIX the annual global compensation of the Company´s management and members of Audit Committee.

 

Note:

 

Considering the effects of the Covid-19 Pandemic (the new Coronavirus) and the measures taken by health and government authorities to contain the spread of such disease at the time of publication of this Notice, the Company has intensified its sanitation protocols and measures in the physical reception environments , at the place where the OGM will take place, for the benefit of the shareholders who choose to vote in person.

 

Our recommendation to the shareholders is to make use of remote voting instruments, either by the electronic means available or by sending written votes to the Company, or granting standardized powers of attorney with voting guidance, according to the instructions provided in the Manual.

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General Instructions:

 

1.The shareholders or their legal representatives shall appear at the OGM with the appropriate identity documents. In the event of representation of a shareholder by an attorney-in-fact, shareholders shall leave at the Company's principal place of business, at least seventy-two (72) hours before the OGM is held, a power of attorney granted according to the applicable law; and

 

2.The documents related to the matters to be examined and resolved at the OGM are available to shareholders (i) at the Company's principal place of business, at Avenida Presidente Juscelino Kubitschek No. 2041 and 2235 - Bloco A, Vila Olímpia, São Paulo/SP, 9th floor - Corporate Legal Department, where they can be consulted, on working days, from 10:00 a.m. until 4:00 p.m., and on its website (www.ri.santander.com.br – at Corporate Governance >> Minutes of the Meeting); (ii) on the website of the Brazilian Securities and Exchange Commission (www.cvm.gov.br) and (iii) on the website of B3 S.A. - Brasil, Bolsa, Balcão (http://www.b3.com.br).

 

3.Remote Voting Ballot: the Company implemented the remote voting system pursuant to CVM Ruling 481/09, allowing shareholders to send remote voting ballots directly to the Company, to the bookkeeper or their respective custody agents, according to the procedures described in the Manual for Participation.

 

São Paulo, March 26, 2021 – Álvaro Antônio Cardoso de Souza – Chairman of the Board of Directors.

___________________________________________________

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3. Participation of shareholders in the OGM

 

Santander Brasil shareholders may participate in the OGM in person or by proxy, as specified in item 3.2 below.

 

Shareholders will be required to provide the following documents to participate in the OGM:

 

Individual:

 

·  identity document with photo[1] (original or copy)

·  proof of ownership of the shares issued by the Company, issued by the depository and/or custodian financial institution (original or copy)

Legal entity:

·  corporate documents that prove the legal representation of the shareholder (original or copy)[2]

·  legal representative's identity document with photo (original or copy)

Investment fund

·  identity document of the legal representative of the Investment Fund’s manager (or of the manager, as the case may be) with photo (original or copy)

·  simple copy of the last consolidated bylaws of the fund and of the Articles of Association or Organization of its manager, in addition to the corporate documentation granting powers of representation (minutes of election of the officers and/or power of attorney)

 

3.1. In-person Participation

 

Santander Brasil shareholders may participate in the OGM by attending the place where it will be held and declaring their vote, according to the types of shares they own (common and/or preferred), and the matters to be voted on. In accordance with the provisions of Article 126 of Law No. 6,404/76, shareholders shall attend the Shareholders' Meeting presenting, in addition to the identity document, proof of ownership of the shares issued by the Company, issued by the depository and/or custodian financial institution. The Company recommends that said proof be issued within two (2) business days before the date scheduled for the Meeting.

 

Corporate shareholders, such as companies and investment funds, shall be represented in accordance with their Articles of Association, Articles of Organization or Bylaws, delivering documents proving the regularity of the representation, accompanied by the Minutes of the election of the Managers, if applicable, at the place and term indicated in the item below. Prior to the OGM, the shareholders shall sign the Attendance Book. Shareholders without voting rights may attend the OGM and discuss all matters submitted for resolution.


[1] The cash net of bank overdrafts position is represented by the balances of cash and cash equivalents being deducted the balance of bank overdrafts. The cash net of debt position is represented by the cash net of bank overdrafts position added by balances of current financial investments and being deducted the balances of loans and financings. Both the cash net of bank overdrafts position and the cash net of debt position are performance indicators used by the Company, and they are not measures according to the Accounting Practices Adopted in Brazil or according to IFRS.

 

[2] The Company calculates the net debt as the balances of loans and financings being deducted the balances of current financial investments and cash net of bank overdrafts. The net debt/EBITDA is a performance indicator used by the Company, and it is not a measure according to the Accounting Practices Adopted in Brazil or according to IFRS.

 

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3.2. Participation by Proxy

 

The shareholder may be represented at the OGM by an attorney-in-fact, duly appointed under a public or private instrument, and pursuant to article 126, § 1 of the Corporations Act, the attorneys-in-fact shall have been appointed less than one (1) year ago, and they shall be (i) shareholders of the Company, (ii) managers of the Company, (iii) lawyers, or (iv) financial institutions, with the investment fund’s manager being responsible for representing the quotaholders.

 

The originals or copies of the documents mentioned above may be delivered at the Company's principal place of business by the time the OGM is held.

 

However, in order to facilitate shareholders' access to the OGM, we recommend that the delivery of such documents be made at least seventy-two (72) hours before the OGM is held.

 

In the case of submittal of documents via email, we request that the shareholder contact the Company, so that the originals or copies can be delivered by the day the OGM is held.

 

In case the Shareholder is unable to attend the OGM or cannot yet be represented by an attorney-in-fact of his/her/their choice, the Company will make available an attorney-in-fact to vote for the shareholder, in accordance with his/her/their voting instructions, according to the power of attorney template in Exhibit 1 to this Proposal.

 

Furthermore, it should be noted that in addition to the power of attorney, the shareholder shall forward the documents required by the Company to participate in the OGM, as provided for in item 3 above.

 

The documents shall be delivered at the Company’s principal place of business, at Avenida Presidente Juscelino Kubitschek, No. 2041 and 2235 – Bloco A - Vila Olímpia - São Paulo – SP, 9th floor – Corporate - Legal Department, through the telephone Nos. +55 11 3553-5438 and +55 11 3553- 3854, email: acamargo@santander.com.br.

 

3.3. Remote Voting Participation

 

Pursuant to articles 21-A et seq. of CVM Ruling No. 481/2009, the Company's shareholders may also vote at shareholders’ meetings by means of remote voting, to be formalized through the “remote voting ballot” (“Ballot”), the template of which is available in the Corporate Governance area of the Company’s Investor Relations website (www.ri.santander.com.br), or on the website of the Brazilian Securities and Exchange Commission – CVM (http://sistemas.cvm.gov.br/?CiaDoc).

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The shareholder that chooses to exercise his/her/their voting rights remotely shall do so by one of the options described below:

 

(I) Submittal of the Ballot to Custody agents

 

The Shareholder that chooses to cast remote voting through his/her/its respective custodian agent (“Custodian") shall convey his/her/their voting instructions in accordance to the rules determined by the Custodian, which shall forward said voting ballots to the Central Depository of B3 S.A. - Brasil, Bolsa, Balcão. Shareholders shall contact his/her/their respective Custodians to check the procedures established by them for issuance of ballot voting instructions, as well as the documents and information required to do so.

 

The Shareholder shall convey the instructions for completion of the Ballot to his/her/their Custody agents by 04/23/2021 (including), unless defined otherwise by them.

 

(II) Submittal of the Ballot by the Shareholder to the Bookkeeper

 

The Shareholder who chooses to cast the remote vote through the Company's Bookkeeper shall observe the following instructions, so that the Ballot can be deemed valid and the votes are counted:

 

(i) all fields shall be duly completed;

(ii) all pages shall be initialed;

(iii) the last page shall be signed by the Shareholder or his/her/their legal representative(s), as applicable, and in accordance with the applicable legislation.

 

The following documents shall be forwarded to the Bookkeeper:

 

(i) original copy of the Ballot, duly completed, initialed and signed; and

(ii) copy of the following documents:

 

  • Individual (Shareholder or legal representative): Identity document with photo (RG and CPF; CNH or Professional Card duly attested by the competent authorities, containing CPF number).

 

  • Legal entity: (i) Articles of Organization or Bylaws duly updated, with the documents proving the powers of representation (minutes of election); (ii) Identity document with photo of the representatives (RG and CPF; CNH or Professional Card duly attested by the competent authorities, containing CPF number).

 

  • Investment fund: (i) Latest consolidated Regulations for the fund, as well as the Bylaws or Articles of Organization of its manager, in addition to the corporate documentation that grants proxy powers (minutes of officers’ election and/or power of attorney); (ii) Identity Card with a photograph of the representatives (RG and CPF; CNH (driver’s license) or official Professional Card containing the CPF enrollment number)
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The documents shall be sent to the Bookkeeper within 7 days before the date of the OGM, in other words, by 04/23/2021 (including) (i) at the following address: Banco Santander (Brasil) S.A. – Shareholders – Bookkeeping of Shares – Rua Amador Bueno, 474 – 2nd floor – Setor vermelho - Santo Amaro – São Paulo/SP – CEP 04752- 005; or (ii) via email, to the electronic address custodiaacionistavotodistancia@santander.com.br.

 

After receiving the documents, the Bookkeeper, within three (3) days, will inform the Shareholder regarding the receipt of the documents and their acceptance. If the submitted documentation is not considered suitable, the Ballot shall be considered invalid, and the Shareholder may regularize it by 04/23/2021.

 

Ballots received by the Bookkeeper after 04/23/2021 shall be disregarded.

 

(III) Submittal of the Ballot directly to the Company

 

The Shareholder who chooses to cast the remote vote through the Company shall observe the following instructions, so that the Ballot can be deemed valid and the votes are counted:

 

(i) all fields shall be duly completed;

(ii) all pages shall be initialed;

(iii) the last page shall be signed by the Shareholder or his/her/its legal representative(s), as applicable, and in accordance with the applicable legislation.

 

The following documents shall be forwarded to the Company:

 

(i) original copy of the Ballot, duly completed, initialed and signed; and

(ii) copy of the following documents:

 

  • Individual (Shareholder or legal representative): Identity document with photo (RG and CPF; CNH or Professional Card duly attested by the competent authorities, containing CPF number).

 

  • Legal entity: (i) Articles of Organization or Bylaws duly updated, with the documents proving the powers of representation (minutes of election); (ii) Identity document with photo of the representatives (RG and CPF; CNH or Professional Card duly attested by the competent authorities, containing CPF number).

 

  • Investment fund: (i) Last consolidated bylaws of the fund and of the Articles of Association or Organization of its manager, in addition to the corporate documentation granting powers of representation (minutes of election of the officers and/or power of attorney) (ii) Identity document with photo of the representatives (RG and CPF; CNH or Professional Card duly attested by the competent authorities, containing CPF number).
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The documents shall be sent to the Company within 7 days before the date of the OGM, in other words, by 04/23/2021 (including) (i) at the following address: Banco Santander (Brasil) S.A. - Investor Relations - Avenida Presidente Juscelino Kubitscheck, 2235 - 26th floor - Vila Olímpia - São Paulo/SP - CEP 04543-011; or (ii) via email, to the electronic address ri@santander.com.br.

 

After receiving the documents, the Company, within three (3) days, will inform the Shareholder regarding the receipt of the documents and their acceptance. If the submitted documentation is not considered suitable, the Ballot shall be considered invalid, and the Shareholder may regularize it by 04/23/2021.

 

Ballots received by the Company after 04/23/2021 shall be disregarded.

 

General Information:

 

Ø in accordance with Article 21-S of CVM Ruling No. 481, the Central Depository of B3 S.A. - Brasil, Bolsa, Balcão, upon receiving the voting instructions from the shareholders through their respective custody agents shall disregard any diverging instructions in relation to the same resolution that has been issued by the same CPF or CNPJ registration number; and

 

Ø upon termination of the deadline for remote voting, in other words, by 04/23/2021 (including), the shareholder will not be able to change the voting instructions already sent, except if attending the Shareholders' Meeting or represented by power of attorney, upon express request for disregard of the voting instructions sent through the Ballot, before the respective matter(s) is subject to voting.

 

3.4. ADS holders

 

Holders of American Depositary Shares (ADSs) shall be given the right to vote on the matters listed on the Agenda, subject to the same criteria applied in relation to national investors, according to the type of shares (common or preferred) on which their ADSs are backed. ADS holders will be duly instructed by The Bank of New York Mellon, depository institution for ADSs backed by Santander Brasil shares.

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4. Matters to be resolved at the OGM

 

Below you shall find clarifications made by the Company’s management regarding each of the items to be resolved in the OGM. According to the Call Notice made available to the shareholders, our OGM shall take resolutions regarding the following matters of the Agenda:

 

4.1. To TAKE the management accounts, to examine, discuss and vote on the Company’s Financial Statements related to the fiscal year ended on December 31, 2020, accompanied by the Management Report, the balance sheet, other parts of the financial statements, external auditors’ opinion and the Audit Committee Report

 

The documents presented by the management are:

 

  1. Management Report showing the operating statistics and the analysis and discussion of the Administrative Officers of the principal accounts of the Statement of Income for the Fiscal Year;
  2. Comments of the administrative officers on the financial condition of the Company (Exhibit II – Item 10 of the Reference Form);
  3. Copy of the Financial Statements and Explanatory Notes;
  4. Opinion of the Independent Auditors;
  5. Summary of the report of the Audit Committee; and
  6. Standardized financial statements form – DFP.

 

The management documents identified above, except for item ii above, were made available to the CVM, via the IPE system, at the time of disclosure of the individual and consolidated financial statements of the Company prepared in accordance with Accounting Practices Adopted in Brazil applicable to institutions authorized to operate by the Brazilian Central Bank, on February 3rd, 2021, and for the consolidated financial statements of the Company in accordance with the IFRS as issued by the IASB made available on February 26th, 2021. These documents can be found on the electronic address of the CVM (www.cvm.gov.br), or of the Company (www.ri.santander.com.brand www.santander.com.br/acionistas), according to information shown in Exhibit II of this Proposal.

 

The Company's management proposes that the shareholders examine in detail the management accounts and the Company's Financial Statements so that they can deliberate about their approval.

 

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4.2. To DECIDE on the allocation of net income for the year 2020 and the distribution of dividends;

 

(a) Net Profit Allocation

 

The Executive Board presents a proposal for the fiscal year 2020 net profit allocation in compliance with the provisions of Article 9, first paragraph, item II and the respective Annex 9-1-II to CVM Instruction 481. Said proposal is contained in Exhibit III to this Proposal. We recommend the careful reading of said exhibit.

 

The net profit of the Company in the fiscal year 2020 was R$ 14,056,148,344.49.

 

Management proposes the following allocation for net income for the year 2020:

 

1.  The amount of R$ 702,807,417.22 to the Company’s legal reserve account;

 

2.  The amount of R$ 3,837,085,231.82, as dividends and Interest on Equity to shareholders, which have been the object of decision in the meetings of the Board of Directors held on April 27, 2020, July 28, 2020, October 26, 2020, December, 28 2020 and February 02, 2021, of which R$ 3,325,000,000.00 as and Interest on Equity allocated within the mandatory minimum dividends and R$ 512,085,231.82 as interim dividends; and

 

3.  The balance of the remaining net profit after the distributions above, to the value of R$ 9,516,255,695.45 for the Dividend Equalization Reserve account, pursuant to Article 36, item III-a of the Company's Bylaws

 

The board understands that the proposal for allocation of net profits above was formulated in accordance with the legal and statutory obligations applicable to the Company, and is in line with the goals and strategies of the Company, which is why the board recommends its approval without restrictions.

 

(b) Distribution of Dividends

 

As better detailed in Exhibit III of this Proposal, the Company management has approved the distribution to its shareholders the global amount of R$ 3,837,085,231.82 as dividends and Interest on Equity to the shareholders, which have been the object of decision in the meetings of the Board of Directors held on April 27, 2020, July 28, 2020, October 26, 2020, December, 28 2020 and February 02, 2021, of which R$ 3,325,000,000.00 as and Interest on Equity allocated within the mandatory minimum dividends and R$ 512,085,231.82 as interim dividends. These values correspond to 28.74% of the adjusted net profit of the Company, and were paid to shareholders based on their respective shares in the share capital of the Company.

 

4.3. To FIX the number of members that will compose the Board of Directors in the mandate from 2021 to 2023;

 

The Company’s management proposes that the Board of Directors comprise 9 members for a term of office to be effective between the OGM of 2021 and the Ordinary General Meeting of 2023.

 

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4.4. To ELECT the members of the Company's Board of Directors for a term of office from 2021 to 2023; and

 

After complying with the applicable governance approvals, the Company proposes to the OGM the election for a new term of two (2) years, of the following candidates recommended by the controlling shareholders to compose the Board of Directors of the Company:

 

Name Position
Álvaro Antônio Cardoso de Souza Chairman and Independent Director
Sergio Agapito Lires Rial Vice-Chairman
Deborah Patricia Wright Independent Director
Deborah Stern Vieitas Independent Director
Jose Antonio Alvarez Alvarez Director
José de Paiva Ferreira Director
José García Cantera Director
Marília Artimonte Rocca Independent Director
Pedro Augusto de Melo Independent Director

 

The information related to the election of the members of the Board of Directors of the Company, pursuant to article 10 of CVM Instruction 481, can be found on Exhibit IV of this Proposal.

 

4.5. To FIX the annual global compensation of the Company´s management and members of Audit Committee.

 

The management presents a proposal for remuneration of the Company’s management, complying with the provisions of Article 12, items I and II of CVM Instruction 481 and item 13 of the Reference Form of the Company, on the terms of Exhibit V to this Proposal.

 

In 2020, the Ordinary General Meeting, held on April 30, approved an annual global compensation for the Company’s management, in an amount of up to R$ 400,000,000.00 (four hundred million Brazilian Reais) for the 2020 financial year, and for the Audit Committee in an amount of R$ 4,000,000.00 (four million Brazilian Reais) for the same period. Effectively, for the period from January to December, 2020 it was paid to the Company’s management members the amount of R$ 285,371,012.82 (two hundred and eighty-five million, three hundred and seventy-one thousand and twelve Brazilian Reais and eighty-two cents), being acknowledged that such amount does not include social security duties.

 

For the period from January to December, 2021, the amount proposed by the management as the annual global compensation for the Company’s management (Board of Directors and Executive Board) is of up to R$ 433,940,000.00 (four hundred and thirty-three million, nine hundred and forty thousand Brazilian Reais), covering fixed remuneration, variable remuneration and the stock base remuneration.

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The management members annual global compensation amount proposed is superior of the cap amount approved for the period from January to December, 2020, without considering the social security duties, which the estimative for the period from January to December 2021 is to reach the amount of up to R$ 29,440,000.00 (twenty-nine million, four hundred and forty thousand Brazilian Reais).

 

The amount proposed by the Board of Directors as annual global compensation of the members of the Audit Committee for the twelve (12) months period counting from January 1st, 2021 is of up to R$ 4,832,500.00 (four million, eight hundred and thirty-two thousand, five hundred Brazilian Reais).

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EXHIBIT I:
POWER OF ATTORNEY

 

POWER OF ATTORNEY

 

[SHAREHOLDER], [QUALIFICATION] (“Grantor”), appoints as his/her/its attorneys-in-fact Messrs. CAROLINA SILVIA ALVES NOGUEIRA TRINDADE, Brazilian, married, registered with OAB/RJ under no. 182.414 and under the CPF/ME under no. 124.143.167.13; and RAFAEL TRIDICO FARIA, Brazilian, married, registered with OAB/SP 358.447 and under the CPF/ME under no. 409.544.508-41, both of them lawyers, with firms in the Capital City of the State of São Paulo, at Avenida Presidente Juscelino Kubitschek Nos. 2041 and 2235 - Bloco A - Vila Olímpia (“Grantees”) to represent, collectively or individually, regardless of the order of appointment, the Grantor, as shareholder of Banco Santander (Brasil) S.A. ("Company"), at the Company's Ordinary General Meeting to be held, on first call, on April 30, 2021, at 3:00 PM, at the Company's principal place of business, at Avenida Presidente Juscelino Kubitschek No. 2235 and 2041 - 2nd mezzanine, Vila Olímpia, São Paulo/SP, and if necessary on second call, on a date to be informed in due course, to whom powers are granted to attend the meeting and vote, on behalf of the Grantor, in accordance with the voting guidelines set forth below for each of the items on the Agenda:

 

(i)   To TAKE the management accounts, to examine, discuss and vote on the Company’s Financial Statements related to the fiscal year ended on December 31, 2020, accompanied by the Management Report, the balance sheet, other parts of the financial statements, external auditors’ opinion and the Audit Committee Report;

 

( ) For ( ) Against ( ) Abstention

 

(ii)  To DECIDE on the allocation of net income for the year 2020 and the distribution of dividends;

 

( ) For ( ) Against ( ) Abstention

 

(iii)   To FIX the number of members that will compose the Board of Directors in the mandate from 2021 to 2023;

 

( ) For ( ) Against ( ) Abstention

 

(iv)   To ELECT the members of the Company's Board of Directors for a term of office from 2021 to 2023;

 

( ) For ( ) Against ( ) Abstention

 

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(v)  To FIX the annual global compensation of the Company´s management and members of Audit Committee;

 

( ) For ( ) Against ( ) Abstention

 

The Grantees are hereby authorized to abstain from any resolution or act for which they have not received, at their discretion, sufficiently specific voting guidelines. The Grantor shall hold the Grantees above harmless and free from any and all claims, disputes, demands, losses, or damages, of any nature, arising from the fulfillment of this instrument, except in cases of acts performed in an abusive and excessive manner, pursuant to the legislation in effect.

 

This power of attorney shall only be valid for the Company's Ordinary General Meeting mentioned above.

 

 

[Place], [month] [day], 2021.

 

 

 

_____________________________________________

[Signature of Grantor]

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EXHIBIT II:
COMMENTS OF THE MANAGEMENT TO THE FINANCIAL CONDITION OF THE COMPANY

(Pursuant to item III of article 9 of CVM Instruction 481)

 

10. Officers comments

 

10.1 Officers should comment on:

 

a. general financial and equity conditions

 

We assessed that in the fourth quarter of 2020, the global scenario continued to be marked by the developments of the COVID-19 pandemic, with the first affected countries facing the so-called "second wave" of contamination in the wake of the slowdown in social distancing policies. However, we also highlight the rapid evolution in the process of developing vaccines against the disease, with some countries having already started an immunization program for their citizens and several formulating the same initiative for the first months of 2021. Despite the uncertainties brought by the pandemic, the fiscal and monetary stimulus packages implemented by the vast majority of economies continued to see the release of indicators of economic activity signaling the continued trend of resumption after the sharp downturn observed in the second quarter of 2020. We assessed that these fiscal and monetary stimuli continued to help support the prices of financial assets. For example, the U.S. S&P500 index, which had retreated from 3,200 points to 2,500 points between December 2019 and March 2020, advanced to approximately 3,100 points at the end of June, ended the third quarter close to 3,400 points and advanced to near 3,800 points in the fourth quarter (up 11.7% in the last three months of 2020).

 

In the country, we consider that the misfortunes generated by COVID-19 diverted the focus from discussions on structural reforms to the debates on measures to combat the economic impacts caused by the pandemic, mainly for actions directed at the poorest layers of the population and to the business segments most exposed to the misfortunes caused by social distancing policies. In our view, such temporary measures were essential to mitigate the impact of the crisis, but will result in a substantial increase in public expenditure throughouth and 2021 and, consequently, will cause a significant increase in the level of indebtedness of the Brazilian government. We believe that this framework only reinforces the need to resume discussions on structural reforms after overcoming the pandemic to prevent the trajectory of Brazilian public indebtedness from becoming unsustainable.

 

After a widespread initial wave of revisions to the GDP projections in 2020 against first quarter expectations, we observed the stimulus granted to cause strong recovery in some segments of the Brazilian economy – namely in the retail segment. This more intense reaction than many imagined caused economic agents to project less intense declines to Brazilian GDP this year and this trend has continued in recent months. While the median projection indicated a 6.6% decline in Brazilian GDP at the end of the second quarter of 2020, at the end of the fourth quarter, the median expectation was that the Brazilian economy will fall by 4.36% in 2020. We believe that, although less intense, the prospect of a sharp contraction in Brazilian GDP in 2020, followed by a gradual recovery in later years – the median expectations for GDP growth in 2021 and 2022 were 3.4% and 2.5%, respectively, at the end of the fourth quarter – they continued to justify the general perception that the variation of the IPCA will converge to the targets stipulated in the relevant horizon for monetary policy, despite having ended 2020 above the target set for the year in the wake of temporary shocks – the annual change of the IPCA in 2020 reached 4.5%, while the target was 4.0%. The combination of prospects for gradual economic recovery and inflation compatible with the established targets is what we believe has provided space to the Central Bank of Brazil to maintain the basic interest rate at the historic minimum level of the country (2.00% p.a.) at the end of 2020, in addition to signaling the permanence of the Selic rate at this level for much of 2021.

17 
 

 

In our view, the situation of slow growth and high public indebtedness is something that has kept international investors worried about the acquisition of Brazilian financial assets. However, this attitude was not an obstacle for the trajectories recorded by both the 5-year CDS in Brazil and the exchange rate to perform favorably in the fourth quarter. In the first case, the instrument of protection regarding insolvency problems of the Brazilian government ended the period at 143 basis points, a level similar to the average level recorded in the first quarter (therefore, before the pandemic declaration), when the indicator was around 150 points – a level lower than the 250 points recorded at the end of the third quarter. In the case of the exchange rate, we saw a similar process with parity against the dollar retreating from R$5.60/US$ at the end of September 2020 to R$5.20/US$ at the end of the fourth quarter of last year, even though it was traded close to R$5.80/US$ over the period. In both cases, we evaluated that the trigger for the improvement recorded over the period concerns the reduction of doubts regarding the Brazilian fiscal dynamics for the coming years, in the wake of official statements that signaled the willingness to respect the rules imposed by the legal framework of the public spending ceiling.

 

Therefore, in order to improve further the performance of these indicators, we evaluate that measures will be necessary that signal even greater commitment of the Brazilian government to the reversal of the upward trajectory of public spending expected for the years ahead. This will only be possible for us with the resumption of structural reforms.

 

(i)2020

 

For the year ended December 31, 2020, we reported a consolidated net income of R$13.4billion, a reduction of 19.1% compared to 2019. Total assets for the year ended December 31, 2020, reached R$936,201 million, an increase of 22.8%over 2019. Shareholders' equity reached R$106,090 million and adjusted ROAE (excluding goodwill) was 18.4% in 2020.

 

Our Basel capital adequacy ratio, in accordance with Central Bank standards, was 15.3% as of December 31, 2020.

18 
 

 

As of December 31, 2020, our portfolio of loans and advances to gross customers grew 20.3%, reaching R$417,822 million, compared to R$347,257 million as of December 31, 2019.

 

The following table provides a managerial breakdown of our portfolio of loans and advances to customers (gross) by customer category on the dates indicated.

 

 

For the year ended December 31

Variations between December 31, 2020 vs. December 31, 2019

 

2020

2011

2018

R$ million

%

  (in millions of R$, except percentages)
Individual 174,042 156,177 133,603 17,865 11.4%
Consumer finance 51,637 48,421 40,964 3,216 6.6%
Small and Medium Enterprises(1) 54,525 53,119 49,624 1,406 2.6%
Large Enterprises (2) 137,618 89,539 97,112 48,079 53.7%
Total 417,822 347,257 321,303 70,565 20.3%

 

(1)Companies with annual gross revenue of up to R$ 200 million.
(2)Companies with annual gross revenue higher than R$ 200 million, including global corporate clients of the Company.

 

Our total funding as of December 31, 2020 was R$647,465 million, an increase of 24.5% compared to R$519,664 million as of December 31, 2019.

 

(ii)2019

 

For the year ended December 31, 2019, a Company reported consolidated net income of R$16.6 billion, an increase of 29.9% compared to 2018. Total assets, for the year ended December 31, 2019 December 2019, reached R$762,237 million, an increase of 5.3% in relation to 2018. Shareholders' equity reached R$97.209 million and the adjusted ROAE (excluding the goodwill effect) was 21.3% in 2019.

 

The Company's Basel capital adequacy index, according to the Brazilian Central Bank rules, was 15.0%, as of December 31, 2019.

 

As of December 31, 2019, the Company's loan and advances portfolio to customers grew 10.6%, reaching R$347,257 million, compared to R$321,933 million on December 31, 2018.

 

The following table provides a managerial breakdown of the Company's loans and advances to customers (gross) portfolio by customer category on the dates indicated.

 

19 
 

 

 

For the year ended December, 31

Variations between December 31, 2019 vs. December 31, 2018

 

2019

2018

2017

R$ million

%

  (in millions of R$ , except for percentages)
           
Individuals 156,177 133,603 107,610 22,574 16.9%
Consumers financing 48,421 40,964 33,170 7,457 18.2%
Small and Medium Companies 53,119 49,624 46,879 3,495 7.0%
Large Companies (1) 89,539 97,112 100,171 (7,573) (0.1)%
Total 347,257 321,303 287,829 25,953 8.1%

 

(1)Companies with annual gross revenue higher than R$ 200 million, including global corporate clients of the Company.

 

Total funding of the Company as of December 31, 2019 was of R$519,664 million, a 4.5% increase compared to R$497,512 million on December 31, 2018.

 

(iii)2018

 

In the year ended December 31, 2018, the Company reported a consolidated net income of R$12.8 billion, a 28.9% increase compared to 2017. Total assets in the year ended December 31, 2018, reached R$723,865 million, an increase of 10.8% compared to 2017. Shareholders’ equity reached R$91,882 million and the adjusted ROE (excluding effect of goodwill) was of 21.0% in 2018.

 

The Basel adequacy rate of the Company, according to the Brazilian Central Bank rules, was 15.1% as of December 31, 2018.

 

As of December 31, 2018, the gross client’s loans and advances portfolio of the Company grew 10.6% and reached R$321,933 million, compared to R$287,829 million as of December 31, 2017.

 

The chart below presents the management details on the loans and advances portfolio (gross) of the Company per client category on the indicated dates.

 

 

For the year ended December, 31

Variations between December 31, 2018 vs. December 31, 2017

 

2018

2017

2016

R$ million

%

  (in millions of R$ , except for percentages)
Individuals 133,603 107,610 91,195 25,993 24.2%
Consumers financing 40,964 33,170 26,608 7,794 23.5%
Small and Medium Companies (1) 49,624 46,879 42,440 2,746 5.9%
Large Companies (2) 97,112 100,171 108,195 (3,059) (3,1)%
Total 321,303 287,829 268,438 33,474 11,6%

 

(1)Companies with annual gross revenue of up to R$ 200 million.
(2)Companies with annual gross revenue higher than R$ 200 million, including global corporate clients of the Company.

 

Total funding of the Company as of December 31, 2018 was of R$497,512 million, a 14.5% increase compared to R$434,620 million on December 31, 2017

 

 

 

 

20 
 

 

b. capital structure:

 

Liability Structure

Liabilities

In million of Real

Dez/20 % of total liability Dez/19 % of total liability Dez/18 % of total liability
Own Capital – Shareholders Equity (1) 106,089 11% 97,209 13% 91,595 13%
Third Capital – Short term (2) 593,880 63% 410,492 54% 415,720 57%
Third Capital – Long term (3) 236,232 25% 254,536 33% 216,550 30%
Total liability 936,201 100% 762,237 100% 723,865 100%

 

(1) Includes Non-Controlling Interest

(2) Current Liabilities

(3) Total liabilities, except Shareholders' Equity and Current Liabilities

Debt ratio, according to the formula: third capitals / total assets x 100, is 89.

 

Furthermore, the following table shows the direct shareholding interest (common and preferred shares) as of December 31, 2020:

 

 

Shareholder

 

Common shares (thousands)

 

Common shares (%)

Preferred shares (thousands)

 

Preferred shares (%)

 

Total shares (thousands)

 

Total shares (%)

   
Sterrebeeck BV (2) 1,809,583 47.39% 1,733,644 47.11% 3,543,227 47.25%
Grupo Empresarial Santander SL 1,627,891 42.63% 1,539,863 41.85% 3,167,755 42.25%
Banco Santander, S.A. 2,696 0.07% - 0.00% 2,696 0.04%
Treasury Stock 18,829 0.49% 18,829 0.51% 37,658 0.50%
Employees (1) 6,265 0.16% 6,273 0.17% 12,538 0.16%
Other minority shareholders 353,430

9.26%

381,227

10.36%

734,657

9.80%

Total

3,818,695

100%

3,679,836

100%

7,498,531

100%

 
(1)It includes members of the Company's senior management.
(2)An affiliate of Santander Group

 

(i)Equity and Participation of Non-Controlling Shareholders

 

As of December 31, 2019, the Company’s capital was of R$57,000,000,000.00, fully paid up and divided into 7,498,531,051 shares, all of them registered, book-entry and with no par value.

 

Pursuant to the current Bylaws, may be increased up to the limit of the authorized capital, irrespective of amendments to the Bylaws, upon a resolution of the Board of Directors of the Company and issuance of up to 9,090,909,090 new shares, whereas the total number of preferred shares shall not exceed 50.0% of the total number of outstanding shares. Any capital increase in excess of such limit requires the approval of the shareholders.

21 
 

 

(ii) Equity and Third-Party

 

Revenue from equity instruments for the year ended December 31, 2020 totaled R$ 34 million, an increase of R$ 15 million compared to R$ 19 million in the year ended December 31, 2019, mainly due to the dividends received from “Santander Fundo de Investimento Amazonas Multimercado Crédito Privado Investimento no Exterior” as the result of gains in stock positions for hedge of derivatives.

 

(iii) Benchmark Equity - Basel Ratio

 

Our capital management is based on conservative principles with continuous monitoring of items that affect our solvency level. We must abide by the Brazilian regulations of capital adjustment according to the rules of the Brazilian Central Bank. In October 2013, the new capital implementation regulations and regulatory capital requirements of the Basel Banking Supervision Committee (Basel III) entered into force in Brazil. The minimum regulatory capital requirement is currently 11%. The Tier I requirement is 6.0%, divided into basic capital of at least 4.5%, consisting mainly of share capital and profit reserves, including shares, units of ownership, reserves and income earned, and additional capital consisting mainly of certain reserves, earned revenues and securities and hybrid instruments such as capital authorized by the Central Bank of Brazil.

 

According to the new rules on regulatory capital in Brazil, the value of goodwill for the calculation of the capital base was deducted according to the "phase-in" for the implementation of Basel III in Brazil, which was concluded on January 1, 2019. The following table shows the percentage of goodwill deduction required for each year through 2019:

 

Basel III Phase in

2015

2016

2017

2018

2019

2020

40% 60% 80% 100% 100% 100%

 

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

 

The Basel adequacy ratio of the Company, according to the Brazilian Central Bank rules was 15.3% at December 31, 2020.

22 
 

 

 

On December 31,

 

2020(1)

2019(1)

2018(1)

  (In millions of R$, except percentages)
Level I Reference Assets 77,571.5 66,481.7 61,476.7
Principal Capital 71,006.3 61,389.5 56,581.5
Supplementary Capital 6,565.2 5,092.2 4,895.2
Level II Reference Assets 6,554.4 5,083.8 4,887.2
Reference Assets (Level I and II) 84,125.9 71,565.5 66,363.9
Required Reference Assets 551,569.1 475,986.9 440,562.9
Credit Risk Portion (2) 478,303.5 407,786.2 358,955.6
Market Risk Portion (3) 15,846.2 20,235.2 39,231.8
Operational Risk Portion 57,419.4 47,965.5 42,375.6
Level I Basel Ratio 14.06% 13.97% 13.95%
Basel Ratio Principal Capital 12.87% 12.90% 12.84%
Basel Ratio 15.25% 15.04% 15.06%
       
 
(1)Amounts calculated based on consolidated information by Prudential Consolidated.
(2)For the calculation of capital allocation for Credit Risk, the modifications and inclusions of Brazilian Central Bank (“BACEN”) Official Letter 3714 of August 20, 2014, Bacen Official Letter 3770 of October 29, 2015, which amends Official Letter 3644 of March 4, 2013 were considered.
(3)It includes portions for exposure to market risk subject to variations on coupon rates in foreign currency, or "PJUR2", price indexes or "PJUR3" and interest rate or "PJUR1 / PJUR4", of the price of goods “commodities” or "PCOM”, of the price of shares classified as negotiation portfolios, or "PACS”, and portions for exposure to gold, foreign currency and transactions subject to currency variation, or “PCAM.”

 

(c) ability to pay the financial obligations assumed

 

The administration of Company's creditworthiness is made dynamically through the implementation of limits and control models, approved and supervised by the Assets and Liabilities Committee (ALCO), which operates according to guidelines and procedures established by Santander Group and the Brazilian Central Bank. The control and management of the creditworthiness are made through the analysis of cash flow positions, structural liquidity and simulations of potential losses of resources under stress scenarios. Also, a plan is prepared containing funding requirements that consider the best structure for the funding sources, in order to achieve the necessary diversification in terms of maturities, instruments and markets, as well as the establishment of contingency plans. These controls, together with the maintenance of a minimum liquidity margin, guarantee sufficient resources to honor client deposits and other obligations, to give loans and financing to clients, fulfill the specific needs of working capital for investment and to cope with occasional risks related to liquidity crisis.

 

The Company actively managers the risks intrinsic to the activity of commercial bank, such as structural risks of interest rates, liquidity and foreign exchange rates. The objective of the financial management is to turn the net income with interest from commercial activities more stable and recurring, maintaining adequate levels of liquidity and solvency. Financial management also analyses the risk of structural interest rate derived from the divergences between the maturities and review of assets and liabilities in each currency operated by the Company.

 

The following table shows the intervals between the pricing dates of financial assets and liabilities with different maturity dates, on December 31, 2019, 2018 and 2017, respectively (liquidity position):

 

23 
 

 

2020 In millions of Reais
  On
Demand
Up to 3 months 3 to 12 months 1 to 3 years 3 to 5 years After 5 years Total
Assets:              
Cash and balances with the Brazilian Central Bank 7,374 12,775 - - - - 20,149
Debt instruments (2) 433 13,196 33,904 64,226 70,183 48,162 230,102
Equity instruments - - - - - 2,329 2,329
Loans and amounts due from credit institutions 57,722 2,778 36,783 15,155 363 48 112,850
Loans and advances to customer 29,386 80,282 93,750 98,550 47,161 44,640 393,768
Derivatives - 14,558 1,994 6,727 1,870 3,721 28,871
Total 94,914 123,588 166,431 184,658 119,576 98,901 788,069
               
Liabilities:              
Financial liabilities at amortized cost:              
Deposits of credit institutions (1) - 83,923 43,315 3,764 - 655 131,657
Customer deposits (1) 85,433 139,191 121,805 62,769 36,578 38 445,814
Marketable debt securities (1) - 8,815 18,736 28,158 747 418 56,876
Debt Instruments Eligible to Compose Capital - 220 - 12,899 - - 13,120
Other financial liabilities 23 21,859 20,730 17,203 5 2 59,823
Short positions - 45,808 - - - - 45,808
Derivatives - 2,047 1,974 8,011 7,744 12,204 31,980
Total 85,457 301,863 206,560 132,804 45,075 13,317 785,077
               

 

2019 In millions of Reais
  On
Demand
Up to
3 Months
3 to
12 Months
1 to
3 Years
3 to
5 Years
After 5
Years
Total
Assets:              
Cash and balances with the Brazilian Central Bank   6,549   13,578 -  - -  -  20,127
Debt instruments (2)   7,748   1,174   22,926 45,058  35,118  61,307   173,331
Equity instruments  -   - -  - -   2,358   2,358
Loans and amounts due from credit institutions  69,135  1,943 21,065  14,525 2,411  153  109,232
Loans and advances to customer   9,452  84,840  43,181 89,624   34,093   65,511  326,701
Derivatives   6,806            
Total 99,690   103,428 89,822   152,754 73,573   132,929   652,196
               
Liabilities:              
Financial liabilities at amortized cost:  -   - -  - -  -  -
Deposits from credit institutions(1)  391   16,584   49,098 25,656  4,877   2,666 99,272
Customer deposits(1) 69,049   130,872   76,245 43,396 16,923   30  336,515
Marketable debt securities (1)  -   10,675   695 37,269  3,900   21,163 73,702
Subordinated liabilities  -   - -  - -  -  -
Debt Instruments Eligible to Compose Capital  - 171 -  10,005 -  -   10,176
Other financial liabilities 10   24,361  14,510  16,679  5   2 55,567
Financial liabilities held for trading:   6,777 9,094 1,961   5,953  6,250  16,230 46,265
Short positions  - 4,749   1,554 1,256  3,748  12,529 23,836
Derivatives   6,776 4,345   406   4,697  2,502   3,702 22,428
Total 76,226 191,757   142,508   138,958  31,955 40,092   621,496

 

24 
 

 

 

2018 In millions of Reais
  On
Demand
Up to
3 Months
3 to
12 Months
1 to
3 Years
3 to
5 Years
After 5
Years
Total
               
Assets:              
Cash and balances with the Brazilian Central Bank  31,324 393  -   -  - - 31,717
Debt instruments (2)  27  51,256   25,903   13,186 26,368 58,693  175,433
Equity instruments 840  34  232  -  -  -   1,106
Loans and amounts due from credit institutions  57,528 8,449  845   12,740 11 34 79,607
Loans and advances to customer  -   112,215   75,101   63,044 21,398 29,933  301,691
Derivatives   -  13,816  1,240  1,114   1,075   1,118 18,363
Total 89,719  186,163   103,321  90,084   48,852   89,778 607,917
               
Liabilities:              
Financial liabilities at amortized cost:              
Deposits from credit institutions(1) 1  55,873   18,564   19,851   2,598   2,136 99,023
Customer deposits(1)  65,242   102,942   76,988   42,400 16,624   2  304,198
Marketable debt securities (1) 9,886  11,105   26,741   22,479   5,854   8,447 84,512
Subordinated liabilities  -  -  -   -  - -  -
Debt Instruments Eligible to Compose Capital   -  -  -  -  -   9,780   9,780
Other financial liabilities  66  31,567 36   18,086  - 28 49,783
Financial liabilities held for trading: 206 7,640  8,864   32,419   605   1,428 51,162
Short positions 206   -  1,140   31,349  -  - 32,695
Derivatives   - 7,640  7,724  1,070   605   1,428 18,467
Total 75,607  216,767   140,057   167,654   26,286   23,249 649,620

 

(1) Include obligations that may have early enforceability, such as: demand deposits and time deposits, repurchase transactions with clients, LCI and LCA.

 

The following table shows financial assets and liabilities by national and foreign currency as of December 31, 2020, 2019 and 2018 (currency position):

 

25 
 

 

 

On December 31,

 

2020

2019

2018

 

National Currency

Foreign Currency

National Currency

Foreign Currency

National Currency

Foreign Currency

  (in millions of R$)
Assets            
Cash and balances with the Brazilian Central Bank 4,531 15,617 4,878 15,250 16,651 15,065
Debt instruments 226,787 3,315 164,447 8,885 166,743 8,690
Equity securities 1,675 2,358 1,106
Loans and other amounts with credit institutions, gross 109,339 3,520 107,694 1,553 79,167 17,902
Loans and advances to customers, gross

396,950

20,822

326,421

20,835

304,031

Total

739,283

43,275

605,798

46,523

567,698

42,111

             
Liabilities            
Financial liabilities at amortized cost            
Deposits from Brazilian Central Bank and Credit Institutions 86,564 45,093 58,283 40,988 74,160 24,863
Customer deposits 445,900 336,515 304,198
Securities obligations 45,476 9,399 64,987 8,715 70,109 4,517
Subordinated liabilities 9,886
Capital-Eligible Debt Instruments 13,120 10,176 9,780
Other financial liabilities

66,727

153

60,885

51,729

Total

646,667

67,766

520,670

59,879

510,082

39,160

 

d. sources of financing for working capital and for investments in non-current assets used

 

The following table shows the composition of the captures n the dates indicated:

 

On December 31,

 

2020

2019

2018

 

(in millions of R$)

Customer Deposits 445,813 336,515 304,198
Checking account 35,550 29,524 18,854
Savings Account 62,210 49,040 46,068
Time deposits 269,929 175,994 190,983
Repurchase agreements 78,124 81,957 48,293
  Transactions backed by Private Bonds (1) 14,944 8,743 6,978
  Transactions backed by Public Bonds (1)

63,180

73,214

41,315

Deposits from the Brazilian Central Bank and deposits from credit institutions 131,657 99,271 99,023
Demand deposits (1) 296 685 710
Time deposits (2) 76,489 56,602 47,227
Repurchase agreements 54,872 41,984 51,086
  Transactions backed by Private Bonds (1) 13,844 9,506 6,978
  Transactions backed by Public Bonds(1)

41,028

32,478

44,108

Total deposits

577,470

435,786

403,221

Debt securities

56,875

73,702

74,626

Agribusiness Credit Bills 14,747 14,777 11,925
Financial Bills 12,750 27,587 30,721
Real Estate Credit Notes 19,979 21,266 27,160
Eurobonds and other securities

9,399

10,072

4,820

Debt instruments Eligible to Establish Capital

13,120

10,176

9,780

Subordinated Debt

-

-

9,886

Total Funding

647,465

519,664

497,513

         
__________________
(1)They basically refer to repurchase transactions backed by own debentures.

(2) Includes transactions with credit institutions resulting from debt facilities to export and import, on lending in the country (BNDES and Finame) and from abroad, and other foreign debt facilities.

 

26 
 

(i) Deposits

 

·  Customer Deposits: Our clients' deposit balance was R$445.9 billion as of December 31, 2020, R$336.5 billion at December 31, 2019 and R$304.2 billion as of December 31, 2018, representing 68.9%, 64.8% and 61.1% of total our funding, respectively.

 

·  Current Accounts: The balance of our current account deposits was R$35.7 at December 31, 2020, R$29.5 billion at December 31, 2019 and R$18.9 billion as of December 31, 2018, representing 6.2%, 6.8% and 4.7% of total deposits, respectively.

 

·  Customer Savings Deposits: Our customers' savings deposits were R$62.2 billion as of December 31, 2020, R$49.0 billion at December 31, 2019 and R$46.1 billion in December 31,2018, representing 10.8%, 11.3% and 11.4% of total deposits, respectively.

 

·  Customer Time Deposits: The balance of term deposits of our customers was R$269.9 billion at December 31, 2020, R$176.0 billion at December 31,2019, R$191.0 billion as of December 31, 2018, representing 46.7%, 40.4% and 47.4% of total deposits, respectively.

 

·  Customer Deposits—Repurchase Agreements: We maintain a portfolio of Brazilian public and private sector debt instruments, which is used to obtain short-term (overnight) resources from other financial institutions or investment funds through the sale of these securities with simultaneous repurchase commitment. Due to the short-term (overnight) nature of this source of resources, these transactions are volatile and are generally composed of Brazilian government bonds and operations committed with ballast in debentures. Securities sold in committed transactions decreased to R$78.1 billion at December 31, 2020, from R$82.0 billion at December 31, 2019 and R$48.3 billion as of December 31, 2018, representing 13.5%, 18.8% and 12.0% of total deposits, respectively.

 

(ii) Deposits from Brazilian Central Bank and Credit Institutions

 

Our deposit balance of the Central Bank of Brazil and credit institutions was R$131.7 billion as of December 31, 2020, R$99.3 billion at December 31, 2019 and R$99.0 billion as of December 31, 2018, representing 22.8%, 22.8% and 24.6% of total deposits, respectively.

 

It also includes National Loan and Transfers Obligations:

 

·  Loan obligations. We have relationships with banks around the world, providing credit lines tied to foreign currencies (both the U.S. dollar and a basket of foreign currencies). We apply the resources of these operations, mainly in credit concessions tied to the U.S. dollar and, in particular, to financing to trade operations.

27 
 

 

·  National transfers. We work in the transfer of public institutions, mainly BNDES and FINAME, for which we act as a financial agent. The financing of these sources in Brazil represents a method of providing long-term loans with medium competitive interest rates for some sectors of the economy. Loans of these funds are allocated by BNDES through banks to specific sectors directed to economic development. This type of loan is known as "transfer". Under this agreement, we borrow funds from BNDES or FINAME, the BNDES equipment financing subsidiary, and pass them on to specific sectors of the economy. These loans are usually granted at rates below average market rates and have an average term of up to five years. Because the funds passed on are generally married and/or financed by loans from a federal government agency, we do not assume any risk of interest rate or risk of mismarriage of deadlines, nor do we charge interest at a fixed margin on the costs of the funds. However, we retain the borrower's commercial credit risk and therefore have discretion in the credit decision and application of the credit criteria. This type of financing is not affected by compulsory deposit requirements. The transfer is generally guaranteed, although this is not required by the terms of the transfer.

 

(iii) Other Methods of Funding

 

(iii.1)Marketable Debt Securities

 

Our balance in debt securities was R$56.9 billion as of December 31, 2020, R$73.7 billion as of December 31, 2019 and R$74.6 billion as of December 31, 2018, representing 8.8%, 14.2% and 15.0% of all our borrowings, respectively.

 

Agribusiness Letters of Credit are freely traded credit instruments and represent a future payment commitment, issued exclusively by financial institutions related to credit rights arising from transactions between rural producers and their cooperatives and other agents of the agricultural production chain and foreign exchange acceptances. Agribusiness Letters of Credit reached R$14.7 billion as of December 31, 2020, R$14.8 billion at December 31, 2019 and R$11.9 billion as of December 31, 2018.

 

Financial bills are alternative funding instruments for banks that may be characterized as senior or eligible to make up the Reference Equity for capital adequacy regulation purposes. According to CMN Resolution 4.733 of June 2019, its minimum term must be 24 months and must be issued for a minimum amount of R$300,000 for subordinated transactions and R$50,000 for senior transactions totaling R$12.8 billion at December 31, 2020, a 53.8% drop from December 2019.

 

The Real Estate Credit Bills, or "LCI," reduced 6.1%, from R$21.3 billion in December 2019 to R$20.0 billion as of December 31, 2020.

 

28 
 

We issue securities under the Global Medium Term Notes program. Our balance of securities issued abroad was R$9.4 billion as of December 31, 2020 and R$10.1 billion as of December 31, 2019. This change occurred mainly due to the non-substitution of certain debt instruments that reached their maturity.

 

(iv) Debt Instruments Eligible to Compose Tier 1 and Tier 2 Capital

 

We issue U.S. dollar-denominated Notes that constitute Level 1 and Level 2 regulatory capital as part of our plan to optimize our capital structure. As of December 31, 2020, the balance of Tier 1 and Level 2 debt instruments was R$13.1 billion, compared to R$10.2 billion as of December 31, 2019. This variation occurred due to the exchange rate differences resulting from the devaluation of the Real against the U.S. dollar in 2020 compared to 2019.

 

(v) Subordinated Debt

 

As of December 31, 2020, we had no subordinated debts.

 

e. Sources of financing for working capital and for investments in non-current assets that it intends to use to cover liquidity deficiencies

 

Due to our stable and diversified sources of funds, which include a large deposit base of its customers as detailed in the above 10.1.d item, we have historically had no liquidity issues.

 

As part of our liquidity risk management, we have a formal plan with measures to be taken in scenarios of systemic liquidity crisis and/or arising from possible risk of our corporate image. This liquidity contingency plan contains parameters of attention, in addition to preventive measures and actions to be triggered in times of liquidity deficiency, if the reserves fall below certain parameters.

 

As sources of financing for working capital and for investments in non-current assets used to cover liquidity shortties, the following resources may be used: (i) deposit capture; (ii) bond issues; (iii) transactions committed with public/private securities; (iv) transfer pricing review; (v) the establishment of more restrictive credit policies; and (vi) release of guarantee margin at B3 S.A. – Brasil Bolsa, Balcão.

 

f. levels of indebtedness and the characteristics of such debts, describing also :

 

(i) Relevant loan and financing agreements

 

There are no loan agreements or other debt instruments that our management deems relevant to us, with the exception of the debt-representing securities of our issue described in Section 18 of the Reference Form.

 

29 
 

(ii) Other long-term relationships with financial institutions

 

Our primary resource sources are local deposits in the modalities demand, savings and long-term, aligned with other Brazilian banks, as well as fundraising in the open market – own securities and Federal Government securities with buy back commitment ("repurchase agreements").

 

We also have deposits in credit institutions related to export and import financing lines taken from banks abroad and intended for application in commercial foreign exchange operations related to export and import financing. We are also party to long-term obligations via transfers, all in accordance with the operational policies of the BNDES system.

 

(ii.1)Eurobonds and Securitization Notes - MT100

 

External issues of securities denominated in foreign currency include securities and other securities (Eurobonds and Structured Notes). The following table shows the detailed composition of Eurobonds:

 

  Issuance Maturity Currency   2020 2019 2018
Eurobonds 2017 2019 USD LIBOR 3M - - 194
Eurobonds 2017 2021 BRL 4.40% 14 63 855
Eurobonds 2017 2024 USD 2.4% to 10.0% 854 665 19
Eurobonds 2018 2019 USD Zero Coupon to 9% 0 0 197
Eurobonds 2018 2019 USD LIBOR 3M + 0.95% 0 0 35
Eurobonds 2018 2020 USD Up to 3.5% 0 37 1,211
Eurobonds 2018 2019 USD LIBOR 1M + 1.5% 0 0 1,288
Eurobonds 2017 2020 BRL 4,40% 0 929 639
Eurobonds 2018 2020 USD Above 3.5% 0 35 0
Eurobonds 2018 2024 USD 6.6% to 6.7% 1,625 1,260 0
Eurobonds 2018 2025 USD Up to 9% 1,720 1,428 0
Eurobonds 2019 2020 USD 0% to 4.4% 0 3,557 0
Eurobonds 2019 2027 USD CDI + 6.4% 1,280 727 0
Eurobonds 2020 2021 USD CDI + 1.9% 170 0 0
Eurobonds 2020 2021 USD 0% to 4% 3,252 0 0
Eurobonds 2020 2022 USD 0% to 4% 17 0 0
Eurobonds 2020 2022 USD CDI + 1.9% 122 0 0
Eurobonds 2020 2023 SUD 0% to 8% 23 0 0
Eurobonds 2020 2023 USD CDI + 1.9% 223 0 0
Eurobonds 2020 2024 USD CDI + 1.9% 98 0 0
Others         0 14 78
Total         9,399 8,715 4,517

 

(ii.2)Subordinated debts

 

We use subordinated debt instruments in its borrowing structure, represented by securities issued in the lines of the Central Bank standards, which are used as Reference Equity - Level 2, for the calculation of operational limits, including Subordinated CDBs, deposit certificates issued by us on the local market, in various issues, at interest rates updated by the CDI or the IPCA. The following table shows the detailed composition of subordinated debts:

30 
 

 

In thousands of Reais Issuance Maturity (1) Value (in millions) Interest Rate 2020 2019 2018
Subordinate DS May/08 May/15 to May/18 R$ 283 CDI (2) - - -
Subordinate DS May/08 to Jun/08 May/15 to Jun/18 R$ 268 IPCA (3) - - -
Tier I (4) Jan/14 Without term (Perpetual) R$ 3,000 7,375% - - 4,907
Tier II (4) Jan/14 Jan/24 R$ 3,000 6,000% - - 4,979
Total         - - 9,886

 

(1)Subordinated time deposits issued by Banco Santander S.A. with yield paid at the end of the term together with the principal.
(2)Indexed by 100% and 112% of the CDI.
(3)Indexed by the IPCA (extended consumer price index) plus interest of 8.3% p.a. to 8.4% p.a.
(4)On December 18, 2018, the Bank issued an approval for the repurchase of the Notes issued on January 29, 2014, which resulted in the reclassification of these instruments from the Series of Eligible Debt Instruments to Subordinated Debt Capital.

 

(iii) Level of subordination between the debts

 

In case of our judicial or extrajudicial settlement there is a preference order regarding the payment of the various creditors of the mass provided for by law, which must be respected in accordance with the Brazilian legislation in force at the time. Specifically, with regard to the financial debts that make up our debt, the following payment order should be observed: debts guaranteed by real guarantee, chiropractic debts and subordinated debts. It is worth saying that, in relation to debts with real guarantee, creditors prefer the others up to the limit of the asset given in guarantee and, as it rises, they will have their claims included in the order of payment of the quirography creditors. Among the chiropractic creditors there is no degree of subordination, as well as there is no degree of subordination between the various subordinated creditors.

 

(iv) any restrictions imposed on the Company, particularly in relation to limits of indebtedness and contracting of new debts, to distribution of dividends, to sale of assets, to issuance of new securities and to the sale of equity control, and whether the Company has been respecting such restrictions

 

Regarding securities issued abroad, the descriptions of operations and programs described in session 18.10 of the Reference Form ("Securitization Program" and "Medium Term Notes – MTN"), the main restrictions imposed on the issuer, existing in financing agreements, are also described in the same item, more specifically in sessions 18.10.I.h.(v) and 18.10.II.h.(v).

 

g.  limits of loans taken out and percentages already used

 

The information requested in this item does not apply to financial institutions. However, the Company is subject to the parameters determined by monetary authorities, in accordance with the Basel principles.

31 
 

 

h.  significant alterations in each item of the financial statements

(i)Assets and Liabilities (in millions Reais):

 

Assets 2020 2019 Var. 2020x2019 2018 Var. 2019x2018
Cash and Balances With The Brazilian Central Bank 20,149 20,127 0.1% 19,464 -3.41%
Financial Assets Held For Trading 0 0 0.0% 0 -100.0%
Financial Assets Measured At Fair Value Through Profit Or Loss 60,900 32,342 88.3% 43,712 -26.0%
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading 98,467 57,021 72.7% 68,852 -17.2%
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss 500 171 192.4% 917 -81.4%
Other Financial Assets At Fair Value Through Profit Or Loss 0 0 0.0% 0 -100.0%
Available-For-Sale Financial Assets 0 0 0.0% 0 -100.0%
Financial Assets Measured At Fair Value Through Other Comprehensive Income 109,740 96,120 14.2% 85,437 12.5%
Held to Maturity Investments 0 0 0.0% 0 -100.0%
Loans and Receivables 0 0 0.0% 0 -100.0%
Financial Assets Measured At Amortized Cost 554,925 474,681 16.9% 429,731 10.4%
Hedging Derivatives 743 340 118.5% 344 -1.2%
Non-Current Assets Held For Sale 1,093 1,325 -17.5% 1,380 -3.9%
Investments in Associates and Joint Ventures 1,095 1,071 2.2% 1,053 1.7%
Tax Assets 41,064 33,599 22.2% 31,566 6.4%
Other Assets 7,222 5,062 42.7% 4,800 5.4%
Tangible Assets 9,537 9,782 -2.5% 6,589 48.4%
Intangible Assets 30,766 30,596 0.5% 30,020 1.9%
Total Assets 936,201 762,237 22.8% 723,865 5.3%

 

Liabilities and Stockholders' Equity 2020 2019 Var. 2020x2019 2018 Var. 2019x2018
Financial Liabilities Held For Trading 77,643 0 100.0% 0 0.0%
Financial Liabilities Measured At Fair Value Through Profit Or Loss Held For Trading - 46,065 -100.0% 50,939 -9.5%
Financial Liabilities Measured At Fair Value Through Profit Or Loss 7,038 5,319 32.0% 1,946 173.3%
Financial Liabilities at Amortized Cost 707,289 575,230 23.0% 547,295 5.1%
Hedging Derivatives 145 201 -27.9% 224 -10.3%
Provisions 13,815 16,332 -15.4% 14,696 11.1%
Tax Liabilities 10,130 10,960 -7.6% 8,075 35.7%
Other Liabilities 14,051 10,921 28.7% 9,095 20.1%
Total Liabilities 830,111 665,028 24.8% 632,270 5.2%
Stockholders' Equity 106,205 96,736 9.8% 91,944 5.2%
Other Comprehensive Income -428 -86 397.7% -879 -90.2%
Stockholders' Equity Attributable to the Parent 105,777 96,650 9.4% 91,065 6.1%
Total Stockholders' Equity 106,090 97,209 9.1% 91,595 6.1%
Total Liabilities and Stockholders' Equity 936,201 762,237 22.8% 723,865 5.3%

 

32 
 

The following are the main changes in balance sheet accounts for the years 2020, 2019 and 2018.

Our total assets reached $936,201 millions as of December31, 2020, a growth of 22,8% compared to 2019, whose total assets reached R$762. 237 million, 5,3% higher than the year ended December 31, 2018, in the amount of R$723,865 million.

 

The portfolio of loans and advances to gross clients, without guarantees and guarantees, totaled R$417,822 as of December 31, 2020, an increase of 20.3% compared to R$347,257 million as of December 31, 2019, an increase of 7.9% compared to R$321,933 million as of December 31, 2018. The Individual segment showed an evolution of 11.6% compared to 2019, followed by an increase of 15.3% in the segment of consumer financing.

 

Consolidated shareholders' equity totaled R$105,777 million as of December 31, 2020, R$96,650 million as of December 31, 2019 and R$91,065 million as of December 31, 2018, up 9.4% as of December 31, 2020 compared to 2019 and an increase of 6.1% as of December 31, 2019 compared to 2018. The evolution of shareholders' equity in the year is mainly due to revenue growth, net income for the period in the amount of R$13,451 million and reduced by the highlight of Dividends and Interest on Equity in the amount of R$3,837 million.

33 
 

 

10.2. Directors should comment:

 

a. Results of the Company's operations:

 

Results of Operations for years ended December 31,2020,2019 and 2018

 

The following table provides an overview of the main central aspects of our operating results in the financial years ended in December 31, 2020, 2019 and 2018

 

Executive Summary - Santander Brasil Results

Total Revenues totaled R$48,242 million in 2020, a reduction of 17.9% compared to the year ended December 31, 2019, mainly due to the impact of the COVID-19 pandemic on the Brazilian economy. Excluding the effects of overseas investment hedging, which had a major impact in 2020 due to exchange rate variation, our total revenue would be$61.825 million in the year, an increase of 3.0% over the same period a year earlier. For more information, see "Item 3. Key Information — A. Selected Financial Data — Reconciliation of Non-GAAP Measures and Indices With IFRS Most Directly Comparable Financial Measures."

 

Consolidated Profit for 2020 totaled R$13,451 million for the year ended December 31, 2020, down19.1%from the year ended December 31, 2019, as a result of an increase in net interest income, net fees and commissions and reduced losses on gains/losses on financial assets and liabilities (net) and exchange rate variations (net).

The Client Loan Portfolio totaled R$418 billion in December 20, an increase of 20.3%compared to December 31, 2019, mainly due to an increase in loans to individuals and the consumer financing portfolio.

 

Credit Quality remains at reasonable levels and supports our growth. The ratio of non-recoverable assets to credit risk was5.0% for the year ended December 31,2020, down 0.1 p.p. from the previous year. The Coverage Index was 110.6% for the year ended December 31, 2020, down from 14.0 p.p. to 96. The Basel Capital Adequacy Ratio was 15.3% for the year ended 31 December 2020, a reduction of 0.3% compared to the year ended 31 December 2019.

 

The Deposits of the Central Bank of Brazil and the deposits of credit institutions plus deposits of customers increased 32,5%, to$578 billion in 2020.

 

34 
 

Results of Operations

The following table presents our consolidated operating results for the years ended December 31, 2020, 2019 and 2018:

    For the year ended December 31,
    2020 2019 2018 Var % Var %
  2020/2019 2019/2018
    (in millions of R$, except percentages)
Net interest income 44,443 44,321 41,921 0.3 5.7
Income from equity instruments 34 19 33 78.9 (42.0)
Income from companies accounted for by the equity method 112 149 66 (24.8) 126.6
Net fee and commission income 16,229 15,713 14,132 3.3 11.2
Gains/losses on financial assets and liabilities (net) and exchange differences (net) (11,703) (326) (5,589) 3,489.9 (94.2)
Other operating income (expenses) (873) (1,108) (1,056) (21.3) 4.9
Total income 48,242 58,769 49,507 (17.9) 18.7
Administrative expenses (17,115) (16,942) (16,792) 1.0 0.9
Depreciation and amortization (2,579) (2,392) (1,740) 7.8 37.5
Provisions (net) (1,657) (3,682) (2,000) (55.0) 84.1
Impairment losses on financial assets (net) (17,450) (13,370) (12,713) 30.5 5.2
Impairment losses on other assets (net) (85) (131) (508) (35.1) (74.1)
Other nonfinancial gain (losses) 308 20 156 1,440.0 (86.9)
Operating profit before tax   9,664 22,273 15,910 (56.6) 40.0
Income tax (3,787) (5,642) (3,110) (167.1) 81.4
Consolidated profit for the year 13,451 16,631 12,800 (19.1) 29.9

 

Our consolidated profit for the year ended December 31, 2020 was R$13,451 million, a reduction of R$3,180 million, or 19.1%, compared to our consolidated profit of R$16,631 million for the year ended December 31, 2019 as a result of an increase of R$ 4,080 in losses due to a reduction in the recoverable value in financial assets (net) mainly due to the covid-19 global pandemic that resulted in an additional provision of R$ 3,200 million for potential loan losses. This was partially offset by the growth of the credit chain.

 

Our consolidated profit for the year ended December 31, 2019 was R$16,631 million, an increase of R$3,832 million, or 29.9%, compared to our consolidated profit of R$12,800 million for the year ended December 31, 2018 as a result of:

35 
 

 

(i)an increase of R$2,400 million in net interest income, mainly due to the growth of our loan portfolio driven by our commercial banking segment;

 

(ii)increase of R$1,581 million in net fees and commissions, mainly as a result of an increase of R$722 million in credit and debit card revenues, an increase of R$417 million in revenues from sales of insurance and securities premiums, an increase of R$295 million in revenues from the capital market and an increase of R$138 million in current account service revenues. These increases were explained by the expansion of our customer base, greater linkage, and greater transactionality.

 

Net interest income

 

Net interest income for the year ended December 31, 2020 was R$44,443 million, an increase of 0.3% or R$122 million compared to R$44,321 million for the year ended December 31, 2019. This increase was mainly explained by a 20.3% increase in the volume of our credit portfolio, a 12% increase in the number of linked customers.

 

The total average profitable assets in 2020 were R$750.1 billion, an increase of 14.5% or R$94.9 billion compared to R$655.2 billion in 2019. The main carrying factors were an increase of R$61.2 billion, or 18.9%, in the average of loans and amounts owed by credit institutions, an increase of R$24.8 billion in the average of debt instruments. Net income (net interest income divided by average profitable assets) was 5.9% in 2020, compared to 6.8% in 2019, a reduction of 0.8 p.p.

 

The average total of onerous liabilities in 2020 was R$572.0 billion, an increase of 6.5% or R$80.8 billion, compared to R$491.2 billion in 2019. The main boosts of this growth were an increase of R$109.4 billion in client deposits, given the shift in investors' assets toward more stable instruments.

 

Finally, the income spread (the difference between the gross income of profitable companies and the average cost of onerous liabilities) was 5.2% in 2020, mainly due to the lower participation of our Commercial Banking segment in our total results and the effect of reducing the SELIC interest rate from 4.5% in 2019 to 2.0% in 2020.

 

Net interest income for the year ended December 31, 2019 was R$44,321 million, an increase of 5.7% or R$2,400 million, compared to R$41,921 million for the year ended December 31, 2018. This increase was primarily due to a 7.9% increase in the volume of our credit portfolio, driven by individuals and consumer credit.

 

Profitable assets in 2019 were R$ 655.2 billion, an increase of 7.8% or R$ 47.1 billion $ 608.0 billionin2018. The main factors were an increase of R$ 45.9 billion, or 81.8%, in the average loans and amounts payable. For credit institutions, an increase of R$ 18.5 billion in average loans and advances to customers and R$ 14.7 billion in the average of debt instruments, partially offset by the reduction of R$ 32.3 billion in the average availability of the Central Bank of Brazil.

36 
 

The average total onerous liabilities in 2019 were R$ 491.2 billion, an increase of 6.0% or R$ 27.8 billion of R$ 463.4 billion in 2018. The main factors for this growth were an increase of R$ 18.0 billion in customer deposits, an increase of R$ 5.3 billion in deposits from the Central Bank of Brazil and deposits from credit institutions and an increase of R$ 4.7 billion in debt securities.

 

Finally, the income spread (difference between the gross income of profitable assets and the cost of onerous liabilities) was 5.3% in 2019 versus 5.4% in 2018, mainly due to an increase in the cost of financing, associated with the overall reduction of the SELIC rate from 6.5% in 2018 to 4.5% in 2019.

 

Income from Equity Instruments

 

Profit on equity instruments for the year ended December 31, 2020 totaled R$34 million, an increase of R$15 million compared to R$19 million for the year ended December 31, 2019, mainly due to Santander Fundo de Investimento Amazonas Multimercado Crédito Privado Investimento no Exterior increased dividend gains resulting from gains in stock positions for hedge of derivatives.

 

Profit from equity instruments in 2019 totaled R$19 million, a reduction of R$14 million compared to R$33 million in the year ended December 31, 2018, mainly due to lower dividends received from Santander Investimento Fundo Guarujá Multimercado Crédito Privado Investimento Abroad.

 

Equity Income

 

Equity income for the year ended December 31, 2020 was R$112 million, a reduction of R$37 million compared to R$149 million for the year ended December 31, 2019, mainly due to a reduction of R$33 million in the results of Banco RCI Brasil S.A. operations and a reduction of R$8 million in the operating results of the Gestora de Inteligência de Crédito, both jointly controlled. These improved results were partially offset by an increase of R$10 million in the results of Tecban (Tecnologia Bancária S.A.), a jointly controlled company.

 

Equity income for the year ended December 31, 2019 was R$149 million, an increase of R$84 million compared to R$66 million for the year ended December 31, 2018. This increase was mainly due to the increase of R$ 59 million in the results of the operations of Banco RCI Brasil S.A., jointly controlled, to the increase of R$ 19 million in the results of the operations of Tecnologia Bancária SA, jointly controlled and an increase of R$ 12 million in the results of the operations of Webmotors SA, a joint control company. This was partially offset by a reduction of R$ 5 million in the results of the operations of The Credit Intelligence Manager, a company controlled in conjunction with and a reduction of R$ 2 million in the results of Santander Auto S.A. operations.

 

37 
 

Revenues from net fees and commissions

 

Net commission and rate revenues for the year ended December 31, 2020 reached R$16,229 million, an increase of 3.3% or R$515 million compared to R$15,713 million for the year ended December 31, 2019. This increase was mainly due to the increase in (i) trade financing, (ii) insurance and capitalization and (iii) credit and debit cards.

 

Net commission and rate revenues for the year ended December 31, 2019 reached R$15,713 million, an increase of 11.2% or R$1,581 million compared to R$14,132 million for the year ended December 31,2018. This increase was mainly due to the increase of R$722 million in credit and debit card revenues, R$417 million in revenues from the sale of insurance and securities premiums, R$295 million in capital market revenues and R$138 million in current account service revenues.

 

Net credit and debit card fees and commissions totaled R$5,151 million for the year ended December 31, 2020, an increase of 3.3% over the year ended December 31, 2019. This increase was mainly due to a recovery in transaction volumes in the second half of 2020, despite the reduction in volume during the first half of 2020.

 

Net credit and debit card fees and commissions totaled R$4.986 million for the year ended December 31, 2019, an increase of 16.9% over the year ended December 31, 2018. This increase was the result of a higher turnover of R$236.4 billion in the fiscal year ended December 31,2019 compared to R$201.6 billion in the fiscal year ended December 31, 2018.

 

Net fees and commissions on insurance and securities premiums totaled R$3,831 million for the year ended December 31, 2020, an increase of 6.8% over the year ended December 31, 2019, mainly due to life insurance associated with the good evolution of the portfolio.

 

Net fees and commissions on insurance and securities premiums totaled R$3,586 million in the financial year ended December 31, 2019, an increase of 13.1% over the year ended December 31, 2018, mainly due to life insurance associated with the good evolution of the portfolio.

 

Revenues from fees and commissions charged in connection with the capital market totaled R$858 million for the year ended December 31, 2020, a reduction of 29.1% compared to the year ended 2019.

 

Revenues from fees and commissions charged in connection with the capital market totaled R$1,211 million for the year ended December 31, 2019, an increase of 32.2% over the year ended 2018, mainly due to an increase of R$263 million in subscription and bond placement revenues and an increase of R$32 million in administration and custody revenues.

 

38 
 

Net fees and commissions for current account services totaled R$3,716 million for the year ended December 31, 2020, a reduction of 8.3% compared to the year ended 2019.

 

Current account service fees and commissions totaled R$4,051 million for the year ended December 31, 2019, an increase of 3.5% over the year ended 2018, driven by the expansion of our active account holders due to increased customer engagement.

 

The following table reflects the composition of net rate and commission revenues for the years ended December 31, 2020, 2019 and 2018:

 

    For the year ended December 31
    2020 2019 2018 Var % 2020/2019 Var % 2019/2018
      (in millions of R$. except percentages)
Current account services 3,716 4,051 3,913 (8.3) 3.5
Collection and payment services 1,459 1,313 1,291 11.1 1.7
Insurance and capitalization 3,831 3,586 3,169 6.8 13.2
Asset Management and pension funds 1,114 1,434 1,289 (22.3) 11.2
Credit and debit cards 5,151 4,986 4,264 3.3 16.9
Capital markets 858 1,211 916 (29.2) 32.2
Trade finance 1,740 1,317 1,228 32.1 7.2
Tax on services (678) (622) (671) 8.9 (7.3)
Others (964) (1,562) (1,266) (38.2) 23.4
Total 16,229 15,713 14,133 3.3 11.2

 

"Gains/losses on financial assets and liabilities (net) and exchange variations (net)"

 

Gains/losses on financial assets and liabilities (net) and exchange rate differences (net) for the year ended December 31, 2020 were losses of R$11,703 million, an increase of R$11,377 million in losses of R$326 million for the year ended December 31, 2019. This variation is mainly due to gains of R$9,732 million related to financial assets measured at fair value through trading results and losses of R$21,912 million related to exchange variations (net). Excluding hedge results on the effect of investments abroad, gains/losses on financial assets and liabilities (net) and foreign exchange (net) differences were gains of R$1,880 million for the year ended December 31, 2020, an increase of R$942 million from earnings of R$938 million for the year ended December 31, 2019 mainly due to positive results in our derivatives position. Gains/losses on financial assets and liabilities (net) and exchange rate differences (net), excluding the effects of overseas hedging investment, is a non-GAAP measure. For more information, see "Item 3. Key Information — A. Selected financial data - Reconciliation of non-GAAP measures and indices with your most directly comparable IFRS financial measures. ".

 

Gains/losses on financial assets and liabilities (net) and exchange rate differences (net) for the year ended December 31, 2019 were losses of R$326 million, a decrease of R$5,263 million in losses of R$5,589 million for the year ended December 31, 2018. This variation is mainly due to gains of R$5,156 million related to the measurement of financial assets measured at fair value through income and gains of R$17.9 million related to exchange rate differences (net). Excluding the effect of hedge investments abroad, "Gains/losses on financial assets and liabilities (net) and exchange rate changes (net)" were gains of R$938 million for the year ended December 31, 2019, an increase of R$660 million in gains of R$278 million compared to the year ended December 31, 2018 mainly due to positive results in our derivative positions. "Gains/losses on financial assets and liabilities (net) and exchange rate changes (net)" excluding the effects of overseas hedging investment are a non-GAAP measure. For more information, see "Item 3. Key Information — A. Selected Financial Data — Reconciliation of Non-GAAP Measures and Indices With IFRS Most Directly Comparable Financial Measures."

39 
 

 

The following table shows our gains/losses on financial assets and liabilities (net) and exchange rate differences (net) in the periods indicated.

 

    For the year ended December 31
    2020 2019 2018 Var % 2020/2019 Var % 2019/2018
    (in millions of R$, except percentages)
Gains/losses on financial assets and liabilities (net) and exchange differences (net) (11,703) (326) (5,589) 3,489.9 (94.2)
Effects of the hedge for investment held abroad 13,583 1,264 5,867 974.6 (78.5)
Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding Hedge Impact(1) 1,880 938 278 100.4 237.7

 

(1) Gains/losses on financial assets and liabilities (net) and exchange rate differences (net) excluding the effects of overseas hedging investment are a non-GAAP measure. For more information, see "Item 3. Key Information — A. Selected Financial Data — Reconciliation of Non-GAAP Measures and Indices With IFRS Most Directly Comparable Financial Measures."

 

Other Operating Income/Expenses

 

Other operating income/expenses for the year ended December 31, 2020 were R$873 million, a reduction of R$236 million compared to expenses of R$1,108 million for the year ended December 31, 2019, mainly due to the lower result of our FGB pension plan and higher expenses with the FGC (Credit Guarantee Fund) due to the increase in the balance of deposits. For the year ended December 31, 2019, other operating income/expenses were expenses of R$ 1,108 million, compared to expenses of R$ 1,056 million for the year ended December 31, 2018.

 

Administrative Expenses

 

Administrative expenses for the year ended December 31, 2020 were R$17,115 million, an increase of R$173 million compared to expenses of R$16,942 million for the year ended December 31, 2019, mainly due to higher spending on technology and systems. For the year ended December 31, 2019, our administrative expenses of R$16,942 million reflected an increase of R$149 million compared to administrative expenses of R$16,792 million for the year ended December 31, 2018. The performance in both periods is mainly attributed to the increase of: (i) personnel expenses, aligned with our meritocratic culture and the performance of our business; and (ii) line of data processing expenses in order to support the increase in the volume of transactions with our customers.

40 
 

 

Personnel expenses reduced by R$457 million in the year ended December 31, 2020, as a result of the reduction in the line of benefits and lower salaries and salaries. In the year ended December 31, 2019, our personnel expenses increased by R$122 million compared to the same period in 2018. This performance can be attributed to the increase in the line of benefits and higher salaries.

 

The following table presents our personnel expenses for each of the periods indicated:

 

    For the year ended December31.
    2020 2011 2018 Change % 2020/2019 Change % 2019/2018
    (in millions of R$. except percentages)
Wages and salaries 5,730 5,876 5,813 (2.5) 1.1
Social security costs 1,222 1,277 1,405 (4.3) (9.1)
Benefits 1,390 1,492 1,387 (6.8) 7.5
Training 49 66 63 (25.8) 4.8
Other personnel expenses 480 617 538 (22.2) 14.7
Total 8,871 9,328 9,206 (4.9) 1.3

 

Other administrative expenses increased R$629 million to R$8,244 million in the year ended December 31, 2020, from R$7,614 million in the year ended December 31, 2019, mainly due to an increase of R$296 million in technology and systems, and an increase of R$176 million in communications.

 

Other administrative expenses increased R$28 million to R$7,614 million in the year ended December 31, 2019, from R$7,586 million in the year ended December 31, 2018, mainly due to an increase of R$272 million in technology and systems, an increase of R$91 million in advertising, an increase of R$83 million in specialized and technical services , both expenses arising from more intense commercial actions in our business, partially offset by a reduction of R$ 582 million with real estate, facilities and materials, as a result of the adoption of IFRS 16.

 

The following table presents our other administrative expenses for each of the periods indicated:

41 
 

 

  For the year ended December 31,
  2020 2019 2018 Change % 2020/2019 Change % 2019/2018
      (in millions of R$, except percentages)
Specialized and technical services 2,171 2,173 2,090 4.0 4.0
General maintenance expenses 744 748 1,331 (43.8) (43.8)
Technology maintenance expenses 2,355 2,059 1,786 15.3 15.3
Advertising 654 713 622 14.6 14.6
Communications 649 473 457 3.5 3.5
Per diems and travel expenses 70 140 127 10.2 10.2
Taxes other than income tax 280 112 89 25.9 25.9

Surveillance and cash courier

services

595 631 617 2.3 2.3
Insurance premiums 17 35 29 20.7 20.7
Other administrative expenses  (1) 709 531 437 21.5 21.5
Total 8,244 7,614 7,586 0.4 0.4

 

(1) As of December 31, 2020, includes data processing expenses in the balance of R$176.1 million (2019 - R$2.4 million and 2018 - R$67.7 million), Service Expenses in the balance of R$27.7 million (2019 - revenue from R$2.2 million and 2018 - R$26.8 million), Expenses with Benefit Guarantee Fund - FGB R$8.5 million (2019 - R$53.5 million and 2018 - R$35.0 million) , Interest On Equity R$0 (2019 - R$0 million and 2018 - R$38.0 million) and Recovery of Charges and Expenses of R$212.8 million (2019 - R$97.4 million and 2018 - R$92.4 million).

 

The efficiency ratio, calculated as total administrative expenses divided by Total Revenues, increased to 35.5% in the year ended December 31, 2020, compared to 28.8% in the year ended December 31, 2019. This increase of 6.7 p.p. in the index is mainly due to the effects of investment hedge carried out abroad. In the year ended December 31, 2018, the efficiency index was 33.9%. Our adjusted efficiency index, which excludes the effect of overseas investment hedging (see "—Hedging on Foreign Investments" and "Selected Financial Data - Selected Consolidated Indices, Including Non-GAAP Indices"), was 27.7%, 28.2% and 30.3% in 2020, 2019 and 2018, respectively

 

Depreciation and Amortization

 

Depreciation and amortization for the year ended December 31, 2020 was R$2,579 million, an increase of R$187 million compared to R$2,392 million for the year ended December 31, 2019, mainly due to higher depreciation expenses for hardware and software items, results of investments made in this period. In the year ended December 31, 2019, depreciation and amortization totaled R$2,392 million, an increase of R$652 million compared to R$1,740 million for the year ended December 31, 2018, to the change in accounting practices resulting from the adoption of IFRS 16 following the principles of IAS 17. For more information, see "Item 1 Introduction, basis for the presentation of consolidated financial statements and other information, c.1) Adoption of new standards and interpretations of our consolidated financial statements" included in "item 18. Financial Statements" of this annual report.

 

42 
 

Provisions (Net)

 

Provisions mainly include provisions for tax, civil and especially labor causes. The provisions (net) totaled R$1,657 million for the year ended December 31, 2020, a reduction of R$2,025 million compared to R$3,682 million for the year ended December 31, 2019, mainly due to an above-normal level of provisions in 2019, as explained below.

 

For the year ended December 31, 2019, the provisions (net) totaled R$3,682 million for the year ended December 31, 2019, an increase of R$1,682 million compared to R$2,000 million in the year ended December 31, 2018, mainly due to an increase of R$700 million related to the creation of an efficiency and productivity fund , increase in civil and labor proceedings due to the revision of the operational model and constitution of provisions related to the judicial process initiated by the Association of Retired Employees of the Bank of the State of São Paulo, or AFABESP, an association of former employees of Banespa in which the classification of the chance of loss was revised to probable in December 2019 (for more information, see observation 23 of our audited consolidated financial statements included in "Item 18. Financial Statements" of this annual report).

 

Impairment Losses on Financial Assets (Net)

 

Impairment losses on financial assets (net) for the year ended December 31, 2020 were R$17,450 million, an increase of R$4,080 million compared to R$13,370 million for the year ended December 31, 2019. This increase was mainly due to the global pandemic COVID-19 which resulted in an additional provision of R$ 3,200 million for doubtful accounts and the recurring growth of the credit portfolio.

 

For the year ended December 31, 2019, R$13,370 million increased by R$657 million compared to R$12,713 million for the year ended December 31, 2018. This increase was mainly due to loans to benefits for individuals, due to the recurrent growth of the credit portfolio in this segment.

 

Our credit risk exposure portfolio increased by R$74.5 billion to R$466.1 billion as of December 31, 2020 compared to R$391.6 billion as of December 31, 2019. In addition, our deteriorated assets decreased from R$ 0.2 billion to R$ 23.4 billion as of December 31, 2019 to R$ 23.2 billion in the year ended December 31, 2020. The default rate decreased by 10 basis points in 2020 compared to 2019.

 

The following table shows the proportion of our non-recoverable assets in relation to total credit risk exposure and our hedging rate as of December 31, 2020 and December 31, 2019 and 2018.

43 
 

 

  From December 31,
  2020 2019 2018 Var % 2020/2019   Var % 2019/2018
  (in millions of R$, except percentages)
Loans and advances to customers, gross 417,819 347,257 321,933 20.3 7.9
Impaired assets 23,176 23,426 22,426 (1.1) 4.5
Provisions for impairment losses 25,640 22,625 22,969 13.3 (1.5)
Credit risk exposure Non-GAAP – customers (1) 466,104 391,569 364,194 19.0 7.5
Ratios          
Impaired assets to credit risk exposure 5.0% 6.0% 6.2% (1.0) (0.2)
Coverage ratio (2) 110.6% 96.6% 102.4% 14.0 (5.7)
Impairment losses (17,451) (13,370) (12,713) 30.5 5.2
Gains (losses) due to derecognition of financial assets measured at amortized cost  (3) - - - - -
Impairment losses on financial assets (net) (4) (17,451) (13,370) (12,713) 30.5 5.2
________________________________

(1) Exposure to credit risk is a non-GAAP financial measure. Exposure to credit risk is the sum of amortized cost amounts of loans and advances to customers (including non-recoverable assets) in the amount of R$466.115 million and guarantees and documentary credits in the amount of R$48.282 billion. We present off-balance sheet information to better demonstrate our total managed credit risk.

(2) Provisions for losses due to reduction to recoverable value as a percentage of assets with reduction to recoverable value.

(3) It corresponds to the record of permanent losses in the realizable value of securities and values classified as "Securities available for sale", currently recorded as "Gains in financial assets (net)".

(4) As of December 31, 2020, 2019 and 2018, our total losses due to reduction to the recoverable value of financial instruments included R$1,577 million, R$2,055 million and R$2,714 million, respectively, related to debt instruments.

 

The following chart shows our relationship between non-recoverable assets and credit risk from 2016 to 2020:

 

44 
 

 

 

Impaired Assets by Type of Loan

 

The following table shows our non-recoverable assets by loan type as of December 31, 2020, 2019, and 2018.

    For the year ended December 31,
    2020 2019 2018 Var % 2020/2019 Var % 2019/2018
    (in millions of R$, except percentages)
Commercial and industrial   10,558 10,073 11,832 4.8 (14.9)
Real estate – construction   456 827 1,035 (44.8) (20.1)
Installment loans to individuals   12,144 12,497 9,499 (2.8) 31.6
Lease financing   17 29 59 (40.6) (50.8)
Total   23,176 23,426 22,426 (1.1) 4.5

 

Commercial and Industrial

 

Non-recoverable assets in the commercial and industrial loan portfolio totaled R$10,558 million as of December 31, 2020, an increase of R$485 million, or 4.8%, compared to R$10,073 million as of December 31, 2019. This increase was mainly due to the collective valuation of R$ 1,660 million carried out by Santander Brasil, which was based on the sensitivity of macroeconomic projections that indicate internship transfers through deterioration of the portfolio.

 

45 
 

Non-recoverable assets in the commercial and industrial loan portfolio totaled R$10,073 million as of December 31, 2019, a reduction of R$1,759 million, or 14.9%, compared to R$11,832 million as of December 31, 2018. The reduction of non-recoverable assets in this portfolio was the result of the measures adopted by Santander Brasil to manage them, including collection practices in relation to our borrowers, through which we offer certain clients the opportunity to negotiate a restructuring of their debts or disposal of assets.

 

Real estate

 

Non-recoverable assets in the real estate loan portfolio totaled R$456 million as of December 31, 2020, a reduction of R$371million, or 44.8%, compared to R$827 million at December 31, 2019. The reduction in assets deteriorated in this portfolio was the result of the measures that Santander Brasil implemented to manage it, including collection practices in relation to our customers.

 

Non-recoverable assets in the real estate loan portfolio totaled R$827 million as of December 31, 2019, a reduction of R$209 million, or 20.2%, compared to R$1,036 million as of December 31, 2018. The fall occurred mainly due to changes in monetary policy that led to a reduction in interest rates in the real estate portfolio in Brazil.

 

Installment Loans to Individuals

Assets with reduction in the recoverable value of term loans for individuals totaled R$12.144 million as of December 31, 2020, with a reduction of R$353 million, or 2.8%, compared to 2019. The reduction of assets in this portfolio was the result of the measures that Santander Brasil implemented to manage it, including collection practices with relation to our borrowers, through which we offer certain customers the option of negotiating a restructuring of their debts, especially during the COVID-19 Pandemic or disposal of assets.

 

Non-recoverable assets in the portfolio of loans to individuals totaled R$12,497 million as of December 31, 2019, with an increase of R$2,998 million, or 31.6%, compared to 2018. This increase was a consequence of the recurrent growth of the portfolio and the weak macroeconomic conditions related to the portfolio in Brazil, such as unemployment rate and degree of income impairment. For more information, see "Item 4. Company Information - B. Business Overview - Selected Statistical Information — Assets — Non-Recoverable Assets — Methodology for Loss to Recoverable Value." .

 

Financial Lease

 

Non-recoverable assets in the loan and lease financing portfolio totaled R$17 million as of December 31, 2020, a reduction of R$12million and m compared to December 31, 2019. This decrease in non-recoverable assets occurred mainly due to defaults of certain borrowers, as a result of weak macroeconomic conditions in Brazil

 

46 
 

Non-recoverable assets in the loan portfolio and lease financing totaled R$29 million as of December 31, 2019, a reduction of R$30 million compared to December 31, 2018.

 

Impairment Losses on Other Assets (Net)

 

Losses due to a reduction in the recoverable value of assets (net) for the year ended December 31, 2020 totaled losses of R$85 million, a reduction of R$46 million compared to the year ended December 31, 2019, mainly due to the less loss due to reduction in the reparable value of intangible assets during the year. For the year ended December 31, 2019, losses due to reduction to the recoverable value of other assets (net) totaled losses of R$131 million, a reduction of R$377 million compared to the year ended December 31, 2018, mainly due to the loss by reduction in the recoverable value of assets in the acquisition and development of software that was recorded due to the obsolescence and interruption function of these systems in 2018that did not occur in 2019.

 

Other Non-Financial Gains/Losses

 

Other non-financial gains/losses were earnings of R$308 million for the year ended December 31, 2020, a positive change of R$288 million in earnings of R$20 million for the year ended December 31, 2019, mainly due to the r$169 million gain in the sale of Superdigital in the first quarter of 2020.

 

During the year ended December 31, 2019, other non-financial gains/losses were earnings of R$20 million for the year ended December 31, 2019, a negative change of R$136 million in losses of R$156 million for the year ended December 31, 2018, mainly due to (i) an increase of R$104 million related to revenue stemming from the reversal of the provision for reduction in the recoverable value of real estate and R$78 million related to the sale of assets received in the recovery of credits with customers that occurred in 2018 and not occurred in 2019.

 

Operating Profit before Tax

 

Operating profit before taxes for the year ended December 31, 2020 was R$9,664 million, a reduction of R$12,609 million, or 56.6%, compared to R$22,273 million for the year ended December 31, 2019. In the year ended December 31, 2018, operating profit before taxes for the year was R$15,910 million.

 

Excluding the effects of investment hedge realized abroad, operating income before taxation totaled R$23,247 million for the year ended December 31, 2020, a decrease of 1.2% compared to R$23,537 million compared to the year ended December 31, 2019. For the year ended December 31, 2018, operating profit before taxes was R$21,777 million. The Operating Income of Taxation, excluding the effects of hedging on investments held abroad, is a non-GAAP measure. For more information, see "Item 3. Key Information — A. Selected Financial Data — Reconciliation of Non-GAAP Measures and Indices With IFRS Most Directly Comparable Financial Measures."

 

47 
 

The table below shows our operating profit before tax and our operating profit before taxes, excluding the effects of hedging for investments held abroad in the markets presented.

 

 

  For the year ended December 31,
    2020 2019 2018 Var % 2020/2019 Var % 2019/2018
    (in millions of R$, except percentages)
Operating Profit Before Tax 9,664 22,273 15,910 (56.6) 40.0
Effects of the hedge for investment held abroad 13,583 1,264 5,867 974.6 (78.5)
Adjusted operating profit before tax (1) 23,247 23,537 21,777 (1.2) 8.1
 

(1) Adjusted operating income is a non-GAAP measure. For more information, see "Item 3. Key Information — A. Selected Financial Data — Reconciliation of Non-GAAP Measures and Indices With IFRS Most Directly Comparable Financial Measures."

 

Income Taxes

 

Income tax expense includes income tax, social contribution, PIS and COFINS. Income tax totaled expenses of R$3,787 million for the year ended December 31, 2020, an increase of R$9,429 million over expenses of R$5,642 million for the year ended December 31, 2019. This increase was mainly attributable to the following events:(i) foreign exchange losses of R$13,583 million as a result of the effects of exchange variations on foreign investments and losses on hedge instruments, affecting the line "Gains (losses) in financial assets and liabilities (net)"; (ii) reduction of operating profit before taxation resulting from the results of the entities' operations and (iii) recognition of certain deferred tax credits in December 2020. For more information, see note 23 of our audited consolidated financial statements included in this annual report.

 

In the year ended December 31, 2019, income tax totaled expenses of R$5,642 million for the year ended December 31, 2019, an increase of R$2,532 million in relation to expenses of R$3,110 million for the year ended December 31, 2018. This increase was mainly attributable to the following events: (i) foreign exchange losses of R$1,512 million as a result of the effects of exchange variations on foreign investments and losses in hedging instruments, affecting the line "Gains (losses) in financial assets and liabilities (net)"; (ii) increase in operating profit before taxation resulting from the results of the entities' operations and (iii) recognition of certain deferred tax credits in December 2019 as a result of the adjustment of CSLL tax credits derived from the increase in the tax rate to 20% for banks (constitutional amendment No. 103/2019). For more information, see note 24 of our audited consolidated financial statements included in this annual report.

 

The following table shows our income tax and income tax excluding the effects of hedging for investments held abroad for the periods indicated.

48 
 

 

    For the year ended December 31,
    2020 2019 2018 Var % 2020/2019 Var % 2019/2018
    (in millions of R$, except percentages)
Income taxes 3,787 (5,642) (3,110) (167.1) 81.4
Effects of the hedge for investment held abroad (13,583) (1,264) (5,867) 974.6 (78.5)
Income taxes excluding effects of the hedge for investment held abroad (9,796) (6,906) (8,977) 41.9 (23.1)
 

* Income tax excluding the effects of investment hedge carried out abroad, is a non-GAAP measure. For more information, see "Item 3. Key Information — A. Selected Financial Data — Reconciliation of Non-GAAP Measures and Indices With IFRS Most Directly Comparable Financial Measures."

 

Results of Operations by Segment of the Years Ended December31, 2020, 2019 and 2018

 

The following tables show our operating results for the years ended December 31, 2020, 2019 and 2018 for each of our operating segments.

 

Commercial Banking

 

    For the year ended December 31,
    2020 2019 2018 Var % 2020/2019 Var % 2019/2018
    (in millions of R$, except percentages)
Net interest income   41,457 42,044 39,391 (1.4) 6.7
Income from equity instruments 5 4 5 10 (25.6)
Income from companies accounted for by the equity method 150 84 150 66 (43.8)
Net fee and commission income 13,923 14,404 13,923 12,537 3.5

Gains/losses on financial assets and liabilities

(net) and exchange differences (net)

(1,541) (13,515) (1,541) (6,752) 777.0
Other operating income (expenses) (1,069) (767) (1,069) (966) (28.3)
Total income   41,667 53,511 44,286 (22.1) 20.8
Personnel expenses   (8,140) (8,554) (8,404) (4.8) 1.8
Other administrative expenses   (7,635) (7,140) (7,186) 6.9 (0.6)
Depreciation and amortization   (2,489) (2,297) (1,637) 8.4 40.3
Provisions (net)   (1,639) (3,669) (1,948) (55.3) 88.3
Impairment losses on financial assets (net) (13,423) (17,379) (13,423) (12,420) 29.5
Impairment losses on non-financial assets (net) (73) (28) (73) (450) (61.2)
Other nonfinancial gain (losses) 20 309 20 156 1.404.1
Operating profit before tax   4,666 18,375 12,397 (74.6) 48.2

 

 

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    For the year ended December 31,

    

 

2020

 

2019

 

2018

Var % 2020/2019 Var % 2019/2018
    (in millions of R$, except percentages)
Operating Profit Before Tax 4,666 18,375 12,397 48.2 48.2
Effects of the hedge for investment held abroad 13,583 1,264 5,867 (78.5) (78.5)
Adjusted Operating Profit Before tax 18,249 19,639 18,264 7.5 7.5

 

2020 and 2019

 

Operating profit before taxes attributed to the Commercial Bank segment for the year ended December 31, 2020 was R$4.7 billion, a reduction of R$13.7 billion, from R$18.4 billion for the year ended December 31, 2019. This variation was mainly due to:

 

• an increase of R$ 3,956 million in losses due to reduction in recoverable value in financial assets mainly due to the global pandemic of COVID 19 which resulted in an additional provision of R$ 3,200 million for potential loan losses and recurring growth in the credit portfolio.

 

• a reduction of R$587 million in net interest income for the year ended December 31, 2020, compared to the year ended December 31, 2019, mainly attributed to the impact of spread pressure and the effect of the mix as a result of the economic effects of the COVID-19 Pandemic.

 

This variation was partially offset by an increase of R$481 million in net revenue from fees and commissions for the year ended December 31, 2020, compared to the year ended December 31, 2019, mainly due to (i) an increase in revenue from the sale of insurance and capitalization; and (ii) the increase in trade finance revenues; and (iii) the increase in credit and debit card revenues.

 

Excluding the hedging effects of investments held abroad on our revenues, our operating profit before taxes would have been $18.2 billion, 7.1% lower than in the fiscal year ended December 31, 2019.

 

50 
 

2019 and 2018

Operating profit before tax attributed to the Commercial Banking segment for the year ended December 31, 2019 was R$18.4 billion, a 48.2% or R$6.0 billion increase from R$12.4 billion for the year ended December 31, 2018. This variation was mainly due to:

• an increase of R$2,653 million in net interest income for the year ended December 31, 2019, compared to the year ended December 31, 2018 mainly due to an 15.0% increase in the volume of our credit.

• an increase of R$1,386 million in net fee and commission income for the year ended December 31, 2019, compared to the year ended December 31, 2018, mainly due to (i) an increase in revenues from credit and debit cards, (ii) an increase in revenues from sale of insurance and premium bonds, and (iii) an increase in revenues from current account service; and.

• a decrease of R$377 million in impairment losses on other assets (net) mainly due to impairment loss of assets in the acquisition and development of software that was recorded due to obsolescence function and disruption of these systems in 2018 that did not occur in 2019.

Global Wholesale Banking

 

  For the year ended December 31,
  2020 2019 2018 Var % 2020/2019 Var %  2019/2018
  (in millions of R$, except percentages)
Net interest income 41,457 42,044 39,391 (1.4) 6.7
Income from equity instruments 5 4 5 10 (25.6)
Net fee and commission income 150 84 150 66 (43.8)
Gains/losses on financial assets and liabilities (net) and exchange differences (net) 13,923 14,404 13,923 12,537 3.5
Other operating income (expenses) (1,541) (13,515) (1,541) (6.752) 777.0
Total income (1,069) (767) (1,069) (966) (28.3)
Administrative expenses 41,667 53,511 44,286 (22.1) 20.8
Personnel expenses (8,140) (8,554) (8,404) (4.8) 1.8
Other administrative expenses (7,635) (7,140) (7,186) 6.9 (0.6)
Depreciation and amortization (2,489) (2,297) (1,637) 8.4 40.3
Provisions (net) (1,639) (3,669) (1,948) (55.3) 88.3
Impairment losses on financial assets (net) (13,423) (17,379) (13,423) (12,420) 29.5
Impairment losses on non-financial assets (net) (73) (28) (73) (450) (61.2)
Operating profit before tax 20 309 20 156 1,404.1
Net interest income 4,666 18,375 12,397 (74.6) 48.2

 

2020 and 2019

 

Pre-tax profit attributable to the Global Wholesale Banking segment for the year ended December 31, 2020 was R$5.0 billion, an increase of 28.2% or R$1,100 million compared to R$3.9 billion for the year ended December 31, 2019.

 

51 
 

This variation was mainly due to:

 

·R$708 million in net interest income, representing a 31% change over 2019, mainly due to the increase in the credit portfolio due to the economic effects of the COVID-19 pandemic.

 

·Gain from financial assets and liabilities and exchange variations of R$597 million due to positive gains from the expansion of market operations with derivatives and mainly gains in the portfolio of securities indexed to the IPCA.

 

This variation was partially offset by an increase of R$125 million in losses due to reduction in recoverable value in financial assets due to an increase in coverage for potential loan losses

 

2019 and 2018

Profit before tax attributed to the Global Wholesale Banking segment for the year ended December 31, 2019 was R$3.9 billion, a 11.0%, or R$385 million increase compared to December 31, 2018.

This variation was mainly due to:

·a decrease of R$347 million in impairment losses on financial assets (net) principally owing to our preventive management.
·an increase of R$195 million in net fee and commission income manly due to an increase in revenues from securities underwriting and placement and an increase in revenues from administration and custody.

These results were partially offset by:

·a decrease of R$253 million in net interest income mainly lower volume in the corporate portfolio.

 

10.3. Occurred and expected events with material effects on the financial statements:

 

a.  introduction or disposal of operating segment

 

No introduction or disposal of any operating segment was carried out over the last three (3) fiscal years.

 

b.  constitution, acquisition or disposal of equity interest

 

·  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.

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·  Put option of the remaining equity interest in Banco Olé Consignado S.A. against Aymoré Crédito, Financiamento

 

On March 14, 2019, the minority shareholder of Banco Olé Bonsucesso Consignado S.A. ("Banco Olé") formalized his interest in exercising the put option right provided in the Investment Agreement, concluded on July 30, 2014, for the disposal of his 40% stake in the capital of Olé Consignado for us.

 

On December 20, 2019, the parties concluded a binding agreement for the acquisition by us of all shares issued by Bosan Participações S.A. (holding company whose sole assets are shares representing 40% of Banco Olé's share capital), for the total amount of R$1.6 billion, to be paid on the closing date of the transaction.

 

On January 31, 2020, the Company and the shareholders of Bosan Participações S.A. concluded the final agreement and signed the purchase and sale agreement of 100% of the shares issued by Bosan, through the transfer of Bosan shares to us and the payment to the customers in the total amount of R$ 1,608,772,783.47. As a result, we have become, directly and indirectly, holders of 100% of Banco Olé's shares.

 

·  Merger of Banco Olé Consignado S.A. in 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.

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·  Incorporation of split portion of Integry Tecnologia e Serviços A.H.U Ltda.

 

On October 31, 2019, the partial spin-off operation of Integry Tecnologia e Serviços AHU Ltda was added. ("Integry"), a wholly owned subsidiary of Getnet Acquiring and Services for Means of Payment S.A. ("Getnet"), with a version of the portion split from its assets, relating to its assets and liabilities, to Getnet.

On December 20, 2019, Getnet and Santander Merchant Platform Solutions, S.L. ("SMPS Global"), a company based in Spain and controlled by Banco Santander, S.A. (Santander Spain), concluded a Contract for the Purchase and Sale of the shares representing Integry's entire share capital, so that SMPS Global now held 100% of Integry's share capital. On December 23, 2019, Integry changed its name to Santander Merchant Platform Tecnológicas Brasil Ltda.

 

·  Acquisition of Return Capital Serviços e Recuperação de Crédito S.A.

 

On October 16, 2017, Santander Brasil, through its wholly-owned Atual Serviços de Recuperação de Créditos e Meios Digitais S.A. ("Atual"), acquired a direct ownership interest in Return Capital Serviços e Recuperação de Crédito S.A. ("Return Capital"), and an indirect shareholding interest in Return Gestão de Recursos S.A. ("Return Asset") corresponding to 70% of the share capital of Return Capital and Return Asset (both "Return Companies").

 

On October 16, 2019, Atual informed the other shareholders of Return Companies of its decision to exercise its call option to acquire the shares representing the remaining 30% of the return companies' capital, in the amount of approximately R$ 17 million.

 

On November 1, 2019, Atual and Return Capital's minority shareholders signed Share Purchase Agreement and Other Covenants of Return Capital, in which Atual acquired all the shares of the minority shareholders, corresponding to 30% of the capital of return companies, so that Atual now directly and indirectly owns 100% of the shares representing the share capital of Return Companies.

 

Return Companies operate in the credit recovery intelligence sector, providing services such as credit portfolio valuation and pricing, collection, management and recovery of unpaid loans.

 

·  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 acquisition transaction was approved by the Brazilian Central Bank on February 18, 2019 and the transaction closed on February 25, 2019. As a result, Santander Brasil currently owns 100% of Getnet’s issued and outstanding share capital.

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·  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.

 

·  Transfer of control of Banco Olé Bonsucesso Consignado S.A. and Super Pagamentos e Administração de Meios Eletrônicos S.A.

 

On October 23, 2019, Aymoré Crédito, Financiamento e Investimento S.A. had its share capital reduced, without the cancellation of shares, through the transfer of the common shares representing its equity interest held in Banco Olé Bonsucesso Consignado S.A. ("Banco Olé") and Super Pagamentos e Administração de Meios Eletrônicos S.A. ("Super") to us. On December 23, 2019, the necessary conditions for completion of the operation were fulfilled, such as: (i) approval of the Central Bank of Brazil; and (ii) termination of the term of opposition of creditors, pursuant to Article 174 of Law No. 6,404/76, so that Banco Olé and Super became directly controlled by us.

 

·  Acquisition of Summer Empreendimentos Ltda.

 

On May 14, 2019, we and our wholly owned subsidiary, Santander Holding Imobiliária S.A. ("SHI") signed a binding document with the members of Summer Empreendimentos Ltda. ("Summer") establishing the terms of the purchase and sale of the shares representing summer's entire share capital. The acquisition was approved by BACEN on September 16, 2019 and completed on September 20, 2019, so SHI now owns 99.999% and we 0.001% of summer's share capital shares. Due to an initial plan to sell Summer in the short term, we had initially registered the investment as Non-Current Assets Held for sale, for its cost value. In June 2020, with the non-execution of the plan established, Summer became part of the scope of Banco Santander's Consolidated Financial Statements.

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·  Constitution of Esfera Fidelidade S.A.

 

On August 14, 2018, we constituted Esfera Fidelidade S.A., with a stake wholly owned by us. Esfera Fidelidade S.A. operates in the development and management of customer loyalty programs. The company began operations in November 2018.

 

·  Investment in Loop Gestão de Pátios S.A.

 

On 26 June 2018, Webmotors S.A., a company with a 70% stake indirectly owned by us, has signed an investment agreement with Allpark Empreendimentos, Participações e Serviços S.A. and Celta LA Participações S.A., in order to acquire an equity interest corresponding to 51% of the share capital of Loop Gestão de Pátios S.A. ("Loop"), through capital increase and issuance of new Loop shares to be fully subscribed and paid by Webmotors S.A. Loop operates in the segment of commercialization and physical and virtual auction of motor vehicles. On September 25, 2018, the transaction was completed with the realization of the capital increase in the amount of R$23,900 through the issuance of shares representing 51% of the equity interest in Loop, which were fully subscribed and paid by Webmotors S.A.

 

·  Constitution of BEN Benefícios e Serviços S.A.

 

On June 11, 2018, we constituted BEN Benefícios e Serviços S.A. ("Ben"), with a stake wholly owned by us to act in the supply and administration of food stamps, food stamps, transportation vouchers, cultural vouchers and the like, via printed issue or loaded on electronic or magnetic cards. Ben started operations in the second quarter of 2019.

 

·  Joint Venture with Hyundai Capital Services, Inc.

 

On April 28, 2016, Aymoré Crédito, Financiamento e Investimento S.A. ("Aymoré") concluded with Hyundai Capital Services, Inc. ("Hyundai Capital") the documents necessary for the constitution of Banco Hyundai Capital Brasil S.A. and an insurance broker with the objective of offering car financing and financial services and insurance brokerage to Hyundai consumers and dealerships in Brazil.

 

o Banco Hyundai Capital Brasil S.A.

On April 11, 2018, the parties constituted, with a 50% stake in Aymoré and 50% of Hyundai Capital, the non-operating company BHJV Assessoria e Consultoria em Gestão Empresarial Ltda. On May 8, 2018, Aymoré and Hyundai Capital decided to transform BHJV Assessoria e Consultoria em Gestão Empresarial Ltda. non-operating corporation called Banco Hyundai Capital Brasil S.A. ("Banco Hyundai"). On December 13, 2018, the constitution of Hyundai Bank was completed.

 

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On February 21, 2019, the authorization granted by BACEN for the operation of Banco Hyundai was published in the Official Gazette. Hyundai Bank began operations in April 2019.

 

o Hyundai Corretora de Seguros Ltda.

On April 30, 2019, BACEN authorized us to have an indirect stake in a company to be incorporated under the name Hyundai Corretora de Seguros Ltda. ("Hyundai Broker"). Hyundai Corretora was incorporated on July 22, 2019. On September 10, 2019, Hyundai Corretora obtained the company's registration as an insurance broker with SUSEP. Hyundai Corretora started operations in November 2019.

 

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

 

On May 3, 2018, Santander Finance Arrendamento Mercantil S.A., a subsidiary indirectly controlled by us, was converted into a securities distributor and had its registered name changed to SI Distribuidora de Títulos e Valores Mobiliários S.A. The conversion process was approved by BACEN on November 21, 2018. On December 17, 2018, SI Distribuidora de Títulos e Valores Mobiliários S.A. had its name changed to PI Distribuidora de Títulos e Valores Mobiliários S.A., and the process of changing the company name approved by BACEN on January 22, 2019. The company began operations on March 14, 2019.

 

·  Acquisition of direct equity interest in Toque Fale Serviços de Telemarketing LTDA.

 

On March 24, 2020, the acquisition by the Bank of the representative shares of the entire share capital of Toque Fale Serviços de Telemarketing LTDA ("Toque Fale") was carried out for the amount of R$ 1,099,854.72, corresponding to the equity value of the shares as of February 29, 2020, previously owned by Getnet Acquiring and Services for Means of Payment S.A. and Auttar HUT Data Processing LTDA. As a result, the Bank became a direct shareholder of Toque Fale and holds 100% of its capital.

 

·  Reduction of the Share Capital of Norchem Holding e Negócios S.A. and Norchem Participações e Consultoria S.A.

 

On October 8, 2020, the shareholders of Norchem Holding e Negócios S.A. and Norchem Participações e Consultoria S.A. (together, "Norchem Companies") approved the capital reduction of the two Norchem Companies, in the amounts of R$ 14,770,468.94 and R$ 19,950,000.00, respectively, so that, after the expiry of the creditors' opposition deadline, on December 8, 2020, Banco Santander withdrew from the shareholders' board of Norchem Companies.

 

·  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. 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.

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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.

 

·  Purchase of Equity Interest in Paytec Tecnologia em Pagamentos Ltda. and Paytec Logística e Armazém EIRELI

 

On December 8, 2020, Banco Santander concluded, together with the partners and holders of Paytec Tecnologia em Pagamentos Ltda. and Paytec Logística e Armazém Eireli (together "Paytec"), a contract for the purchase and sale of shares, transfer of ownership and other agreements, whereby, once the operation has been carried out, it will hold 100% of Paytec's share capital. Paytec acts as a logistics operator with national coverage and focused on the payments market. By complying with the conditions set out in the contract, in particular the applicable regulatory approvals, the parties formalized the definitive instruments on March 12, 2021. With the execution of the operation, Banco Santander now held 100% of Paytec's share capital.

 

·  Sale of all stake held in CIBRASEC

 

On July 24, 2019, Banco Santander divested its entire stake in the share capital of CIBRASEC – Companhia Brasileira de Securitização, corresponding to 4,000 common shares and 50 preferred shares, to ISEC Securitizadora S.A. for the amount of R$ 9,845,611.54. Due to the closing of the transaction, Banco Santander ceased to be a shareholder of CIBRASEC.

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·  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 insurer called Santander Auto S.A., or "Santander Auto". Sancap Investimentos e Participações S.A., a company controlled by Santander Brasil, holds 50% of the share capital issued by Santander Auto, with the remaining 50% held by HDI Seguros. Santander Auto is focused on offering car insurance policies through a fully digital platform. The transaction was terminated on October 9, 2018, when the documentation for the formation of Santander Auto S.A. on January 11, 2019 was executed, Santander Auto received regulatory authorization to start operations by SUSEP and effectively began operations in October 2019.

·  Dissolution and liquidation of Santander Brasil, Establecimiento Financiero de Credito, S.A.

 

On November 12, 2020, we approved the dissolution and liquidation of Santander Brasil, Establecimiento Financiero de Credito, S.A., a Spanish entity wholly owned by us, which we mainly use for the acquisition of funds in the banking and international capital market to provide credit lines to us that are extended to our clients for working capital and trade-related financing. The capital invested abroad was repatriated to Brazil in November 2020. The deed of dissolution and liquidation of the entity was registered in the Mercantile Registry of Madrid and effective on December 15, 2020. These activities are now carried out by our Luxembourg subsidiary.

 

·  Acquisition of the companies Isban Brasil S.A. and Produban Serviços de Informática S.A.

 

On February 19 and 28, 2018, respectively, we bought all shares issued by Isban Brasil of Ingenería de Software Bancário, S.L., and all shares issued by Produban Serviços de Informática S.A. of Produban Servicios Informáticas Generales, S.L., for R$61,078,000 and R$42,731,000, respectively. Although all parts of these transactions are ultimately controlled by Santander Spain, the transactions were carried out on an equitable basis of values. On February 28, 2018, Isban Brasil was incorporated into Produban Serviços de Informática S.A. and, on the same date, Produban Serviços de Informática S.A. we changed its company reason for Santander Brasil Tecnologia S.A.

 

c.  Unusual events or operations

 

Nothing to report.

 

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10.4. Officers’ comments on:

 

a.  Significant changes in accounting practices

 

IFRS 16 - as of January 1, 2019, the Bank adopted IFRS 16, which replaces IAS 17.

 

I.   Transition

 

As permitted by the specific transition provisions, Banco Santander has chosen to apply the rules in a modified retrospective manner, the effects of which were applied on January 1, 2019.

 

The changes in accounting practices resulting from the adoption of IFRS 16 have been applied to assets under right of use as part of tangible assets and lease liabilities as other liabilities in the balance sheet.

 

II.   Lease Identification

 

In adopting IFRS 16, the Bank recognized lease liabilities involving leases that had already been classified as “commercial leases” in accordance with the principles of IAS 17 - Leases.

 

For the initial application of the standard, the Bank used the following practical procedures allowed:

 

• The exclusion of initial direct costs for measuring the right-of-use asset on the initial application date;

 

• It was decided not to separate the service provision component embedded in leasing contracts; and

 

• The Bank also decided not to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4 - Determination of whether a Contract contains a Lease.

 

Additionally, the following recognition exemptions are also being used:

 

• Accounting for operating leases with a remaining term of less than 12 months on January 1, 2019 as short-term leases;

 

• Accounting for operating leases whose underlying asset is of low value;

 

• Until January 1, 2019, leases of fixed assets, in which the Bank, as a lessee, held substantially all the risks and benefits of ownership were classified as finance leases. The balances presented are immaterial.

 

The Bank leases various properties and equipment. Predominantly, the assets subject to the lease agreements are real estate deals referring to the agencies.

 

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Banco Santander does not have any rights of use assets that fall within the definition of investment properties.

 

III.   Lease term

 

The lease agreements are formalized, analyzed and renegotiated individually and contain a wide range of different terms and conditions. The Bank assesses the term of the contract, as well as the intention to remain in the properties. Thus, the term estimates may vary according to the contractual conditions, considering extension options, and also according to legal provisions.

 

The Bank assumes that fines for contract termination collected before the due date do not make up a significant portion.

 

The lease agreements do not contain restrictive clauses, but the leased assets cannot be used as collateral for loans.

 

IV.   Initial Measurement

 

In their initial registration, leases are recognized as a right-of-use asset and a corresponding liability on the date the leased asset becomes available for use by the Group.

 

The right to use the registered sis measured at its cost in return for the rental liabilities that represent the present value of the lease payments that are not made to date. Lease payments are discounted using the incremental interest rate on the tenant's loan. There is no onerous contract that required an adjustment to the usage rights to be registered as assets on the date of initial adoption.

 

Direct usage is measured at amortized cost according to the following:

 

·The value of the initial measurement of leasing liabilities;

 

·Any lease payment made before or on the reduced start date of any incentive received;

 

·Any directly assigned initial cost; And

 

·Restoration costs, if IAS 37 requirements are met for the registration of Provisions, Contingent Liabilities and Contingent Assets.

 

Grupo Santander uses as an incremental rate the interest rate that it would have to pay when borrowing the necessary resource to obtain the asset with a value similar to the asset under the lease, for term, guarantee and similar economic scenarios, represented in Santander Brasil, by the curve of funding cost (funding) of a free asset, applied individually to each contract according to the projected estimates for the lease term.

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Lease liabilities include the net present value of the following lease payments:

 

• Reduced fixed payments for any incentive;

 

• Variable payments that are based on a rate or index;

 

• Amounts expected to be paid by the lessee based on the residual value of guarantees;

 

• The exercise price of a call option, if the lessee is reasonably certain about the exercise of the option; and

 

• Penalty payments for terminating the lease if the term of the transaction reflects the exercise of the option by the lessee.

 

Below is the inflation projection (IGP-M) on the base date December 31, 2020:

IGP-M Projection (annualized)  
Up to 3 months 26.1%
From 3 to 12 months 5.3%
From 1 year to 3 years 4%
From 3 years to 5 years 4%
More than 5 years 4%

 

V.   Subsequent measurement

 

After the initial measurement, the values of the assets recorded as rights of use are being updated using the cost method, so any accumulated depreciation is deducted monthly, in accordance with the criteria of IAS 16/ CPC 27 - Property, Plant and Equipment in the depreciation of the right of use asset. use and corrected any remeasurement of the lease liability, when applicable.

 

The lease liability initially recorded is updated by monthly increasing the liability amount of the interest installment of each lease and reducing the amount of monthly lease payments and adjusted for any lease remeasurements, when applicable.

 

The lease liability is remeasured, in the event of changes in the lease term or the contract value, the amount resulting from the new determination of the lease liability is recorded against the corresponding asset in use right.

 

The rights of use are subject of impairment test.

 

The effects of adopting IFRS 16 have an impact exclusively on the operating segment - Banco Comercial.

 

• IFRIC 23 – Published in June 2017 by the IASB, IFRIC 23 - Uncertainty over Income Tax Treatments on Profit has mandatory application as of January 1, 2019 and aims to clarify procedures for the application of recognition and measurement requirements established in the IAS 12 of Taxes on Profit when there is uncertainty about the treatments to be adopted for the Taxes on Profit.

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The Bank carried out analyzes on the procedures already adopted for accounting and presentation of Income Taxes in relation to the content of IFRIC 23 and it was possible to conclude that there are no impacts on related measurements nor disclosures.

 

Definitions and classification of financial instruments

 

i. Definitions

 

“Financial instrument” is any contract that gives rise to a financial asset of one entity and, simultaneously, to a financial liability or financial interest of another entity.

“Equity instrument” is any agreement that evidences a residual interest in the asset of the issuing entity after deducting all of its liabilities.

 

“Financial derivative” is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is zero or very small compared with other financial instruments with a similar response to changes in market factors, and which is settled at a future date.

 

“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect to make part of the cash flow of the hybrid contract vary similar to a stand-alone derivative.

 

The following transactions are not treated as financial instruments for accounting purposes:

·  Investments in subsidiaries, jointly controlled entities and associates (notes 3&11 of our Financial Statements).

·  Rights and obligations due to employee benefit plans (note 21 c of our Financial Statements).

 

ii. Classification of financial assets for measurement purposes

 

Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash, cash balances at Central Banks and other deposits on demand, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately.

 

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Upon initial recognition of an equity instrument not held for trading, the Bank may irrevocably choose to present subsequent changes in fair value through Other Comprehensive Income. This option is made considering each investment individually and was not used by the Bank. In addition, upon initial recognition, the Bank may irrevocably designate at fair value through profit or loss a financial asset that would otherwise meet the measurement requirements at amortized cost or at fair value through Other Comprehensive Income, if such designation eliminate or substantially reduce an accounting mismatch that could exist. This option was not used by the Bank.

 

Financial assets are included for measurement purposes in one of the following categories:

 

Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading: this category includes the financial assets acquired to generate short-term profit resulting from the fluctuation of its prices and financial derivatives not classified as hedging instruments, whose primary business model of the Bank is to trade them frequently.

 

Financial Assets Measured At Fair Value Through Profit Or Loss: this category includes the financial assets that did not meet the pre-established criteria when evaluating the SPPI Test (Solely Payment of Principal and Interest).

 

Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss: this category includes the financial assets that at the time of initial designation was made the fair value option.

 

Financial Assets Measured At Fair Value Through Profit Or Loss: are stated at fair value. This category does not include debt instruments classified as “Held-to-maturity investments” or “Financial assets at fair value through profit or loss”, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as “Financial assets held for trading” or as “Other financial assets at fair value through profit or loss”.

 

The results rising from changes in fair value are recognized at the Financial Assets Measured At Fair Value Through Other Comprehensive Income line in the Shareholders´ equity except for cumulative impairment losses which are recognized in statement of profit or loss. When the investment is sold or has evidences of decreases on the fair value due to impairment, the previously recognized result at the same Shareholders´ Equity line, mentioned above is reclassified to the statement of profit or loss.

 

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iii. Financial assets measured at amortized cost

 

this category includes financing granted to third parties, based on their nature, irrespective of the type of borrower and the form of financing, including finance lease transactions in which the consolidated entities act as lessors. The entities included in the consolidation have, in general, the intention of maintaining the loans and credits they grant until their final maturity, which, therefore, are presented in the consolidated balance sheet at amortized cost (which includes the necessary adjustments to reflect the estimated impairment losses).

 

• A financial asset is measured at amortized cost if it meets the following conditions and is not designated at fair value through profit or loss:

 

• The asset is maintained within a business model whose objective is to maintain assets in order to receive contractual cash flows;

 

• The contractual terms of the financial asset generate, on specific dates, cash flows that refer exclusively to payments of the principal and interest on the principal amount outstanding;

 

• A debt instrument is measured at fair value through Other Comprehensive Income if it meets the following conditions and is not designated at fair value through profit or loss;

 

• The asset is maintained within a business model whose objective is achieved by receiving contractual cash flows and by selling financial assets; and

 

• The contractual terms of the financial asset generate, on specific dates, cash flows that refer exclusively to payments of the principal and interest on the principal amount outstanding.

 

iv. Business model assessment

 

The Bank assesses the objective of a business model in which an asset is maintained at the portfolio level, as it better reflects how the business is managed and what information is provided to management. The information considered comprises:

 

- Policies and objectives defined for the portfolio and the application of these policies in practice. Including, if the Administration's strategy is focused on earning contractual interest income, maintaining a specific interest rate profile, aligning the duration of the assets;

 

- How the portfolio's performance is assessed and reported to the Bank's management;

 

- The risks that affect the performance of the business model (and the financial assets held within that business model) and how these risks are managed;

 

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- How the business managers are remunerated - for example, if the remuneration is based on the fair value of the managed assets or the contractual cash flows received;

 

- The frequency, volume and timing of sales in previous periods, the reasons for such sales and your expectations about future sales. However, information on sales activity is not considered in isolation, but as part of an overall assessment of the objective defined by the Bank to manage financial assets.

 

Financial assets held for trading or managed, whose performance is assessed based on fair value, are measured at fair value through profit or loss, as (i) they are not held to receive contractual cash flows (ii) nor are they held to receive flows contractual cash flow and sell financial assets.

 

v. Valuation to determine whether contractual cash flows refer exclusively to principal and interest payments

 

For the purposes of this assessment, “principal” is defined as the fair value of the financial asset upon initial recognition. “Interest” is defined as the consideration for the value of the currency over time and for the credit risk associated with the value of the principal outstanding during a specific period and for other basic risks and costs of loans (for example, liquidity risk and administrative costs), as well as the profit margin.

 

When assessing whether contractual cash flows refer exclusively to payments of principal and interest, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the term or value of the contractual cash flows in a way that would not meet this condition. When carrying out the assessment, the Bank considers:

 

- contingent events that would change the amount and timing of cash flows;

 

- leverage;

 

- advance payment terms and extension;

 

- terms that limit the Bank's right to cash flows from assets; and

 

- resources that modify the consideration of the currency value over time, for example, periodic adjustment of interest rates.

 

vi. Classification of financial liabilities for measurement purposes

Financial liabilities are classified for measurement purposes into one of the following categories:

 

• Financial Assets At Fair Value Through Profit Or Loss Held for Trading: this category includes financial liabilities incurred for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not designated as hedging instruments, and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements ("reverse repos") or borrowed (short positions).

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• Financial Assets At Fair Value Through Profit Or Loss: financial liabilities are included in this category when they provide more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group's key management personnel.

 

• Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the ordinary borrowing activities carried on by financial institutions.

vii. Classification of financial liabilities for presentation purposes

 

Financial liabilities are classified by nature into the following items in the consolidated financial statements:

 

• Deposits from Bacen: deposits of any nature received from Bacen.

 

• Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.

 

• Client deposits: includes deposits of any nature such as demand deposits, saving deposits and time deposits including money market operation received from client

• Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than subordinated liabilities.

 

• Trading derivatives: includes the fair value, with a negative balance for the Bank, of derivatives which do not form part of hedge accounting.

 

• Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets purchased under reverse repurchase agreements or borrowed.

• Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Bank which, although equity for legal purposes, do not meet the requirements for classification as equity.

 

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• Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as non-performing.

• Hedging derivatives: includes the fair value of the Bank's liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

 

• Debt Instruments Eligible to Compose Capital: financial instruments issued by other entities, such as shares, with the nature of equity instruments for the issuer, except investments in subsidiaries, jointly controlled entities or associates.

 

viii. Derecognition of Financial Liabilities

 

The Bank derecognizes a financial liability when its contractual obligations are terminated, canceled or when they expire.

 

ix. Compensation

 

Financial asset and liability balances are offset (i.e. reported in the consolidated balance sheets at their net amount) only if the Bank and their subsidiaries currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

 

Offsetting Agreements and Obligations Settlement (CMN Resolution 3.263/2005) - The Bank has an agreement for the clearing and settlement of obligations under the National Financial System (SFN), signed with individuals and legal entities, whether or not members of the SFN, resulting in higher financial settlement guarantee, with the parties that have this modality of agreement. These agreements establish that payment obligations to Banco Santander arising from credit and derivative operations, in the event of default by the counterparty, will be offset against Banco Santander's payment obligations with the counterparty.

 

i.Measurement of financial assets

 

Financial assets are measured at fair value, without deduction of estimated costs of transaction that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have as equity instruments subject and are settled by delivery of those instruments.

The fair value of a financial instrument on a given date is taken to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price).

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If there is no market price for a given financial instrument, its fair value is estimated on the basis of valuation techniques commonly used by market participants, according to the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

 

All derivatives are recognized in the balance sheets at fair value from the trade date. If the fair value is positive, they are recognized as assets and if the fair value is negative, they are recognized as liabilities. The changes in the fair value of derivatives from the trade date are recognized in “Gains (losses) on financial assets and liabilities” in the consolidated income statement. Specifically, the fair value of standard financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure over the counter “OTC” derivatives.

 

The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by market participants: “net present value” (NPV), option pricing models and other methods.

“Financial Assets Measured At Amortized Cost” and “Held-to-maturity investments” are measured at amortized cost using the effective interest method. “Amortized cost” is the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the income statement) between the difference of the initial cost and the maturity amount. In the case of financial assets, amortized cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.

The “effective interest rate” is the discount rate that exactly matches the initial amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date.

Equity instruments whose fair value cannot be determined in a sufficiently objective manner are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.

 

Equity instruments whose fair value cannot be calculated in a sufficiently objective manner are measured at acquisition cost, adjusted, as the case may be, to the related impairment losses.

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The amounts at which the financial assets are recognized represent, in all material respects, the Bank’s maximum exposure to credit risk at each reporting date. Also, the Bank has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under leasing and renting agreements, assets acquired under repurchase agreements and securities loans and derivatives.

ii. Provisions for losses on credits for impairment

 

The carrying amount of non-recoverable financial assets is adjusted through the recording of a provision for loss due to “Losses on financial assets (net) - Financial assets measured at amortized cost” in the consolidated income statement. The reversal of previously recorded losses is recognized in the consolidated income statement in the period in which the impairment decreases and can be objectively related to a recovery event.

 

To individually measure the impairment loss on loans assessed for impairment, the Bank considers the conditions of the counterparty, such as its economic and financial situation, level of indebtedness, ability to generate income, cash flow, management, corporate governance and quality of internal controls, payment history, industry experience, contingencies and credit limits, as well as characteristics of assets, such as their nature and purpose, type, sufficiency and guarantees of liquidity level and total credit value , and also based on the historical experience of impairment and other circumstances known at the time of the valuation.

 

To measure the impairment loss on loans assessed collectively for impairment, the Bank separates financial assets into groups taking into account the characteristics and similarities of credit risk, that is, according to the segment, type of assets, guarantees and other factors associated with the historical experience of impairment and other circumstances known at the time of the valuation.

 

iii. Impairment

 

The Bank recognizes adjustments for expected credit losses with respect to the following financial instruments that are not measured at fair value through profit or loss:

 

- financial assets that are debt instruments;

- amounts receivable from leasing;

- financial guarantee contracts issued; and

- loan commitments issued.

 

No impairment loss is recognized in equity instruments.

 

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The Bank measures the adjustments for losses at an amount equal to the expected credit losses during the expected life, except for the instruments below, for which they are recorded as expected credit losses in 12 months:

 

- debt instruments that present a low credit risk at the closing date; and

- other financial instruments (except lease receivables) in which the credit risk has not increased substantially since its initial recognition.

 

Adjustments for losses on amounts receivable from leasing are always measured at an amount equal to the expected credit losses during their useful lives.

 

iv. Measurement of expected credit losses

 

The expected credit losses are an estimate weighted by the probability of credit losses. They are measured as follows:

 

- financial assets not subject to impairment at the closing date: as the present value of all cash shortfalls, that is, the difference between the cash flows due to the entity under the contract and the cash flows that the Bank expects to receive;

- financial assets subject to impairment at the closing date: as the difference between the gross book value and the present value of estimated future cash flows;

- loan commitments: as the present value of the difference between the contractual cash flows due to the Bank if the commitment is used in full and the cash flows that the Bank expects to receive; and

- financial guarantee contracts: payments expected to reimburse the holder, less any amounts that the Bank expects to recover.

 

v. Modified assets

 

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced by a new asset due to the debtor's financial difficulties, it is necessary to assess whether the financial asset should be written off and expected credit losses are measured as follows:

- If the expected restructuring does not result in a decrease in the existing asset, the expected cash flows from and the modified financial asset are included in the calculation of the cash shortfalls of the existing asset.

- If the expected restructuring results in a write-off of the existing asset, the expected fair value of the new asset is treated as the final cash flow of the existing financial asset at the time of its write-off.

This amount is included in the calculation of cash shortfalls arising from the existing financial asset discounted from the estimated write-off date until the closing date, using the original effective interest rate of the existing financial asset.

 

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vi. Determination of significant increases in credit risk

 

On each balance sheet calculation date, the Bank assesses whether financial assets recorded at amortized cost and debt financial instruments recorded at fair value through Other Comprehensive Income are subject to impairment, as well as other financial instruments subject to that assessment.

 

A financial asset is “subject to impairment” when one or more events that have a negative impact on the estimated future cash flows of the financial asset have occurred.

 

Evidence that a financial asset is subject to impairment includes the following observable data:

- significant financial difficulty for the debtor or issuer;

- delays in contractual obligations;

- breach of contract, such as default or delay;

- the restructuring of a loan or advance by the Bank under conditions that the Bank would not consider interesting to carry out;

- the likelihood that the debtor will enter bankruptcy or other financial reorganization; or

- the disappearance of an active market for a security due to financial difficulties.

 

A financial instrument that has been renegotiated due to deterioration in the borrower's condition is generally considered to be subject to impairment, unless there is evidence that the risk of not receiving contractual cash flows has been significantly reduced and there is no other impairment indicator.

 

vii. Presentation of the provision for impairment losses in the balance sheet

 

Provisions for impairment losses are presented in the balance sheet as follows:

 

- financial assets measured at amortized cost: as a deduction from the gross book value of the assets;

- loan commitments and financial guarantee contracts: as a provision; and

- debt instruments measured at fair value through Other Comprehensive Income: no provision for losses is recognized in the balance sheet, as the book value of these assets corresponds to the fair value.

 

viii. Individual or collective assessment

 

An individual measurement of impairment was based on management's best estimate of the present value of cash flows expected to be received. In estimating these cash flows, management exercised judgment as to the financial situation of a debtor and the net realizable value of any underlying guarantee. Each asset reduced to recoverable value was evaluated in relation to its merits, while the test strategy and the estimated cash flows considered recoverable, were approved by the Bank's credit risk officers.

 

When assessing the need for a collective provision for losses, management considered factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the necessary provision, premises were established to define how the inherent losses were modeled and to determine the necessary data parameters, based on historical experience and current economic conditions.

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ix. Measurement of impairment

 

Losses on impairment of assets measured at amortized cost were calculated as the difference between the carrying amount and the present value of estimated future cash flows, discounted at the asset's original effective interest rate. Impairment losses on assets measured at fair value through Other Comprehensive Income were calculated as the difference between the book value and the fair value.

 

x. Reversal of impairment

 

For assets measured at amortized cost: If an event that occurred after impairment caused the impairment loss to decrease, the impairment loss was reversed through profit or loss.

For debt securities measured at fair value through Other Comprehensive Income: If, in a subsequent period, the fair value of a debt security reduced to recoverable value has increased and this increase could be objectively linked to an event that occurred after recognition from impairment loss, impairment loss was reversed through profit or loss; otherwise, any increase in fair value was recognized through Other Comprehensive Income.

 

Any subsequent recovery in the fair value of an equity instrument measured at fair value through Other Comprehensive Income and reduced to recoverable value was recognized at any time in Other Comprehensive Income.

 

Below is the reconciliation of shareholders' equity resulting from the initial adoption of IFRS 9:

 

Reconciliation of Shareholders' Equity                    
Shareholders' equity before IFRS 9 adjustments - 12/31/2017           87,087,601
Allowance for loan losses                   (2,149,051)
Provisions for contingent commitments                   (674,513)
Remeasurement of assets arising from the new categories               17,806
Others                               237,867
Income taxes and deferred social contribution                       1,026,066
Shareholders' equity after IFRS 9 adjustments - 01/01/2018           85,545,776
                                       

 

Information, assumptions and techniques used to estimate the impairment

 

i.Classification of financial instruments by stages

 

The portfolio of financial instruments subject to impairment is divided into three levels, based on the stage of each instrument related to its level of credit risk:

 

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- Stage 1: It is understood that a financial instrument at this stage does not have a significant increase in risk since its initial recognition. The provision on this asset represents the expected loss resulting from possible default over the next 12 months;

- Stage 2: If a significant increase in risk is identified since initial recognition, without materializing deterioration, the financial instrument will be classified within this stage. In this case, the amount referring to the provision for expected loss due to default reflects the estimated loss of the residual life of the financial instrument. To assess the significant increase in credit risk, quantitative measurement indicators used in normal credit risk management will be used, as well as other qualitative variables, such as the indication of being a non-deteriorating operation if considered as refinanced or included operations in a special agreement; and

 

- Stage 3: A financial instrument is recorded within this stage, when it shows signs of deterioration evident as a result of one or more events that have already occurred and which materialize at a loss. In this case, the amount referring to the provision for losses reflects the expected losses due to credit risk over the expected residual life of the financial instrument.

 

ii.Impairment estimate methodology

 

The measurement of impairment loss is performed using the following factors:

 

- Exposure to Default or EAD: is the value of the transaction exposed to credit risk, including the current balance ratio available that could be provided at the time of default. The models developed incorporate assumptions about changes in the payment schedule for operations.

 

- Probability of Default (PD): is defined as the probability that the counterparty will be able to fulfill its obligations to pay the principal and / or interest. For the purposes of IFRS 9, both will be considered: PD - 12 months (Stage 1), which is the probability that the financial instrument will default in the next 12 months as well as PD - lifetime (Stages 2 and 3), which considers the probability that the counterparty will default between the balance sheet date and the residual maturity date of the operation. The standard requires that future information relevant to the estimation of these parameters must be considered.

 

- Loss on Default (LGD): is the resulting loss in the event of default, that is, the percentage of exposure that cannot be recovered in the event of default. It mainly depends on the guarantees associated with the transaction, which are considered as risk mitigation factors associated with each financial credit asset and the expected future cash flows to be recovered. As established in the regulations, future information must be taken into account for its estimation.

 

- Discount rate: is the rate applied to the estimated future cash flows over the expected life of the asset, to bring them to present value.

 

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In order to estimate the aforementioned parameters, the Bank has applied its experience in the development of internal models for the calculation of parameters for both the regulatory environment and internal management purposes.

 

iii.Defaultdefinition

 

The Bank considers that a financial asset is in default when:

 

- it is likely that the debtor will not fully pay its credit obligations to the Bank; or

- the debtor presents significant credit obligations to the Bank overdue for more than 90 days, as a general rule.

Overdrafts are considered overdue if the customer breaches a recommended limit or has been granted a limit lower than the current open amount.

When assessing whether a debtor is in default, the Bank considers indicators:

- qualitative - for example, violations of covenants;

- quantitative - for example, overdue status and non-payment of another obligation of the same issuer with the Bank; and

- based on data collected internally and obtained from external sources.

 

b.  Auditor’s qualified opinion and highlights

 

In the years ended December 31, 2020, 2019 and 2018 the auditor in charge issued no qualified opinion and highlights.

 

10.5. Officers’ indication of key points and comments on.

 

I. Estimates used

 

The consolidated results and the calculation of consolidated equity are impacted by the accounting policies, assumptions, estimates and measurement methods used by the Bank's directors in the preparation of interim consolidated financial statements. The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities of future periods. All estimates and assumptions required, in accordance with IFRSs, are the management's best estimate in accordance with the applicable standard.

 

In the consolidated financial statements, estimates are made by management of the Bank and consolidated entities in order to quantify certain assets, liabilities, revenues and expenses and disclosures of explanatory notes.

 

(i) Critical estimates

 

The main estimates were discussed in detail with a view to the preparation of the consolidated financial statements as of December 31, 2020.

 

In the year ended December 31, 2020, there were no significant changes in the estimates made at the end of 2019, in addition to those indicated in these financial statements.

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Critical estimates and assumptions that have a more significant impact on the accounting balances of certain assets, liabilities, income and expenses and on the disclosures of explanatory notes are described below:

 

i. Income taxes (IRPJ), Social Contribution (CSLL), Social Integration Program (PIS) and Tax for Social Security Financing (COFINS)

 

Income tax expense is obtained by adding the Income Tax, Social Contribution, PIS and COFINS. Current Income Tax and Social Contribution result from the application of the respective rates on taxable income, and the PIS and COFINS rates applied on the respective calculation basis provided for in the specific legislation, added also with changes in deferred tax assets and liabilities recognized in the consolidated income statement. The CSLL rate, for banks of any kind, was increased from 15% to 20% effective as of March 1, 2020, pursuant to Article 32 of Constitutional Amendment 103, published on November 13, 2019.

 

Income tax is calculated at the rate of 15% plus a surcharge of 10% levied on the profit, after adjustments determined by tax legislation. The social contribution (CSLL) is calculated at the rate of 20% for financial institutions (15% up to August 2015) and 9% for other companies, levied on the profit, after considering the adjustments determined by tax legislation.

 

Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carry forwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.

 

Deferred tax assets are only recognized as temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit or accounting profit. Other deferred tax assets (tax loss and tax credit carry forwards) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilized.

 

Due to the change in social contribution tax rate, the group companies made the remeasurement of tax credit assets and deferred liabilities at the rates applicable to the period in which estimates the realization of assets and settlement of liabilities.

 

For additional details see Note 2.aa. of our Financial Statements.

 

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ii. Valuation of the fair value of certain financial instruments

 

Financial instruments are initially recognized at fair value and those that are not measured at fair value through profit or loss are adjusted for transaction costs.

 

Financial assets and liabilities are subsequently measured at the end of each period using valuation techniques. This calculation is based on assumptions, which take into account the management's judgment based on information and market conditions existing at the balance sheet date.

 

Banco Santander classifies the measurements at fair value using the hierarchy of fair value that reflects the model used in the measurement process, segregating the financial instruments between Levels I, II or III.

 

Additional details are in notes 2.e and 46.c8 of the consolidated financial statements of December 31, 2020, which present the sensitivity analysis for Financial Instruments.

 

iii.IFRS 9 - Financial Instruments

 

Issued in its final format in July 2014, the International Accounting Standards Board (IASB) approved IFRS 9, which replaced IAS 39 Financial Instruments, in accordance with the guidelines defined by the G20 by finance ministers of the world's 20 largest economies) in April 2009, establishing requirements for the recognition and measurement of financial instruments. This standard was adopted from January 1, 2018.

 

iii.1.  Provisions for losses on receivables

 

The book value of non-recoverable financial assets is adjusted by recording a provision for loss of debt of "Losses on financial assets (net) – Financial Assets measured at amortized cost" in the consolidated income statement. The reversal of previously recorded losses is recognized in the consolidated income statement in the period in which the reduction to recoverable value decreases and can be related objectively to a recovery event.

 

To individually measure the loss by reduction to the recoverable value of loans evaluated as to the reduction to recoverable value, we consider the conditions of the payoff, such as its economic and financial situation, level of indebtedness, income generation capacity, cash flow, administration, corporate governance and quality of internal controls, payment history, industry experience, contingencies and credit limits, as well as asset characteristics, such as their nature and purpose, type, sufficiency and guarantees of liquidity level and total credit value, and also based on historical experience of reduction to recoverable value and other circumstances known at the time of valuation.

 

To measure the loss by reduction to the recoverable value of collectively valuated loans for the reduction to recoverable value, we separate financial assets into groups taking into account the characteristics and similarities of credit risk, i.e., according to the segment, type of assets, guarantees and other factors associated with the historical experience of recoverable value reduction and other circumstances known at the time of the valuation.

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iii.2.  Business model assessment

 

The Bank assesses the objective of a business model in which an asset is maintained at the portfolio level, as it better reflects how the business is managed and what information is provided to management. The information considered comprises:

- Policies and objectives defined for the portfolio and the application of these policies in practice. Including, if the Administration's strategy is focused on earning contractual interest income, maintaining a specific interest rate profile, aligning the duration of the assets;

 

- How the portfolio's performance is assessed and reported to the Bank's management;

 

- The risks that affect the performance of the business model (and the financial assets held within that business model) and how these risks are managed;

 

- How the business managers are remunerated - for example, if the remuneration is based on the fair value of the managed assets or the contractual cash flows received;

 

- The frequency, volume and timing of sales in previous periods, the reasons for such sales and your expectations about future sales. However, information on sales activity is not considered in isolation, but as part of an overall assessment of the objective defined by the Bank to manage financial assets.

 

Financial assets held for trading or managed, whose performance is assessed based on fair value, are measured at fair value through profit or loss, as (i) they are not held to receive contractual cash flows (ii) nor are they held to receive flows contractual cash flow and sell financial assets.

 

iii.3.  Valuation to determine whether contractual cash flows refer exclusively to principal and interest payments

 

For the purposes of this assessment, “principal” is defined as the fair value of the financial asset upon initial recognition. “Interest” is defined as the consideration for the value of the currency over time and for the credit risk associated with the value of the principal outstanding during a specific period and for other basic risks and costs of loans (for example, liquidity risk and administrative costs), as well as the profit margin.

 

When assessing whether contractual cash flows refer exclusively to payments of principal and interest, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the term or value of the contractual cash flows in a way that would not meet this condition. When carrying out the assessment, the Bank considers:

 

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- contingent events that would change the amount and timing of cash flows;

- leverage;

- advance payment terms and extension;

- terms that limit the Bank's right to cash flows from assets; and

- resources that modify the consideration of the currency value over time, for example, periodic adjustment of interest rates.

 

iii.4.  Financial assets write-off

 

We write-off a financial asset when the contractual rights to the asset's cash flows expire or when we transfer the rights to receive contractual cash flows in a transaction in which essentially all risks and benefits of ownership of the financial asset are transferred or in which we do not substantially transfer or retain all the risks and benefits of ownership of the financial asset and do not control the financial asset.

 

At the loss of a financial asset, the difference between the book value of the asset (or book value allocated to the portion of the asset summed) and the sum (i) of the payment received (including any new asset obtained, deducted from any new assumed liabilities) and (ii) any accumulated gains or losses recognized in "Other Comprehensive Results" is recorded in the income statement.

 

From the opening date of IFRS, mentioned above, any accumulated and recognized gains/losses in "Other Comprehensive Results" in relation to equity instruments designated at fair value through Other Comprehensive Results are not recorded in profit or loss by the loss of these securities.

 

We carry out operations in which we transfer the assets recognized in our balance sheet, but we maintain all or substantially all the risks and benefits of the transferred assets or part thereof. In these cases, transferred assets are not downloaded. Examples of these transactions include restraining of portfolios of loans with co-obligation. In operations in which we do not substantially retain or transfer all risks and property benefits of a financial asset and retain control of the asset, we continue to recognize the asset to the extent of our ongoing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.

 

iii.5.  Financial Liabilities write-off

 

We write-off a financial liability when your contractual obligations are extinguished, cancelled or when they expire.

 

iii.6.  Compensation

 

Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, we have a legally enforceable right to offset the amounts and the intention to settle them on a net basis, or realize the asset and settle the liability simultaneously.

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Revenues and expenses are presented on a net basis only when allowed by IFRSs or for gains or losses resulting from a group of similar transactions, as in our trading activity.

iii.7.  Impairment

 

The Bank recognizes adjustments for expected credit losses with respect to the following financial instruments that are not measured at fair value through profit or loss:

 

- financial assets that are debt instruments;

- amounts receivable from leasing;

- financial guarantee contracts issued; and

- loan commitments issued.

No impairment loss is recognized in equity instruments.

 

The Bank measures the adjustments for losses at an amount equal to the expected credit losses during the expected life, except for the instruments below, for which they are recorded as expected credit losses in 12 months:

 

- debt instruments that present a low credit risk at the closing date; and

- other financial instruments (except lease receivables) in which the credit risk has not increased substantially since its initial recognition.

 

Adjustments for losses on amounts receivable from leasing are always measured at an amount equal to the expected credit losses during their useful lives.

 

iii.8.  Measurement of expected credit losses

 

The expected credit losses are an estimate weighted by the probability of credit losses. They are measured as follows:

 

- financial assets not subject to impairment at the closing date: as the present value of all cash shortfalls, that is, the difference between the cash flows due to the entity under the contract and the cash flows that the Bank expects to receive;

- financial assets subject to impairment at the closing date: as the difference between the gross book value and the present value of estimated future cash flows;

- loan commitments: as the present value of the difference between the contractual cash flows due to the Bank if the commitment is used in full and the cash flows that the Bank expects to receive; and

- financial guarantee contracts: payments expected to reimburse the holder, less any amounts that the Bank expects to recover.

 

iii.9.  Modified assets

 

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced by a new asset due to the debtor's financial difficulties, it is necessary to assess whether the financial asset should be written off and expected credit losses are measured as follows:

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- If the expected restructuring does not result in a decrease in the existing asset, the expected cash flows from and the modified financial asset are included in the calculation of the cash shortfalls of the existing asset.

- If the expected restructuring results in a write-off of the existing asset, the expected fair value of the new asset is treated as the final cash flow of the existing financial asset at the time of its write-off.

This amount is included in the calculation of cash shortfalls arising from the existing financial asset discounted from the estimated write-off date until the closing date, using the original effective interest rate of the existing financial asset.

 

iii.10.  Determining significant increases in credit risk

 

On each balance sheet calculation date, the Bank assesses whether financial assets recorded at amortized cost and debt financial instruments recorded at fair value through Other Comprehensive Income are subject to impairment, as well as other financial instruments subject to that assessment.

 

A financial asset is “subject to impairment” when one or more events that have a negative impact on the estimated future cash flows of the financial asset have occurred.

 

Evidence that a financial asset is subject to impairment includes the following observable data:

 

- significant financial difficulty for the debtor or issuer;

- delays in contractual obligations;

- breach of contract, such as default or delay;

- the restructuring of a loan or advance by the Bank under conditions that the Bank would not consider interesting to carry out;

- the likelihood that the debtor will enter bankruptcy or other financial reorganization; or

- the disappearance of an active market for a security due to financial difficulties.

 

A financial instrument that has been renegotiated due to deterioration in the borrower's condition is generally considered to be subject to impairment, unless there is evidence that the risk of not receiving contractual cash flows has been significantly reduced and there is no other impairment indicator.

 

iii.11.  Presentation of expected credit losses in the financial statements

 

Provisions for impairment losses are presented in the balance sheet as follows:

- financial assets measured at amortized cost: as a deduction from the gross book value of the assets;

- loan commitments and financial guarantee contracts: as a provision; and

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- debt instruments measured at fair value through Other Comprehensive Income: no provision for losses is recognized in the balance sheet, as the book value of these assets corresponds to the fair value.

 

iii.12.  Individual or collective evaluation

 

An individual measurement of impairment was based on management's best estimate of the present value of cash flows expected to be received. In estimating these cash flows, management exercised judgment as to the financial situation of a debtor and the net realizable value of any underlying guarantee. Each asset reduced to recoverable value was evaluated in relation to its merits, while the test strategy and the estimated cash flows considered recoverable, were approved by the Bank's credit risk officers.

 

When assessing the need for a collective provision for losses, management considered factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the necessary provision, premises were established to define how the inherent losses were modeled and to determine the necessary data parameters, based on historical experience and current economic conditions.

 

iii.13.  Measurement of impairment

 

Losses on impairment of assets measured at amortized cost were calculated as the difference between the carrying amount and the present value of estimated future cash flows, discounted at the asset's original effective interest rate. Impairment losses on assets measured at fair value through Other Comprehensive Income were calculated as the difference between the book value and the fair value.

 

iii.14.  Impairment reversal

 

For assets measured at amortized cost: If an event that occurred after impairment caused the impairment loss to decrease, the impairment loss was reversed through profit or loss.

For debt securities measured at fair value through Other Comprehensive Income: If, in a subsequent period, the fair value of a debt security reduced to recoverable value has increased and this increase could be objectively linked to an event that occurred after recognition from impairment loss, impairment loss was reversed through profit or loss; otherwise, any increase in fair value was recognized through Other Comprehensive Income.

 

Any subsequent recovery in the fair value of an equity instrument measured at fair value through Other Comprehensive Income and reduced to recoverable value was recognized at any time in Other Comprehensive Income.

 

Below is the reconciliation of shareholders' equity resulting from the initial adoption of IFRS 9:

 

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Equity conciliation                

                         
Equity before IFRS 9 adjustments - 12/31/2017       87,087,601
Allowance for loan losses               (2,149,051)
Provision for contingent commitments           (674,513)
Re-measurement of assets arising from the new categories         17,806
Others                       237,867
Income taxes and deferred social contribution                   1,026,066
Equity after IFRS 9 adjustments - 1/01/2018       85,545,776

 

iii.15.  Information, assumptions and techniques used in the impairment estimate

 

iii.15.1 Classification of financial instruments by stages

 

The portfolio of financial instruments subject to impairment is divided into three levels, based on the stage of each instrument related to its level of credit risk:

 

- Stage 1: It is understood that a financial instrument at this stage does not have a significant increase in risk since its initial recognition. The provision on this asset represents the expected loss resulting from possible default over the next 12 months;

 

- Stage 2: If a significant increase in risk is identified since initial recognition, without materializing deterioration, the financial instrument will be classified within this stage. In this case, the amount referring to the provision for expected loss due to default reflects the estimated loss of the residual life of the financial instrument. To assess the significant increase in credit risk, quantitative measurement indicators used in normal credit risk management will be used, as well as other qualitative variables, such as the indication of being a non-deteriorating operation if considered as refinanced or included operations in a special agreement; and

 

- Stage 3: A financial instrument is recorded within this stage, when it shows signs of deterioration evident as a result of one or more events that have already occurred and which materialize at a loss. In this case, the amount referring to the provision for losses reflects the expected losses due to credit risk over the expected residual life of the financial instrument.

 

iii.15.2 Impairment estimate methodology

 

The measurement of impairment loss is performed using the following factors:

 

- Exposure to Default or EAD: is the value of the transaction exposed to credit risk, including the current balance ratio available that could be provided at the time of default. The models developed incorporate assumptions about changes in the payment schedule for operations.

 

- Probability of Default (PD): is defined as the probability that the counterparty will be able to fulfill its obligations to pay the principal and / or interest. For the purposes of IFRS 9, both will be considered: PD - 12 months (Stage 1), which is the probability that the financial instrument will default in the next 12 months as well as PD - lifetime (Stages 2 and 3), which considers the probability that the counterparty will default between the balance sheet date and the residual maturity date of the operation. The standard requires that future information relevant to the estimation of these parameters must be considered.

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- Loss on Default (LGD): is the resulting loss in the event of default, that is, the percentage of exposure that cannot be recovered in the event of default. It mainly depends on the guarantees associated with the transaction, which are considered as risk mitigation factors associated with each financial credit asset and the expected future cash flows to be recovered. As established in the regulations, future information must be taken into account for its estimation.

 

- Discount rate: is the rate applied to the estimated future cash flows over the expected life of the asset, to bring them to present value.

 

In order to estimate the aforementioned parameters, the Bank has applied its experience in the development of internal models for the calculation of parameters for both the regulatory environment and internal management purposes.

 

iii.15.3 Default Definition

 

The Bank considers that a financial asset is in default when:

 

- it is likely that the debtor will not fully pay its credit obligations to the Bank; or

- the debtor presents significant credit obligations to the Bank overdue for more than 90 days, as a general rule.

Overdrafts are considered overdue if the customer breaches a recommended limit or has been granted a limit lower than the current open amount.

When assessing whether a debtor is in default, the Bank considers indicators:

- qualitative - for example, violations of covenants;

- quantitative - for example, overdue status and non-payment of another obligation of the same issuer with the Bank; and

- based on data collected internally and obtained from external sources.

 

iv.Provisions for pension funds

 

Defined benefit plans are recorded based on an actuarial study, carried out annually by a specialized company, at the end of each year, effective for the subsequent period and are recognized in the consolidated income statement in the Interest and similar expenses and Provisions lines (net).

 

The present value of the defined benefit obligation is the present value without deducting any plan assets, from the expected future payments necessary to settle the obligation resulting from the employee's service in current and past periods.

 

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Additional details are in note 2.x to the Consolidated Financial Statements of December 31, 2020.

 

v.Contingent provisions, assets and liabilities

 

Provisions for judicial and administrative proceedings are constituted when the risk of loss of the judicial or administrative action is assessed as probable and the amounts involved are measurable with sufficient security, based on the nature, complexity and history of the actions and the opinion of the legal advisors internal and external.

 

Explanatory note 2.r to the Bank's consolidated financial statements for the year ended December 31, 2020, features information on provisions and contingent assets and liabilities. There were no significant changes in provisions and contingent assets and liabilities of the Bank between December 31, 2019 and December 31, 2020, the date of preparation of these consolidated financial statements.

 

vi.Goodwill

 

The goodwill recorded is subject to the impairment test, at least once a year or in a shorter period, in the event of any indication of impairment of the asset.

 

The basis used for the recoverability test is the value in use and, for this purpose, the cash flow is estimated for a period of 5 years. Cash flow was prepared considering several factors, such as: (i) macroeconomic projections of interest rates, inflation, exchange rate and others; (ii) behavior and growth estimates of the national financial system; (iii) increased costs, returns, synergies and investment plan; (iv) customer behavior; and (v) growth rate and adjustments applied to flows in perpetuity. The adoption of these estimates involves the probability of future events occurring and the alteration of any of these factors could have a different result. The cash flow estimate is based on a valuation prepared by an independent expert annually or whenever there is evidence of a reduction in its recoverable amount, which is reviewed and approved by management.

 

Additional details are in note 13 of our Financial Statements.

 

II. Foreign currency transactions

 

The financial statements are presented in Brazilian Reais, the functional and reporting currency of Banco Santander and its subsidiaries.

 

The assets and liabilities and foreign subsidiary are converted to Real as follows:

- Assets and liabilities are translated at the exchange rate at the balance sheets date

- Revenues and expenses are translated at the monthly average exchange rates.

 

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- Gain and losses on translation of net investment are recorded in the statement of comprehensive income, in “exchange rate of investees located abroad”.

 

III. Basis for consolidation

 

i. Subsidiaries

 

“Subsidiaries” are defined as entities over which the Bank has control. Control is based on whether the Bank has: i) power over the investee; ii) exposure, or rights, to variable returns from its involvement with the investee; and iii) the ability to use its power over the investee to affect the amount of the returns, as set forth in the law, the Bylaws or agreement.

 

Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Specifically, income and expense of a subsidiary acquired or disposed during the year are included in the consolidated income statement and other comprehensive income from the date the Bank gains controls until the date when the Bank ceases to control the subsidiary.

Profit or loss and each component of Other Comprehensive Income are attributed to the owners of the Bank and to the non-controlling interests even if the effect is attributed to non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interest even if this generates a negative balance for non-controlling interests. All transactions, balances, income and expenses between the companies of the Santander Group are eliminated in the consolidated financial statements.

 

Changes in the Santander Group’s interest in a subsidiary that do not result in loss of control are registered as equity transactions. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Company.

When the Bank loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. Amounts previously recognized in other comprehensive income in relation to the subsidiary are registered (i.e. reclassified to income statement or transferred directly to retained earnings) in the same manner as it would be required if the relevant assets or liabilities are disposed of. The fair value of any investment retained in the former subsidiary at the date when control got lost is considered as the fair value on initial recognition for subsequent accounting under IFRS 9 Financial Instruments: Recognition and Measurement or, when applicable, the costs on initial recognition of an investment in an associate or jointly controlled entity

 

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ii. Interests in joint ventures (jointly controlled entities) and associates

 

Joint ventures mean interests in entities that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more entities (“ventures”) acquire interests in entities (jointly controlled entities) so that strategic financial and operating decisions affecting the joint venture require the unanimous consent of the ventures.

 

Associates are entities over which the Bank is in a position to exercise significant influence (significant influence is the power to participate in the financial and operating decisions of the investee) but it does not control or has joint control over the investee.

 

In the consolidated financial statements, interest in joint ventures and investments in associates are registered using the equity method, i.e. at the Bank’s share of net assets of the investee, after taking into consideration the dividends received from capital reductions and other related transactions.

 

iii. Business combinations, acquisitions and disposals

 

A business combination means the union of two or more individual business or economic business into one single entity or group of entities and is registered in accordance with IFRS 3 - “Business Combinations”.

 

Business combinations are carried out so that the Bank obtains control over an entity and are recognized for accounting purposes as follow:

 

The Bank measures the cost of the business combination, defined as the fair value of the assets offered, the liabilities incurred and the equity instruments issued, if any.

The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognized by the acquiree, are estimated at the acquisition date and recognized in the consolidated financial statement.

 

The excess of the acquisition cost over the fair value of the identifiable net assets acquired are recognized as goodwill (note 13). The excess of fair value of the identifiable net assets over the acquisition cost is an advantageous purchase gain and it is recorded as income on the date of the acquisition.

 

Note 3 of our Financial Statements has the most significant transaction descriptions in 2020, 2019 and 2018.

 

iv.Investment Funds

 

These include investment funds in which the Santander Group companies hold a substantial interest or the entirety of the interests and are therefore exposed to, or have rights, to variable returns and have the ability to affect those returns through power over the fund, in accordance with IFRS 10 - Consolidated Financial Statements and are therefore, consolidated in these financial statements.

 

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IV. Definitions and classification of financial instruments

 

i. Definitions

 

“Financial instrument” is any contract that gives rise to a financial asset of one entity and, simultaneously, to a financial liability or financial interest of another entity.

 

“Equity instrument” is any agreement that evidences a residual interest in the asset of the issuing entity after deducting all of its liabilities.

 

“Financial derivative” is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is zero or very small compared with other financial instruments with a similar response to changes in market factors, and which is settled at a future date.

 

“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect to make part of the cash flow of the hybrid contract vary similar to a stand-alone derivative.

 

The following transactions are not treated for accounting purposes as financial instruments:

 

- Investments in subsidiaries, jointly controlled entities and associates (notes 3&11 of our Financial Statements).

- Rights and obligations under employee benefit plans (note 21 of our Financial Statements).

 

ii. Classification of financial assets for measurement purposes

 

Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash, cash balances at Central Banks and other deposits on demand, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately.

 

Upon initial recognition of an equity instrument not held for trading, the Bank may irrevocably choose to present subsequent changes in fair value through Other Comprehensive Income. This option is made considering each investment individually and was not used by the Bank. In addition, upon initial recognition, the Bank may irrevocably designate at fair value through profit or loss a financial asset that would otherwise meet the measurement requirements at amortized cost or at fair value through Other Comprehensive Income, if such designation eliminate or substantially reduce an accounting mismatch that could exist. This option was not used by the Bank.

 

Financial assets are included for measurement purposes in one of the following categories:

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• Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading: this category includes the financial assets acquired to generate short-term profit resulting from the fluctuation of its prices and financial derivatives not classified as hedging instruments, whose primary business model of the Bank is to trade them frequently.

 

• Financial Assets Measured At Fair Value Through Profit Or Loss: this category includes the financial assets that did not meet the pre-established criteria when evaluating the SPPI Test (Solely Payment of Principal and Interest).

 

• Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss: this category includes the financial assets that at the time of initial designation was made the fair value option.

 

• Financial Assets Measured At Fair Value Through Profit Or Loss: are stated at fair value. This category does not include debt instruments classified as “Held-to-maturity investments” or “Financial assets at fair value through profit or loss”, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as “Financial assets held for trading” or as “Other financial assets at fair value through profit or loss”.

 

The results rising from changes in fair value are recognized at the Financial Assets Measured At Fair Value Through Other Comprehensive Income line in the Shareholders´ equity except for cumulative impairment losses which are recognized in statement of profit or loss. When the investment is sold or has evidences of decreases on the fair value due to impairment, the previously recognized result at the same Shareholders´ Equity line, mentioned above is reclassified to the statement of profit or loss.

 

• Financial Assets Measured At Amortized Cost: this category includes financing granted to third parties, based on their nature, irrespective of the type of borrower and the form of financing, including finance lease transactions in which the consolidated entities act as lessors. The entities included in the consolidation have, in general, the intention of maintaining the loans and credits they grant until their final maturity, which, therefore, are presented in the consolidated balance sheet at amortized cost (which includes the necessary adjustments to reflect the estimated impairment losses).

 

• A financial asset is measured at amortized cost if it meets the following conditions and is not designated at fair value through profit or loss:

 

• The asset is maintained within a business model whose objective is to maintain assets in order to receive contractual cash flows;

 

• The contractual terms of the financial asset generate, on specific dates, cash flows that refer exclusively to payments of the principal and interest on the principal amount outstanding;

 

• A debt instrument is measured at fair value through Other Comprehensive Income if it meets the following conditions and is not designated at fair value through profit or loss;

 

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• The asset is maintained within a business model whose objective is achieved by receiving contractual cash flows and by selling financial assets; and

 

• The contractual terms of the financial asset generate, on specific dates, cash flows that refer exclusively to payments of the principal and interest on the principal amount outstanding.

 

Business model evaluation

 

The Bank assesses the objective of a business model in which an asset is maintained at the portfolio level, as it better reflects how the business is managed and what information is provided to management. The information considered comprises:

 

- Policies and objectives defined for the portfolio and the application of these policies in practice. Including, if the Administration's strategy is focused on earning contractual interest income, maintaining a specific interest rate profile, aligning the duration of the assets;

 

- How the portfolio's performance is assessed and reported to the Bank's management;

 

- The risks that affect the performance of the business model (and the financial assets held within that business model) and how these risks are managed;

 

- How the business managers are remunerated - for example, if the remuneration is based on the fair value of the managed assets or the contractual cash flows received;

 

- The frequency, volume and timing of sales in previous periods, the reasons for such sales and your expectations about future sales. However, information on sales activity is not considered in isolation, but as part of an overall assessment of the objective defined by the Bank to manage financial assets.

 

Financial assets held for trading or managed, whose performance is assessed based on fair value, are measured at fair value through profit or loss, as (i) they are not held to receive contractual cash flows (ii) nor are they held to receive flows contractual cash flow and sell financial assets.

 

iii. Classification of financial assets for presentation purposes

 

Financial assets are classified by nature into the following headings in the consolidated financial statements:

 

• Cash and balances with the Bacen: cash balances and balances receivable on demand relating to deposits with Bacen and credit institutions.

 

• Financial Assets Measured At Amortized Cost: includes the debit balances of all credit and loans granted by the Bank, other than those represented by securities, as well as finance lease receivables and other debit balances of a financial nature in favor of the Bank, such as checks drawn on credit institutions, balances receivable from clearing houses and settlement agencies for transactions on the stock exchange and organized markets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees and debit balances arising from transactions not originating in banking transactions and services, such as the collection of rentals and similar items.

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• Loans and other amounts with credit institutions: credit of any nature in the name of financial institutions.

 

• Loans and advances to clients: includes debit balances of all the remaining credit and loans granted by the Bank, including money market operations through centralized counterparties.

 

• Debt instruments: bonds and other securities that represent a debt for their issuer, that generate an interest return, and that are in the form of certificates or book entries.

 

• Equity instruments: Financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, other than investments in subsidiaries, joint ventures or associates. Investment fund units are included in this item.

 

• Trading derivatives: includes the fair value in favor of the Bank of derivatives which do not form part of hedge accounting.

 

• Hedging derivatives: includes the fair value in favor of the Bank of derivatives designated as hedging instruments in hedge accounting.

 

• Investments in associates and jointly controlled companies: includes the investments made in the share capital of associates and jointly controlled companies.

 

iv. Classification of financial liabilities for measurement purposes

 

Financial liabilities are classified for measurement purposes into one of the following categories:

 

• Financial Assets At Fair Value Through Profit Or Loss Held for Trading: this category includes financial liabilities incurred for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not designated as hedging instruments, and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements ("reverse repos") or borrowed (short positions).

 

• Financial Assets At Fair Value Through Profit Or Loss: financial liabilities are included in this category when they provide more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group's key management personnel.

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• Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the ordinary borrowing activities carried on by financial institutions.

v. Classification of financial liabilities for presentation purposes

 

Financial liabilities are classified by nature into the following items in the consolidated financial statements:

 

• Deposits from Bacen: deposits of any nature received from Bacen.

 

• Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.

 

• Client deposits: includes deposits of any nature such as demand deposits, saving deposits and time deposits including money market operation received from client.

• Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than subordinated liabilities.

 

• Trading derivatives: includes the fair value, with a negative balance for the Bank, of derivatives which do not form part of hedge accounting.

 

• Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets purchased under reverse repurchase agreements or borrowed.

• Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Bank which, although equity for legal purposes, do not meet the requirements for classification as equity.

 

• Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as non-performing.

 

• Hedging derivatives: includes the fair value of the Bank's liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

 

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• Debt Instruments Eligible to Compose Capital: financial instruments issued by other entities, such as shares, with the nature of equity instruments for the issuer, except investments in subsidiaries, jointly controlled entities or associates.

 

V. Funding, debt notes issued and other liabilities

 

Funding debt rates and other liabilities Instruments are recognized initially at fair value, considered primarily as the transaction price. They are measured at amortized cost and its expenses are recognized as a financial cost.

 

Among the liabilities initial recognition methods, it is important to emphasize those compound financial instruments which are classified as such due to the fact that the instruments contain both, a debt instrument (liability) and an embedded equity component (derivative).

 

The recognition of a compound instrument consists of a combination of (i) a main instrument, which is recognized as an entity’s genuine liability (debt) and (ii) an equity component (derivative convertible into ordinary share).

 

The issue of "Notes" must be registered in specific heading liabilities and updated according to the agreed rates and adjusted by the effect of exchange rate variations, when denominated in foreign currency. All remuneration related to these instruments, such as interest and Exchange variation (difference between the functional currency and the currency in which the instrument was named) shall be recognized as expenses for the period, according to the accrual basis.

 

The relevant detail sanding of these eligible debt instruments to capital is described in note 19 of our Financial Statements.

 

VI. Measurement of financial assets and liabilities and recognition of fair value changes

 

In general, financial assets and liabilities are initially recognized at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss, are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows:

 

i. Measurement of financial assets

 

Financial assets are measured at fair value, without deduction of estimated costs of transaction that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have as equity instruments subject and are settled by delivery of those instruments.

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The fair value of a financial instrument on a given date is taken to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price).

 

If there is no market price for a given financial instrument, its fair value is estimated on the basis of valuation techniques commonly used by market participants, according to the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

 

All derivatives are recognized in the balance sheets at fair value from the trade date. If the fair value is positive, they are recognized as assets and if the fair value is negative, they are recognized as liabilities. The changes in the fair value of derivatives from the trade date are recognized in “Gains (losses) on financial assets and liabilities” in the consolidated income statement. Specifically, the fair value of standard financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure over the counter “OTC” derivatives.

 

The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by market participants: “net present value” (NPV), option pricing models and other methods.

“Financial Assets Measured At Amortized Cost” and “Held-to-maturity investments” are measured at amortized cost using the effective interest method. “Amortized cost” is the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the income statement) between the difference of the initial cost and the maturity amount. In the case of financial assets, amortized cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.

The “effective interest rate” is the discount rate that exactly matches the initial amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date.

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Equity instruments whose fair value cannot be determined in a sufficiently objective manner are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.

 

Equity instruments whose fair value cannot be calculated in a sufficiently objective manner are measured at acquisition cost, adjusted, as the case may be, to the related impairment losses.

The amounts at which the financial assets are recognized represent, in all material respects, the Bank’s maximum exposure to credit risk at each reporting date. Also, the Bank has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under leasing and renting agreements, assets acquired under repurchase agreements and securities loans and derivatives.

 

ii.Measurement of financial liabilities

 

In general, financial liabilities are measured at amortized cost, as defined above, except for those included under “Financial Assets Measured At Fair Value Through Profit Or Loss” and financial liabilities designated as hedge items (or hedging instruments) in fair value hedges, which are measured at fair value.

 

iii.Recognition of changes in fair value

 

As a general rule, changes in the carrying amount of financial assets and liabilities are recognized in the consolidated income statement, distinguishing between those arising from the accrual of interest and similar items -which are recognized under “Interest and similar income” or “Interest expense and similar charges”, as appropriate - and those arising for other reasons, which are recognized at their net amount in the heading “Gains (losses) on financial assets and liabilities (net)”.

Adjustments due to changes in fair value arising from Available-for-sale financial assets are recognized temporarily in equity in the heading “Other Comprehensive Income”. Items charged or credited to this account remain in the Bank’s consolidated equity until the related assets are written-off, whereupon they are charged to the consolidated income statement.

 

iv. Hedging transactions

 

The consolidated entities use financial derivatives for the following purposes: i) to provide these instruments to clients who request them in the management of their market and credit risks; ii) to use these derivatives in the management of the risks of the Bank entities' own positions and assets and liabilities (“hedging derivatives”); and iii) to obtain gains from changes in the prices of these derivatives (“financial derivatives”).

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Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives.

 

A derivative qualifies for hedge accounting if all the following conditions are met:

1. The derivative hedges one of the following three types of exposure:

a. Changes in the fair value of assets and liabilities due to fluctuations, among other, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”);

 

b. Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (“cash flow hedge”);

 

c. The net investment in a foreign operation (hedge of a net investment in a foreign operation).

 

2. It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

 

a. At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness).

 

b. There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (retrospective effectiveness).

 

3. There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Bank’s management of own risks.

 

The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:

 

a. In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items (attributable to the type of risk being hedged) are recognized directly in the consolidated income statement.

b. In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in equity under “Other comprehensive Income - Cash flow hedges” until the forecast transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability. The ineffective portion of the change in value of hedging derivatives is recognized directly in the consolidated income statement.

 

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c. The ineffective portion of the gains and losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under “Gains (losses) on financial assets and liabilities (net)” in the consolidated income statement.

 

If a derivative designated as a hedge instrument no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified as a derivative measured at fair value through profit or loss.

When fair value hedge accounting is discontinued (expired, sold our no longer meet hedge accounting criteria) the adjustments previously recognized on the hedged item are transferred to profit or loss at the effective interest rate re-calculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity.

When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognized in equity in the heading "Other comprehensive Income” (from the period when the hedge was effective) remains recognized in equity until the forecast transaction occurs at which time it is recognized in profit or loss, unless the transaction is no longer expected to occur, in which case any cumulative gain or loss is recognized immediately in profit or loss.

 

For the accounting and disclosure of the hedge accounting structures as of December 31, 2019, the bank used the faculty of IFRS 9, to maintain the practices determined by IAS 39.

 

VII. Settlement of financial assets and liabilities

 

The Bank derecognizes a financial asset when the contractual rights to the cash flows of the asset expire or when it transfers the rights to the receipt of the contractual cash flows in a transaction in which essentially all the risks and benefits of ownership of the financial asset are transferred or in which the Bank does not transfer or retain substantially all the risks and rewards of ownership of the financial asset and does not control the financial asset.

 

The difference between the carrying amount of the asset (or book value allocated to the portion of the asset disposed) and the sum (i) of the consideration received (including any new assets obtained, less any new liabilities assumed) and (ii) any accumulated gains or losses recognized in "Other Comprehensive Income" is recorded in the income statement.

 

As from the date of the adoption of IFRS, mentioned above, any accumulated gains / losses recognized in "Other Comprehensive Income" in relation to equity instruments designated at fair value through Other Comprehensive Income are not recorded in the statement of income through the write-off of these securities.

 

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The Bank carries out transactions in which it transfers the assets recognized in its balance sheet, but maintains all or substantially all the risks and benefits of the assets transferred or part thereof. In these cases, the transferred assets are not written off. Examples of such operations include assignments of co-sponsored loan portfolios.

 

In operations in which the Bank does not retain or transfer substantially all the risks and rewards of ownership of a financial asset and hold control of the asset, the Bank continues to recognize the asset in the extent of its continued involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.

 

VII. Offsetting of financial instruments

 

Financial asset and liability balances are offset (i.e. reported in the consolidated balance sheets at their net amount) only if the Bank and their subsidiaries currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

 

Offsetting Agreements and Obligations Settlement (CMN Resolution 3.263/2005) - The Bank has an agreement for the clearing and settlement of obligations under the National Financial System (SFN), signed with individuals and legal entities, whether or not members of the SFN, resulting in higher financial settlement guarantee, with the parties that have this modality of agreement. These agreements establish that payment obligations to Banco Santander arising from credit and derivative operations, in the event of default by the counterparty, will be offset against Banco Santander's payment obligations with the counterparty.

 

(i) Impairment of financial assets

 

i. Definition

 

A financial asset is considered impaired when there is objective evidence that events have occurred which:

 

• Give rise to an adverse impact on the future cash flows that were estimated at the transaction date, in the case of debt instruments (loans and debt securities);

 

• In the case of equity instruments, mean that their carrying amount may not be fully recovered.

 

• Arising from the violation of terms of loans, and

 

• During the Bankruptcy process.

 

As a general rule, the adjustment of the value of the impaired financial instruments is recognized in the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment loss is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

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ii. Debt instruments carried at amortized cost

 

The amount of an impairment loss incurred for determination of the recoverable amount on a debt instrument measured at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows (excluding future credit losses that have not been incurred) discounted the original effective interest rate of the financial asset (or the effective interest rate computed at initial recognition), and is presented as a reduction of the asset balance and recorded in income statements.

In estimating the future cash flows of debt instruments the following factors are considered:

 

• All the amounts that are expected to be obtained over the remaining life of the instrument, in this case, the provided guarantees. The impairment loss considers the likelihood of collecting accrued interest receivable.

 

• The various types of risk to which each instrument is subject; and

• The circumstances in which collections will foreseeably be made.

These cash flows are discounted using the instrument's effective interest rate.

Specifically, in regards to recoverable amount losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency when there is evidence of a deterioration of the obligor's ability to pay, either because it is in arrears or for other reasons.

 

The Bank has certain policies, methods and procedures for covering its credit risk arising from insolvency allocable to counterparties.

 

These policies, methods and procedures are applied in the granting, in the examination and to document debt instruments, and contingent liabilities and commitments, the identification of their recoverable amount and the calculation of the amounts necessary to cover the related credit risk.

 

The procedures applied in the identification, measurement, control and reduction of the exposure to credit risk, are based on an individual basis or grouped by similarity.

• Clients with individual management: Wholesale clients, financial institutions and certain companies. Risk management is performed through an analysis complemented by tools to support the decision-making based in internal risk assessment.

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• Clients with standardized management: individuals and companies not classified as individual clients. Risk management models based on automated decision-making and risk assessment procedure, complemented, when the model is not comprehensive or accurate enough, by teams of analysts specialized in this type of risk. The credits related to clients standardized, are usually considered not recoverable when they have historical loss experience and delinquency greater than 90 days.

 

Regarding the provision for impairment losses from credit risk, the Bank evaluates all loans. Loans are either individually or collectively evaluated for impairment. Loans accounted as amortized cost, which are not individually evaluated for impairment, are collectively evaluated for impairment, grouping them considering the similarity of risk. Loans individually evaluated for impairment are not included in balances that are collectively evaluated for impairment.

 

To measure the impairment loss on loans individually evaluated for impairment, the Bank considers the conditions of the borrower, such as his economic and financial situation, level of indebtedness, ability to generate income, cash flow , management, corporate governance and quality of internal controls, payment history, industry expertise, contingencies and credit limits, as well as characteristics of assets, such as their nature and purpose, type, sufficiency and liquidity level guarantees and total amount of credit, as well as based on historical experience of impairment and other circumstances known at the moment of evaluation.

To measure the impairment loss on loans collectively evaluated for impairment, the Bank segregates financial assets into groups considering the characteristics and similarity of credit risk, in other words, according to segment, the type of assets, guarantees and other factors associated as the historical experience of impairment and other circumstances known at the time of assessment.

 

In some cases, the observable data required to estimate the amount of an impairment loss on a financial asset may be limited or no longer fully relevant to current circumstances.

In such cases, an entity uses its experienced judgment to estimate the amount of any impairment loss. Similarly, an entity uses its experienced judgment to adjust observable data for a group of financial assets to reflect current circumstances.

The impairment loss is calculated by using statistical models that consider the following factors:

 

Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty. The timing of default is considered in the PD measurement.

In accordance with IFRSs, the exposure at default used for this calculation is the current exposure, as reported in the balance sheets.

 

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• Probability of default, or “PD”, is the probability of the borrower failing to meet its principal and/or interest payment obligations.

 

PD is measured using a time horizon of one year when the transaction is at stage one or for the life time of the transaction, when the it is at stages 2 or 3; that is, it quantifies the probability of the borrower default. A loan will be defaulted if either the principal or interest become past due by ninety days or more or the loan is active but there are doubts about the solvency of the counterparty (subjective doubtful assets).

• Loss is given default, or “LGD”, is the loss arising in the event of default.

LGD calculation is based on the net charge offs on defaulted loans, considering the guarantees/collateral associated with the loans, the income and expenses associated with the recovery process and the timing of default.

 

• In addition, prior to loans be written-off (which is only done after the Bank have completed all recovery efforts and after about 360 days late), it is registered fully provision of the loan´s remaining balance so this provision (allowance for loan losses) fully covers the losses. Thus, the Bank that its loan loss allowance methodology has been developed to meet its risk metrics and capture loans that could potentially become impaired.

 

iii. Debt or equity instruments classified as financial assets measured at fair value through other comprehensive income

 

The difference between the amortized cost and fair value of debt or equity instruments classified as available for sale are recorded in equity under "Other Comprehensive Income.”

 

When there is objective evidence that the aforementioned differences are due to a prolonged decline in fair value, they are no longer recognized in equity and are reclassified, at the cumulative amount at that date, to the consolidated income statement. Losses from a prolonged decline in fair value relating to an investment in equity instruments are not reversed in subsequent periods.

 

IX. Repurchase agreements 

 

Purchases (sales) of financial instruments under a non-optional resale (repurchase) agreement at a fixed price (repos) are recognized in the consolidated financial statements as financing granted (received), based on the nature of the debtor (creditor), under Loans and advances with Bacen, Loans and advances to credit institutions or Loans and advances to clients (Deposits from Bacen, Deposits from credit institutions or Client deposits).

 

Differences between the purchase and sale prices are recognized as interest over the duration of the contract.

 

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X. Leasing accounting

 

i.Financial leases

 

Financial leases, until December 31, 2018, are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. From January 1, 2019, see note 1.c.1 of our Financial Statements.

 

When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term when such exercise price is sufficiently below fair value at the option date such that it is reasonably certain that the option will be exercised, is recognized as lending to third parties and is therefore included under Financial Assets Measured At Amortized Cost in the consolidated financial statements.

 

The finance income arising