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, 2011
Accounting Standards: International Financial Reporting Standards (IFRS)
Overview: Santander Brasil is the third-largest private bank in Brazil by assets (8.4% market share as of September 2011) and the largest bank in Brazil controlled by a major global financial group (Santander Spain). The bank operates through three segments: Commercial Banking, Global Wholesale Banking, and Asset Management and Insurance. In 2011, the bank completed the full integration of Banco Real, acquired in 2008, and sold its insurance subsidiary, Santander Seguros, to a joint venture with Zurich Financial Services.

Key Financial Metrics (2011)

Note: US$ figures are translated at the period-end rate of R$1.8758 to US$1.00.

Key Ratios and Performance Indicators

• Return on Average Total Assets (ROA): 2.0%
• Return on Average Shareholders' Equity (ROE): 10.2%
• Adjusted ROE (excluding goodwill): 16.2%
• Basel Capital Adequacy Ratio: 19.9%
• Non-Performing Assets (NPA) to Total Loans: 6.7%
• Allowance for Credit Losses to NPA (Coverage Ratio): 85.5%
• Efficiency Ratio: 35.6%

Material Changes vs. Prior Period (2010)

• Profitability: Net profit decreased by approximately 4.9% (from R$7,383 million in 2010 to R$7,756 million in 2011; note: the text indicates a decrease in profit for the year in the table, but the narrative states R$7.8 billion. The table shows 2011 profit as 7,756 and 2010 as 7,383, which is an increase. However, the text states "attributable profit totaled €5,351 million, 34.6% less than the previous year" referring to the parent, Santander Spain. For Santander Brasil, the table shows an increase in profit from 7,383 to 7,756 million R$). Correction based on table data: Net profit increased from R$7,383 million in 2010 to R$7,756 million in 2011.
• Asset Quality: Non-performing assets increased significantly by 39.8% (from R$9,348 million to R$13,073 million), driven primarily by a 58.7% increase in non-performing installment loans to individuals. This was attributed to rising interest rates and restrictive consumer credit measures by the Brazilian Central Bank.
• Loan Portfolio: Total loans and advances to customers grew by 20.9% to R$194.2 billion. Growth was led by individual loans (up 24.4%) and SME loans (up 25.6%).
• Divestiture: The bank sold its insurance subsidiary, Santander Seguros, in October 2011 for a preliminary price of R$2,752 million, recognizing a gain of R$424 million. This transaction removed insurance liabilities from the balance sheet.
• Exchange Rate Impact: The Brazilian real depreciated against the US dollar in the second half of 2011 (from R$1.53 to R$1.88), impacting the US dollar value of financial results and generating hedging losses.

Guidance, Outlook, and Risks

Management Commentary and Strategy: Management highlighted the completion of the Banco Real integration and the launch of the "Santander 3.1" strategic plan, aiming to be the clients' preferred bank by 2013 through agility, simplicity, and brand strengthening. The bank plans to continue expanding its product offering, particularly in credit cards and insurance distribution, and to improve operating efficiency.

Outlook: The bank anticipates continued growth in credit demand, supported by Brazil's economic recovery, though it faces headwinds from global economic uncertainty (particularly in Europe) and domestic monetary policy adjustments. The Brazilian Central Bank reduced the SELIC rate to 11.0% in December 2011 and further to 9.75% in March 2012 to stimulate the economy.

Key Risks and Contingencies:

• Macroeconomic Volatility: Exposure to Brazilian interest rate fluctuations, inflation, and exchange rate volatility (Real vs. USD/Euro).
• Credit Risk: Rising non-performing loans, particularly in the consumer segment, due to economic slowdown and higher interest rates.
• Regulatory Changes: Significant exposure to Brazilian Central Bank regulations regarding capital adequacy (Basel III implementation), reserve requirements, and credit card minimum payment rules.
• Global Financial Markets: Potential impact of the European sovereign debt crisis on funding costs and investor sentiment.
• Contingencies: The bank maintains provisions for legal claims, tax, and social security obligations. The final purchase price for the Santander Seguros sale is subject to adjustment in 2012.

Important Facts for Investor Verification

• Non-Performing Asset Coverage: Verify the adequacy of the 85.5% coverage ratio for non-performing assets, which declined from 98.3% in 2010, amidst a 40% increase in NPA volume.
• Goodwill Impact: Note that a significant portion of the bank's equity (approx. R$27 billion) is goodwill from the Banco Real acquisition. Investors should review the "Adjusted ROE" (16.2%) which excludes goodwill, as management considers this a better indicator of economic substance.
• Regulatory Capital Requirements: Monitor the implementation of Basel III rules in Brazil, which will increase minimum capital requirements and introduce new leverage and liquidity ratios starting in 2013-2019.
• Insurance Divestiture: Confirm the final purchase price and any subsequent adjustments for the sale of Santander Seguros, as the preliminary price was R$2,752 million.
• Exchange Rate Sensitivity: Assess the impact of the Brazilian Real's depreciation on the bank's US dollar-denominated results and its hedging strategies, which generated losses in 2011.
• Public Float: Verify the bank's compliance with the 25% public float requirement for its Level 2 listing on BM&FBOVESPA, as the float was approximately 24.1% as of March 2012.