Banco Santander (Brasil) S.A. — FY2019 Form 20-F
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2019, not a standalone fourth-quarter filing. The consolidated financial statements are audited and prepared under IFRS as issued by the IASB; amounts below are in Brazilian reais (R$) unless stated otherwise. Santander Brasil reported 26.3 million active customers and operated in commercial banking and global wholesale banking.
Key financial results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total income | R$58.77bn | R$49.51bn | +18.7% |
| Net interest income | R$44.32bn | R$41.92bn | +5.7% |
| Net fee and commission income | R$15.71bn | R$14.13bn | +11.2% |
| Operating profit before tax | R$22.27bn | R$15.91bn | +40.0% |
| Consolidated profit for the year | R$16.63bn | R$12.80bn | +29.9% |
| Profit attributable to parent shareholders | R$16.41bn | R$12.58bn | +30.4% |
Net interest income and fees benefited from loan growth, customer expansion and higher card, insurance and capital-markets activity. Reported income also reflected substantial year-to-year movements in financial-asset gains/losses, exchange differences and the hedge of foreign investments; management reported 2019 total income of R$60.03bn excluding that hedge effect, up 8.4% year over year.
Balance sheet, credit quality, liquidity and capital
- Scale and lending: Total assets were R$762.24bn, up 5.3% from R$723.87bn. Gross customer loans were R$347.26bn, up 7.9%; net loans were R$326.70bn. Growth was strongest in individual and consumer-finance lending; corporate loans declined 8.4% in the management breakdown.
- Funding and liabilities: Customer deposits were R$336.51bn, up 10.6%; deposits from the Central Bank and credit institutions were R$99.27bn. Total funding, as defined by the company, was R$519.66bn. Marketable debt securities were R$73.70bn; capital-eligible debt instruments were R$10.18bn. Total liabilities were R$665.03bn and total shareholders’ equity was R$97.21bn.
- Credit quality: Impaired assets were R$23.43bn, or 6.7% of gross loans, versus 7.0% in 2018. Impairment coverage declined to 96.6% from 102.4%. Net impairment losses on financial assets increased 5.2% to R$13.37bn. Impaired installment loans to individuals rose 31.6% to R$12.50bn, while impaired commercial and industrial loans declined 14.9% to R$10.07bn.
- Profitability and efficiency: Return on average assets was 2.3% versus 1.9%; return on average equity was 17.4% versus 14.3%. Net yield eased to 6.8% from 6.9%. The reported efficiency ratio improved to 28.8% from 33.9%; the company’s adjusted non-GAAP ratio was 28.2% versus 30.3%.
- Capital and liquidity: The Basel capital adequacy ratio was 15.04%, slightly below 15.06% in 2018. Reported liquidity coverage ratio was 126.7%, above the 100% minimum; NSFR was above 112.3%, also above its 100% minimum.
- Cash flow: Operating activities generated R$24.87bn; investing activities used R$2.51bn and financing activities used R$26.20bn. Cash and cash equivalents declined R$3.84bn to R$21.44bn at year-end.
Material changes versus 2018
- Profit growth accelerated, supported by net interest income and fee growth, and by substantially smaller reported losses on financial assets and exchange differences than in 2018.
- Consumer and individual lending expanded, while impaired individual installment loans increased materially. Overall impaired-loan ratio improved modestly, but coverage fell.
- Administrative expenses rose only 0.9%, while depreciation and amortization increased 37.5%, largely reflecting adoption of IFRS 16. The standard also reduced general maintenance expense; management said the combined effect on 2019 profit was a R$43m reduction.
- Net provisions increased 84.1% to R$3.68bn, including a R$700m efficiency and productivity fund and higher civil and labor provisions, including the AFABESP matter being reclassified as probable loss.
- Customer deposits increased, but funding composition shifted: current accounts rose and time deposits declined. Repurchase-agreement funding reported in the funding breakdown rose to R$82.0bn from R$48.3bn.
Outlook, risks and unusual items
- Outlook and guidance: In October 2019, the Bank said it intended to provide projections for selected indicators for 2022, including loan growth, ROE, cost to income and active-customer growth. The supplied filing text does not provide the numerical projections. Management cautioned that projections depend on assumptions and factors outside its control.
- Brazilian macroeconomic and market exposure: Brazil’s SELIC rate fell to 4.50% at year-end 2019, while the real weakened to R$4.03 per U.S. dollar. Management estimated that a 100-basis-point interest-rate increase would reduce one-year net interest income by R$334m. About 17.8% of assets and 78.4% of the securities portfolio consisted of Brazilian federal government debt.
- Funding and liquidity risks: 80.6% of customer deposits had maturities of one year or less or were payable on demand, while 31.6% of assets had maturities of one year or more. The filing warns that withdrawals, market disruption, rating downgrades or higher funding costs could pressure liquidity and margins.
- Legal and tax contingencies: Probable-loss judicial and administrative proceedings and legal obligations were approximately R$9.2bn and provisioned; possible-loss proceedings were approximately R$27.6bn. Outcomes are uncertain and could exceed provisions. A separate proceeding involving an officer’s alleged bribery of a tax auditor is ongoing; the Bank says it is not a party, provided information to authorities and relinquished certain related tax credits.
- Other unusual or subsequent events: The Bank acquired the remaining 40% interest in Banco Olé for approximately R$1.61bn on January 31, 2020, and sold its entire Superdigital interest to a Santander Group affiliate for R$270m on February 28, 2020. The company also disclosed the coronavirus outbreak as a risk; the effect on results was uncertain as of the report date.
- Dividends and repurchases: The Bank declared R$10.8bn of 2019 dividends and interest on shareholders’ equity, including R$7.8bn paid in February 2020. Its stated policy recommended distributing 50% of adjusted net income, but future distributions are not assured and may be constrained by capital, liquidity, regulation or Brazilian law. A buyback program authorized repurchases of up to 37.26m units or ADRs, approximately 1% of share capital, through November 4, 2020.
Most important facts for investors to verify
- Reconcile reported IFRS profit and key operating measures with the foreign-investment hedge effects and the company’s non-GAAP adjusted measures.
- Review the growth and loss trends in individual installment loans, the fall in impairment coverage, and the assumptions used in expected-credit-loss models.
- Examine the composition and maturity of deposits, repurchase funding, liquidity buffers and capital ratios, including the effect of any further market stress.
- Track the AFABESP and other material legal matters, possible tax exposures, and the R$9.2bn of provisioned versus R$27.6bn of possible-loss proceedings.
- Confirm the status and financial impact of the Banco Olé acquisition, Superdigital sale, 2022 guidance and subsequent developments, including coronavirus-related effects.
Investor note: the filing contains inconsistent or unclear descriptions in some passages, including certain macroeconomic figures and references to adjustment measures. Figures above use the audited financial statements and clearly identified disclosures where available.