Banco Santander (Brasil) S.A.

Luiz Felipe Taunay Ferreira - Officer and Member of the Board of Executive Officers Angel Santodomingo Martell - Chief Financial Officer, Vice-President Executive Officer, Investors Relations Officer and Member of The Board of Executive Officers

Good morning. This is Luiz Felipe Taunay Ferreira.

I would just like to report the idea that we'll give priority to the questions that are posted through the webcast. I will put together all the questions related to the same subject and afterwards, if needed, we will also answer questions that comes from the phone.

So Angel, if you could proceed, please?

Thank you, Felipe. Good morning, and thank you for attending Santander Brasil's third Q results conference.

Before going specifically into the results, I would like to share with you some ideas about the voluntary public offer -- tender offer that was just finalized some days ago. As you probably have seen, the addition of minority shareholders of Santander Brasil combined with the ADR holders represented approximately 13.7% of the total capital, given that, that did not exceed the 2/3 of the existing free-flow to the exchange offer disclosed.

So there would no -- be no additional periods provided. So in this way, Banco Santander groups are holding a stake rises to 88.3% of the capital.

In shares and units of Santander Brasil ceased to be list, as you know, on level 2 of the BOVESPA and began trading on the traditional segment. As mentioned during the offer, we will continue to strive to deliver increasing profitability to all our shareholders -- current shareholders.

We will continue our Investor Relations activities with the market as we have done in the past. So now changing or moving to the specific results presentation.

I would like to go through the different concepts, the macro scenario, highlights from the results -- key results and some final remarks. On Slide 4, we start with the macro scenario, which is the consensus macroeconomic outlook.

The market's forecast saw some macroeconomic scenario improving to a still low level of activity of around 1%, which was, as you know, adjusted in the last weeks, within inflation hovering around the target ceiling in the next 2 years. In general terms, the economy expected to recover gradually.

The market expects '15 GDP growth to be gradually and positively impacted by the economic policy adjustments after the last weeks interest rate rise by percent of 25 basis points. Consensus stays at 11% for '14, inclines to 12% for 2015, probably to be adjusted within the next weeks.

On the foreign exchange market, expectations are stable. We continue to believe that Brazil will overcome the short-term economic challenges and the country continues to be a growth opportunity in the medium realm.

Now moving to Page 6, I would like to underline the main highlights of the third Q results. Let me remind you that we speak here of comparisons in between quarters, in 3Q compared to second Q.

I would like to mention that as of this quarter, our results already reflect the consolidation of GetNet in -- starting in August 2014, us having a 2-month impact on our results. Bottom line, there is -- there is no almost -- there is almost no impact, so the GetNet consolidation shows almost 0 bottom line, although different lines of the P&L, obviously, are impacted.

My -- let me say with you my view in this results. First, the bank continues with a comfortable position in terms of capital and liquidity, reflected in the strength of its balance sheet.

The BIS ratio, the capital stood at 18.8%, almost 19%, with a strong generation in the quarter. And with the Tier 1 capital of 17.3%.

The loan-to-deposit ratio decreased a couple of percentage points to 96%. Secondly, the expanded loan portfolio grew 5% in the quarter.

We would like to underline that 5%, mainly driven by large corporates -- large corporation mortgages, which recorded both an increase of 9%. If we exclude the exchange rate variation, which also affected positively, the growth would have been, instead of 5%, 4%.

At the same time on the liability side, funding from clients continues also to be strong with a 5% rise in 3 months. Thirdly, regarding results.

Total revenues moved up by 4% in the same period, reflecting the increase in the net interest income and commissions. On the other hand, general expenses including depreciation and amortization posted an upturn of 6.7% in 3 months, reflecting the perimeter impact and the contractual adjustments for the wage agreements in the period.

All in all, net profit totaled BRL 1.4 billion in first Q, posting an increase of 2% in the quarter. Of course, I will elaborate in the different lines on the P&L and specifically on the receipts lines in the structure of that part of the P&L.

Lastly, I would like to point out the improvement in credit quality of our portfolio and delinquency ratio over 90 days dropped 40 basis points in the quarter and the coverage ratio reached 170 basis points. It's also increasing from last quarter.

And this was accompanied by a good quality leading indicator, the 15 to 90 days, on which I will elaborate in the next slides. In Slide 8, basically, what you have there is the net profit evolution.

As you can -- as I mentioned, net profit amounts to BRL 1,464,000,000 with a 2% rise in the quarter and year-to-date, that's the 9 months results, amounting to BRL 4.328 billion, remaining flat in relation to last year. Let's move to the P&L, which you can find in Slide 9.

Starting with revenues, net interest income moved up 4% in the quarter, falling 9% in 12 months. Evolution in 12 months, as we -- as I already mentioned in other quarters, was impacted among other factors by the capital optimization plan that we executed last January.

In the quarter, we had an expansion of NII driven by higher gains from market activities. In the next slide, you will see a breakdown of these concepts.

Commissions climbed 3% in 3 months and it is important to note here that evolution both in the 3 months and in the 9 months was affected full by nonrecurring impacts, but we always explain in the quarters, and I will also try to indicate in the next slide. In any case, excluding these effects, commission would have grown a like-for-like or a business-like oriented ratio, 5% in the quarter and 8% in total.

Moving to quality. Allowance for loan losses remained stable in the quarter.

In the first 9 months, those allowances amounted to BRL 7.3 billion with a reduction of 24% in the year. We continue to maintain such strong reduction that was shown in an accommodated basis in the past quarters.

In terms of credit, also the cost of credit was reduced by 10 basis points in the quarter and 133 basis points on annual terms. General expenses, the other important -- another important line in the P&L, we think they remain under control with an annual growth of around 3%.

A gain well below inflation, reflecting our efforts in this increased productivity and efficiency. In the quarter, as you can see, expenses grow close to 7%, 6.8%, impacted by what I've mentioned before, the wage agreement that was signed in this quarter and the perimeter effect that I also mentioned a couple of slides ago.

In any case, our view with regards to cost is that they will maintain a growth well below inflation. As a result of all these dynamics, as I mentioned, net profit increased 4% -- 2% in the quarter.

In the next page, with regards to net interest income. I would like to comment the main points: Net interest income totaled BRL 7 billion in the third quarter of this year, with an increase of almost 300 -- BRL 294 million compared to the previous year.

Such performance was driven by what we call other margins, which is basically returning to historical normal levels of market activities. As you can see, in the previous columns, exception made of the second Q.

Credit related NII presents a decline as a result of good growth in lower spread products, as is reflected in the spread chart. The reduction of the spread was due to a falling revolving loans, offset by growth in mortgages.

So what you have is a decrease of around 9% in this type of revolving loans, which is basically offset or tends to be offset with lower spread loans like mortgages. So the full drop on the spread is totally explained by the change of mix.

In the 9 months accumulated 2014, NII came to BRL 20.7 billion, with a reduction both in the margin related to businesses, change of mix and other margins, specifically into the second quarter I mentioned before. This reduction in the Others line is the result of basically 2 factors: lower accumulated results from our market activities, including the impact of a higher steady rate that we have commented in previous quarters; and then now an impact from our capitalization optimization plan that I also mentioned done in January.

This explains approx of the variation of Others. If we don't account this impact, the capital optimization, the NII, would have declined around 6% in the 12 months.

So the impact is around 3 percentage points. On Page 11, we can move to the loan portfolio.

As you can see, credit growth in general terms was clearly accelerated in this quarter in all segments. Expanded loan portfolio totaled BRL 293 billion, posting a growth for the second consecutive quarter with an increase of 5% in the quarter and 7% in 12 months, mainly driven by the segment large corporates, which grew 9% in the quarter and 17% in total.

Even if we exclude the effect of the foreign exchange variation, this segment posted quite an expressive evolution. In the individual segment, mortgage was a highlight, with a -- I mentioned, a 9% growth in the quarter and 35% in 12 months.

The individuals performance was impacted by payroll lending as has also happened in previous quarters. Again, excluding this product, individual loan would have grown 2%, 1.9% exactly in the quarter and 9% in 12 months, 9.2%.

The consumer finance portfolio, which is another important line, remained relatively stable in the quarter. I remind you that this line is basically car financing.

And as you know, also we have the vehicle financing market is slowing down. We continue to gain share here, and we have become leaders in credit origination with a market share over 20%.

This is the first time we rank first in the market for a long time. In terms of SMEs, we can see that the evolution is improving in the quarter as a result of the bank's strengthening in this segment, aiming to begin in 2013 [ph], basically in the first quarter of next year with a stronger proposal, which we also mentioned in the past, which is Santander Advance.

The performance of the quarter has gone from -- has improved and has gained acceleration as the quarter moved on. As we have said in the past, this segment is strategic for the bank, both locally and globally.

On the funding side on the next page, the evolution is also quite positive. This reflects the evolution on deposit activity.

Our focus is on our clients and the linkage. Liquidity buffer, currently, is at its highest level, with very comfortable levels of liquidity ratios, both the LCR and the NSFR, well above the already-known minimum levels.

Funding from clients amounted to BRL 243 billion, an increase of almost BRL 34 billion in 12 months and BRL 12 billion in the quarter. In both periods, growth was higher than the increase in the total credit portfolio.

And as a result, the loan to deposit ratio, as I mentioned, went down 96 -- to 96%. This is almost 9 points drop in 12 months and almost 2 points drop in the quarter.

Total funding plus assets under management amounted to BRL 436 billion with an increase of 9% in the quarter, that is BRL 35 billion and 17% in 12 months or almost BRL 63 billion. As you can see, assets under management amount to BRL 161 billion, which also rise significantly both 12% and 5% year-on-year and Q-on-Q.

Moving to fees on the next page. As we mentioned before, we have different impacts, basically non-like-for-like impacts and perimeter impacts.

In the first 9 months of this year, fees totaled BRL 8 billion -- BRL 8.1 billion, increasing 3% compared to last quarter and the same period in 2013. As already mentioned, this annual growth is impacted by the weighing, the life insurance policies was renewed as well as by the sale of the asset management operations.

These both things have been commented[ph] extensively within the last quarter. Insurance fees dropped 3 months (sic) [3%] in 12 months.

Excluding the financial effect, they would have grown 10%. So the business like-for-like of activity of this line is growing 10%.

In the same direction, in relation with asset management, the revenues from this unit would have grown 8% or are growing in a like-for-like basis 8%, instead of the drop of 18% that you see here. In the quarterly evolution, we have another current impact from the accounting reclassification between cards and tax expenses.

As you can see on the cards line, we -- again, the business like-for-like evolution is 5%, but this reclassification between lines makes that drop to 0% in the quarter or flat in the quarter. In any case, fees are reflecting the evolution of the business in a like-for-like comparison, following quite a positive trend.

Moving to general expenses or to expenses on Page 14. We have the following things: Total expenses excluding depreciation and amortization, so basically administrative and personnel, have increased 6% in these 3 months and 2% in the 12 months.

If we include everything, as you can see there, they have increased 3% year-on-year. The increase in expenses reflects mainly the wage agreement that was signed by the sector and again, the perimeter effect that I mentioned.

I would underline the 12 months effect, which is still a good performance in terms of expenses that we expect to continue, of course, in following quarters as a result of the productivity and efficiency programs that we plan to continue during next year. In any case, cost will grow well below, and I underline, well below inflation.

On Page 15, we go into the quality part of the portfolio, and we have the quality ratios, the delinquency ratios. I would like to underline and to highlight the improvement -- the general improvement on the quality of the portfolio, both in the current quality or in the leading indicators part of it as well as the coverage ratio.

There were 90-day delinquency fell 79 basis points in 12 months, with an improvement both in individuals, 87 basis points and the corporate segments, 66 basis points. In the quarter, the delinquency ratio declined 40 basis points with a more expressive improvement in the individuals segment.

So we run at a 3.7% NPL ratio over 90 days, which is, as you can see, the lowest in the last 5 or 6 -- at least in the last 5 or 6 quarters have you seen in this slide, at least even more. If you think to 90-day, the leading indicator that we normally publish, also presents a strong improvement of 72 basis points in the quarter, continuing as a second quarter improvement and also in a year-on-year comparison to 4.3%.

Finally, the coverage ratio reaches 170 basis points, again, increasing 4 percentage points in the quarter and almost 20%, 19% in comparison to September '13. We remain quite comfortable with this ratio even as you can see in an increasing trend.

All in all, quite comfortable and positive quality ratios that should lead to no surprises in the future. Going into the P&L in the next slide.

We can analyze how both expenses and ratios in terms of quality have evolved. Allowance for loan losses totaled BRL 7.3 billion, as you can see in the first 9 months with what I mentioned in the introduction, almost a 22% decrease compared to last year.

In the quarter, the allowance losses or the provision cost remained flat. For the fourth consecutive quarter, we remained at similar volumes.

If we speak of cost of credit, as you may see in the red lines, they -- it declined more than 130 basis points in the last 12 months and 10 basis points in the quarter. Even the trends mentioned in our credit portfolio, we should expect also positive trends going forward as a reflection of lower spreads and better quality evolution on the cost of credit.

Finally, performance ratios in the next page. Let me underline the main points here as you already have all the data there.

Efficiency ratio came up to 50.6%, increasing again 113 basis points in the quarter, reflecting mainly the pressure on expenses that I mentioned. Recurrent ratio, 64.3% in the quarter using 227 basis points in 3 months.

In the return on equity, maintains the 11.6%, which is the same level as in the past quarter. Finally, with liquidity and capital ratios on the last page.

Again, let me underline that we are at very comfortable levels in terms of liquidity with a stable funding sources and quite a strong and adequate funding structure. The loan-to-deposit ratio, as I mentioned, reached 96% in September, with a fall of almost 2 percentage points in the quarter and 9 percentage points in 12 months, reflecting what I already mentioned several times, a good funding performance with a positive asset growth in third Q '14.

On the BIS ratio, that stands at 18.8%, so almost 19%, probably -- well, it is the highest among Brazilian banks, as you know. It rises 87 basis points above the previous quarter and being mainly composed of Tier 1.

The main reason of the improvement, as you can easily imagine, is the new measures that were approved by the buffing [ph], the Central Bank in Brazil in August with regards to lower capital consumption of different loan portfolio. That explains basically the increase of -- from 100 basis points of core capital.

Let me finalize with my main final remarks. As you have seen, third quarter results indicate that, first, our balance sheet remains quite solid.

It has strong and comfortable levels of capital, liquidity and coverage ratios. Total revenues increased in the quarter, reflecting the overall [ph] evolutions in the net interest income and commission.

We had a good recovery of the loan portfolio growth. It was followed by an improvement in the quality of our assets with a delinquency over 90 days, improving almost 80 basis points just in a quarter.

In terms of expenses, allowance for loan losses remained virtually stable, while general expenses posted some growth, a significant growth due to the [indiscernible] agreement and the non-like-for-like events that I already elaborated. As we have said in the past, 2014 remains a year with top line pressure.

This is not a surprise because we have been underlying that situation. Besides, these comprehension relate basically to the change of the mix.

We also have the impact from the capital optimization plan. In any case, hence, tend to be positive, as I have elaborated, both in the credit portfolio and in general terms in the P&L.

Finally, our productivity and efficiency plans are delivering the expected results, but the most important point is to maintain our focus on transforming the bank into a client lend -- client-led bank, that we will have its reflect on the upper part of the P&L. Our management priorities have to continue delivering results, while we work on that part of the profit and loss account.

Thank you very much. We open the floor now for questions, if there are any.

I have 3 questions in the webcast. The first one regarding the loan portfolio is, Santander is accelerating credit growth, why would overall growth in the system is decelerating.

What explains such behavior by Santander? And what are the risks involved?

Thank you. Sorry, I was on mute.

Thank you very much. I would like to underline, first thing, that with regards to the portfolio, as you know, both SMEs and payroll financing, they're being kind of a drag in the past.

In SMEs, we are remodeling the offer. That offer, which I mentioned briefly in the presentation is called Santander Advance, which is basically a full-package service that is going to be offered to our SMEs.

And that will come into force probably around first Q next year. In any case, what we will start to see is that, that dragging effect of SMEs in the past is kind of fading [ph] away.

We have seen that in this quarter, SME lending growth has gone from being negative to almost being nonnegative at the end of the quarter. So we see a kind of an improvement on a marginal way in terms of SMEs.

In terms of payroll, you already know the story. It's basically, we reached an agreement with [indiscernible].

We are in the process of looking that app, trying to make it work and start to be active in the way we design, and we present it to the market probably starting of next year. So these 2 things that were kind of negative in the past are, let me call it, less negative now compared to other quarters.

At the same time, we are growing in kind of lower spread, higher-quality loans. The portfolio, I already mentioned the dynamics, good growth in corporates -- in large corporates, in real estate and drops in revolving that generate interest rates, a 9% drop in the quarter in revolving that generate interest rate, which means that you have pressure, of course, from the -- on the -- both on the NII and on the spread.

But I also mentioned that, that should be reflected in the cost of credit in the next quarters. Obviously, we are quite busy [ph] In terms of asset quality issues.

That is something that has always been underlined. And as you may see, the credit quality is clearly under control.

Thank you.

We have 2 questions on the NII topic. One regarding spreads and the other one regarding the line Others.

The one regarding spread is the decreasing spread in the quarter was quite strong. You have mentioned that the mix expense decreased.

Could you provide more details? What should one expect in terms of spread evolution going forward?

And the question regarding the line orders is the following: this line has improved substantially in the quarter. How sustainable is the improvement?

Okay, thank you for both questions. Let me elaborate a little bit more in NII.

And as I mentioned just in the previous question, the change of mix is strong. I mentioned the 9% drop in those revolving loans.

That is a part of revolving loans that generate interest rates, a 9% drop in -- on the Q is quite strong. This is obviously something that we have been executing during the last quarters and now in this quarter was more intense.

Obviously, we don't expect this to be extrapolated to other quarters. I would say that our general comment is that probably that kind of change of mix or normalization of the spreads is something that is structurally, and I'm speaking here more in medium to long term, what we would see on the Brazilian financial system going forward.

Probably the discussion here is the base, the acceleration or not, the moments where this happens. And here, the visibility is lower.

But I would say that the trend is there to stay. With regards to Others.

Well, I think I already elaborated a lot on this, but basically the idea is that we are kind of returning to -- in a volatile line because we have quite a volatility in this -- in the P&L. We are returning to what we could call, if we can call this an average of the history.

Well, we'll return into that average, yes? Remember that we have the impact of the accounting of the Tier 1 instruments in the second Q.

It was one of the reasons why we showed an extraordinary low level of Others and basically, we are returning what -- to what we have seen as an average in the previous quarters. I don't think there is nothing more or less established [ph] there.

We received one question regarding the fee issue. The question is the credit policy growth seems to be weak for a company that is still an entrant on the acquiring business and has integrated GetNet in the quarter.

What explains this? How GetNet integration is behaving?

Were there any major accretion related to the integration?

Okay. With regards to fees.

We have several things there. I already pinpointed the different issues in the year-on-year and on the quarter.

The year-on-year were already known. On the quarter, we have this final readjustment in between lines.

So I will underline that the business is growing -- what I mentioned, the 5% Q-on-Q. So I will say it has more to do with accounting things and nothing more than this type of reclassifications that you have to do.

We thought of doing the statements, but we thought it would make it more kind of less clear. So we just -- we prefer to explain it as it happened.

In any case, obviously, in between GetNet, our credential [ph] business and being one of our main products, credit cards. Obviously, the growth in these lines should continue to be important.

We have one question regarding asset quality. And the question is asset quality has improved in the quarter, what is the perception for 2015?

I also think I mentioned a lot about the credit quality issues. I mean, the general trend is quite positive.

Either you take balance situations, you take P&L ratios or whatever. So I think that both current and leading indicators are positive and pointing in the right direction.

We expect the change of mix, of course, to be reflected on that evolution, and we continue to have a strong focus on credit quality and credit standards. I will also invite you to see -- I think comments on the annexes, Felipe?

We have the vintages, the ZAFRAs. We have the vintages there and if you see all of them, are also pointing in a kind of a -- quite a positive direction.

I think, I'm trying to find it. It's here, Slide 34, if you want to look in the presentation in the Annex.

And you can see that individuals, corporate and even car finance that had a little bit of a peak in the previous quarter. They are all pointing down.

So the trend is positive. We don't have any kind of concerns or anything that could mean a concern for us.

So that's it, thank you.

We have no more questions coming through the webcast. If anybody wants to pose a question through the phone, please?

Okay. Thank you very much to all of you for being there in this third Q results.

I see that we have answered basically all the questions posted. Any additional things, please do come to us, and we will try to respond.

Thank you for being there.