BSBR

Business Context and Reporting Period

Company: Banco Santander (Brasil) S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Accounting Basis: International Financial Reporting Standards (IFRS)
Business Overview: Santander Brasil is the third-largest private bank in Brazil by assets (8.6% market share) and the largest bank controlled by a major global financial group. Operations are divided into three segments: Commercial Banking, Global Wholesale Banking, and Asset Management and Insurance. The bank completed the technological integration of Banco Real in early 2011.

Key Financial Metrics (Year Ended Dec 31, 2010)

Note: US$ figures are translated at the period-end rate of R$1.6662 = US$1.00.

Key Ratios and Performance Indicators

• Return on Average Total Assets (ROA): 2.2%
• Return on Average Shareholders' Equity (ROE): 10.3%
• Adjusted ROE (excluding goodwill): 16.9%
• Net Yield: 8.8%
• Efficiency Ratio: 34.5%
• Basel Capital Adequacy Ratio: 22.1%
• Nonperforming Assets (NPA) to Total Loans: 5.8% (down from 7.2% in 2009)
• Coverage Ratio (Allowance/NPA): 98.3%

Material Changes vs. Prior Period

• Profitability: Consolidated profit increased to R$7.4 billion in 2010 from R$5.5 billion in 2009, driven by improved credit quality and lower impairment charges.
• Asset Quality: Nonperforming assets decreased by 5.6% (R$551 million) compared to 2009. The NPA ratio improved from 7.2% to 5.8%.
• Impairment Charges: Net impairment losses on financial assets decreased by 17.5% to R$8.2 billion, reflecting the recovery of the credit cycle following the 2008-2009 crisis.
• Loan Portfolio: Total loans and advances to customers grew 16.0% to R$160.6 billion, with significant growth in individual loans and SME lending.
• Deposits: Customer deposits increased 12.4% to R$167.9 billion, providing a stable funding base.
• Regulatory Environment: The Central Bank of Brazil increased reserve requirements in 2010 to reduce liquidity, raising the required reserve level from 18% to 35% of total deposits.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Integration Synergies: The bank expects to achieve cumulative cost synergies of approximately R$2.4 billion and revenue synergies of R$300 million by December 31, 2011, from the Banco Real integration.
• Strategic Focus: Continued focus on mid- and high-income customers, expansion of credit cards and insurance products, and leveraging the Santander Group's global network for wholesale banking.
• Insurance Restructuring: In February 2011, the board approved the sale of its insurance subsidiary, Santander Seguros, to a holding company controlled by Santander Spain and Zurich Financial Services, while retaining distribution rights.

Risk Factors and Contingencies

• Macroeconomic Risks: Exposure to Brazilian interest rate fluctuations, inflation, and exchange rate volatility (Real vs. US Dollar).
• Regulatory Changes: Significant impact from Central Bank reserve requirements and potential implementation of Basel III capital standards.
• Credit Risk: Potential for increased defaults if the Brazilian economic recovery stalls or if interest rates rise sharply.
• Goodwill Impairment: The bank holds R$27.5 billion in goodwill from the Banco Real acquisition. While no impairment was recorded in 2010, future economic downturns could trigger impairment charges.
• Concentration of Control: Santander Spain owns approximately 81.4% of the capital, giving it significant influence over corporate decisions.

Investor Verification Checklist

• Credit Quality Trends: Verify the sustainability of the decline in nonperforming assets and the adequacy of the 98.3% coverage ratio against future economic shocks.
• Goodwill Valuation: Review the assumptions used in the annual goodwill impairment test for the R$27.5 billion Banco Real goodwill.
• Regulatory Capital: Assess the impact of upcoming Basel III implementation and current Central Bank reserve requirement changes on liquidity and capital ratios.
• Insurance Transaction: Monitor the closing of the Santander Seguros sale and the terms of the 25-year distribution agreement to ensure revenue continuity.
• Exchange Rate Exposure: Evaluate the effectiveness of hedging strategies regarding the Cayman Islands branch and foreign currency-denominated assets/liabilities.