BSBR

Business Context and Reporting Period

Company: Banco Santander (Brasil) S.A. (Santander Brasil)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2017
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Santander Brasil is the third-largest privately owned bank in Brazil and the only international commercial bank with a significant presence in the country. It operates through two main segments: Commercial Banking (retail, SME, and corporate) and Global Wholesale Banking. The bank serves approximately 21.7 million active customers.

Key Financial Metrics (Year Ended Dec 31, 2017)

*US$ amounts translated at the rate of R$3.3080 to US$1.00 as of December 31, 2017.

Key Ratios and Performance Indicators

• Return on Average Total Assets (ROA): 1.4% (vs. 1.2% in 2016)
• Return on Average Stockholders' Equity (ROE): 10.4% (vs. 8.9% in 2016)
• Adjusted ROE (excluding goodwill): 15.4% (vs. 13.3% in 2016)
• Basel Capital Adequacy Ratio: 15.8% (vs. 16.3% in 2016)
• Efficiency Ratio: 33.1% (vs. 30.6% in 2016)
• Impaired Assets as % of Loans: 6.7% (vs. 7.0% in 2016)
• Net Yield: 6.4% (vs. 6.2% in 2016)

Material Changes vs. Prior Period

• Profitability: Net profit from continuing operations increased by 22.4% to R$9.1 billion, driven by higher net interest income and improved asset quality, despite a decrease in operating profit before tax due to hedging effects.
• Loan Portfolio Growth: Total loans and advances to customers grew 7.2% to R$287.8 billion. Significant growth was observed in loans to individuals (+18.0%) and consumer finance (+24.7%), while corporate loans declined by 7.4%.
• Asset Quality Improvement: The default rate decreased from 7.04% in 2016 to 6.65% in 2017. Impaired assets as a percentage of total loans declined to 6.7% from 7.0%.
• Impairment Losses: Net impairment losses on financial assets decreased to R$12.3 billion (from R$13.3 billion in 2016), reflecting better recovery rates and credit management.
• Dividends: The bank paid R$6.3 billion in dividends and interest on stockholders' equity in 2017, representing a payout ratio of approximately 70.7%.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook

Management highlighted a strategy focused on customer-centricity, digital transformation, and rigorous cost control. The bank reported an 8% increase in its active customer base and a 16% increase in loyal customers. The outlook remains cautious due to the macroeconomic environment in Brazil, though signs of economic recovery were noted in late 2017.

Key Risks and Contingencies

• Macroeconomic and Political Instability: The filing cites significant risks related to Brazil's political environment, including the "Lava Jato" corruption investigations, which have negatively impacted economic growth and investor confidence. Presidential elections in October 2018 add further uncertainty.
• Interest Rate and Inflation: While the SELIC rate was lowered to 7.0% by December 2017, the bank remains exposed to interest rate fluctuations and inflation, which affect funding costs and loan demand.
• Exchange Rate Volatility: The Brazilian real has experienced significant volatility. A 1.0% variation in the exchange rate could impact income on net foreign exchange positions.
• Regulatory Changes: The bank is subject to evolving Basel III regulations, including capital conservation buffers and liquidity coverage ratios (LCR). As of late 2017, the LCR was 123%, well above the 80% requirement.
• Credit Risk: Despite improvements, the bank faces risks from non-performing loans, particularly in the commercial and industrial sector, due to the economic downturn.
• Cybersecurity: The bank faces increasing risks from cyber-attacks and data breaches, requiring ongoing investment in security infrastructure.

Important Facts for Investor Verification

• Goodwill Impact: A significant portion of the bank's equity (approx. R$28.4 billion) is comprised of goodwill from past acquisitions (notably Banco Real). Investors should review the "Adjusted ROE" metric (15.4%) which excludes goodwill, as it provides a different perspective on core profitability compared to the reported ROE (10.4%).
• Hedging Effects: Operating profit before tax was significantly impacted by the hedge for investments held abroad (an expense of R$810 million in 2017). Management presents "Adjusted Operating Profit" excluding this effect to show underlying performance.
• Concentration of Ownership: Santander Spain (the controlling shareholder) owns approximately 89.5% of the total capital, giving it significant influence over corporate decisions.
• Asset Quality Coverage: The coverage ratio for impaired assets (provisions as a percentage of impaired assets) was 95.4% as of December 31, 2017, indicating a high level of provisioning against bad loans.
• Regulatory Capital: The Basel capital adequacy ratio of 15.8% is well above the minimum regulatory requirements, providing a buffer against potential losses.