Business Context and Reporting Period
This Form 20-F is the annual report for Banco Santander (Brasil) S.A. for the fiscal year ended December 31, 2014. The company is a major Brazilian financial institution, indirectly controlled by Santander Spain (88.3% ownership). Financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and presented in Brazilian Reais (R$), with U.S. dollar translations provided for convenience using the year-end exchange rate of R$2.6562 to U.S.$1.00.
Key Financial Metrics
| Metric (R$ Millions) | 2014 | 2013 |
|---|---|---|
| Total Income | 34,950 | 35,712 |
| Net Interest Income | 27,229 | 28,479 |
| Net Fee and Commission Income | 8,766 | 8,100 |
| Impairment Losses on Financial Assets (Net) | (11,272) | (14,118) |
| Operating Profit Before Tax | 6,443 | 4,018 |
| Net Profit from Continuing Operations | 5,708 | 3,785 |
| Consolidated Profit for the Year | 5,708 | 5,848 |
| Total Assets | 520,231 | 453,053 |
| Total Loans and Advances to Customers | 249,111 | 226,206 |
| Customer Deposits | 220,644 | 200,156 |
| Basel Capital Adequacy Ratio | 17.5% | 19.2% |
| Return on Average Equity (ROE) | 7.3% | 7.3% |
| Efficiency Ratio | 39.9% | 38.8% |
Material Changes vs. Prior Period
- Profitability: Consolidated profit decreased 2.4% to R$5.7 billion, primarily due to the absence of R$2.06 billion in gains from discontinued operations (sale of asset management business) recorded in 2013. However, net profit from continuing operations increased 50.8% to R$5.7 billion.
- Loan Portfolio: Total loans grew 10.1% to R$249.1 billion. Growth was driven by a 23.6% increase in corporate lending and a 34.4% surge in mortgage loans.
- Asset Quality: Impaired assets remained flat at R$14.0 billion (down 0.1%). The default rate (loans past due >90 days) improved to 5.6% from 6.2%. Impairment losses decreased 20.2% to R$11.3 billion.
- Net Interest Income: Declined 4.4% to R$27.2 billion due to a compression in net yield (6.9% vs 8.0% in 2013), driven by a shift toward lower-risk, lower-spread products like mortgages and payroll loans.
- Non-Interest Income: Net fee and commission income rose 8.2% to R$8.8 billion, boosted by credit/debit card volumes and the acquisition of GetNet.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management highlighted a strategic shift toward sustainable growth with a focus on lower-risk credit products. The bank completed the acquisition of GetNet (electronic payments) and entered a joint venture with Banco Bonsucesso for payroll loans. The bank exited the Level 2 Corporate Governance segment of the BM&FBOVESPA following a voluntary exchange offer by Santander Spain.
Risks and Contingencies
- Macroeconomic Environment: Brazil faced significant headwinds in 2014, including GDP growth of only 0.1%, high inflation (6.4% IPCA), and currency devaluation (Real depreciated 13.4% against the USD). The SELIC rate was raised to 11.75% by year-end.
- Political and Corruption Risks: The "Lava Jato" (Car Wash) investigation into corruption in the oil and gas sector has increased risk aversion and negatively impacted investor perception of the Brazilian economy.
- Regulatory Changes: Implementation of Basel III capital rules is ongoing, requiring higher capital buffers and the phased deduction of goodwill from regulatory capital by 2019.
- Foreign Exchange: The bank recorded foreign exchange losses of R$3.6 billion in 2014 due to the devaluation of the Real, partially offset by hedging derivatives.
Unusual Items
The 2013 results included a one-time post-tax capital gain of R$1.2 billion from the sale of the asset management business (Santander Brasil Asset), which is classified as discontinued operations. This item significantly inflated 2013 consolidated profit compared to 2014.
Investor Verification Checklist
- Continuing Operations vs. Discontinued: Verify the distinction between the 2.4% decline in total consolidated profit and the 50.8% increase in profit from continuing operations to assess core business performance.
- Asset Quality Coverage: Confirm the coverage ratio of 96.8% (allowances vs. impaired assets) and monitor the trend of the default rate (5.6%) against the backdrop of Brazil's economic slowdown.
- Net Yield Compression: Analyze the sustainability of the 1.1% drop in net yield (6.9%) and the bank's ability to maintain margins as it shifts to lower-risk loan products.
- Goodwill Impact: Review the R$27.7 billion goodwill balance (from the Banco Real acquisition) and its phased deduction from regulatory capital under Basel III rules.
- Macroeconomic Sensitivity: Assess the bank's exposure to Brazilian sovereign debt (approx. 20% of total assets) and the impact of rising interest rates (SELIC) on funding costs and loan demand.