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ANNUAL REPORT 2006
Other states104 branches
São Paulo1.427 branches
Rio de Janeiro125 branches
Espírito Santo9 branches
Paraná65 branches
Santa Catarina67 branches
Rio Grande do Sul156 branches
Minas Gerais73 branches
PROFILE
Santander is one of the largest private banks in Brazil in terms of assets,
a refl ection of its entrepreneurial, innovative and daring profi le, and one of
the leading banks in São Paulo state.
Santander has more than 7.4 million clients and operates in all areas of the
fi nancial market. It concentrates its activities in the South and Southeast of Brazil,
the area responsible for the largest part of domestic GDP. The Bank employs
23,355 members of staff and has an infrastructure of 2,026 branches and bank
attendance posts, and 7,440 electronic cash dispensing machines in 600 towns
and cities.
Santander was the main source of the Santander Group’s growth plan in 2006 in
the region and ended the year with total assets of R$ 107.2 billion, shareholders´
equity of R$ 8.1 billion, a Basle index of 15.4% and business volume (loans,
deposits, investment and pension funds) amounting to R$ 110.5 billion.
These results were equivalent to 11% of the net income of the Santander Group,
its parent company, and 33% of income in Latin America. The Santander Group
is based in Spain and is the largest Bank in the Euro zone and among the world´s
largest fi nancial institutions. It is celebrating its 150th anniversary in 2007.
The Santander Group employs 130,000 people, has 69 million clients and 10,852
branches in more than 40 countries.
SANTANDER GROUP VISIONSantander wants to consolidate itself
as a large International Financial
Group, which provides a growing
return to its shareholders and satisfi es
all the fi nancial needs of its clients.
To achieve this, it has a strong
presence on local markets combined
with corporate policies and global capacities.
SANTANDER GROUP MISSIONTo develop and consolidate a leading
fi nancial franchise in the South and
Southeast regions of Brazil, by creating
value for shareholders, clients, employees
and the communities in which we operate.
CORPORATE VALUES OF THE GROUP
Leadership: A passionate desire for
leadership in all markets where we are
present, with the best teams and a
constant focus on clients and results.
Dynamism and fl exibility: Initiative and fl exibility to discover and exploit business opportunities ahead of our competitors and the agility to adapt to changes on the market.
Financial strength: The strength of our balance sheet and the cautious management of risk are the best guarantees of our ability to grow and create value for our shareholders in the long term.
Innovation: The constant pursuit of products, services and processes that meet the needs of the customers and allow us to increase our return at a rate which
is higher than that of our competitors.
Aggressive comercial approach:
The customer is the focus of our strategy.
We want to make continuous improvements
in the way of funding, satisfying and
forming relationships with customers by
providing a wide-ranging selection of
products and services, which are always
of the best quality.
Professional ethics: As well as strict
compliance with the law, the Codes of
Conduct and the internal regulations, all
Santander employees operate with utmost
honesty and transparency and always put
the interests of the Group and customers
above their own personal position.
Results (R$ Million) 2006 2005 Variation %
Income from Financial Operations* 14,498 12,298 17.9%
Revenues from Services Rendered 2,836 2,306 23.0%
Gross Profi t from Financial Operations* 5,435 4,961 9.6%
Income from Operations* 1,641 1,868 -12.2%
Net Income* 1,260 1,109 13.6%
Balance Sheet (R$ Million) 2006 2005 Variation %
Total Assets 107,186 88,934 20.5%
Deposits 31,746 29,744 6.7%
Investment Funds 41,261 31,668 30.3%
Credit Portfolio 37,509 28,982 29.4%
Stockholders´ Equity 8,115 7,537 7.7%
Return and Productivity 2006 2005 Variation %
Return on Equity – ROE 16.1% 21.6% -5.5%
Return on Assets – ROA 1.3% 2.2% -0.9%
Loan Portfolio Quality Ratio (AA-C rating on the total portfolio) 94.0% 92.9% 1.1%
Effi ciency Ratio 58.9% 57.1% 1.8%
Basle ratio 15.4% 14.1% 1.3%
57,668
70,437
90,394
110,516
2006200520042003
Business Growth*R$ Million
Credit
Deposits
Investment Funds
*Total Business = Credit + Deposits
+ Investment Funds
23,0
1718
,049
16,6
02
26,1
7422
,670
21,5
93
31,6
6829
,744
28,9
82
41,2
6131
,746
37,5
09
+22.3%
Rating Long term Short term
Fitch Rating Support 3
National Scale AA + (BRA) F1+ (BRA)
Local Currency BBB- F3
Foreign Currency BB+ B
Standard & Poor’s National Scale brAA brA-1
Local Currency BB B
Foreign Currency BB B
*The 2005 fi gures do not include the result from the sale of shares of AES Tietê amounting to R$ 635 million.
3
1. Chief Executive Offi cer´s Message 4
2. Santander in Brazil 6 A Bank Focused on the Customer 8 Focus on the Customer within the Network 9 Solid Growth 10 Pursuing Leadership on the Domestic Market 11 Santander Group and its Global Reach 12
3. Our Business 14
4. Our Employees 50
5. Corporate Governance 58
6. Our Social Investment 62
7. Risk Management 66
8. Financial Statements 86
9. Corporate Information 142
CONTENTS
Edua
rdo
Sim
ões
CASA 1 (São Paulo)
The Institution underwent a
revolution in record time and we still
managed to double our business in
three years. All this effort brought
rewarding results and an even
greater challenge to our team: to
grow at a faster rate than the other
banks and be the best bank in Brazil.
Santander is now a modern Bank,
with innovative products, the most
modern technology, skilled teams
which are completely integrated,
a completely remodeled organization
and is prepared for a new stage
of expansion.
This burning desire for growth is
part of the DNA of the Santander
Group, elected the ‘Best Bank in
Latin America in 2006’ by the Global
Finance and Euromoney magazines.
with innovation, daring and an
aggressive commercial approach.
There are many examples to confi rm
the success of this approach. We
surprised the market with the launch
of a number of differentiated products
in 2006, such as the Santander Light
Credit Card, which brought more than
500,000 new customers in only four
months, and the Multi Returno Funds,
which made the Bank the leader in the
multi-market retail sector. Besides this,
we are proud to have been pioneers in
introducing mortgage products with
fi xed installment periods of up
to 20 years.
The strategy of creating differentiated
products and services which are
identifi ed with the different market
segments is in line with the Retail
Banking 20.10 Project. This program
is directed at implementing a
business model based on excellence
in serving, winning, forming links
with and retaining customers, both
individuals and small and medium-
sized companies.
We can count on a team of local
executives with a global view of
The year 2006 demanded great teamwork and, for this reason, it will be a milestone in the history of Santander in Brazil. We ended a fi ve-year period of transformations, with the conclusion of projects which were essential in order to build strong, sustainable growth. We fi nalized the modernization, including the integration of all the systems and the incorporation of Santander´s banks in Brazil. Moreover, to consolidate this whole process, we standardized the Santander brand at a national level.
CHIEF EXECUTIVE OFFICER´S MESSAGE
I am certain that all these conquests
Santander has made in Brazil in recent
years have resulted from the daily
exercise of our values: leadership,
dynamism and fl exibility, fi nancial
strenght, innovation, aggressive
commercial approach and professional
ethics. This allows us to look ahead
with optimism and back with pride
at our history until now. In 2007, the
Santander Group will commemorate
150 years since it was founded. Here,
in Brazil, Santander is also a traditional
Bank with deep roots which date to
1858 in the south of the country and
from 1909 in the state of São Paulo.
This link is fully identifi ed with the
Brazil´s current positioning which is
marked by the pursuit of long-lasting
relationships with its clients combined
5
business and intend making all our
employees aware that they are part of
a worldwide organization. The Group´s
initiative in giving each of its 130,000
employees worldwide 100* shares
as part of the celebrations marking
its 150 years in 2007 shows its
commitment to creating a team with
different cultures but the same values
and a global identity.
The strengthening of this identity
was the foundation of our victories
in 2006 and will guide our projects
in the coming year. One of these
conquests was a source of great pride
since we won a vote of confi dence
from hundreds of thousands of
public employees in São Paulo state
who expressed their clear preference
for Santander when their salary
accounts were transferred. Another
great reason for satisfaction was the
signifi cant expansion of our presence
in Rio de Janeiro, a strategic region
for the organization, by winning
the payroll business of the municipal
government. This breakthrough
multiplied our presence in the state
capital and, in less than 90 days, we
had established a complete, fl exible,
effi cient network with an operating
and technological structure.
This allowed us to serve our 165,000
new customers with the highest
degree of quality right from the fi rst
day operations started.
This backdrop allowed us to
achieve excellent results in 2006.
We increased our client base by
750,000 new customers, arriving at
a total of 7.4 million, and business
volume increased by 22%. Revenues
refl ected the higher business growth
and increased by more than 20%.
Funding and credit expanded by more
than 20% in the year, led by loans to
individuals and by investment funds.
Global Wholesale Banking brought
us excellent results in providing
integrated service to international
customers, highlighted by our leading
the largest fi nancing operation in the
emerging markets in 2006.
Our mission is to expand our business,
with a strong emphasis on professional
ethics, corporate responsibility and
commitment to work for the economic
and social growth of the country.
We are concentrating our social
investments on education, particularly
the university area, with the aim
of encouraging the practical
dissemination of knowledge and
bringing about better opportunities
for young people to develop.
This approach led the Group to
create a unique alliance with
the academic world through the
Santander Universities program and
the Universia Portal.
We thank our whole team for the
conquests they have achieved during
the year as well as our customers,
shareholders, suppliers and the
community for the confi dence they
have placed in us.
SANTANDER IS A MODERN,
CAPABLE, STRUCTURED BANK
WHICH IS PREPARED TO WIN
OVER, DELIGHT AND GAIN THE
LOYALTY OF AN INCREASING
NUMBER OF CUSTOMERS.
Gabriel JaramilloChief Executive Offi cer
of Santander in Brazil
*Subject to the approval of the General Shareholders Meeting of the Santander Group to be held in June 2007 in Spain.
João
Lui
z M
usa
A TOTALLY RENOVATED BANK WHICH IS FOCUSED ON THE CUSTOMER
SANTANDER IN BRAZIL
The year 2006 marked the
conclusion of the transformation
stage of Santander in Brazil.
This process has modernized
the Bank, integrated cultures,
consolidated the Santander brand
and created a powerful institution,
with great critical mass, directed
at the demands of the market and
focused on the customer.
The change process involved three
distinct stages:
Unifying the Brands
The process of unifying the
brands was completed in March
2006 and allowed all customers
to have access to differentiated
products and services created
to meet their needs;
Technological Integration
The operational integration
was concluded in April 2006
with the modernization of
the systems of the Group
companies in Brazil.
¨
¨
This allowed activities to
be standardized, processes
to be rationalized and the
management of the branch
network to be improved. It also
created instruments to develop
new products and services
which had a big impact on
the market and strengthened
customer loyalty; and
Legal Incorporation
The legal merger of the banks
within the conglomerate in
Brazil occurred in August 2006
and substantially improved
the organizational model,
eliminated duplicated operating
processes and made the Bank´s
management instruments
more effi cient.
Santander is now totally renovated
and, with its skilled base of talents,
has become more fl exible and is
in a position to provide the most
attractive market solutions in
¨
Brazil. This will allow it to succeed
in its burning desire – to be an
aggressive Bank in launching
innovative products and services,
attentive to market opportunities,
focused on the needs of its
customers, highly competitive
and aligned with the drive and
strength of the Santander Group
worldwide.
These changes occurred against an
extremely favorable business and
sector backdrop and helped boost
Santander´s growth substantially in
2006. The Bank is now structured
and well positioned in the market
to reach new levels of expansion
and create value for the Bank,
its customers, shareholders
and employees.
Edua
rdo
Sim
ões
Cláudia and Lilian – Investor Relations
Santander in Brazil
The changes made in recent years have made the Bank more fl exible and ready to create differentiated products and services. The aim is to surprise the market but, above all, the customers.
Santander in Brazil
Vanessa
Commercial Network
The restructuring process to make
Santander even more fl exible and
effi cient in creating innovative
solutions required discipline and
alignment, team work and a shared
effort with a single objective –
the customer.
The Bank aims to create differentiated
products and services which are daring
and delight the customer and establish
a partnership with its accountholders
to encourage the construction of long-
lasting relationships.
In 2006, Santander reinforced its
strategy and launched initiatives
to strengthen links with individual
customers, expand business with
corporate customers and boost
international synergies in Global
Wholesale Banking, in order to achieve
sustainable growth.
These initiatives led the Bank to gain
750,000 new customers, taking
its client portfolio to 7.4 million.
A large part of this acquisition
was due to winning the payrolls of
large multinational companies and,
particularly, the public employees
of the municipal government of
Rio de Janeiro, a region of strategic
importance to the Bank.
Defi ned strategy:
A BANK FOCUSED ON THE CUSTOMER
Edua
rdo
Sim
ões
Refl e
xus
Foto
s
Santander Customer
Ibirapuera Branch (São Paulo)
9
Santander Customer and Ana Paula
Faria Lima Branch (São Paulo)
Santander Customer
Share Room (São Paulo)
Graça
Commercial Network
Refl e
xus
Foto
s
Santander launched a daring growth plan to expand, link up with and retain its customer base and consolidate its image as a solid, agile and innovative bank.
Clear objectives:
FOCUS ON THE CUSTOMER WITHIN THE NETWORK
In 2006, the Bank launched its
process to speed up its growth on the
Brazilian market with the introduction
of a daring growth plan launched in
November called the Retail Banking
20.10 Project. To improve the business
model and personnel management
and reinforce the leadership of the
Group in the region, the project is
renewing the expansion process of
fi nancial services and reaffi rming its
ambitious goal of becoming the best
Bank for customers in the region.
The aim of the project is to expand the
base, link and retention of customers
and consolidate Santander´s image as
a Bank which invests in relationships,
is solid and innovative, and able to
surprise and delight customers.
Expansion – The focus of the
acquisition of new customers is based
on four initiatives: to improve the
conquest of new accountholders by
the branch network, intensify the
pursuit of company payrolls, maintain
a specialized sales force and create
relationship channels for non-clients
with differentiated products (Light
Credit Card, auto fi nance and payroll
loans, amongst others).
Relationship – To strengthen
the relationship with the current
accountholders, new products and
services were launched. Management
tools were also introduced, such
as SuperBase, which identifi es the
right product for the needs of each
customer profi le. This effort has
already brought results. The rate of
forming relationships with individual
clients increased by an average of 25%
over the year in terms of providing
at least three or four differentiated
products or services per customer.
Retention – To maintain its
partnership with its customers,
Santander adopted measures to
establish an even stronger and more
dependable link with them, improved
the service in the branch network and
developed relationship mechanisms,
such as the Retention Center.
Edua
rdo
Sim
ões
Edua
rdo
Sim
ões
57,668
70,437
90,394
110,516
2006200520042003
Business Growth*R$ Million
* Total Business = Credit + Deposits + Investment Funds
+22.3%for year
Santander in Brazil
History of conquests:
SOLID GROWTH
Santander has registered above average growth in recent years and gained
market share in various sectors. This growth is sustainable and is seen
particularly in the expansion of the individual and corporate customer base
with the launch of differentiated products and services.
The investments made in the business paid off in terms of the gains in effi ciency
on other fronts and led to an increase of 22.3% in business volume.
This good performance was obtained even though the Bank was undergoing its
transformation process and put Santander among the best fi nancial institutions
in Brazil. It is now renewed, modernized and totally focused on the market and
ready to take advantage of the opportunities from this new stage of growth.
Edua
rdo
Sim
ões
Cidade Universitária Branch
(São Paulo)
11
CASA 4 – Wholesale Banking (São Paulo)
Ambitious goal:
PURSUING LEADERSHIP ON THE DOMESTIC MARKET
Mary
Faria Lima Branch (São Paulo)
The invigorated, modernized Santander
is totally focused on and ready to take
advantage of the opportunities arising
from this new stage of growth.
Through its ability to provide fast
business solutions and its dynamic
positioning, linked to the current
favorable economic outlook,
Santander will intensify its operations
in Brazil. Its goals include:
maintaining a rate of expansion
which is higher than the banking
sector, gaining market share
and preserving the quality of its
portfolio;
increasing customer revenues
by more than 20% a year in the
coming three years;
strengthening the relationship with
customers by means of growth
(expanding, forming relationships
and retaining customers);
¨
¨
¨
increasing the range of products
which add value to the Business/
Companies* segment;
expanding the distribution business
(cards, payroll loans and auto
fi nance) to accountholders and non-
accountholders, nationally;
permanently pursuing improved
effi ciency to fi nance commercial
expansion, increasing the use of
installed capacity;
increasing the mortgage business,
taking advantage of its international
experience;
exploiting the potential of global
businesses such as Insurance, Cards
and Global Wholesale Banking;
becoming one of the best companies
to work for in Brazil.
¨
¨
¨
¨
¨
¨
The Bank´s efforts are focused on growth and it intends becoming one of the best retail institutions on the Brazilian market within a short period.
Edua
rdo
Sim
ões
Edua
rdo
Sim
ões
*Companies with revenues of up to R$ 20 million
Andréa and Renata
Individual Customer Segment
Refl e
xus
Foto
s
Expertise and worldwide support:
SANTANDER GROUP AND ITS GLOBAL REACH
Santander in Brazil
As part of the Santander Group, Santander is structured to provide
a differentiated service to customers who need a strong Bank in Brazil
and abroad, operating with the same effi ciency and accessibility.
This synergy permits knowledge and service technology to be shared and
the continuous improvement of its operations. The Bank can rely on the
experience of the Santander Group which is celebrating the 150th anniversary
of its foundation.
The Santander Group
The Santander Group is based in Spain and is the biggest fi nancial institution
in the Euro Zone by market capitalization, the seventh largest in terms of
profi ts and the leader in consumer fi nancing in Spain, Portugal, Germany and
Italy. The Santander Group has 834 billion euros in total assets and manages
funds amounting to more than 1 trillion euros. The Group had a net income
of 7.6 billion euros in 2006, 22% higher than the 6.2 billion euros obtained
the previous year. It has a network of 10,852 branches, 130,000 employees
distributed throughout more than 40 countries and 69 million customers.
The Group operates mainly in three broad areas: Retail Banking, Global
Wholesale Banking (for large clients) and Asset Management and Insurance.
Santander concentrates its business in Continental Europe, which was
responsible for 51% of the net income in the year – and 15% came from the
UK, through Abbey.
The Santander Group has the leading banking franchise in Latin America
and handles business volume of around US$ 250 billion (loans, deposits,
investment and pension funds) and has 4,368 branches. Net income in the
region in 2006 came to US$ 2.86 billion, 29% higher than in 2005. This
represented 34% of the Group´s net income for the year. Brazil was the top
performer and was responsible for 11% of this result, followed by Mexico,
with 8%, and Chile, with 7%.
In 2006, the Santander Group was elected the Best Bank in Latin America
by the Global Finance and Euromoney magazines, which also featured the
positive way in which the Altair technological system had been established
in Latin America.
Ace
rvo
Sant
ande
r
Rio de Janeiro Branch
(Rio de Janeiro)
FTSE4Good Index Series
13
The Santander Model
The Santander Group has a large
world presence and a well defi ned
business model built on solid
principles. The model also provides
the required fl exibility to anticipate
opportunities for growth.
The expansion and return the
Santander Model is sustained by the
business model itself, structured on
fi ve pillars.
Quality of Service – Proximity to
the customer brings the chance of
identifying customer needs and ways
in which the provision of services
can be improved, responding rapidly
to these expectations and, as a
result, ensuring customer loyalty
and expanding the customer base,
thereby increasing revenues.
The Santander Model also assumes
customer segmentation which helps
focus on objectives, concentrates
efforts and boost results.
1.
Effi ciency – This attribute demands
permanent restructuring since
effi ciency foresees not only the
discipline required in terms of costs
but commercial agility and latest
generation technology to improve
customer services.
Quality of credit – The Group
has developed its own models
of internal risk management,
with global guidelines backed by
multi-local management. All the
institutions within the Group work
with predictable low-risk margins.
Capital discipline – The capital is
directed at the businesses with
the highest return potential
and which are aligned to the
institution´s strategy. This analysis,
combined with the evaluation of
the risk indices and the recurring
generation of capital, ensures
sustainable growth.
2.
3.
4.
Global vision – The Group´s business
in each country is managed by local
teams who know the peculiarities
of their markets and have the
strong backing of the Group in
global questions, such as risk
evaluation and management, and
auditing. Santander operates in
two important regions (Europe
and Latin America), thereby
ensuing diversifi cation in terms of
geography, currencies (euro, dollar
and pound) and risks, thanks to
a balanced presence in developed
and emerging markets.
5.
QUALITY OF SERVICE EFFICIENCY CREDIT QUALITY CAPITAL DISCIPLINE GLOBAL VISION
CUSTOMER FOCUSED CONTINUOUS
RESTRUCTURINGLOW & FORESEEABLE
RISKGROWTH CAPACITY DIVERSIFICATION
Increased customersatisfaction, loyalty
and linkage
Focus on businesseffi ciency
Strict riskmanagement
Highcapital ratios
International Groupspecialized in the
commercial market
Technological ImprovementsPartenon
AltairAlhambra Project
Shared managementGlobal business
Supported by localbusiness
Common metrics throughout the Group
unitsIntegrated procurement
managementDevelopment of internal
models
High generation of recurring capital
Balance sheet in three currencies
Santander Group – Widespread Presence around the World
Guided by a well defi ned model
57,668
70,437
90,394
110,516
2006200520042003
Business Growth*R$ million
Credit
Deposits
Investment Funds
* Total Business = Credit + Deposits + Investment Funds
23,0
1718
,049
16,6
02
26,1
7422
,670
21,5
93
31,6
6829
,744
28,9
82
41,2
6131
,746
37,5
09
+22.3%
A BANK WHICH IS WELL STRUCTURED AND ALERT TO MARKET OPPORTUNITIES
OUR BUSINESS
Santander´s consistent, structured operations, the
launch of differentiated products and an effi cient
business model, aligned with the Santander Group,
brought impressive results in 2006. The total business
volume came to R$ 110.5 billion, an increase of
22.3% over the previous year.
These results occurred at the same time as the
conclusion of the transformation stage to meet the
business expansion strategy In Brazil, which involved
all areas. During this period of change, the Bank
presented a story of growth.
Credit more than doubled over the last three years,
funding increased by almost 80%, business revenues
have risen by more than 20% a year and the
customer base rose constantly.
Santander has become a powerful retail banking
which is well structured, totally directed at the market
and attentive to opportunities for growth. The end
of the restructuring process boosts the expectations
for business, aided by the fact that it occurred at
a favorable moment for the Brazilian economy.
Armando (Individual Customer Segment) and Agustín (Risk)
Edua
rdo
Sim
ões
our business
During its transformation process, Santander doubled its business volume. Now, completely restructured, it should grow even more.
André
Economic Research
174165
133
31
Credit / GDP (%) Credit / GDP – Brazil (%)
Source: World Bank, Moody´s and BCB Source: Brazilian Central Bank (BCB)
27.9
200320022001200019991998 2004 2005 2006UN
ITED
STA
TES
UN
ITED
KIN
GD
OM
SPA
IN
BRA
ZIL
24.926.4
24.722.0
24.0 24.5
28.130.8
our business
Potential for Banking Opportunities
Modest penetration of credit in relation to GDP suggests high potential for expansion of banking.
Santander believes that the regulatory environment is heading towards the relaxation of the market. This development
favors banks with its profi le: an aggressive business approach, fl exible and innovative in launching products, with
excellent infrastructure, the right size and international know-how.
Infl ation remained under control in
2006 and led to cuts in interest rates,
making banking activity even more
buoyant. Infl ation and interest rates
are moving towards convergence on
a series of economic factors and Brazil
is heading for a good country risk and
investment grade rating.
This positive outlook is translating
into higher levels of income
and employment, lower infl ation,
a rise in the minimum wage and the
appreciation of Brazilian assets, factors
which show confi dence in the future
of the country. These helped maintain
the good period the economy is
enjoying and encouraged greater
access to credit. There has been
increased demand for payroll loans,
auto fi nance and credit cards –
products where the Bank is extremely
competitive. The higher supply of
credit in Brazil, although still weak,
indicates a high potential for greater
banking opportunities and the growth
of business.
FAVORABLE ECONOMIC OUTLOOK
Dec
o Ro
drig
ues
17
Funding Profile2006
Open Market
Issues
Obligations
Others (abroad)
Investment Funds
28%
22% 4%
9%
1%
36%
2004 2005 2006
48,844
61,412
73,007
+6.7%
+30.3%
Deposits and Investment FundsR$ million
Investment Funds
Deposits
26,1
7422
,670
31,6
6829
,744
41,2
6131
,746
+18.9%
2004 2005 2006
70,545
92,124
114,776+24.6%
Total Funding*R$ million
* Deposits + Investment Funds + Funding on Open Market + other funding
FUNDING
Santander´s total funding, including
assets under management, came
to R$ 114,776 million in 2006, an
increase of 24.6% over 2005. Total
funding is an important indicator of
the growth of the Bank´s businesses.
In general terms, the Bank is
responsible for managing 4.6%
of investment funds, 3.9% of
private pension funds and 4.7%
of total funding.
The Bank´s deposits rose by 6.7%
to R$ 31,746 million in the year.
Time deposits rose by 5% over 2005,
equivalent to a market share of 5.9%.
Sight deposits and savings rose by
11.6% and 5.4% respectively, to
a total of R$ 9,790 million.
The Bank is alert to the possibilities
of increasing funding and offers
services with higher added value
to attract funds, such as the
Investment Consulting Center which
provides personalized advisory
services directly to clients who
are Preferential Customer investors.
Funding on the open market rose
from R$ 20,000 million to R$ 25,475
million, an increase of 27.4%.
The Investment Funds under
management grew by 30.3% and
amounted to R$ 41,261 million.
During the year Santander launched
new versions of its highly successful
Greater Multi Retorno Mais (Multi
Return) Fund. The Fund aims to
obtain gains in different market
such as equities, dollar, interest rates
and derivatives. It was welcomed
by customers since it combines the
return of a multi-market fund with
an insurance policy, thereby ensuring
the return on the amount invested.
In 2006, the Bank increased its
market share in the Retail Multi-
market sector to 36.8% from 31.0%
in 2005.
Santander increased its funding by 24.6% in volume with the emphasis on investment funds which grew by 30.3% a year.
2004 2005 2006
21,593
28,982
37,509+29.4%
Total Credit*R$ million
*Credit Operations + Market Leasing + Advances on Currency Contracts + Other credits
Credit Profile 2006
Individuals
Industry
Services and others
Commerce
Agriculture, housing, financial institutions fand public sector
33%
27%
20%
10%
10%
our business
CREDIT
In 2006, Santander once again
enjoyed a high level of growth in
credit on the Brazilian market. Loan
operations amounted to R$ 37,509
million, 29.4% higher than in 2005.
The Bank provided 5.8% of total
volume of credit in Brazil and
maintained its market share.
Individuals
Operations involving individuals
(auto fi nance, payroll loans, credit
cards, amongst others) amounted
to R$ 12,303 million in 2006, an
increase of 32.3% over 2005.
The auto fi nance sector has a
nationwide coverage of 620 sales
personnel and 5,326 car dealers and
stores, and grew by 49.6% in volume
in 2006, a rise of 0.4% in market share.
In 2006, Santander completed its
offer of credit cards for every market
segment and registered an increase
of 52.5% in credit volume. This is
equivalent to a market share of 4.8%,
1.4 basis points more than in 2005.
The main driver of growth came from
payroll loans discounted from workers´
paychecks which increased by 75.0%
over the year and came to R$ 1,767
million in operations.
Personal loans rose by 17.6% in
the year, due to initiatives such as
making advances on income tax and
the 13th salary. There was a rise in
mortgages of 22.1% which helped
maintain the Bank in fi fth place in the
ranking of mortgages, with the launch
of innovative products such as the
SuperCasa Própria, SuperCasa 20
and SuperOffi ce plans.
Corporate entity
Credit operations for corporate
entities increased by 27.2% over the
previous year (excluding housing and
farm loans) to R$ 21,378 million. The
biggest rise occurred in operations
directed at the industrial sector which
increased by 46.3% while the services
sector rose by 39.0%.
The loan portfolio for Business/
Companies increased by 34.0%
in 2006, highlighting Santander´s
desire to operate with this category
of customers.
The Bank aims to meet all its customers´
needs by providing a combination of
traditional services, such as working
capital, guaranteed account, custody
and check discounting, and other
innovative services, such as company
credit card, insurance, mortgages,
amongst others.
As a result of these efforts, the Bank´s
market share in corporate credit
a with free resources rose from 6.0%,
in 2005 to 6.3% in 2006.
19
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2004 2005 2006
11,805
16,811
21,378
+27.2%
Credit for IndividualsR$ million
Credit for individuals rose
by 32.3% in 2006. Credit
card operations, payroll loans
and auto fi nance led the business
ranking.
Vitório and João
Commercial Network
Márcio
Asset Management
Pedro Paulo, Sergio and Wilson
Commercial Network
our business
Retail
This area serves private and corporate customers with revenues of up to
R$ 20 million. It is organized into:
Branch Network strategically located in the South and Southeast regions to
attend individuals and corporate entities;
Distribution business which manages products for accountholders and non-
accountholders at national level, through credit cards, auto fi nance and
payroll loans; and
Global Business Development, with operational independence and
products which may also be sold within the Bank, such as insurance and
pension plans, capitalization and mortgages.
¨
¨
¨
Companies
This area is responsible for attending companies and business groups with
revenues above R$ 20 million. It provides national coverage, has a high growth
potential and is divided into two segments, Large Companies and Companies.
Wealth Management
This area is responsible for investment funds and asset management (Private
Bank/Asset Management).
Global Wholesale Banking
This area attends domestic and international business groups and large
companies which need sophisticated customized solutions and the strong
infrastructure of a global bank.
Business areas
In line with the Santander Group
world model, the Bank splits its
business into four large operating
areas: Retail, Companies, Wealth
Management and Global Wholesale
Banking.
This model allows each area
to concentrate its efforts on a
determined segment and expand its
knowledge of the customers´ needs
and business opportunities. This
distribution makes the development Re
fl exu
s Fo
tos
Paul
o U
ras
of tailor-made products and services
more fl exible, a strategy which
encourages client fi delity.
Roberto
Treasury
Edua
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Well-defi ned segmentation of the customer base, with differentiated service models
21
MARKET SEGMENTATION To make its client service even more effi cient, Santander has structured itself
with specialist teams to serve each market segment. The model allows the
creation of products and services which fi t the profi le of each segment, thereby
making the business team more effi cient.
Linked to the technological management tools, segmentation allows a faster,
more effi cient service which is tuned to the customer´s needs. This strategy
makes it easier to do business, strengthens the relationship with the Bank and
creates a stronger bond.
Differentiated cards, various investment plans and packages of services were
created which take the customer profi le of each segment into consideration
based on segmentation.
Segmentation has also allowed corporate customers to receive special attention.
The Business, Companies and Large Corporate areas have trained teams
available to offer intelligent, dynamic solutions which facilitate the daily routine
of companies and make their business more fl exible.
The strategy of market segmentation and technological management tools allows products and services identifi ed with the profi le of each customer to be created.
CORPORATE ENTITIES
Business II Revenues from R$ 1million to R$ 20 million/year
Business I Revenues up to R$ 1 million/year
CompaniesDomestic and international
Governments and institutions
INDIVIDUALS
ClassicMonthly income up to R$2,000
ExclusiveMonthly income from R$2,000 to R$ 4,000
PreferentialMonthly income above R$4,000
Private – Investments above R$ 3 millionLarge CorporateBusiness groups and large domestic and international corporations
Jamil
Commercial network
Junior
Commercial network
Distribution of EmployeesDecember 2006
Strong Commercial Model
Business focus on the branch network
Business focus outside the branch network
Customer attendance services
Branch network operations
Risk
Central services
31%
14%
36%
4%
3%
12%
Commercial
Support
our business
RETAIL
The Retail network is located in the most attractive market in Brazil.
The Bank´s aggressive commercial positioning has brought impressive growth in
the Retail operations, particularly in the distribution business (credit cards, auto
fi nance and payroll loans) and Business sectors.
To expand, relate to and retain its customer base, Santander has a powerful,
agile and effi cient business, with a structure designed to identify market
opportunities. This has led to the expansion of operations and closer links with
individual and corporate customers, particularly in the Retail area.
This business model, with its positioning as an aggressive bank offering
innovative products, has important critical mass and infrastructure:
customer scale – 7.4 million segmented customers;
correct technological platform, which sustains sophisticated
management tools;
broad distribution network – 2,026 sales points and 7,440 ATMs –
strategically located in the region of greatest economic growth potential;
strong, motivated talent base – of 23,355 employees, 88% are directed at
meeting the customers´ needs and proposing innovative, ineffi cient solutions,
focused completely on the market and the customer
The banking network is concentrated in the South and Southeast regions. This
is the most attractive market in Brazil and has a per capita income level which
is 40% above the national average. In the state of São Paulo alone, the Bank
has a market share of 11% in the retail network infrastructure (of every 100
branches, 11 belong to Santander).
¨
¨
¨
¨
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s
Santander is strategically located in the South and Southeast regions, the most attractive market in Brazil and is gaining customers with a high business potential.
Pers
onal
Pre
ss
23
São Paulo1,427 branches
Rio de Janeiro125 branches
Espírito Santo9 branches
Paraná65 branches
Santa Catarina67 branches
Rio Grande do Sul156 branches
Minas Gerais73 branches
25.0
8.311.7 12.5 11.4
SPA
IN
BRA
ZIL
SP RJ RS
GDP per capita US$ ‘000
Other states: 104 sales points
This strategic coverage allows the
Bank to win and maintain customers
with high potential for business
generation. This is a public which
identifi es with the Santander profi le
– a global, dynamic, creative Bank,
capable of offering innovative
products developed with the best
world practices.
The goal is to conquer one million
new customers a year by 2010. To
achieve this target, Santander intends
concentrating its efforts in the
acquisition of payrolls, expanding the
corporate segment, and strengthening
the relationship with governments,
institutions and universities. It also
intends intensifying the distribution
business which attracts a large
number of customers for the Bank and
further reinforces the link between
the Bank and public employees in
the state of São Paulo.
Internet Banking – The highly
successful technological integration
of all the systems of the Santander
conglomerate in Brazil in April 2006,
led to the standardization of the
on-line service system and greater
fl exibility in providing new products
and services. Internet Banking
registered 12 million transactions
in 2006.
Wide Distribution
Sales points1 2,026
ATMs 7,440
Customers (million) 7.4
1. Includes branches and bank attendance posts.
Data to 2004. Source: IBGE, FMI and Santander
Gilvandro (Business) and
Vladimir (Commercial Network)
Paulo, Claudio and Cristiane
Business
2004 2005
6,732
9,297
12,303+32.3
Credit to IndividualsR$ million
2006
Individual customers
The volume of credit with these
customers amounted to R$ 12,303
million, 32.3% higher than the previous
year. The highlight of this growth was
the distribution business – credit cards,
which rose by 52.5% in 12 months,
auto fi nance, which rose by 49.6%,
and payroll loans, which rose by
75.0% in the same period.
The increase is the result of the higher
number of accountholders and the
rate of linkage of the customers, which
rose by 25% in 2006. Every client has
the opportunity to use at least four
differentiated products or services.
There was an across-the-board rise
in market share of products for
individuals. We gained 1.4 basis points
in one year with credit cards, 0.4 basis
points in auto fi nance and 0.6 basis
points in payroll loans. This raised
the Bank´s market share of loans to
individuals with free resources to
5.8% compared with 5.4% in 2005.
The goal in 2007 is to attract around
one million new customers by using
the opportunities for leverage in the
branch network, payroll, specialist
sales forces and channels for non-
accountholders.
our business
Business
The Business segment (for companies
with revenues of up to R$ 20 million)
will be one of the drivers of Santander´s
business expansion in Brazil. This area
has over 300,000 customers and
Santander is positioned as a relationship
bank with this public. To boost its
share of this market, the Bank created
an exclusive team responsible for
implementing the strategy of acquiring,
forming a relationship with and retaining
customers, with areas dedicated to
developing products, marketing,
planning and business intelligence.
Santander is focused on creating
products which strengthen the
commercial operations of these
customers. A good example was the
launch of the Conta Garantida e do
Capital de Giro com Vinculação de
Recebíveis de Cartão (Guaranteed
Working Capital Account with the
Receivables from the Card) as a
guarantee. By requiring proof of only
six months´ revenues to contract the
products, Santander has become one
of the most aggressive banks on the
market. Another breakthrough was
its business card which is the most
complete on the market. With this
card, the company can set credit limits
and the kind of establishments in
which the employee can use the card.
To offer a personalized service, the Bank
has a team of more than 500 relationship
managers who are specialists in fi nancial
consultancy. They are trained to advise
the company, understand its needs and
create a service plan which helps its
business management.
The goal in 2007 is to strengthen
the portfolio management, raise the
volume of business and become one
of the main banks offering credit in
this area. To achieve this, risk analysis
tools and mechanisms were created
based on methodologies developed
with the international experience of
the Santander Group.
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sEd
uard
o Si
mõe
s
25
Branch Network Business
Santander is on the way to
consolidating itself as a strong Bank
in customer relationship, structured
to anticipate demand and services
which facilitate the daily routine of
its customers, providing appropriate
solutions to the profi le of each
segment. The aim is to be the client´s
main Bank.
To identify correctly the market
demands and trends and create
products which delight and surpass
customers´ expectations, the Bank
relies on systems to measure and
analyze the relationship which can
deepen knowledge of these customers
and their needs.
The Bank strengthened the A+
Program, established to improve
service at the sales points, by training
employees to help them adopt ideal
practices in the customer relationship
and identify business opportunities.
Due to the positive results of the
Program, an A+ team was created
to improve the teams and service
on a constant basis. In 2006, this
team created four new tools to
train the network staff and held
more than 500 workshops in which
over 7,000 employees took part.
The area´s initiatives included the
creation of a new concept of the
branch – modern, spacious and well
equipped – to make the service more
effi cient and comfortable.
Attentive to the potential of this
segment and in line with the
positioning of the Santander Group,
which gives priority to quality,
fl exibility and effi ciency, Santander
is expanding and modernizing its
branch network.
The Retail area also has relationship tools
and personalized attendance centers.
Superbase – A tool which allows
employees to access the customer´s
data and get to know his or her
historical relationship with the Bank.
The program also identifi es products
which fi t in with this customer´s
profi le so the manager can offer
the most adequate solutions and
increase business effectiveness.
Solution Center – This area has
employees who answer questions,
send suggestions and propose
solutions to customer complaints.
A survey in 2006 showed that the
average time to attend to customer
requests was only two working days
and that 83% of the comments
received by phone were dealt with
at the fi rst contact.
Customer Retention Center – This
area has a team of 780 employees
and focuses on two areas:preventive,
aimed at customers who show some
inclination to leave the Bank, and
reactive, aimed at customers who
ask to close their account.
Information generated by these
tools serves as a reference to create
innovative products and services which
encourage customers to become closer
to the Bank, establish stable relations,
quality and create value for customers.
¨
¨
¨
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Juscelino Kubitschek Branch
(São Paulo)
Sergio
Governments
Silvio
Cash Management
Malanga
Commercial Network
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s
our business
Differentiated service
Santander is specialized in differentiated
attendance and creates products and
services focused on the specifi c needs
of groups of customers. These clients
can rely on dedicated teams which
help form a closer relationship and
create personalized, effi cient solutions.
Preferential segment
The Preferential Segment is composed
of individuals with monthly income
above R$ 4,000 who represent around
10% of the total of Retail clients.
Santander provides differentiated
services, such as more elaborate
fi nancial advice to optimize their
accounts and investments.
To serve these customers, 262
special areas and 90 share rooms
were created in the branches, and
a specialist telephone center and an
Internet portal with exclusive offers
were set up. These customers also
have a specially trained team of eight
superintendents, 66 managers for
The results obtained from the F1 program exceeded expectations: 500,000 public employees from São Paulo said they were ready to maintain Santander as their main Bank.
individuals and 772 for the Preferential
Business, advised by the individual
customer segment area, which provides
personalized attendance in contracting
credit products, investments, insurance
and pension plans. The strategy is to
present advantages to link up with
these customers.
Public Employees
The Bank has an in-depth knowledge
of the needs and differentials for
the adequate attendance for public
employees. This has been achieved
through an exchange of experiences
and sharing know-how among the
institutions within Santander. Banespa
has had particular experience of
providing employees of the São Paulo
state government with services for
around 100 years.
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27
Carmen and Fabio
F1 Program
Paulo (Control Management), Nelson
(Operating Processes) and Walter (F1 Program)
F1 Program
The F1 Program was launched in 2005
and aims to strengthen the fi delity and
retention of one of the Bank´s most
important customer niches: more
than 800,000 public employees in
São Paulo state. Exclusive products
and services have been developed for
this group, with the aim of improving
their views on the quality and
differentiated service and prove that
Santander is the best institution to
serve them.
These initiatives include the creation
of a new differentiated product
every month, the establishment of
an exclusive operational area – the
Superlinha telephone service – which
makes the attendance service more
fl exible and uses a personalized
treatment after identifying the
sector where the employee works;
the modernizing of the sales points
and the launch of VIP spaces, and
attendance by a team of 650 business
managers who have been specially
trained and allocated to the 300
branches where most of this group
of customers is concentrated.
Effort rewarded – The result has
surpassed expectation. This long-term
partnership with public employees
in São Paulo state led 500,000 of
these workers to express in writing
their desire to keep Santander as
their fi nancial institution of choice.
This was a source of pride to all
the professionals who work in the
organization. A large percentage
remains customers of the Bank today,
taking advantage of the differentiated
products and services which Santander
makes available to them.
The excellent return from these special
customers proves that this challenge
was met successfully. It has also given
the Bank the skills to pursue new
opportunities in other municipalities
within its operating area.
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F1 Program
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s
our business
Santander expanded its operations in Rio de Janeiro by winning the payroll of the city government and gaining 165,000 new customers.
Proven skill and fl exibility
Santander won the tender to handle the employee payroll of the Rio de Janeiro
city government at the end of August 2006. The state of Rio de Janeiro has
15 million inhabitants, the highest per capita income in the country and the
second-largest GDP. This victory represents an important platform for growth
in the state and brought 165,000 new customers with an excellent profi le for
the Bank´s products and services.
Santander´s experience in the public sector allowed it to exploit this victory in
a fl exible, effi cient way. In just 70 days, the 165,000 public employees had their
accounts opened, received the welcome kit, credit cards, checkbooks and pre-
approved credits. Eight hundred employees were hired, 100 new sales points
opened and 310 new ATMs installed. During this period, the Bank also created
and established a special attendance program to satisfy these customers, with
specialist managers, a Superlinha dedicated to providing personalized products,
as well as differentiated communication and branch layout.
The commercial potential and Santander´s proven experience in serving these
customers meant that by November 2006, Rio´s public employees received their
salaries in modern branches, staffed by trained, motivated teams.
Branch in Rio de Janeiro
(Rio de Janeiro)
Ace
rvo
Sant
ande
r
29
20052004 2006
2,2382,256
3,052+36.3%
Credit to AgribusinessR$ million
Agribusiness
Santander is the largest private
fi nancial institution in the agricultural
credit area in the state of São Paulo
and one of the most important
fi nancial agents in Brazil in granting
loans to agribusiness. Its activities
include all those involved in the
productive chain, such as agribusiness,
cooperatives and farmers, in particular,
among whom it holds a leading
position in granting loans in the state.
The Bank ended 2006 with a volume
of R$ 3,052 million in loans to the
agricultural area, 36.3% higher than
in 2005. This outstanding position is
the result of a partnership with the
customer. The Bank has a specialist
team of over 80 agronomists
operating in the South and Southeast
regions. These managers are trained to
make an operational assessment of the
project, in technical and commercial
matters, and also to help make the
resources necessary and identify the
most convenient loan for the producer.
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CASA 2 (São Paulo)
Santander Light
Gabriela, Nuno and Cassius
Cards
our business
Santander Light: a success story
The Bank carried out research and found that customers´ main concern in relation
to cards related to interest rates. The introduction of the Santander Light Credit
Card in Brazil brought together our global experience and a local need.
The Santander Light Credit Card has a risk model which uses this experience abroad
and advanced technology from the Mastercard and Visa brands. It charges interest
of around 5.5% whereas other cards on the market charge around 10.5%.
The Santander Light Credit Card can be used nationally and has won over
500,000 new customers, most of whom are not accountholders, and
surpassed expectations.
Distribution Business
The Distribution Business registered
the highest growth among all
products in 2006. These include
three specialized products with great
growth potential: credit cards, payroll
loans and auto fi nance. The products
are directed at customers and non-
customers and were developed with
the best practices within the Group
worldwide and offer innovative, highly
competitive differentials.
Credit Cards
In 2006, Santander completed its
offer of credit cards for all market
segments. In the Individual segment,
the Bank currently offers Platinum
and Platinum Style (Preferential) cards
to high-income customers, the Gold
card to the exclusive segment, and
the Flex card, ideal for those who need
fl exibility, the Classic segment, cards
for specifi c market niches attended
by the Bank, such as public employees
and university students, and the OAB
card for lawyers. The Santander Light
Credit Card, which offers half the
rate of interest and double the limit,
is available to the whole market.
For the corporate segment (Business
and Companies), the Bank offers the
Company card.
The credit card product is a global
business for the Santander Group.
A division which includes executives
with the highest technical and
professional skills is responsible for
handling the cards business throughout
the world, linking global experiences,
strategies and innovation to local
opportunities, strategies and needs.
Card sales doubled and the loan
volumes rose by 52.5% in 2006.
This result boosted the Bank´s market
share by 1.4% to 4.8% in the year.
Preferential
Classic
Corporate
Exclusive
Universities
OAB
Public Employee
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31
Rodrigo
Auto fi nance/Payroll Loans
2005 2006
2,332
3,488+49.6%
VehiclesR$ million
7.0%6.6%
2004
1,431
Market Share (%)
2005 2006
1,009
1,767+75.0%
Payroll LoansR$ million
3.7%3.1%
2004
387
Market Share (%)
Payroll loans
Loans deducted from workers´ pay
slips (“consigned credit”) amounted to
R$ 1,767 million in 2006, an increase
of 75.0% over the previous year.
Santander has agreements with 1,427
companies in the public and private
sectors to make these loans. These
fi gures represent a rise of 29% over
the 1,107 partnerships registered at
the end of 2005.
Santander is concerned that these
loans do not overstretch the
accountholder´s budget and provides
guidance to workers by making
presentations on healthy fi nancial
planning in the partner companies.
A training area for branch employees
was created in 2006 to ensure better
service and the correct disclosure of
this product.
Auto fi nance
The Bank raised its share of the auto
fi nance market from 6.6% to 7.0%,
due to higher business volume in the
year. In 2006 alone, the fi nancing
operations increased by 49.6% to
R$ 3,488 million. The Bank had
partnerships with more than 5,100
stores throughout Brazil by the end
of the year.
In 2006, Santander increased its
supply of loans, accelerated its
growth, reduced the time for an
answer, gained greater quality and
opened new business fronts.
The outlook for 2007 is optimistic.
In the coming year, the auto fi nance
area will use new technological tools
to pursue large scale commercial
agreements which will lead to growth
above the average market level.
Dec
o Ro
drig
ues
Gilberto
Insurance
Sandra and Santander customer
Sales point – CASA 1 (São Paulo)
our business
Insurance
Santander operates in the insurance
distribution sector – through its own
insurance house and by outsourcing
– through its branch network.
The focus of the business is on retail
products, such as life, personal
accident and car insurance. The Bank
also distributes company insurance
through the Group brokerage.
In the life, personal accident and home
insurance area, Santander ended the
year as one of the largest distributors
on the market with 7.1% market share
and 6.9% of the market in premiums
underwritten. The Bank is also one of
the main vehicle insurers in Brazil with
1.3% of the domestic market.
Two products had outstanding
performances in 2006: insurance
linked to granting credit, a life
insurance policy with special benefi ts,
which grew by 51% and achieved
7th position in the ranking, and the
insurance for credit cards, which took
advantage of the Bank´s success with
this product. During the year, the
Bank launched new products, such as
the Dose Dupla (Double Dose) Home
Insurance, a policy which offers twice
the coverage (for a limited period) for
the same price, simplifi ed contracting
and 24-hour residential assistance.
Business Development
Private Pension Plans
Santander´s private pension area
ended 2006 with R$ 3.7 billion in
reserves, a rise of 28% over the year,
a portfolio of 133,000 customers and
a market share of 3.9%, in only fi ve
years of operation.
The performance of Santander´s
private pension operations is due
mainly to innovative products, such
as the MultiRenda and SuperFilhos
policies, directed at pensioners and
children, which are differentiated
from other plans on the market by
making 13 payments a year after
retirement instead of the traditional
12 monthly payments.
The extra payment is paid for by
the Bank, with no reduction in the
client´s benefi t.
The SuperFilhos policy not only pays
the 13th installment to the children
but also provides a pension to minors
as a benefi t should the policyholder
die. In 2006, the fi xed-income pension
funds appreciated by 12.9%, the
highest return among funds of this
category on the market.
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33
Ana Isabel
Mortgages
José Manoel
Mortgages
In 2006, successful products included the private pension plan which makes 13 payments a year and mortgages with fi xed instalments payable over 20 years.
Capitalization
In 2006, Santander undertook
two important initiative involving
capitalization products: the voluntary
“Din Din” and the “Din Din Ronaldo”.
The fi rst aimed to bring the Bank
closer to needy communities while
increasing sales of the product.
To achieve this goal, branches were
given an incentive in which those
which surpassed the sales targets
received blankets to donate to social
organizations. The campaign resulted
in more than 8,000 blankets being
donated to around 270 groups
in Brazil.
The Din Din Ronaldo initiative led to
one tee-shirt being distributed for
every purchase and resulted in more
than 130,000 policies being sold in
six months.
The technical reserves increased by
23% in 2006, placing Santander in
seventh position in the market ranking.
Mortgages
Santander consolidated its profi le as
also being innovative and aggressive
in the mortgage market in 2006.
It was the fi rst bank to launch home
loan fi nancing for individuals over
a period of up to 20 years in fi xed
installments during the contract,
within the Brazilian Housing
Financing System the SuperCasa 20.
In terms of products, Santander
offers the SuperCasa Própria loan for
homes and SuperOffi ce for acquiring
commercial space. Another innovation
is the refunding of 20% of the amount
loaned at the end of the contract for
periods of 15 years or more.
To make it easier to contract the
products, a bureaucracy-free income
analysis for homes still on the
drawing board was created, using
the Behavior methodology.
These initiatives boosted loan applications
by 124% to R$ 1,483 million.
Paul
o U
ras
Paul
o U
ras
our business
COMPANIES
The Companies segment has been
gaining share in business volume and
becoming an important leverage in
increasing the Bank´s earnings.
By sharing the relationship models of
the Santander Group abroad, the area
increased credit volume to its target
companies by 60% in 2006. Foreign
trade operations were also outstanding
and expanded by around 70%, as
did the funding in Investment Funds,
which grew by over 26%.
To improve client attendance in
2006, an expansion process and
organizational restructuring got under
way. This resulted in an increase in
the number of specialist managers
(superintendents and business
managers) of around 50% over 2005.
More than 160 professionals dedicated
exclusively to attending companies
were brought in. Two segments were
created within this new model – for
Large Companies and Companies
- providing intelligent, tailor-made
solutions for their customers, with
wide-ranging differentiated products
and services.
Due to the importance of being
physically close to its customers, the
Bank opted for a decentralized service
model which currently consists of 23
Regions spread across Brazil. Of these,
eight deal with Large Companies and
15 with the Companies segment.
Strategic initiatives were also taken
in 2006 to increase the customer
relationship, activity and return on
the customer base.
To ensure that the strategies laid
down for the Companies segment
were complied with, a portfolio of
commercial management tools and
a quality program were developed
to map all the existing processes and
establish standards of excellence and
maximum effi ciency and performance.
All this change in the attendance
model will bring greater fl exibility
in drawing up creative, innovative
solutions which satisfy the needs of
customers and bring greater quality
to managing the products and services
portfolio. This portfolio includes,
amongst other items, loans and
fi nancing, investments, foreign trade
and currency operations, Capital
Market operations, derivatives,
Cash Management, insurance and
cards. Customers can also rely on
the support and global experience
of the Santander Group to evaluate
and undertake operations on the
international market.
More than 31,000 new accounts for
individuals were opened for employees
of customers who opted to pay wages
through the Santander branch network.
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Luís and Gregor
Companies
35
GLOBAL WHOLESALE BANKING
In 2006 a global strategy was
implemented for the Wholesale
Banking with the main objective of
serving the customer in a globalized
form. This strategy links the Santander
Group´s network throughout the
world in developing intelligent,
customized solutions which take into
account the company´s activities locally
and in all the countries where it is
present or intends operating.
To align the work developed by the
Wholesale Banking in Brazil to this
proposal, the concept of adopting
a global view of customers and
products, while respecting local
conditions used by the Group abroad
was repeated.
The decision to take advantage
of the synergies within the Group
and offer an integrated service to
companies operating in Brazil and
abroad allows the Bank to gain
greater agility, effi ciency and market
share. It also benefi ts customers in
Brazil. Among other aspects, this
integrated attendance expands the
supply of products and services with
international quality standards, places
a global infrastructure at the disposition
of large groups, and brings the security
of working with one of the largest
fi nancial conglomerates in the world.
This allows the company to standardize
the whole operation of its affi liates,
make processes more fl exible and
brings greater business control.
To attend large customers in an effective globalized way, the Bank provides products and services with international standards of quality and a worldwide network.
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CASA 4 – Wholesale Banking
(São Paulo)
Gil e Fernando
Brokerage
our business
Strategic view reaffi rms confi dence in Brazil
Santander believes that the view that Brazil is converging to Investment
Grade will lead many domestic companies to enter the international market.
Within this context, being global is an important competitive differential
for the Bank which can provide standardized, fl exible and capable
service anywhere.
Santander believes in Brazil´s great growth potential and is investing in
expanding its operations in the country. To do so, all market opportunities
must be taken advantage of. It is particularly important to develop new
products and establish innovative ways of approaching and serving
its customers.
To achieve this, the Wholesale Global Bank was structured on three pillars:
Structured Finance and Corporate Finance (split into Capital Markets and
Mergers and Acquisitions).
Treasury.
Investment Bank (corporate products) – which includes Cash Management,
International Products & Services and Global Securities.
Santander currently has 100 of the largest Brazilian customers and around
250 multinationals in Brazil. The strategy of the global model is to maintain
the focus on the needs of customers to provide products and services which
meet their demands. To do so in a differentiated way, the Bank has a highly
specialized team, dedicated to a restricted client portfolio and distributed
by segments. The objective is to allow the Bank´s executives to acquire an
in-depth knowledge of the sector, the specifi c needs of the area and the
particular features and demands of the companies in order to develop
a strong relationship with these customers.
To meet this strategy, the Wholesale Global Bank makes investments to
attract and maintain talented individuals by hiring executives and specialists
who are in step with the new positioning. In 2007, it will implement a
human resources program which brings together professional specialization
and skills, career plans and international mobility projects. The program
aims to broaden the view of the employees on the needs of global
customers and the attendance structures used in other countries.
¨
¨
¨
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Cantídio
Global Customers
37
Latin Finance – Deals of The Year AwardsBest Syndicated Loan
Latin Finance – Deals of The Year AwardsBest Local Currency Financing
US$ 17,600,000,000Financial Advisor inthe acquisition of
Inco Ltd.
R$ 5,000,000,000Financial Advisor inthe acquisition of
Inco Ltd.
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Mirella, Renata and Shay
Brokerage
Outstanding Position
Global Wholesale Banking received important recognition for its skilful,
innovative work in creating intelligent, creative solutions for large industrial,
commercial and fi nancial groups in Brazil:
First position in the Concession Auctions in Brazil for large fi nancial
advisory and structuring projects, through the detailed analysis of projects,
determining the capital structure and negotiating long-term fi nancing
sources, amongst others.
Leadership in the ranking of institutions which granted most loans for project
development, with 24% market share, according to fi gures published by the
National Association of Investment Banks (ANBID).
Fourth place in the ranking of the general advisory services in Project Finance
in Brazil, according to ANBID, also for its operations in fi nancial advisory
and structuring.
Outstanding leadership in forming syndicates to fi nance operations, due to
its growing ability to attract fi nancial institutions.
Three Deal of the Year awards presented over the last two years by respected
publications in the fi nancial market.
Lead coordinator in the purchase of Inco by Companhia Vale do Rio Doce
at the end of 2006, an operation which led to the Deal of the Year 2006
award in the Syndicated Loan category by IFR and Latin Finance magazines.
Lead coordinator in the ATE II operation, carried out in 2006, and Lender
of the Ventos do Sul operation, in 2005, both elected Deal of the Year by
Project Finance and Euromoney magazines, respectively.
¨
¨
¨
¨
¨
¨
¨
our business
Investment Bank
The Investment Bank is housed
within the Global Wholesale Banking
structure and is split into two
business areas: Structured Finance
and Corporate Finance.
Structured Finance
Structured Finance is the arm of Global
Wholesale Banking which develops
differentiated strategies and solutions to
match the complexity of global fi nancial
management. Its main activities include,
amongst others, the provision of
services in the areas of Project Finance,
Acquisition & Leveraged Finance and
loan syndication.
Santander is the institution which
most grants loans for project fi nance
on the market. It holds fi rst position
in advisory services for Concession
Auctions in Brazil and was ranked
fourth in the general list of Project
Finance deals, according to ANBID.
This result is a refl ection of its
commitment to fi nancial advisory
and structuring services, through
the detailed analysis of projects,
determining the capital structure
and negotiating long-term fi nancing
sources, amongst others.
Structured Finance is gaining a leading
position as a specialist in infrastructure
projects, particularly in the generation
and transmission of electrical energy,
mining, highway concessions, water
treatment, petroleum and gas, and
petrochemical sectors.
The prominent position Santander
has achieved in this area results
from its investments in creating
a highly professional and qualifi ed
team, experienced in various sectors
of the economy, gaining access
to multiple sources of funding
and its specialization in the project
fi nance segment.
The Bank also has the backing of
the know-how and global account
management structure of the
Santander Group which is present in
Europe, the United States and Latin
America, and ensures excellence in the
creation of operations and projects.
Santander occupies fi rst position in granting loans for project fi nance and leads the ranking of advisory services in concession auctions.
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Cassio
Structured Finance
39
Eduardo
Relationship with
Wholesale Customers
Telmo
Relationship with
Wholesale Customers
Ricardo, Silvia and Rodrigo
Economic Research
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Corporate Finance
Corporate Finance clients include some of the largest and most important
industrial, commercial and fi nancial groups in Brazil. The Bank makes a team of
specialist which is highly experienced in mergers and acquisitions and capital
market operations available to these groups to provide the solutions which are
most suitable to their needs.
Capital Markets
The Capital Markets area played a
leading role in the main operations
in the sector in 2006 and the Bank
consolidated its position as a leading
player in fi xed income and variable
income in Brazil. This result confi rmed
the policy of developing personalized
solutions to meet the specifi c demands
of each customer.
Debt Capital Markets – Santander
kept its position as one of the main
market operators in local fi xed-income
operations and took part and led 18
subscription operations amounting
to a total volume of close to
R$ 16.5 billion.
In 2006, the Bank structured and
acted as lead coordinator in the
biggest operation in the history
of the Brazilian corporate fi xed-
income market - the seventh issue
of debentures by Companhia Vale
do Rio Doce (CVRD) - amounting
to R$ 5.5 billion. This debenture
placement, the issue of the global
bond amounting to US$ 3.75 billion
and a pre-payment of exports of
US$ 6 billion – operations in which
Santander also acted as joint lead
and bookrunner – were part of
the refi nancing of the bridge loan,
granted by Santander and the three
other fi nancial institutions for CVRD´s
purchase of the Canadian mining
company, Inco.
This was the most aggressive
acquisition led by a Latin American
company in history and received the
Latin Finance magazine awards for
the Best Corporate Bond, Best Cross-
Border M&A, Best Hostile Takeover
and Best Syndicated Loan.
For the second year, Santander
received the “Bovespa 2006
Highlight – Fixed Income Category”
award from the São Paulo Stock
Exchange (Bovespa) for its Bovespafi x
operations, particularly for the volume
of Real Estate Receivables Certifi cates
which it led, registered and traded in
the system during the year.
Equity Capital Market – Global
Wholesale Banking acted as bookrunner
in variable-income operations of around
R$ 1.5 billion which confi rmed its
leading position in relation to the main
investors on the stock market.
In 2006, the Capital Markets Area led,
with great success, the Initial Public Share
Offer for Dufry South America, a duty-
free company which operates in Brazil´s
international airports, amounting to
R$ 900 million. It was also lead
coordinator in the primary and secondary
public offers for Editora Saraiva (an
operation amounting to R$ 200 million),
and the primary and secondary public
offer for Randon, a highway equipment
company, which amounted to R$ 250
million. It also maintained a leading
position in relations with all investors.
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Camila
Treasury
Blatyta and Aron
Treasury
João
Lui
z M
usa
our business
Treasury
The Treasury area is an important pillar in the Bank´s global structure and
is dedicated to creating fi nancial solutions for customers in various segments.
It specializes in the areas of currency, interest rates and shares on the domestic
and external market and provides solutions which are aligned to the needs of
each client, through the intense use of fi nancial instruments such as derivatives
and structured operations.
Santander´s active participation as one of the main players on a number
of markets proves its ability to offer solutions which help manage risk.
The Treasury is focused on restructuring long-term investments and works
in conjunction with the internal and external fi nancing areas to ensure
that ratios are appropriate and eliminate risks which may compromise its
customers´ projects.
Santander was among the leaders in the rankings for derivatives and currency
operations in 2006 once again. The Treasury also concentrates on developing
structures which use derivatives. This strategy led to the launch of new products
on the futures and options markets, based on the most varied exchange rates,
interest rates, shares and commodity indices.
Mergers and Acquisitions
The Mergers and Acquisitions area is
responsible for the acquisition, sales
and corporate restructuring processes
and providing advisory services in
the structuring and obtaining of
funds to undertake projects in many
sectors. The Mergers and Acquisition
professionals focus on forming
long-term relationships with their
customers, creating complete solutions
which are wide-ranging and well
structured, and providing total support
throughout the process.
The main achievement in 2006
was the Bank´s participation in the
syndicate which provided advisory
services to Companhia Vale do
Rio Doce in its acquisition of the
Canadian mining company, Inco.
The assistance in this transaction
involved a complete package of
fi nancial services – from advisory
in mergers and acquisitions to
fi nancing the purchase – along with
the structuring of all the transactions
for the payment of the fi nancing.
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sEd
uard
o Si
mõe
s
41
Ricardo
Global Transaction Banking
Bruno and Ronaldo
Service for the Comex Customer
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Global Transaction Banking (Corporate Products)
To meet the growing demand from the corporate and institutional market for
Treasury management services in Brazil and abroad, the Global Transaction
Banking area has created customized local and global solutions for Financing,
Cash Management, Trade Services and Custody and Controlling services. In line
with the Group´s new strategy of making the commercial and fi nancial sectors
global, the corporate investment and fi nance areas were separated from the Cash
Management, International Products & Services and Global Securities areas.
Cash Management
Santander´s Cash Management area focuses its activities on designing intelligent,
high-performing products and services to meet the specifi c needs of the most varied
business segments and to its customers´ expansion strategies, quickly and capably.
The Bank´s international experience allows it to create fi nancial solutions which
are fl exible and effi cient in relation to the processes for receivables, payments,
confi rming, conciliation and custody, amongst other services, which optimize
its customers´ business administration. The Santander Group´s presence in
over 40 countries allows the Cash Management area to operate globally and
provide customized products which help streamline the process of handling
international cash fl ows.
In pursuit of excellence in customer attendance, in September 2006 the Bank
launched the Cash Portal, an e-business solution which gives business partners
(clients and suppliers) fast, secure access to its Accounts Payable and Receivable
area. The strategy optimizes the cash fl ow, improves the level of information
and controls, makes the operating and fi nancial processes more fl exible and the
company´s routine operations more effi cient.
Santander s highly qualifi ed team also creates integrated processes to manage fi nancial
operations abroad safely and with quality. This allows its customers to manage and
monitor all the data and information about their operations abroad quickly and easily.
Santander wants to be an important participant in this segment and intends
expanding its market share from its current level of 3%. The Bank intends
tripling its share of the market by 2010 through disciplined, capable work
backed by strong technological platforms.
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s
The experience of the Santander Group, present in over 40 countries, allows it to provide customized global solutions to its customers.
Mauro
International Products & Services
Gustavo
Treasury
our business
International Products & Services
Santander´s strong international
presence and specialist teams for every
commercial sector allow it to offer
effi cient, differentiated international
trade services and fi nancing and
warranty operations (both related
to foreign trade and working capital).
In terms of structured fi nance,
the Bank is a leader in customized
products. These help customers
and suppliers meet their business
objectives and commitments
and ensure the best cost/benefi t
relationship for the operations, reduce
the level of the customer´s exposure
to risk and identify the opportunity
for structured operations. The Treasury
area also contributes by providing
complete, high performance solutions.
To do so, the executives in the area
analyze the possibility of associations
of commercial fl ows, to offset
and distribute the risk and the
participation of multilaterals agencies
(MLAs), export credit agencies (ECAs)
and insurance companies specialized
in foreign trade. Opportunities
to create structures which combine
the international operations with
Treasury products are also considered
in order to manage the intrinsic risk
of the customer´s exposure.
In the international warranty area
(such as participating in international
auctions and trade negotiations
which need the support of a strategic
fi nancial partner), Santander is
recognized for its consulting ability
to analyze and package various
kinds of guarantees and its agility
in making issues to meet the needs
of its customers.
Within the wide scope of its
international trade services, the Bank
provides higher added value services
for companies which are pursuing
operating effi ciency, cost reduction,
greater fl exibility – optimizing
working capital – and improving
the way information is managed.
The International Products & Services
area´s differentiated activity led to it
being classifi ed in 2006 in fi rst place
in terms of volume and the number
of deals in the foreign trade ranking
(Global Ranking and Latin Ranking),
in the Dealogic league table (excluding
aircraft and shipping).
Teams specialized in every sector provide higher added value services which optimize working capital and facilitate the managament of information.
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43
Global Securities
Global Securities is responsible for the custody, settlement, local
representation, controlling, fund management and risk analysis of the
portfolios and investment funds of its customers. It attends non-resident
customers (global custodians, hedge funds, brokers and investment banks),
large corporations and institutional investors, such as pension funds, insurance
companies and asset managers.
In 2006, the area registered an increase of 26% in volume of custody for local
customers which rose from R$ 34 billion to R$ 43 billion. This performance
puts Santander Custody in fi fth place in the national ranking by ANBID, with
a market share of 23% and within the target of the 40 largest pension funds
in Brazil.
The volume in custody for non-resident customers rose from R$ 2.15 billion
in 2005 to R$ 3.5 billion in 2006, an increase of 63% which put the Bank in
sixth place in the ANBID national ranking. The segment also increased by 27.8%
in revenues generated by the Global Securities Brazil area in 2006, compared
with the previous year.
Global Securities provides its customers with differentiated services, such as:
access to customers via website directed solely and exclusively to the product;
dedicated teams in the daily control and customer attendance;
exclusive operational area for each customer;
preventing the acquisition of assets by the customer or administrators/
managers (Compliance Asset) in real time.
Through its capable, fl exible activities, the Global Securities area has held
a leading position in the specialist media and the market in recent years and
has won various awards:
Best domestic custodian in Brazil and the only Top Rated custodian in Brazil
– Global Custodian* for the second consecutive year.
First and only South American custodian to obtain rating in services
(Standard & Poor’s** – Above Average).
For 2007, the Global Securities area intends expanding the coverage of new market
segments, such as insurance companies and hedge funds, and launching new
products, such as the bookkeeping of shares, loans of securities and FI. It also
intends intensifying its operations in receivables funds (FIDCs) and non-resident
operations, which should lead to an increase of around 40% in volume of revenues.
¨
¨
¨
¨
¨
¨
* Global Custodian – British magazine which assesses all the custody service providers to customers in over 80 countries. This evaluation is based on criteria of Technology, Client Attendance, Commitment to Quality, Price, Response Agility, Security, Controls and Level of Information.** Standard & Poor’s – Classifi cation attributed to the custody services based on the aspects of the Qualifi cation of the Professional Team, Best Policies, Practices and Procedures, Technology, Performance Statistics and Auditing Systems.
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s
Laércio
Global Securities
Fabio
Brokerage
our business
The Bank´s excellence in attendance and execution of operation led it to receive the Institutional Investor Best Brokerage award in Brazil in 2006.
Brokerage
Santander offers brokerage services
which combine a rigorous policy
of compliance, quality of information
and excellence in carrying out
operations through differentiated
service structures. To attend local
and foreign clients, the brokerage
has a team of analysts, strategists and
economists which is widely recognized
and has received international awards.
This team covers 53 companies listed
on the Bovespa. The Bank serves more
than 100 institutional customers and
has a portfolio of 17,700 individual
customers in retail.
The Santander and Banespa brokerages
handled a trading volume of R$ 48.8
billion in 2006, 55% higher than the
amount of R$ 31.4 billion registered
the previous year.
The Bank also has an innovative,
pioneering project – the Share Rooms,
which attend individual customers
through the retail branch network.
These areas have experienced, capable
staff who provide consultancy services
on the stock market, help investors
take decisions and answer questions.
They also explain the nature of long-
term investing on the capital market.
The highlight among the innovations
in 2006 was the creation of the
Derivatives and Futures area traded
on the BM&F commodities and futures
exchange. With the start of these
activities in the last quarter of the year,
the Brokerage completed its range
of products to attend foreign and
institutional investors.
Santander Brokerage´s sales
and trading team confi rmed its
excellence in attendance and customer
relationship with institutional customers
by being recognized as number 1 in
The Latin American Sales & Trading
Team ranking of Institutional Investor
magazine in 2005. In 2006, it won
the best Brokerage for Institutional
Investors award (Brazil).
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45
Equity Research
The Equity Research area is
responsible for analyzing the
economy, sectors and companies
with shares listed on the São Paulo
Stock Exchange (Bovespa). During
the year, Santander´s Research
team covered 53 companies from
14 different sectors. Its analysis is
distributed through daily, monthly
and quarterly reports and at
presentations and conferences.
Santander holds many events with
companies and sectors which are
attended by institutional investors
from Brazil and abroad and its main
individual customers. These meetings
may center on a specifi c sector
(Aerospace and Transportation Day,
Consumer Day or Petroleum Sector
Analysis Day) or be wide ranging,
such as the Annual Santander/Brazil
Conference (held for the seventh
time in 2006).
The Equity Research analysts have
received awards in recent years
from Institutional Investor, the
most prestigious publication in
this market.
In the Latin American ranking,
Santander Investment was placed
second in the “Research House”
ranking in 2006 and 2005, after
coming third in 2004 and fourth
in 2003.
A closer look at the Institutional
Investor ranking in 2006 shows that
Santander´s sales team won fi rst
place while its analysts appeared in
12 positions in the ranking, which
proves the recognition achieved in
all the strategy categories, as well as
the Retail, Aerospace and Transport,
Food and Beverages, Cement and
Construction and Conglomerates.
In the magazine´s Brazilian ranking for
2006, the Equity Research area came
second with the best analyst in the
telecommunications sector and had
a leading position in the Aerospace,
Transport and Industry and Electricity
and Water treatment areas.
In 2005, the team came second with
the best analyst in the aeronautic
and aerospace sector and third with
the best analyst in the electrical
energy sector.
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Osiel and Daniel
Brokerage
Marcelo (Risk) and Edvaldo
(Wealth Management)
our business
Asset Management
The Asset Management area
has an excellent performance
in managing multi-market funds,
through the development of
advanced management systems,
the construction of analytical models
and forecasting customer behavior,
identifying and mapping business
opportunities and improving
customer attendance.
The result of this strategy was confi rmed
in 2006, with the offer of the Multi
Retorno Mais product made up of
a multi-market fund – which pursues
a differentiated return – and an
insurance policy which guarantees
the gain of a saving account at the
end of two years.
Multi Segurança Mais, a conservative
fund with an insurance policy which,
as well as guaranteeing the savings
rate, also offers an insurance policy
against personal accidents and
coerced redemption.
These launches helped Santander
rise higher in the ranking of fund
managers in Brazil, according to
the ANBID fi gures.
The Bank rose to seventh position
and ended the year with more
than 360,000 quotaholders and
shareholders´ equity of more than
R$ 46 billion, equivalent to 4.6%
of market share of the funds industry.
WEALTH MANAGEMENT
The Bank is currently the largest
manager of multi-market funds in the
Retail sector. In its latest campaign,
held between September 4 and
October 6, 2006, the Multi Retorno
Mais product raised around R$ 1.1
billion. This took the total funding for
the year (three series) to R$ 2.2 billion
and the funding since the creation
of the product in October 2004 to
R$ 3.8 billion.
In line with its desire for innovation
and customer focus, the Bank
launched new products in 2006:
the Melhor de 2 which offers the
best return between a DI and a Fixed
Income fund (according to the gain
at the end of each month) and the
The Santander Group manages
assets of more than one trillion euros,
proving that it can administer these
resources throughout the world.
In Latin America alone, the Bank
operates in eight countries besides
Brazil: Chile, Argentina, Mexico,
Peru, Puerto Rico, Uruguay, Bolivia
and Venezuela. Santander manages
around R$ 46 billion in assets in Brazil
and is one of the largest managers
in this market.
The Bank is dynamic and innovative
and provides products and services
which stand out for their modernity,
security and innovation and meet
the needs of all market niches.
To ensure the best effi ciency ratio,
the Bank has a differentiated
management. The strategic planning
is defi ned by committees made up
of professionals from each of the
areas involved which meet regularly.
This approach allows the business
performance to be accompanied
and strategic decisions made.
The Committees have agendas covering
various issues ranging from assessing
the result, funding in the period and
the performance of the funds to the
development of new products, risk
studies and personnel management.
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Guilherme, Rodrigo and Fernanda
Asset Management
Alexandre
Asset Management
Globalization
A fund of shares in Brazilian
companies, based on shares
which make up the IBX index
on the Bovespa, was launched
on the Argentinean market in line
with the Santander Group´s strategy
of synergy throughout the world.
The fund received an excellent
reception from investors and is
managed by Santander in Brazil and
traded in the Group branches in Argentina.
The initiative – a demand from
managers who work in Argentina
– is an example of the advantages
of being part of a global Group.
The Brazilian team´s performance
should increase once again in the
coming year.
Awards
Standard & Poor's has classifi ed
Santander Asset Management with
the best position in its ranking (AMP-
1*) since 2004. This classifi cation
represents “very strong” practices
in managing assets for third parties
(the highest possible level).
In recent years, Santander Asset
Management has received awards
from the most important and well-
known fi nancial publications in
Brazil, a recognition which proves
the Bank´s commitment to provide
its customers with the best products.
¨
¨
Santander Asset Management has had an outstanding performance in managing multi-market funds.
Strategy
Santander is constantly seeking to
create products which improve its
service to specifi c groups of customers.
The Bank is committed to a high
performance in asset management and
invests in qualitative and quantitative
surveys and holds group focus activities
to fi nd out what customers think of the
new products.
In 2006, the surveys were enhanced
by the Take Part Project which consists
of regular meetings with sales point
managers to fi nd out the opinions
and suggestions of these staff who
meet customers. The Bank carried
out a similar pilot project in 2006,
with the 10 largest Asset Management
customers to assess new products
to be launched in 2007.Re
fl exu
s Fo
tos
Refl e
xus
Foto
s
*Standard & Poor’s – evaluates (a) the Company Profi le; (b) Operating, Control and Fiduciary aspects; (c) Portfolio Management, Investment Process and Risk Management e; (d) Financial Position, along with the controls, separation of asset management activities, technology and operating risks related to the preventive and corrective procedures.
our business
Private Banking
Santander Private Banking brings
all the experience, tradition and
solidity of one of the largest banks
in the world in managing assets for
customers with high personal or
family wealth and developing exclusive
investment solutions.
The Bank´s method of fi nancial
planning focuses on increasing and
protecting the net worth by forming
the most complete portfolio of
fi nancial products and services.
To provide a differentiated service,
the Bank has a team of relationship
managers who act as fi nancial
advisers. These professionals identify
customers´ needs, expectations and
opportunities, monitor and evaluate
results and help defi ne the best
business strategies.
This operating model, which combines
a global view of the market with a
close customer relationship, allows
Execution and implementation.
Monitoring and accompanying
the results.
Santander Private Banking undertakes
the control of risks and commitment
to the regulations laid down by its
rigorous Compliance and Code of
Conduct policy, and the Self Regulatory
Code of Private Banking Activity in the
Domestic Market of ANBID.
Thanks to its excellent performance,
the number of customers increased
by 11% in 2006 and total assets
managed by Santander Private
Banking amounted to R$ 7.8 billion.
¨
¨
the managers to dedicate themselves
exclusively to administering their
portfolios with total independence
from the Bank´s Asset Management
and Advisory areas, thereby ensuring
that the customer has the greatest
security and confi dentiality.
Santander Private Banking considers
the individual characteristics of the
investors, respecting their age, global
objectives, level of risk tolerance,
return expectation and their current
portfolio.
Based on these variables, the
relationship manager draws up a
fi nancial plan which is structured into
four phases:
Defi nition of the investment profi le
and objectives.
Defi nition of the investment
strategy.
¨
¨
Dav
ilyn
Dou
rado
Karina and Cristina
Private Banking
49
Exclusiveness is a global passion
of Santander Private
Banking and an individual
commitment to each customer.
Dav
ilyn
Dou
rado
Voivodic
Private Banking
The conclusion of the
transformation which involved
unifying the brands, technological
integration and the legal
incorporation, resulted from
the efforts of all employees and
created the correct physical and
organizational conditions for the
Bank to grow even more in the
coming years. To ensure that this
expansion is solid and constant,
the Bank needs more than just
structural bases - the main driving
force of the new growth stage lies
in managing employees.
The Bank is aware that its growth
is directly linked to the professional
and personal development of
its human capital. A consistent
personnel management policy
began to be implemented to take
advantage of the new growth
opportunities within the Bank and
the Santander Group. This policy
is directed at forming, training and
improving the working environment
and the quality of life.
The Bank´s intention is to create a
center of excellence by means of a
strong personnel management policy
that will become a benchmark for
the market, not only in terms of the
talent and capacity of its employees
but also for the job opportunities and
growth the Bank offers.
Santander is also implementing
programs and incentive initiatives
which are helping to improve the
quality of life of its employees.
This is being done within the
You Program, a new initiative
which will provide guidance, hold
campaigns, put forward activities
and encourage positive proposals
in the areas of health (well being)
and three other pillars – family,
work and social life.
During the year, the Bank hired
5,458 new employees, of whom
1,448 were university trainees.
Santander is the institution which
hires most trainees and offers
them real chances to enter the
work market.
The Bank had 23,355 employees
at the end of the year.
MANAGING PEOPLE AS PART OF THE GROWTH STRATEGY
OUR EMPLOYEES
Santander employees
Edua
rdo
Sim
ões
our employees
Santander has constantly improved its processes for selecting and managing the careers and training of its team and encourages employees to make a proper balance between their private and professional lives.
VALUES OF THE SANTANDER CULTURE In 2006, the Human Resources area began the Culture and Identity Program
to establish a “culture of belonging” and pride in being part of Santander.
This program aims to align employees´ behavior and attitudes to the Bank´s
global values.
The program is in line with the Santander Group´s global program which
intends aligning the organization´s values in all countries where it is present.
The aim is to further reinforce employees´ sense of belonging to a global
group and sharing the same corporate values and unique identity.
In 2007, the Culture and Identity Program will be strengthened through
initiatives to commemorate the 150 years of the Santander Group. One initiative
will give 100 shares in the Group to every one of its 130,000 employees all
over the world as a means of encouraging them to become partners in the
organization. The goal next year is to begin a wide-ranging process to integrate
all employees through the introduction of a single intranet in all countries and
an immersion course in Spanish via intranet.
In 2006, the Bank also consolidated the Only Uma Só Voz (One Voice) Program
directed at new employees to help them adapt to the Bank´s culture.
To commemorate its 150 years, the Santander Group will give 100* shares to every one of its 130,000 employees in the world to encourage them to form a partnership with the Bank.
our employees
Edua
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Sim
ões
Sandra Lia and Sandra
Multinationals and Projects
*Subject to the approval of the General Shareholders Meeting of the Santander Group to be held in June 2007 in Spain.
53
PERSONNEL MANAGEMENT
To bring this goal of excellent
personnel management about and
align initiatives to the Retail Banking
20.10 Project, the Human Resources
area is developing a range of projects.
These aim to stabilize the workforce,
strengthen the culture of belonging,
intensify efforts towards a global
identity and train employees at
all levels, particularly those in the
branch network.
The fi rst initiatives have already
been implemented. A Human
Resources Communication Program
was established which will provide
information to all Bank employees on
each step of the process. Since March
2006, employees have also been
able to access information on their
Individual Development Plan (PID)
via the intranet. These are training
plans drawn up on an individual basis
which help leaders choose the most
suitable training for each employee,
thereby ensuring improvements
in professional performance.
The Bank carries out surveys and
monitors the working environment
through its managerial staff in pursuit
of constant improvement. Santander
undertakes such surveys throughout
the Bank on an annual basis.
Recognizing talented, capable
individuals is part of the organization´s
best international practices in personnel
management. Santander promotes its
employees on the basis of meritocracy
and in 2006 it approved 1,136 merit
awards and promoted 1,817 staff.
Santander also improved its staff
selection processes to map the potential
of each candidate and select people
with great potential to fi t the position
with a greater degree of certainty.
Performance Management
During the year, Santander consolidated
an extensive system of performance
evaluation (skills and results) for
all employees. Besides measuring
employees´ abilities, this system also
allows individual objectives to be drawn
up and measured and integrated to
the strategic business planning.
Career Management
The system of evaluating employee
potential, known as SPP (Strategic
People Planning) led to a more
detailed analysis of 7,376 staff,
including all the vice-presidencies.
This program mapped key positions
in the business areas and allowed
succession and personalized career
plans to be built. It also concluded
the mapping of young people with
high potential and identifi ed 255
professionals with the ability to
assume important positions within
the organization.
For the fi rst time, the Bank used 360
degree evaluation of 900 managers.
Through this system, subordinates,
peers and superiors assess the
leadership style and interpersonal
relationship of leaders to improve
their performance. More than 5,000
evaluations were made in the year,
with an average result of 4 points on
a scale of 1 to 5.
All the evaluation efforts – capacity,
performance, potential, 360 degrees
and talents – allowed an analysis to be
made of the professional´s alignment
with the Bank´s culture. They also
brought an in-depth knowledge of
the potential and prospects for the
Santander employees´ performance
and career.
Ulrico
Human Resources
PROFESSIONAL EDUCATION
our employees
MGN-Master in Business
Management
The MGN-Master in Business
Management project is a pioneering
one and the Bank´s largest initiative in
the business specialization area. It is a
continuing education program aimed
at creating a professional elite in the
sales area to develop and expand retail
business. It was launched in March
2006 and targets superintendents
and general managers from the
commercial network, particularly
in the Business, Preferential and
Agribusiness areas.
In 2006, 775 executives with high
potential from the commercial
network took part in the courses in
34 groups. The program is split into
three themed blocs: View of the
Market and Customer, Economy and
Finance and Business Tools. The MGN
has the weight of an MBA and was
structured in fi ve stages, with physical
and distance modules, and includes
activities at the workplace, such as
lectures, seminars and client visits.
Diversity Program
This program was created in 2006
and aims at the inclusion and social
promotion of particular groups.
It focuses on three main areas:
women, Afro-Brazilians and people
with defi ciencies.
To speed up women´s careers in the
organization, a Santander Group
global program was put into effect
and split into two groups: TOP 60,
for the 60 women with the greatest
potential to rise, and TOP 300, for
middle management executives.
The TOP 60 and TOP 300 women
include 16 and 76 Brazilians,
respectively.
A training program was created in
partnership with the Unipalmares
university which will create 30 jobs for
young Afro-Brazilians from next year.
The Bank currently has around
500 employees with some kind of
defi ciency and intends expanding this
number to 1,100 people by hiring
another 600 by 2010.
The professional education and
development of employees is
coordinated by the Formation and
Development Center (CFD) which
includes programs focused on the
Bank´s strategic objectives. The
intention is to ensure that the leaders
adopt good practices in managing
people and that every employee is
able to attend customers capably,
generate business and be cautious
in relation to the business risks.
The Bank used the intranet to create
the Formation Campus, an area
directed at developing and training
employees. All members of staff can
access information on the availability
of programs and courses – physical
and distance – to comply with the
Individual Development Plan (PID)
drawn up by his or her superior.
In this year alone, 78 new training
courses were created, 15 of which
were virtual. In 2006, the Formation
Center had 1,120 classroom training
groups, with 117,391 participations,
a total of 1.8 million hours and
investments of R$ 22.1 million.
The highlight of the year was the
continuous education program,
adapted for the commercial network.
Paul
o U
ras
55
Edua
rdo
Sim
ões
Santander believes that human capital is one of its main competitive differentials
and follows a policy of making strong investments in forming its employees.
It has developed training and skill-building programs, based on its global
specialization, which provide opportunities for professional growth, match
the growth of business, and create professionals who are effi cient and highly
motivated to sustain its competitive excellence.
One of the main initiatives in 2006 was the expansion of the partnership between
the Human Resources area and the Universia Brasil Portal which led to the
creation of specifi c courses for various sectors within the Bank and boosted
the process of selecting talented individuals from universities.
DEVELOPMENT TALENT
José EduardoServing the Customer – Settlement Operation/
New Talents Program (Trainees)
The New Talents program received
15,000 applications in its 19th
appearance. Of these, 29 candidates
were chosen to take part in the Trainees
Program which lasts 12 months and
is directed at young people who have
graduated recently. The training has
structured phases, including training
models lasting approximately 400
hours, during which the trainees pass
through various sectors of the Bank
and develop a strategic project.
Each trainee is accompanied by
a tutor and the HR department
and takes part in individual career
guidance meetings. Nine ex-trainees
are currently taking part in the Future
Managers Program and working
abroad. Another 12 positions are
foreseen for 2007.
Intern Program
Every year, Santander makes a selection
of university students for its Intern
Program which complements the
students´ academic formation and
gives them an opportunity to learn
and develop in various areas of the
Bank. During the Program, the interns
receive an institutional and a specifi c
instruction through distance learning
courses. Almost 1,500 trainees were
hired through this program during the
year, including 70% of the students
who took part in the Program.
Special Intern Program
To encourage the entry to the job
market of young people whose
timetable makes it diffi cult to work
as an intern during the academic
year, Santander created a Trainee
Program for the holiday periods
which allows interns to gain
knowledge and work in different
sectors of the Bank. These are short
internships directed at developing
specifi c projects. More than 400
special interns have undergone this
program since 2002. Many of these
young people were hired and are
currently working for Santander.
Ramón
Acquisition of Individual Customers
our employees
International Experience
Future Managers – The Bank
offers outstanding employees the
opportunity to acquire experience
abroad. The Santander Group has
concentrated investments and efforts
in developing its operations in Latin
American countries to reinforce its
commitment to being a benchmark
bank on the international market.
To do so, it created a standing
interchange program for employees
called Future Managers in the Latin
American countries where the Bank
is present.
Through this program, 184 employees
have already worked in other
countries. Of this total, 20% are
Brazilians who have participated in
special projects, mainly in Spain,
Mexico, Peru and Argentina. Fifteen
members of staff from other countries
are currently working in Brazil.
International MBA for Employees
A program to provide support for
MBAs abroad was launched in 2006
for employees with potential and an
outstanding performance record. The
aim is to improve their managerial
skills and develop a strategic,
pragmatic view of business. For the
second semester of this year, 80
employees were recommended by
the directors of their respective areas
to take part in the selection process
which will choose those who will
take an MBA course abroad. From
2007, the approved candidates will
be prepared and accompanied in the
entry process to the best international
American and European universities.
At the end of next year, around fi ve
employees are expected to have been
chosen for MBA courses at these
universities. The Bank sponsors the
educational costs.
MBA Summer Jobs – This program
is directed at Brazilian students who
are studying for an MBA abroad.
It provides positions in developing
projects in Brazil during the holiday
period, with the possibility of being
hired when the course is concluded.
In 2006, a total of 10 MBA students
at foreign universities took part in the
program in Brazil.
Dec
o Ro
drig
ues
57
For employees with great
potential and an outstanding
performance record,
Santander has a standing
program of international
interchange and opportunities
for staff to study for MBAs
abroad.
Edua
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ões
Matias, Maria and Gerardo
Future Managers
Transparent management, the
provision of accounts and the
preservation of the rights of its
shareholders are constantly at
the center of the Bank´s actions
and guide Santander´s initiatives
and communication with its
stakeholders. To ensure effi cient,
responsible management which
allows its processes and system
to be monitored effectively,
Santander is constantly developing
and updating rules and regulations
which are aligned and integrated
to the Santander Group´s corporate
governance practices.
In line with its business culture,
the Bank regulates the rights and
duties of the members of its Board
of Directors and its committees.
It adopts a Code of Ethics in which
it underscores the kind of conduct
it expects from its employees
in matters involving professional
secrecy, confl icts of interest and
personal investments. It also has
a Code of Conduct related to the
Capital Markets which establishes
principles and rules of behavior for
its executives in relation to their
activities on the stock market.
The Bank has a differentiated
structure which gives it a high
performance management and
an Executive Commission – made
up of the Chief Executive Offi cer
of Santander and the Executive
Board, supported by specialist
committees. This Commission
is responsible for coordinating
the management and achieving
excellence in its commitment to
integration, results, corporate
governance and value creation.
The Bank also has committees
which are specialized in various
strategic areas and have the
mission of strengthening internal
controls, raising the degree of
transparency and operational
effi ciency. To ensure the complete
independence of these committees,
the Bank´s executives are individuals
of high standing and national
recognition. One of these is Sergio
Darcy, a former director of the
Central Bank, who takes part in
Santander´s Audit Committee
in Brazil. The committees are
structured as follows:
DIFFERENTIATED STRUCTURE ENSURES GREATER TRANSPARENCY AND HIGH PERFORMANCE MANAGEMENT
CORPORATE GOVERNANCE
59
corporate governance
Audit Committee
This committee monitors and
examines the fi nancial statements,
internal controls and the degree of
independence and performance of the
internal and external auditors through
three executive directors and three
independent members.
Executive Committee for Anti-Money
Laundering and Compliance
This committee develops and monitors
policies to combat money laundering
instituted by the Santander Group
on a global level. It checks the
compliance with the Bank´s code
of conduct, identifi es possible areas
of risk to compliance with the internal
standards and confl icts of interest,
and establishes and controls the rules
on the preservation and use of
privileged information.
Executive Operating Risk
Committee
This committee analyzes and approves
policies directed at managing
operating risks and preserving
the Bank´s internal control systems.
Executive Credit, Market and
Counterparty Risk Committee
This committee establishes the
Bank´s policies in the credit area
and determines its inherent risks.
Executive Assets and Liabilities
Committee (ALCO)
This committee is responsible for
managing the capital and structured
risks which include those derived
from the country risk, liquidity,
interest rates and the exchange rate.
Executive New Products Committee
This committee approves new
products and services or those
which have been altered to make
them available through Santander´s
distribution channels.
Executive Technology Committee
This committee accompanies the
development of the Technology
projects in relation to attendance
systems and channels.
Edua
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Sim
ões
Executive Commission
Internal Audit
The Internal Audit area ensures that the Codes of Ethics and Conduct in the
Bank´s daily routine work are followed and monitors various units through
teams specialized by kinds of business risks.
Legal Incorporation
To standardize operating procedures and processes, increase the effi ciency
of the management instruments and improve the organizational structure,
approval was given in August 2006 for the incorporation of three institutions
– Banco Santander Brasil S.A., Banco Santander S.A. and Banco do Estado de
São Paulo S.A. (Banespa) – by Banco Santander Meridional S.A., which altered
its offi cial corporate name to Banco Santander Banespa S.A. This made it the
leading institutions among fi nancial and fi nancial service groups accredited by
the Central Bank.
Best Global Practices
By the global nature of its business – sustained in the leadership of the
Santander Group, one of the largest fi nancial conglomerates in the world,
the shares of which are traded on the New York Stock Exchange – Santander
is aligned and integrated with the best and most up-to-date corporate
governance practices and rigorously follows the rules of business conduct laid
down by the Sarbanes-Oxley Act.
Commitees which are specialized in various strategic areas reinforce the internal controls and raise the degree of transparency and operating effi ciency.
corporate governance
Edua
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ões
Edua
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ões
Executive Commission
Executive Commission
61
Senior Management of Banco Santander Banespa S.A.
1 2 3 4 5 6 7
Gabriel Jaramillo Sanint*Chief Executive Offi cer
• • • • •
Ana Isabel Pérez Pérez**VP Mortgages
Angel Oscar Agallano**VP Means
• • • • •
Arnaldo Bonoldi Dutra**General Secretary and Compliance
• • •
Edvaldo Ailder Catalani Morata**VP Wealth Management
• • •
José de Paiva Ferreira**EVP Marketing and Business
• • • • • • •
Luiz Carlos da Silva Cantídio Júnior*VP Global
• •
Miguel João Jorge Filho*EVP HR, Corporate and Legal Matters
• • •
Nuno Gonçalo de Macedo e Santanade Almeida Matos**VP Cards
• •
Pedro Carlos Araújo Coutinho**EVP Commercial Network
• • •
Ramón Sanchez Diez**VP Acquisition of Individual Customers
Ulrico Barini Filho**VP Human Resources
•
*Member of the Board of Directors**Member of the Executive Board
1 – Executive Commission2 – Executive Credit, Market and Counterparty Risk Committee3 – Executive Operating Risk Committee4 – Executive New Products Committee5 – Executive Committee for Prevention of Anti-Money Laundering and Compliance 6 – Executive Assets and Liabilities Committee (ALCO) 7 – Executive Technology Committee
João
Lui
z M
usa
CASA 1 (São Paulo)
The Santander Group´s investments in social responsibility focus on education, particularly higher education and academic research. In line with its commitment to help create the basis for a fairer world, the Group has created the largest collaboration program in the world with Latin American universities. This program is aimed at expanding opportunities for young people and giving them access to culture, education and research, as well as better chances of personal and professional growth.
The Santander Group´s Higher Education Support Program received investments of 66 million euros in 2006 and is completing 10 years of existence. Its main drivers are the Universia Network and Santander Universities program. Universia is a cooperation network which brings together 985 higher education institutions in Latin America and the Iberian Peninsula and is present in 11 countries
(Spain, Argentina, Brazil, Chile, Colombia, Mexico, Peru, Puerto Rico, Portugal, Venezuela and Uruguay). The main integrating element is the Universia portal (www.universia.com.br) which creates and brings together free content and services for the academic community in Portuguese and Spanish.
The Santander Universities program has cooperation agreements with 540 universities in Europe and Latin America. It benefi ts eight million students and made possible 10,161 study grants to promote study, research and the fi rst professional experience.
The global reach of the Santander Universities program, diversity of the projects and the size of this commitment led the Group to create the Santander Universities Global Division. This is the most effi cient model for developing and implementing the program
in the different countries where the Bank operates.
In line with the Group´s commitment throughout the world, Santander also maintains projects on education and higher education and develops projects such as the Santander Universities and subsidizes the Brazil Universia. It also takes part in dozens of social activities in the areas of social development, health, culture, sport, protecting children and adolescents, caring for older people, the environment and voluntary work.
In 2006, Santander made total investments in social responsibility initiatives in Brazil of R$ 46 million.
COMMITMENT TO SUSTAINABLE SOCIAL DEVELOPMENT
OUR SOCIAL INVESTMENT
63
Santander Universities
The Santander Universities
program has academic cooperation
agreements with 127 Brazilian
universities and colleges and brings a
direct link with one million students.
The program invests more than
R$ 25 million in academic projects
and gives priority to those making
study grants and specialization
courses in Brazil and abroad.
Two new projects were launched
in 2006: a program to develop
university/company integration, bring
students and companies closer and
encourage the inclusion of incubator
projects, and an international
mobility program involving Latin
American universities which is
making 167 study grants available
initially. These grants will be offered
to graduate and postgraduate
students for a period of six months
in Spain, Portugal, Mexico, Chile
and Argentina.
The Santander Universities program
in Brazil includes various ongoing
projects with partner institutions and
three "macro” agreements with the
University of São Paulo (USP), the state
University of São Paulo (Unesp) and
the University of Campinas (Unicamp).
These initiative include study grants
for students and teachers in various
areas, in Brazil and abroad, a high
technology research center to study
the ox genome at Unesp, sponsorship
of the USP Chamber Orchestra,
maintenance and expansion of student
lodgings and fi nancial support for
formation, training, leisure, culture and
integration events.
By 2007, the Bank will also sponsor
2,011 study grants for students with
a good academic performance but
unfavorable social and economic
conditions and provide them with an
extra R$ 330 per month. This program
mainly serves public institutions, such
as USP, Unesp, Unicamp and the
Federal University of São Carlos.
Another innovation in 2007 was
the interchange program between
Brazilian and Portuguese universities.
This initiative provided 162 Brazilian
students with grants to study in
Portugal and 162 students from
Portuguese universities to come
to Brazil.
A series of events and initiatives
is also scheduled for 2007 to
commemorate the Santander Group´s
150th anniversary. In the education
area, the Group has decided to offer
1,000 international mobility grants
to countries which are part of the
Santander Universities program.
our social investment
Edua
rdo
Sim
ões
Santander Customer
Universities (São Paulo)
Teachers visiting Salamanca
College Preparation Course
Suely (USP), José Tadeu (Unicamp), Alina
(Universia Brazil), Paulo (UFMT), José Lopes
(Technical University of Lisbon) and Lúcio (UFSC)
Salamanca Grant
The Salamanca Grant projects is
another Santander initiative originally
created to allow teachers from the
public school network in São Paulo
state to take part in intensive 30-day
courses on Spanish Language and
Culture at the University of Salamanca
in Spain. Thirty teachers took part
in the program in 2006. During its
three years of existence, a total of 92
grants have been provided. In 2007,
the program will be extended to the
city of Rio de Janeiro and 40 teachers
will be sent to take part in courses at
Salamanca University in the coming
four years
College Preparation Project
The Bank also helps young people
from needy backgrounds to take part
in the entrance exams to the best
schools and courses in Brazil.
The Bank has supported this project
in partnership with the City School
Apprentice NGO, the Institute of
Business Foundation (FIA-USP) and
JP Morgan since 2005. This year, 29
young people were helped and 65%
entered public universities. For 2007,
30 people were selected to study
during the year.
In terms of sport, the Bank sponsors
the Volleyball Project which benefi ted
45 players in the child, juvenile and
adult categories. The aim of the
project is to develop social inclusion
programs which provide opportunities
for young people to develop in
personal and professional terms
through sport.
our social investment
To help university students open
a their own bank account, learn to
organize their fi nances and relate
to a fi nancial institution, Santander
provides dedicated managers and an
exclusive portal. As a differential and
to show that it understands students´
lives, the Santander Universities
program provides modern offi ces,
lower banking tariffs and rates and
a fi nancial education service for these
young people. These initiatives aim to
establish a long-term relationship and
prove Santander´s commitment and
serious approach to a public group of
individuals who will shortly be running
companies and their own businesses.C
arlo
s D
ella
Roc
caN
ancy
Cam
pos
Serg
io Z
acch
i
65
Universia Brazil
Santander is the strategic fi nancial
partner of the Universia Brasil
portal which has been in existence
for around fi ve years. The portal
has formed partnerships with 237
universities, has 1.8 million registered
users and receives an average of
900,000 individual visitors (source:
Nielsen/NetRatings). In Brazil,
the portal presents content and
services for the academic world,
such as career advice (internships
and trainee programs), study
grants, entrepreneurship, on-line
course, interchange, e-mail, virtual
classrooms, scientifi c publications,
culture, teaching agendas from
institutions, the voluntary sector and
distance learning.
The portal is aimed at pre-university
and university students as well as
graduates, teachers, administrators
and researchers at higher education
institutions. Its mission is to integrate
the academic communities in the
countries where it is present and
facilitate the creation of a space for
Latin American higher education,
through training, culture, research
and collaboration with the business
world, thereby helping sustainable
development in these countries.
To help place young people on the
job market, the Portal developed
the Universia Jobs channel which
presents opportunities for internships
and fi rst job, information on career
management, recommendations of
specialization courses, presentation of
jobs for interns and trainee programs.
The channel has a CV bank and
agreements with companies to help
provide internships and opportunities
for students to fi nd their fi rst job.
Under Banco Santander´s sponsorship,
Universia Brasil created the Santander
Rooms. These are areas of digital
inclusion containing about 20
computers with Internet access where
students, teachers, employees and
the needy communities living near
the universities can have access
to information technology. Five IT
inclusion rooms were handed over to
four universities in 2006 and another
10 new Santander Rooms will be
opened in 2007.
In 2006, the second Santander
Banespa Entrepreneurship Prize and
Santander Banespa Science and
Innovation Prize competition was
promoted by Santander and developed
by the Universia Brasil program. It
attracted 1,085 applications from
181 partner universities in 21 states.
There were 840 entrepreneurial and
245 scientifi c research projects – 21%
more than in the fi rst year of the event
in 2005.
Three entrepreneurial projects received
prizes in the Industry, Services and
Technology categories and four in the
scientifi c and innovation areas in the
Industry, Services, Technology and
Social Responsibility categories.
The high level of the projects attracted
the attention of large organizations,
such as the Federation of Industries of
São Paulo State (FIESP) which decided
to evaluate all the prize-winning
projects registered in the two years of
the event to check the possibility of
including them in its incubator model.
Edua
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Santander Customer
Universities (São Paulo)
PROFITABLE GROWTH IN LOAN OPERATIONS THROUGH A CAUTIOUS CREDIT POLICY AND OPTIMIZING THE USE OF CAPITAL
Effective risk management techniques
are essential for the sustainable
growth of any fi nancial institution.
Santander´s commitment to
Risk Management is to provide
customers with the best fi nancial
services – with quality, innovation
and effi ciency. At the same
time, it aims to increase the loan
portfolio, through a prudent
policy which allows the resources
to be optimized and obtain
the maximum return on capital,
to provide shareholders with an
adequate level of protection for
their capital by means of intelligent
systems of evaluating the risks
involved in every operation.
To achieve this, Santander developed
its own Risk Management model
which is aligned to the Group´s
objectives in Brazil and the world
and is based on the following
principles:
Functional independence,
with a shared hierarchy.
The aims and methodologies
are established by the
Risk Division while the
organizational structure
adapts itself to the business
needs and is closer to
the customer, preserving
the standards of risk quality.
Executive ability boosted by
knowledge and closeness
to the customer, in parallel
with support for the business
manager and the collegiate
decisions of the corresponding
risk committees.
Global functional reach
(different types of risk) and
single treatment for the
customer, without prejudicing
specialization by type of risk or
customer segment.
1.
2.
3.
Collegiate decisions which
evaluate all the possible scenarios
and do not compromise the
results with individual decisions.
To do so, the risk decision
process goes through a series
of committees, made up of
executives from the commercial
and risk areas. The top body is
the Executive Risks Committee,
headed by the Chief Executive
Offi cer, which includes various
members of the Bank´s Executive
Commission, such as the
vice-president of the Credit
and Market Risks area.
This Committee’s responsibilities
are to:
establish the risk policies for the Bank, taking into consideration the instructions from the Board of Directors and the Santander Group Risks Division;
4.
¨
RISK MANAGEMENT
67
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monitor the level of risk assumed,
both global and individual, and
comply with the fi xed objectives;
make decisions on operations with
higher limits than those approved
by subordinate committees;
delegate approval to assume risks
to other subordinate committees;
receive information on important
matters which it should know
about and make decisions;
revise the risk exposure to the
main customers, sectors of
business activity, types of risk etc
on a systematic basis.
Manage risk equation/return,
optimizing it as a prudent risk
policy which ensures cultural
consistency in policies and
procedures, emphasizing:
¨
¨
¨
¨
¨
5.
the great importance of
accompanying risks, looking ahead
and preventing possible losses;
diversifying risk and generally
limiting the Bank´s participation in
the debt its customers have; and
avoiding exposure to companies
with rating considered to be
insuffi cient, even though there
may be the possibility of receiving
a risk premium in proportion to
the internal rating.
Optimizing the risk/return function
to deliver greater value to the
shareholders.
Applying advanced methodologies
in risk management in function of
the kind of business or customer.
¨
¨
¨
6.
7.
The Risk Management policy the Bank has developed allows it to increase its loan portfolio and obtain the maximum return on capital for the shareholders.
Pedro and Marcelo
Wholesale Risks
risk management
Reginaldo and Patrício
Technology
Miriam and Pinheiro
Technology
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The Bank has a high level structure to defi ne strategies and directives, disclose and ensure the implementation of the best management and operating control practices.
risk management
After concluding its transformation
stage, Santander consolidated the
necessary platform to win and profi t
from new customers, and maintain
and monitor the portfolio with
integrated risk-measuring tools,
including in the branch sales points.
With this Risk Management model,
Santander is ready to serve customers
from all segments – Large Companies,
Governments & Institutions, Small
and Medium-Sized Companies and
Individuals through the Retail Bank,
and large corporations through Global
Wholesale Banking – respecting the
specifi c needs of each. The experience
acquired in each country where the
Group operates is also incorporated
to the local models so that the best
practices cross the borders from their
place of origin.
The Retail area was marked in 2006
by the consolidation throughout the
branch network of the GARRA system
which was set up in 2005 and consists
of specifi c modules for the various
segments of the Bank. The GARRA
system automates and allows control
over the fl ow of the generation
and approval of credit proposals to
the Retail Bank and represents the
most signifi cant development in Risk
Management yet implemented within
the Group. The GARRA system allows
the branches to have their own tools
and initiate, approve and formalize
loan operations in a few minutes,
without overriding the controls
required for a Bank of Santander´s size.
The modernization and technological
integration in April 2006 led to the
unifi cation and consolidation of the
risk quantifi cation platforms and
tools (credit score and behavior score
models) in the Retail network of the
Santander and Banespa banks. This
process raised the automation of
operational proposals in the network,
particularly in the Business segment,
from 25% to 61%.
In Global Wholesale Banking, several
important points were raised in pursuit
of quality in granting credit.
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International experience applied to the local model
69
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Distribution of Credit Portfolio
Wholesale
Companies
Business
47%
12%
7%
Government and Institutions
Individuals
Others
1%
32%
1%
Environmental Risk
and Social Responsibility
One of the variables considered in
the analysis is the concern which
companies express in relation to
environmental risks involved in the
sector in which they operate.
Sector Specialization and Training
The Bank maintained it focus during
the year on training employees to
become specialists in sectors of
industry to improve synergy with the
companies. To achieve this objective,
investments were made in training
and turning the analysts into
specialists. At the same time,
regular interchanges are made with
employees from the head offi ce in
Madrid, to improve professional
training and standardize concepts for
the development of activities.
Luis
Market Risk
The Decision Center:
case by case analysis
A function of Risk Management
is also to analyze customers in a
personalized, hands-on way so that
the responsibility for attending the
network in the retail area belongs to
the Decision Center. In line with the
segmentation which occurred at the
sales points, the Decision Centers
were split into Individuals, Business,
Agribusiness and Governments
and Institutions areas. The aim was
to advise the commercial area to
improve as far as possible, make credit
decisions fl exible and help increase
and maintain the quality of the loan
portfolio. The whole team received
training on the particular aspects of
each segment/product consumed
by these customers. The greater
integration of the Decision Center
team with the model development
team led to greater automation
in the credit-granting process. To
complement these initiatives, a plan
for the greater sharing of information
and integration of the Risks area staff
with the products and commercial
areas was put in place.
Mauro
Companies' Risk
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Distribution by RatingR$ billion
AA
5 10 15 20 25
A
B
C
D
E
F
G
H
risk management
Management and Accompaniment
of Credit Risk
By analyzing and accompanying
risks, the credit managers can detect
early warning signals of a worsening
in the customer´s economic and
fi nancial situation.
These early warning signs should lead
to a revision of the degree of the
customer´s risk and expectations of
a loss. As a result, a decision is made
on whether or not the customer is
accompanied or even transferred to
the Billing area, justifying classifying
the customer in accordance with
the degree of risk and expectations
of a loss, keeping the customer
in a “normal” situation or classifying
it for accompaniment.
The process of managing the
recovery of Santander´s credit is
defi ned in line with the segmentation
of the customers, amount of debt,
the number of days of default and
the guarantees.
In the Retail segment, the billing
process is initiated through the branch
network by the business managers by
telephone or personal contact with
the customer, as well as by sending
bills. If the bill is not settled within
the period laid down by the billing
regulations, the debt is transferred to
the Call Center which has a specially
trained team to deal with each of
the billing phases and automated
systems and controls to register
all contacts with the customers,
including payment pledges, which are
scheduled to be accompanied. The
debts which are not settled within
the period of the Call Center´s activity
are transferred to the specialist Billing
Offi ces, duly accredited by Santander.
The operations involving larger amounts
are dealt with by the centralized area,
specialized in billing and personal
negotiations with the customers.
In cases where the settlement is not
made, the process is forwarded to
the Legal Billing Offi ces for a decision
to be made on the debt/guarantees.
71
Patrícia
Recovering Credit
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Financial Risks – New Basle Capital
Accord (BIS II)
The Santander Group has committed
itself to comply not only with the
demands of the Brazilian Central Bank
in relation to regulatory capital but is
also working in line with the directives
of the Bank of Spain to use the most
advanced methods to calculate the
regulatory capital for the credit risk
– advanced models based on Internal
Ratings (Advanced IRB).
These methodologies use internal
models to measure risks, using the
optimization of the allocation of
regulatory capital and risk control in
line with the best market practices.
These models foresee and monitor
delays by means of the attribution of
a likelihood of default by each lender,
and can distinguish between good
and bad customers when closing a
deal. In the Santander Group´s case,
the initial application for the credit risk
is the Standard coverage which weighs
the credit operations in line with the
lender´s rating provided by the external
ratings agencies such as Moodys®,
Fitch® and Standard & Poor´s®.
Through an SAS® calculation, the
Bank can meet the requirements of
the calculation of regulatory capital
for the credit risk in line with the
directives of the Bank of Spain.
The Local Basle II Technical
Committee meets to ensure the correct
implementation of the Santander
Group´s internal models. This is the
Executive Committee which reports
directly to the Chairman´s offi ce and
the Global Technical Committee at
head offi ce and is responsible for the
implementation of the Basle II project
in Brazil. The Local Risk Controller,
who is subordinate to the Corporate
Coordination Project Workshop in
Madrid, has been responsible since 2003
for the independent area dedicated
to the capital matters (regulatory
and business), internal control and
validating the internal models.
The implementation of internal rating
models (for Global Wholesale Banking
and Companies) and the support (for
Retail) follows a timetable established
by the Vice-Presidency of Risks, which
is responsible for this process. This
process is accompanied by the Internal
Auditors in Brazil and Spain.
Santander has been using technical
and fi nancial resources to develop
and establish the most sophisticated
capital measurement models required
by Basle II. The use of the Capital
Models in managing the business
lines is as important as complying
with the commitments to the Brazilian
Central Bank and the Bank of Spain in
measuring the Regulatory Capital.
Santander uses tools on a daily basis
to measure the Return on Business
Capital and EVA™ – Economic
Value Added. The business lines are
managed in a way which optimizes
the benefi ts to the shareholder
in a sustainable way, with a high
sensitivity to risk, and can allocate
capital to businesses which create
value while, at the same time,
avoiding potential risks.
In 2006, the Credit Risk Portfolio increased
by 29.4% and came to R$ 37.5 billion.
The Wholesale, Companies and
Individual segments were the leaders
in the volume of the portfolio
compared with December 2005.
Samantha
RiskRe
fl exu
s Fo
tos
Credit Risk Control
Credit Risk Control is an
accompanying process which begins
when the Bank starts negotiating
with customers and extends during
the whole period in which these
operations are active.
Based on the approval of a line of
credit, the structure monitors on a
daily basis the use of this line and
compares the approved limit with
the risk measures (capital at risk
consumed, maximum exposure and
availability for new operations).
The control also considers periods,
guarantees and products approved for
each client.
The information required for this
control is presented through a tool
which consolidates the entire Risk
portfolio: limit, value of the operations
and their features, percentage of use,
capital consumption and customer
rating, amongst other data. The
objective of this tool is to support the
management of the portfolio and
reduce the chances of the credit being
used outside the approved areas.
Within this fl ow, Santander also uses the
Transnational Channel which analyzes
and calculates the credit risk equivalent
in derivative operations when a deal is
made with the customer.
The methodology used is the Mark
to Future model which considers
the maximum potential exposure
of the client during the lifetime of
the operation. In this model, the
calculation of the risk, which uses
the underlying historic volatility
stressed in two standard deviations,
has a confi dence level of 97.5%.
The levels of volatility are regularly
revised in accordance with the market
conditions of the asset.
Control of Cross Border
or Country Risk
Since it is a global Bank, Santander
needs to have a detailed Cross Border
operation. This control identifi es,
analyzes and foresees the risks in
case of a Country Risk event and the
consequences for the Bank should the
country in which the customer lives
not allow the transfer of resources.
Market Risk
The Market Risk is managed by the
variations in the prices of the various
risk factors: interest rates, exchange
rate, variable income, volatility of these
components, solvency risk and the
liquidity risk of the different products
and services, as well as the markets in
which it operates.
Santander operates according
to global policies within the risk
framework tolerated by the Santander
Group. The Group´s control activities
operate in such a way as to facilitate
business with customers, optimize the
benefi ts for the Bank and constantly
improve the risk/return ratio.
Risk Control and Methodology
risk management
73
Credit management follows a methodology developed by the Santander Group worldwide and establishes a minimum return for operations.
Methodology
Value at Risk (VaR)
Santander uses the standard VaR
methodology. This measure uses a
base for historical simulation of 520
days, with a confi dence level of 99%
and time horizon of one day. The
realization of statistical adjustments
allows events which interfere with
the levels of the assumed risk to
be incorporated quickly. The Bank
uses two methodologies for daily
measuring, weighted and unweighted
VaR, and chooses the most
conservative result of either.
Due to the needs of the size or nature
of the portfolios, other methodologies,
such as the Montecarlo Simulation
and the Parametric Models can be
used. In order to verify and proportion
a precision ratio in the models used
to calculate the VaR, Santander uses
Calibration and Contrast measures
(Backtesting).
At the same time, an analysis of
scenarios is also used to defi ne the
behavior of the different fi nancial
variables to simulate the impact on the
portfolio results.
Financial Sensitivity
Margin (NIM)
The sensitivity of the fi nancial margin
is a short or medium-term ratio which
measures the alterations in the results
expected over a determined period
(12 months) against a change in the
interest rates curve. It is calculated by
simulating the margin, for a future
movement in the curve as well as the
current scenario, with the sensitivity
being the difference between the two
calculated margins.
Sensitivity of the Net Assets (MVE)
This is also used to measure the
stress of interest rates. It lasts for
the duration of the operation and,
therefore, complements the Financial
Sensitivity margin established over
the year. It measures the profi t
risk implicit in the net worth (own
resources) over the incidence base
which has the variation of the interest
rates in the current values of the
fi nancial assets and liabilities.
CASA 2 (São Paulo)
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risk management
Liquidity Analysis
This instrument brings information
on the expected infl ow and outfl ow
of contracted cash at a certain
moment in each of the currencies
used. It measures the need and
the net excess of funds on a date
and refl ects the level of liquidity
maintained in normal market
conditions. There are two types
of analysis of the liquidity gap.
The fi rst is the contractual one in
which all the documents on and
off the balance sheet which create
a fl ow of cash are placed at the
point of maturity. The second is the
operational situation which foresees
a scenario in normal conditions
where the fl ows are at the point of
probable liquidity.
Scenario Analysis/
Contingency Plan
The management of the Bank´s
liquidity is based on adopting all the
necessary measures to prevent a crisis.
It is not always possible to foresee
the causes of a liquidity crisis and, for
this reason, the contingency plans
centre on creating potential crises
with an analysis of different scenarios:
identifying the kinds of crisis, internal
and external communications, and
individual responsibilities.
The Contingency Plan covers the
scope of the direction of a local
unit and head offi ce. The fi rst sign
of a crisis requires clear lines of
communication and suggests a wide
variety of responses to different levels
of crisis.
As the crises can develop on a
regional or global basis, each local
unit must prepare a Contingency
Financing Plan and indicate the
amount that may be required as
help or fi nancing from the central
unit during a crisis. The local unit´s
Contingency Plan must be presented
to the central unit in Madrid at
least every semester to be reviewed
and updated. However, these plans
are updated over shorter periods
whenever market circumstances
require.
The system of controlling the limits of exposure ensures that the Bank takes advantage of opportunities on the market.
75
CONTROL SYSTEM Defi ning Limits
This instrument is used to establish the assets which each activity has available
and is the process of fi xing the limits when the budget is drawn up. The
establishment of limits is a dynamic process which is in line with the level of risk
acceptance laid down by the Board of Directors.
Objectives of the Limits Structure
To defi ne the structure of the limits, the Bank takes the following aspects into
consideration:
Identifying and describing, in an effi cient, comprehensive form, the main
kinds of market risks incurred so they are consistent with the business
management and defi ned strategy;
Quantifying and informing the business areas of the risk levels and profi les
which the Board of Directors regards as reasonable to prevent exposure to
undesirable risks;
Giving the business areas fl exibility in taking the market risk decision in an
effi cient and opportune way, in line with changes in the market and business
strategy, always within the risk levels the Bank considers acceptable;
Allowing the business managers cautious but suffi cient room to take risks
in order to achieve the planned results; and
Establishing alternative investments within the consumption limit
of own resources.
¨
¨
¨
¨
¨
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João
Lui
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usa
Davi
Credit Card Risk
Saldanha
Financial Management
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0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
VaR Daily (USDMM)Ja
n. 0
6
Mar
. 06
May
06
Jul.
06
Sep
. 06
No
v. 0
6
Figures 2005 2006
Maximum 12.9 76.1
Minimum 2.1 8.5
Average 8.1 21.1
Standard Deviation 2.2 8.3
It is worth noting that Santander´s adaptation to the new international
accounting standards (NICs) led to changes in the way the different portfolios
were classifi ed (some which had previously been valued in the curve being
marked to market). The following table of the breakdown of the VaR by risk
factor shows that the main products which generate risks are interest rates and
the exchange rate.
Total VaR FI VaR EQ VaR FX
Maximum 76.09 75.30 5.76 8.43
Minimum 8.54 6.90 0.23 0.50
Average 20.85 18.24 2.05 2.30
The following table shows how the VaR performed compared with
the previous year:
During the year, the Bank maintained an exposure which was practically
constant. During the crisis period of May-July 2006, there was an increase
in the VaR (the methodology the Bank uses which penalizes exposure to risk
in moments of stress) which obliged it to reduce its exposure in line with its
limits. Once this period was over, the Bank gradually returned to the average
level in the second semester. As a result, Santander ensured its ability to take
advantage of the market opportunities (ongoing falls in the exchange rate and
base interest rates) without running any unnecessary risk.
Trading Activity
Quantitative Analysis of the VaR in the year:
In 2006, the development of the risk related to trading activity on the fi nancial markets, quantifi ed by the VaR method
was as follows
risk management
77
9 11 13 15 17 19 21 23 25 27 29 33 65 75
Dispersion of VaR in the year
32
4
67
15 15
13
10 10
18 1819 19 19
12
9
23
7
43
6
1 1 1 1 11
0
5
10
15
20
25
0 .0 0
1 0 .0 0
2 0 .0 0
3 0 .0 0
4 0 .0 0
5 0 .0 0
6 0 .0 0
7 0 .0 0
8 0 .0 0
VaR Daily (USDMM)
1 .8 0
1 .9 0
2 .0 0
2 .1 0
2 .2 0
2 .3 0
2 .4 0
2 .5 0
USD Spot
Jan
. 06
Jan
. 06
Jan
. 06
Feb
. 06
Mar
. 06
Mar
. 06
Mar
. 06
Ap
r. 0
6
May
06
May
06
May
06
Ju
n. 0
6
Ju
n. 0
6
Ju
l. 06
Ju
l. 06
Au
g. 0
6
Au
g. 0
6
Sep
. 06
Sep
. 06
Oct
. 06
Oct
. 06
No
v. 0
6
No
v. 0
6
Dec
. 06
Dec
. 06
The following graph shows the development of the VaR in relation to the development of the risk perspective,
represented here by the movement of the Real against the Dollar.
The fi gures show that the Bank followed the movement of the market and
accompanied the downward trend of the exchange rate and interest rates.
The following chart describes the frequency distribution of risk measured in
terms of the VaR during 2006. Levels close to 80% of the limit were achieved
on only six occasions and kept the risk level at around 34% during the year.
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Renata
Faria Lima Branch (SP)
0
2 0
4 0
6 0
8 0
1 0 0
1 2 0
1 4 0
1 6 0
Jan
. 06
Feb
. 06
Mar
. 06
Ap
r. 0
6
May
06
Jun
. 06
Jul.
06
Au
g. 0
6
Sep
. 06
Oct
. 06
No
v. 0
6
Dec
. 06
Sensitivity Margin and Value
Margin
Value
The effi cient management of Santander´s balance sheet allowed it to maintain an adequate level of exposure to the risk of interest rates in 2006, amongst other factors.
DIRECTIONAL PORTFOLIO/BALANCE SHEET MANAGEMENT
Quantitative Analysis of Interest Rate Risk in the Year
The following table shows the movement of the fi nancial margin and equity asset sensitivities. The sensitivity value was
between 100 MM USD and 160 MM USD during 2006, due to the change in the composition of the portfolio during
the year, with sales of assets in the fi rst semester and purchases in the second. The sensitivity margin moved between
U$ 30 million and US$ 50 million in the period.
risk management
79
0
5
1 0
1 5
2 0
2 5
3 0
3 5
4 0
4 5
5 0
Jan
. 06
Feb
. 06
Mar
. 06
Ap
r. 0
6
May
06
Jun
. 06
Jul.
06
Au
g. 0
6
Sep
. 06
Oct
. 06
No
v. 0
6
Dec
. 06
Sensitivity margin by currency
EXT
LOC
TOT
0
2 0
4 0
6 0
8 0
1 0 0
1 2 0
1 4 0
1 6 0
Jan
. 06
Feb
. 06
Mar
. 06
Ap
r. 0
6
May
06
Jun
. 06
Jul.
06
Au
g. 0
6
Set.
06
Oct
. 06
No
v. 0
6
Dec
. 06
Sensitivity margin by currency
EXT
LOC
TOT
Sensitivity fi nancial margin
From the point of view of currencies, the higher sensitivity margin is generated by the local currency in which almost the
whole balance sheet is denominated, while the sensitivity generated by the currency in dollar terms is low.
Sensitivity equity value
For the equity sensitivity, see the same methodology for the margin sensitivity. Most of the sensitivity is generated by the
local currency which marks the developments seen in the previous tables.
Treasury
ALCO
Corporate Centers
42%
34%
24%
The risk management systems are recognized on the international market for their effi ciency and facilitate the handling of business and decision making.
Unit Risk Analysis
This area provides information on risk for the whole Bank through a total VaR
measurement. The following chart shows that 66% of the Bank´s total risk is
concentrated on Balance Sheet Management and Treasury and the rest on the
Corporate Centers.
Systems
Santander works to implement systems which bring effi ciency, control and
accuracy in the information used to manage risk and take decisions.
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CASA 3 (São Paulo)
risk management
81
Baldisera, Alvaro and Tomas
Operational Risk Management
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OPERATIONAL RISK MANAGEMENT
The Bank takes pains to implement
and spread the culture, policies and
infrastructure needed to bring its
Operational Risks up to adequate
standards and, in parallel, to pursue
effi ciency in the Internal Controls
System, the prevention, mitigation and
reduction of risk events and operating
losses. This concern is expressed in
the mission statement of the Vice-
Presidency of Operating Risks:
“To be the area responsible for
implementing and disclosing the
necessary culture, policies and
infrastructure to enable all employees
to adhere to and commit themselves
to managing and controlling Operating
Risks and to the effi ciency of the
Internal Controls System, thereby
making a contribution to the aims of
Santander and its stakeholders.”
By doing so, the Bank wants to
achieve its commitment to Santander´s
strategic objectives, continually
improving its reputation, solidity
and trust on the local market.
The processes adopted aim to
position Santander among the leading
fi nancial institutions recognized for
having the best and most demanding
management practices on controlling
these operational risks.
To meet the strategic aims and
the adequate management of the
Operating Risks, the model and
processes are in accordance with
the Santander Group guidelines, the
requirements of the New Basle Accord
– BASLE II, the Brazilian Central Bank,
and the requirements of the Sarbanes-
Oxley Act.
Executive Operational Risks
Committee
This committee is completely
independent and responsible
for defi ning the strategies and
directives related to the control and
management of operational risks and
Santander´s internal controls;
Vice-Presidency of
Operational Risks
This area´s responsibilities include
a commitment to disseminating
the culture through the use of the
methodologies, norms, policies,
instruments, training and procedures
required for the effi cient management
and control of operational risks.
Superintendency of Operational
Risks and Internal Controls (SROCI)
This area is responsible for identifying
and implementing the best practices
in the management of Operational
Risks and Internal Controls to help the
managers follow the decision-making
processes of the Bank in complying
with the obligatory requirements
and the maintenance of Santander´s
reputation, solidity and trust.
Edua
rdo
Sim
ões
Cristiano and Alessandra
Sales Point CASA 1 (São Paulo)
Approaches
The Bank adopts two approaches
– Qualitative and Quantitative – to
implement best practices in Operating
Risk management in an integrated,
complete and consistent way.
The qualitative approach aims to
prevent potential operational risks
and defi nes the risk profi le. It is
based on strengthening the Group´s
internal control structure. The main
methodological instruments used are:
Matrixes of Operational Risks
and Internal Control
This tool was created and used to
formalize and constitute a data base
of potential risks and control
procedures and activities identifi ed
in carrying out activity in the areas,
processes and products. Self-evaluation
methodologies through workshops
and self-assessment questionnaires
on operational risks and internal
controls are used.
Santander´s operational risk management model is divided into:
Centralized model
The control of the Operating Risks is the responsibility of the SROCI and
includes identifying, capturing, consolidating and adding the important
potential operating risks and occurrences arising from faults and events which
could affect the results and our stakeholders. It covers all Santander´s areas and
processes. The SROCI is also responsible for ensuring that the culture, policies,
methodologies and tools for managing operating risks are disclosed.
Decentralized model
The management of Operating Risk is the responsibility of the managers who
are helped by the Representatives of Operating Risks and Internal Controls
(RROCI) and use the policies, methodologies and tools defi ned by the SROCI.
Abridged Matrix of Operational
Risks and Internal Controls
for New Products
This instrument was developed and is
used to formalize the potential risks
and existing internal control for the
launch of new banking products
and services.
Quality Assurance
This validates and proves the
effi ciency of the existing internal
controls and formalizes them within
the Matrix of Operational Risks and
Internal Controls.
Disclosure and Treatment of
Failures and Relevant Occurrences
This is a cultural process developed
for the correct communication by the
managers responsible and the proper
handling of the failures and important
occurrences in the Bank which require
special attention in conducting
corrective and preventive measures.
The operational risk management model is aligned to the new Basle Accord (BIS II), the requirements of the Brazilian Central Bank, and the Sarbanes-Oxley Act.
risk management
83
Edua
rdo
Sim
ões
CASA 1 (São Paulo)
CASA 4 – Wholesale Banking
(São Paulo)
Monitoring of the Regulatory
Agencies
This process was developed to identify
and handle the treatment of the
registrations and requirements of the
regulatory agencies and aims to ensure
that the legal requirements and orders
are complied with.
The quantitative approach aims to
detect, correct and prevent operational
risks and provide mechanisms for
analyzing and making decisions.
It is based on the joint use with the
Qualitative approach to capturing
risk events and operational losses,
identifying and analyzing the
causes of the events, as well as
their corresponding impacts. It also
accompanies the development and
establishment of action plans to correct
and prevent the registered occurrences.
It uses the following tools:
Historical Data Base of Loss Events
and Operational Risks
This instrument is used to take decisions
on the priorities in the action plans to
prevent and reduce operational risks
and losses. It will also sustain the future
approach of advance measuring in
calculating the required capital, through
the construction of the distribution
of the frequency and severity of the
operational losses and subsequent
calculation of the Operational VaR.
Preparation of Forecasts and
Operating Loss Limits
This is a process to elaborate and obtain
the commitment of the main areas in
relation to the forecast of losses for
each fi nancial year, with the regular
accompaniment and analysis of the
swings observed in relation to the actual
outcome compared with what had been
foreseen, and the recommendation of
action plans if necessary.
Preparation of Scenarios and
Simulations
Regulatory capital requirement testing
of the basic, standard and alternative
approaches defi ned by the Basle II
Accord. The risk events and operational
losses by units and categories of risk
according to Basle II are currently
allocated, thereby allowing corrective
and preventive action plans to be
created and optimized.
Identifi cation and Accompaniment
of Action Plans to Mitigate and
Correct Operating Risk Events
This process controls and
accompanies the implementation
of the action plans identifi ed
in occurrences with a relevant
operational risk in order to mitigate
future occurrences and strengthen
the internal controls environment.
Base of Operating Risk Events
Obtained from External Public
Sources
This tool is used to disclose the
culture and incorporate in the analysis
of scenarios and evaluation of the
likelihood of occurrences (frequency
and severity) to complement and
measure the regulatory capital.
These two approaches jointly bring
a better knowledge of exposure to
risk and measuring the regulatory
capital need.
Dan
iel R
osa
Baranauskas, Fabiana and Priscila
Corporate Resources
Refl e
xus
Foto
sEd
uard
o Si
mõe
s
Extent of Approach
The extent of the management and
control of Operating Risks in Santander
goes beyond the simple identifi cation
of the allocation and calculation of the
regulatory capital. The Group regards
it as being of strategic importance. It
serves as an effective management
instrument and is essential in identifying,
capturing, measuring, managing,
controlling, preventing and reducing
operational risks and losses. The
following lists its main achievements:
in line with the existing regulations
(Central Bank, CVM, SUSEP,
BIS-II, SOX);
improved operating effi ciency;
in line with the certifi cation from
the Sarbanes-Oxley Act;
consistent means of identifying the
regulatory capital;
strengthened reputation;
improved Risk/Return ratio for
stakeholders;
in line with the new requirements
of the regulatory agencies;
maintenance and preservation
of the quality and trust in the
products and services provided to
customers; and
cultural change and disclosure
of accountability.
Additionally, continuing the
current approach to handling faults
and important occurrences, an
improvement was seen in the clear
¨
¨
¨
¨
¨
¨
¨
¨
¨
identifi cation of these causes and
their correction.
The following activities were held in
2006 to publicize the culture, policies
and infrastructure:
the 2nd Prevention and Control of
Operating Risks Week;
training course for managers
on the main concepts for
handling Operating Risks and
the maintenance of the Internal
Controls environment;
training courses on the importance
of and need to follow the
Sarbanes-Oxley Act;
disclosure of the existence of the
Operating Risks structure and the
main concepts to new employees;
updating and disclosing the
Instruction Manuals on the intranet
for corporate disclosure and
commitment of all employees;
coordination of the process of
drawing up forecasts of operating
losses for 2007 with the Real versus
Forecast accompaniment; and
the disclosure of the main news
affecting Operating Risks obtained
from external public sources.
This combination of activities ensures
that Santander is consistently
achieving its objectives in a controlled
environment in terms of exposure to
assumed risks.
¨
¨
¨
¨
¨
¨
¨
risk management
85
Vanessa and Cristine
Products for individuals – Funding
Agência Praça Panamericana
(São Paulo)
National Monetary Council
Resolution CMN 3.380/06 –
Central Bank
The Vice-Presidency of Operating Risk
presents the norms, methodologies
and internal model, founded on
the best market practices for the
identifi cation, evaluation, monitoring,
management and control of the
operating risks. By doing so, the Bank
has anticipated the requirements
laid down in the National Monetary
Council CMN Resolution 3.380/Central
Bank of 29.06.2006.
The management of Santander in
Brazil and the Santander Group
is committed to this matter and
evaluates, approves, recognizes and
supports the structure, methodologies,
tools, norms, policies and procedures
required to promote the proper
management and control of the
conglomerate´s operating risks.
The main results obtained – including the
creation and workings of the Executive
Operating Risks Committee – were
disclosed in the Annual Report and the
Sustainability Report for the 2005 period,
the consolidated fi nancial statements
of 31.12.2006 and are available
at www.santanderbanespa.com.br.
Sarbanes-Oxley Act
Since 2005, Santander has been
implementing the COSO methodology
for the Internal Controls system in
its Sarbanes-Oxley Project in order to
obtain local certifi cation in the fi rst
semester of 2007. This project brings
Santander the best practices and
requirements in terms of the Internal
Controls of the US market.
With the support of the approach
adopted in handling risks and
operating losses and the use of
the COSO methodology used in
the SOX project, the Bank intends
having an integrated Operating Risks
management and control system.
This integration will strengthen the
Group, not only locally but also
internationally. It will consolidate
the existing strategy and maintain
the Bank´s recognition as an institution
at the forefront in the process of
managing and controlling operational
risks and the implementation of the
system of effi cient internal controls.
Encouraging excellence among our employees
In line with the Bank´s strategy of carrying out regular training and skill-
building to improve the effi ciency of its employees, Risk Management
accounted for 53,855 hours of training, including physical and distance
learning courses and involving 12,955 participants, in 2006.
The Operating Risk and Internal Controls areas held training on site and
distance learning courses for 3,772 participants, on issues related to
the management and control of Operating Risks, Internal Controls and
the Sarbanes-Oxley Act (SOX).
João
Lui
z M
usa
Edua
rdo
Sim
ões
FINANCIAL STATEMENTS
87
Management Discussion and Analysis (MD&A)
Combined Financial Statements
Balance Sheets
Statements of income
Statements of changes in stockholders’ equity
Statements of changes in fi nancial position
Notes to the combined fi nancial statements
Independent Auditor’s Report
Summary of the Audit Committee Report for Santander Banespa
MANAGEMENT DISCUSSION AND ANALYSIS (MD&A)
Operations
Santander Banespa, controlled by Santander Central Hispano, has been operating in Brazil through Banco Santander Banespa S.A. and Santander Seguros S.A. and their respective subsidiaries, and its operations are conducted on an integrated basis in the fi nancial market.
Santander Banespa’s Combined Financial Statements better refl ect the performance of the group’s activities in the country, with aggregated evolution and with comparative data from the same period in 2005.
Corporate Restructuring
On August 31, 2006, Extraordinary Stockholders’ Meetings approved the proposed corporate restructuring in accordance with the “Protocolo e Justifi cação da Incorporação do Banco Santander Brasil S.A., Banco Santander S.A., e Banco do Estado de São Paulo S.A. – Banespa pelo Banco Santander Meridional S.A.” (Protocol and Justifi cation for the Merger of Banco Santander Brasil S.A., Banco Santander S.A., and Banco do Estado de São Paulo S.A. – Banespa into Banco Santander Meridional S.A), declaring as effective the corporate restructuring. As a consequence, Merged Companies were wound up, with Banco Santander Banespa S.A. becoming the universal successor of the Merged Companies to all their assets, rights and obligations, and becoming the lead institution of the fi nancial and non-fi nancial group with Bacen.
The purpose of the corporate restructuring was to unify the brand, improve the business strategy focus on customers, users, business partners and the market, and streamline operations. From the legal viewpoint, it simplifi ed the corporate structure of the Companies, with reduction of administrative costs, especially those related to legal and regulatory obligations. From the accounting standpoint, it allowed the Group to improve its equity structure.
In December 2006, the legal merger process was concluded with the approval of the corporate acts by Bacen and its fi ling with the Junta Comercial do Estado de São Paulo (São Paulo State Division of Corporations). In March 2007 Banco Santander Banespa S.A.’s going-public process was approved by the Comissão de Valores Mobiliários, the Brazilian Securities and Exchange Commission (CVM).
Complementing the Bank’s corporate restructuring process, the “Protocolo e Justifi cação de Incorporação da Santander Banespa Companhia de Arrendamento Mercantil pela Santander Brasil Arrendamento Mercantil S.A.” (Protocol and Justifi cation of the Incorporation of Santander Banespa Companhia de Arrendamento Mercantil’ into Santander Brasil Arrendamento Mercantil S.A.), signed on November 13, 2006, was approved in the Extraordinary Stockholders’ Meting held on November 30, 2006. The corporate restructuring implementation was intended to streamline the Companies’ operations and reduce administrative, operating, economic and fi nancial benefi ts.
2006 Commercial Highlights
Santander Banespa ended 2006 with positive results and consolidated its image as an innovative and strong Bank in the acquisition and retention of customers.
Santander Banespa’s business strategy has the following objectives:
1. To increase the number of customers linked in the consumer segment.
2. Improve the relationship program with São Paulo State civil servants.
3. Stimulate business for small and medium companies and other companies, consolidating those segments to leverage sustainable growth.
4. Globalize the Wholesale Bank, taking advantage of the Group’s relationship models abroad.
5. Position the brand so as to refl ect the attributes of the bank’s innovation and growth strategy.
management discussion and analysis (MD&A)
89
In 2006, Santander Banespa concluded the processes of brand unifi cation, technological integration and legal merger, completing the commercial, operational, and bank management integration process.
Santander Banespa is one of the leading fi nancial institutions in São Paulo State and has been expanding its operations in Rio de Janeiro, after the acquisition of the city government’s payroll. A total of 165 thousand new customers, with excellent profi les for the products and services developed by the institution, will join Santander Banespa’s 7.4 million customer portfolio in Brazil.
Santander Banespa has a distribution network of 2,026 points of sale and 7,440 ATMs.
Product Innovation
In order to guarantee a new expansion phase, Santander Banespa has launched products that have surprised the market with their innovative features. They include the Cartão Light, which exceeded sales expectations by more than 500 thousand cards in a 5-month period; the SuperCasa 20, a line of credit with fi xed installments over 20 years, for loans starting at R$40 thousand; and the Multi Retorno Fund, which has provided Santander Banespa with a leadership position in retail multi-market funds management, according to ANBID (National Association of Investment Banks).
Santander Banespa also stood out in the market with the launch of special products such as the new Platinum Style Card, Multi Renda and Rende Mais.
In the insurance business, lenders insurance obtained a 7.1% market share, which represents an increase of 59% over the last 12 months, according to data provided by FENASEG (National Federation of Private Insurance and Capitalization Companies).
Rating Agencies
Rating agencies maintained the Bank’s rating in the third quarter of 2006, after the institutions’ corporate restructuring process.
Long term Short term
Fitch Ratings Support 3 National Scale AA+(BRA) F1+(BRA) Local Currency BBB- F3 Foreign Currency BB+ B
Standard & Poor´s National Scale brAA brA-1 Local Currency BB B Moeda Estrangeira BB B
management discussion and analysis (MD&A)
Financial Data and Ratios (R$ million) 2006 2005
Total Assets 107,186 88,934 Stockholders´ Equity 8,115 7,537 Net Income 1,260 1,744 Return on Equity – ROE 16.1% 21.6%Return on Assets – ROA 1.3% 2.2%Financial Margin (1) 7.2% 8.4%ÍEffi ciency Ratio (2) 58.9% 57.1%Basel Agreement Rate 15.4% 14.1%
(1) Financial Margin: Income from Financial Operations before the Allowance for Loan Losses/Total Average Assets (-) Average Permanent Assets.(2) Effi ciency Ratio: (Personnel Expenses + Other Administrative Expenses)/(Income from Financial Operations before the Allowance for Loan Losses + Income from Services Rendered + Income from Insurance, Pension Plan and Capitalization Operations + Tax Expenses + Other Operating Income/Expenses).
Income
Statements of Income (R$ million) 2006 2005 Variação %
Income from Financial Operations 14,498 12,298 17.9%Expenses from Financial Operations (7,541) (6,520) 15.7%Income from Financial Operations before the Allowance for Loan Losses 6,957 5,778 20.4%Allowance for Loan Losses (1,522) (817) 86.3%Gross Profi t from Financial Operations 5,435 4,961 9.6%Other Operating Income/(Expenses) (3,794) (3,093) 22.7%Income from Operations 1,641 1,868 -12.2%Nonoperating (Expenses) Income (47) (369) -87.3%Income before Taxes on Income and Minority Interest 1,594 1,499 6.3%Income and Social Contribution Taxes (9) (89) -89.9%Profi t Sharing (300) (261) 14.9%Income before Minority Interest 1,285 1,149 11.8%Minority Interest (25) (40) -37.5%Net Income excluding the Income from the sale of shares 1,260 1,109 13.6%Income from the Sale of Shares (1) - 635 -Net Income 1,260 1,744 -27.8%
(1) Including R$704 million of income from securities transactions and R$69 million of other operating expenses related to the income form the sale of shares issued
by AES Tietê.
Santander Banespa ended 2006 with a net income of R$1,260 million. The fi scal year results showed a favorable evolution in revenue related to the commercial business, although in the 12-month comparison, the trend was affected by the income of R$635 million from the sale of shares issued by AES Tietê, in June 2005. The results of the fi nancial intermediation, before the allowance for loan losses, increased by 20.4% compared to 2005. The returns on the average stockholders’ equity and on the average net assets represented 16.1% and 1.3% respectively, compared to 21.6% and 2.2% in 2005.
Income from Financial Operations (R$ million) 2006 2005 Variance %
Lending Operations and Leasing Operations 7,261 5,619 29.2%Securities Transactions and Derivative Financial Instruments (1) 6,772 6,050 11.9%Foreign Exchange Operations 83 242 -65.7%Compulsory Investments 382 387 -1.3%Total excluding the sale of shares 14,498 12,298 17.9%Income from securities transactions – sale of shares - 704 - Total 14,498 13,002 11.5%
(1) Including income from insurance, pension plan and capitalization operations.
The results of the fi nancial intermediation increased by 17.9% compared to 2005, excluding the income from the sale of shares issued by AES Tietê. Income from lending and leasing operations grew by 29.2% compared to 2005, mainly as a result of the 29.4% increase in the credit portfolio in relation to December 2005, which was partially offset by the negative impact of the reductions in the Selic (Central Bank overnight rate).
91
Income from securities transactions and derivative fi nancial instruments, in 2006, increased by 11.9%, excluding the income from the sale of shares in 2005, mainly as a result of the 36.8% increase in the securities portfolio and derivative instruments,the change in the portfolio mix with the reduction in the position of securities indexed to the foreign exchange rate and to the IGP-M, and the increase in the positions of fi xed rate notes and notes indexed to the IPC-A, partially offset by the negative impact of the decrease in the interest rate (Selic) and by the negative exchange rate variation from -11.8% in 2005 to -8.7% in 2006, as well as the income from derivative fi nancial instruments.
Expenses from Financial Operations (R$ million) 2006 2005 Variance %
Deposits Saving Deposits 377 395 -4.6% Interbank Deposits 15 6 - Time Deposits 3,076 2,801 9.8%Money Market Funding 2,663 2,577 3.3%Other Funding Operations 483 (71) -Funding Operations 6,614 5,708 15.9%Adjustment of Interest on Technical Reserves for Insurance, Pension Plan and Capitalization Operations 442 400 10.5%Borrowings and Onlendings 485 412 17.7%Total 7,541 6,520 15.7%
Financial intermediation expenses, increased by 15.7% in comparison to 2005, as a result of the increase in the funding volume, primary, deposits, borrowings and money market fundings.
Additionally, in 2006, the Bank issued R$2.8 billion in Subordinated Certifi cates of Bank Deposit (CDBs) and R$895 million in eurobonds wich contributed to increased in the expenses from other funding operations, partially offset by the maturity of US$282 million and EUR$500 million in eurobonds and certifi cates of bank deposit and by the exchange rate variation from -11.8% in 2005 to -8.7% in 2006. Allowance for Loan Losses (R$ million) 2006 2005 Variance %
Balances as of January 1 1,197 916 30.7%Allowances Recognized 1,522 817 86.3%Write-offs (1,097) (539) 103.5%Other Changes - 3 -Balances as of December 31 1,622 1,197 35.5%Recoveries 355 210 69.0% Expenses with the allowance for loan losses constituted during fi scal year 2006 amounted to R$1.522 million, refl ection of the increase in the credit portfolio and of the highest provisioning required as a result of the growth in retail operations. The Bank continues to improve its credit risk management process through the implementation of new scoring methodologies at admission and through the improvement of credit collection processes. In 2006, were recovered R$335 milion in operations previously written off to loss, an increase of 69% compared to the same period of 2005. Other Operating (Expenses)/Income (R$ million) 2006 2005 Variance %
Income from Services Rendered 2,836 2,306 23.0%Income from Insurance, Pension Plan and Capitalization Operations 232 188 23.4%Personnel and Administrative Expenses (4,536) (4,412) 2.8%Tax Expenses (729) (695) 4.9%Equity inf affi liates 4 - -Other Operating (Expenses)/Income (1,601) (549) -Total (3,794) (3,162) 7.5%Other Operating Expenses from the sale of shares - 69 -Total sem Resultado na venda das Ações (3,794) (3,093) 22.7%
Focus on service improvement allowed an increase in income from services rendered of 23.0% in 2006, when compared to 2005. Income from insurance and related services rendered increased 23.4% in 2006, when compared to 2005, showing a growth in market share and development in insurance business.
Personnel expenses and other administrative expenses increased by 2.8% refl ecting the effort to control spending. Income from Services Rendered (R$ million) 2006 2005 Variance %
Fund Management 646 531 21.7%Checking Account Services 589 532 10.7%Lending Operations 589 371 58.9%Insurance 198 193 2.6%Credit Cards 220 163 35.3%Receiving Services Collection 127 132 -3.8% Bills, Taxes and Fees 79 80 -1.3% Securities Brokerage and Placement Services 128 111 15.3% Guarantees Provided 56 40 40.0% Other 204 153 33.3%Total 2,836 2,306 23.0% The increase of income from services rendered in 23.0% in 2006, compared to 2005, with a 58.9% increase in fees from lending operation, as a result of the increasing volume of the lending operations, 21.7% income from fund management as a result of the increase in managed portfolio, 35.3% in credit card fees, as a result of the growth and launching new products of credit cards and 10.7% in income from checking accounting services. Administrative Expenses (R$ million) 2006 2005 Variance %
Compensation 1,118 1,258 -11.1%Payroll Charges 485 416 16.6%Benefi ts 287 249 15.3%Training 27 30 -10.0%Other 9 10 -10.0%Total Personnel Expenses 1,926 1,963 -1.9%Outside and Specialized Services 811 562 44.3%Depreciation and Amortization 413 511 -19.2%Advertising, Promotion and Publicity 256 268 -4.5%Data Processing 212 228 -7.0%Communications 214 199 7.5%Rentals 163 146 11.6%Transportation and Travel 137 120 14.2%Asset Maintenance 81 94 -13.8%Financial System Services 59 87 -32.2%Security Services 98 84 16.7%Utilities 60 60 0.0%Other 106 90 17.8%Total Other Administrative Expenses 2,610 2,449 6.6%Total Administrative Expenses 4,536 4,412 2.8% Personnel expenses of 2.8% in personnel expenses and administrative expenses, in 2006, refl ects the effort of Santander Banespa to control spending, which despite the nominal increase in expenses, kept the increase in expenses below the infl ation rate of 3.1%.
management discussion and analysis (MD&A)
93
Personnel expenses decreased 1.9% while other administrative expenses increased by 6.6%. The increased in other administrative expenses is a result mainly of increased in outside service expenses by advisory services, communications and rentals expenses, which was partially offset by reduction in the depreciation and amortization expenses.
Effi ciency ratio in 2006 was 58.9% compared to 57.1% in 2005. Excluding the income from the sale of shares issued by AES Tietê in 2005 effi ciency ratio would be of 62.2%. Tax Expenses (R$ million) 2006 2005 Variance %
Cofi ns (Tax on Revenue) 430 420 2.4% ISS (Service Tax) 137 115 19.1% PIS/Pasep (Tax on Revenue) 70 69 1.4% Other 92 91 1.1%Total 729 695 4.9% Tax expenses increased from R$695 million on December 31, 2005 to R$729 million on December 31, 2006, an increase of 4.9%, as a result of Santander Banespa’s operations increase in 2006.
Other Operating (Expenses) Income (R$ million) 2006 2005 Variance %
Reversal of Operating Accruals 173 720 -76.0% Tax 34 62 -45.2% Labor 1 292 -99.7% Civil 6 209 -97.1% Other 132 157 -15.9%Restatement of Escrow Deposits 129 137 -5.8%Other 364 253 43.9%Total Other Operating Income 666 1,110 -40.0%Updating of Pension Plan (709) (475) 49.3%Operating Accruals (521) (364) 43.1% Tax (140) (198) -29.3% Labor (197) (77) - Civil (94) (20) - Other (90) (69) 30.4%Discounts Granted (184) (113) 62.8%Goodwill Amortization (126) (102) 23.5%Credit Cards (56) (62) -9.7%Interest on Sale of Right to Receipt of Future Flow of Payment Orders from Abroad (47) (53) -11.3%Other (624) (490) 27.3%Total of Other Operating Expenses (2,267) (1,659) 36.6%Total (1,601) (549) 191.6%
Other operating income decreased 40.0%, compared to 2005, mainly due to the reduction in the reversal of operating accruals. Other operating expenses increase 36,6%, a refl ex mainly of the increase of operating accruals expenses and of the increase of interest and updating of pension plan expenses, whose benefi ts was not updated in 2005 pursuant to determinations provided for in Collective Bargaining of Banespa.
Assets and Liabilities (R$ million) 2006 2005 Variance %
Cash 1,183 1,592 -25.7%Interbank Investments 5,309 10,267 -48.3% Money Market Investment 3,269 7,822 -58.2% Interbank Deposits and Investments 2,040 2,445 -16.6%Securities and Derivative Financial Instruments 44,544 32,564 36.8%Credit (1) 37,509 28,982 29.4%Allowance For Loan Losses (1,622) (1,197) 35.5%Central Bank of Brazil (Compulsory Deposits) 4,733 4,325 9.4%Tax Credit 3,603 3,574 0.8%Other Assets 10,148 7,115 42.6%Permanent Assets 1,779 1,712 3.9%Total Assets 107,186 88,934 20.5%Deposits 31,746 29,744 6.7%Money Market Funding 25,475 20,000 27.4%Securities Issued Abroad 1,435 978 46.7%Borrowings and Onlendings 9,960 7,618 30.8%Technical Reserve for Insurance, Pension Plan and Capitalization Operations 4,636 3,618 28.1%Subordinated Debts 4,036 1,173 -Supplementary Pension Plan 4,110 4,073 0.9%Sale of Right to Receipt of Future Flow of Payment Orders from Abroad 863 943 -8.5%Other Liabilities 16,644 13,083 27.2%Minority Interest 166 167 -0.6%Stockholders’ Equity 8,115 7,537 7.7%Total Liabilities and Stockholders’ Equity 107,186 88,934 20.5%
(1) Lending and leasing operations and other credits, including advances on foreign exchange contracts under determination of Central Bank of Brazil, are recorded as
reductions of Other Liabilities – Foreign Exchange Portfolio.
The total assets grew 20.5% in relation to December 31, 2005, reaching R$107,186 million. Of this amount, R$44,544 million are represented by securities and derivative fi nancial instruments, mainly federal government securities; R$37.509 million by the credit portfolio and R$5,309 million by interbank investments. Deposits presented a growth of 6.7% in comparison to December 2005, totaling R$31,745 million, and money market funding increased 27.4% in comparison to December 2005, totaling R$25,475 million.
Stockholders’ equity reached R$8,115 million presenting a growth of 7.7% in relation to December 31, 2005, impacted mainly by the net income of R$1,260 million and adjustment to market value of securities transactions - available for sale securities and derivative fi nancial instruments of R$344 million, compensated by the decision on the distribution of dividends and interests on own capital of R$1,152 million during fi scal year 2006.The Basel Agreement ratio, which is calculated on a consolidated basis and takes into account the perpetual bonds and subordinated certifi cates of bank deposit, reached 15.4%, higher than the 11% minimum required by the Bacen. Credit Portfolio and Allowance for Losses (R$ million) 2006 2005 Variance %
Industrial and Commercial 14,049 11,010 27.6%Services and other 7,329 5,801 26.3%Individuals 12,303 9,297 32.3% Credit Cards 1,668 1,094 52.5% CDC e Auto Finance 4,425 3,340 32.5% Other 6,210 4,863 27.7%Housing 1,232 1,009 22.1%Rural 2,596 1,865 39.2%Total 37,509 28,982 29.4%
management discussion and analysis (MD&A)
95
Credit operations increased 29.4% in relation to December 31, 2005, reaching R$37,509 million. Operations with individuals grew 32.3%, stimulated by the increase of 32.5% in CDC operations and auto fi nance, and 52.5% in credit cards operations. Operations with corporate grew 27.2%, especially increase in business for small and medium companies and other companies. Credit Portfolio Allowance Required
Risk Level 2006 2005 2006 2005
AA 22,210 15,073 - - A 11,454 10,908 57 54 B 718 624 7 6 C 877 324 26 10 D 454 829 46 83 E 214 142 64 43 F 208 104 104 52 G 187 97 131 68 H 1,187 881 1,187 881 Total 37,509 28,982 1,622 1,197 AA-C Rating Credits over Total Portfolio 94.0% 92.9% Allowance/Credit Portfolio 4.3% 4.1% Credits with AA to C ratings represented 94.0% of the total portfolio in December 2006, compared to 92.9% in December 2005, and credits with D to H ratings represented 6.0% of the total portfolio, compared to 7.1% in December 2005. The allowance for loan losses represented 4.3% of the total credit portfolio as of December 31, 2006, compared to 4.1% in December 31, 2005. Funding Operations (R$ million) 2006 2005 Variance %
Deposits 31,746 29,744 6.7% Demand Deposits 4,729 4,238 11.6% Saving Deposits 5,061 4,803 5.4% Interbank Deposits 251 228 10.1% Time Deposits 21,388 20,366 5.0% Other Deposits 317 109 190.8%Money Market Funding 25,475 20,000 27.4%Securities Issued Abroad 1,282 978 31.1%Real estate credit notes 153 - 100.0%Borrowings and Onlendings 9,960 7,618 30.8%Subordinated Debts 4,036 1,173 244.1%Sale of Right to Receipt of Future Flow of Payment Orders from Abroad 863 943 -8.5%Total 73,515 60,456 21.6%Fund Management 41,261 31,668 30.3%Total 114,776 92,124 24.6% Total funding, including managed funds, reached R$114,776 million cwith a 24.6% increase over 2005.
Deposits presented a growth of 6.7% in comparison to December 2005, totaling R$31,745 million, as to refl ect mainly the increase of 5% in time deposits portfolio which reached R$21,388 million. During fi scal year 2006, Santader Banespa issued R$2,797 million in Subordinated Certifi cates of Bank Deposit (CDBs), yielding between 104.5% and 105% of the CDI. Investment funds evolved 30.3% in comparison to December 2005, reaching R$41,261 million. Santander Banespa increased its market share in all credit products, particularly in those areas which grew most within the fi nancial system in 2006: auto fi nance and payroll loans.These two products increased by 0.4 basis points and 0.7 basis points, respectively over 12 months. There was an even larger increase in credit cards which rose by 1.3 basis points in the same period. There was a rise in market share over 12 months of 0.2 basis points in terms of total inrestrictec loans and 0.1 basis points in deposits.
SANTANDER BANESPA COMBINED FINANCIAL STATEMENTS BALANCE SHEETSAs of December 31, 2006 and 2005In thousands of Brazilian reais – R$
2006 2005
Current Assets 69,655,827 58,678,166
Cash 1,182,576 1,592,432
Interbank investments (note 6) 4,727,095 10,102,115
Money market investments 3,268,810 7,821,698
Interbank deposits 601,794 517,037
Foreign currency investments 856,491 1,763,380
Securities and derivative fi nancial instruments (note 7) 32,798,119 19,780,349
Own portfolio 14,424,890 12,616,353
Subject to resale commitments 7,054,335 2,217,794
Linked to Central Bank of Brazil 2,406,323 2,256,261
Linked to guarantees 1,477,727 1,646,720
Derivative fi nancial instruments (note 33) 649,977 1,027,369
Linked to trading portfolio operations 6,764,674 15,852
Privatization certifi cates 20,193 -
Interbank accounts (note 8) 4,746,885 4,342,638
Payments and receipts pending settlement 2,245 2,239
Restricted deposits:
Central Bank of Brazil 4,732,979 4,325,151
National Housing System 8,252 7,686
Correspondents 3,409 7,562
Interbranch accounts 2,009 1,349
Internal transfers of funds 2,009 1,349
Lending operations (note 9) 17,516,283 14,722,875
Public sector 39,875 38,764
Private sector 17,712,609 14,859,505
Allowance for loan losses (note 9.d) (236,201) (175,394)
Leasing operations (note 9) 232,512 222,157
Private sector 237,847 225,940
Allowance for doubtful lease receivables (note 9.d) (5,335) (3,783)
Other receivables 8,175,541 7,772,217
Receivables for guarantees honored 442 -
Foreign exchange portfolio (note 10) 4,466,491 4,732,061
Income receivable 185,782 136,129
Trading account (note 11) 423,797 614,388
Receivables from insurance operations 109,862 30,138
Deferred tax credits (note 12) 1,251,440 481,100
Other (note 13) 1,752,257 1,800,256
Allowance for losses on other receivables (note 9.d) (14,530) (21,855)
Other assets (note 14) 274,807 142,034
Other assets 220,376 209,526
Allowance for valuation (174,942) (170,576)
Prepaid expenses 229,373 103,084
Long-term Assets 35,751,297 28,544,661
Interbank investments (note 6) 582,246 164,755
Interbank deposits 582,446 164,955
(Allowance for losses) (200) (200)
combined fi nancial statements
97
2006 2005
Securities and derivative fi nancial instruments (note 7) 11,746,249 12,783,658
Own portfolio 2,557,989 2,062,684
Subject to resale commitments 6,842,448 8,643,003
Linked to Central Bank of Brazil - 666,250
Linked to guarantees 1,769,998 1,337,744
Derivative fi nancial instruments (note 33) 523,441 -
Privatization certifi cates 52,373 73,977
Interbank accounts (note 8) 60,365 56,771
Restricted deposits
National Housing System 60,365 56,771
Lending operations (note 9) 15,043,886 9,457,372
Public sector 130,997 154,581
Private sector 16,224,282 10,087,233
Allowance for loan losses (note 9.d) (1,311,393) (784,442)
Leasing operations (note 9) 157,696 261,601
Private sector 164,437 264,361
Allowance for doubtful lease receivables (note 9.d) (6,741) (2,760)
Other receivables 7,674,833 5,685,720
Receivables for guarantees honored 3,199 2
Foreign exchange portfolio (note 10) 1,474,526 127,529
Income receivable 20,016 6,275
Deferred tax credits (note 12) 2,351,472 3,093,230
Other (note 13) 3,873,544 2,667,746
Allowance for losses on other receivables (note 9.d) (47,924) (209,062)
Other assets (note 14) 486,022 134,784
Temporary investments 12,086 26,822
Allowance for losses (655) (763)
Other assets 1,170 9,195
Allowance for valuation (1,170) (9,195)
Prepaid expenses 474,591 108,725
Permanent assets 1,778,611 1,711,580
Investments 123,356 104,114
Investments in affi liates
Domestic 16,336 12,463
Other investments 138,815 123,367
(Allowance for losses) (31,795) (31,716)
Property and equipment in use (note 15) 693,134 631,903
Real estate 298,287 324,119
Other 1,401,399 1,201,399
(Accumulated depreciation) (1,006,552) (893,615)
Deferred charges (note 16) 962,121 975,563
Organization and expansion costs 2,030,911 2,034,464
(Accumulated amortization) (1,068,790) (1,058,901)
Total Assets 107,185,735 88,934,407
The accompanying notes are an integral part of these fi nancial statements.
2006 2005
Current Liabilities 70,826,073 61,274,139
Deposits (note 17.a) 23,050,938 23,205,076
Demand deposits 4,728,481 4,238,319
Savings deposits 5,061,171 4,802,534
Interbank deposits 239,555 227,896
Time deposits 12,705,126 13,827,270
Other deposits 316,605 109,057
Money market funding (17.b) 22,958,026 19,083,336
Own portfolio 14,312,606 11,260,878
Third parties 1,641,290 6,228,949
Linked to trading portfolio operations 7,004,130 1,593,509
Funds from acceptance and issuance of securities (note 17.c) 257,400 432,202
Securities issued abroad 131,113 432,202
Real estate credit notes 126,287 -
Interbank accounts 2,105 6,676
Receipts and payments pending settlement - 437
Correspondents 2,105 6,239
Interbranch accounts 880,801 541,978
Third-party funds in transit 877,888 538,347
Internal transfers of funds 2,913 3,631
Borrowings (note 17.d) 5,220,867 4,244,788
Foreign borrowings 5,220,867 4,244,788
Domestic onlendings – offi cial institutions (note 17.d) 1,484,559 897,986
National Economic and Social Development Bank (BNDES) 710,448 199,111
Federal Savings and Loan Bank (CEF) 15,562 15,782
National Equipment Financing Authority (FINAME) 550,832 526,925
Other institutions 207,717 156,168
Derivative fi nancial instruments (note 33) 1,360,938 1,136,807
Derivative fi nancial instruments 1,360,938 1,136,807
Other liabilities 15,610,439 11,725,290
Collected taxes and other 36,479 25,013
Foreign exchange portfolio (note 10) 3,201,592 3,366,489
Social and statutory 1,060,475 1,337,333
Taxes and social security (note18), 176,041 230,228
Trading account (note 11) 417,722 203,007
Technical reserves for insurance, pension plan and capitalization operations (note 19.a) 4,636,278 3,618,066
Subordinated debts (note 20) 2,584 2,828
Supplementary pension plan (note 34) 3,692,243 699,174
Other (note 21) 2,387,025 2,243,152
SANTANDER BANESPA COMBINED FINANCIAL STATEMENTSBALANCE SHEETS As of December 31, 2006 and 2005In thousands of Brazilian reais – R$
combined fi nancial statements
99
2006 2005
Long-term Liabilities 28,037.387 19,919,148
Deposits (note 17.a) 8,694.628 6,538,913
Interbank deposits 11.880 -
Time deposits 8,682,748 6,538,913
Money market funding (17.b) 2,516,682 916,794
Own portfolio 2,516,682 916,794
Funds from acceptance and issuance of securities (note 17.c) 1,177,933 545,568
Securities issued abroad 1,150,634 545,568
Real estate credit notes 27,299 -
Borrowings (note 17.d) 747,781 865,786
Foreign borrowings 747,781 865,786
Domestic onlendings - offi cial institutions (note 17.d) 2,507,434 1.609,653
National Economic and Social Development Bank (BNDES) 1,486,117 455,399
Federal Savings and Loan Bank (CEF) 26,052 39,452
National Equipment Financing Authority (FINAME) 966,296 1,114,802
Other institutions 28,969 -
Derivative fi nancial instruments (note 33) 650,140 -
Derivative fi nancial instruments 650,140 -
Other liabilities 11,742,789 9,442,434
Foreign exchange portfolio (note 10) 1,408,190 124,394
Taxes and social security (note18) 3,148,615 2.325,137
Trading account (note 11) 162,313 332,791
Subordinated debts (note 20) 4,033,455 1,170,350
Supplementary pension plan (note 34) 417,725 3,373,719
Other (note 21) 2,572,491 2,116,043
Deferred income, 41,522 37,525
Deferred income 41,522 37,525
Minority interest 166,189 166,658
Stockholders’ equity 8,114,564 7,536,937
Capital (note 23.a) 6,980,907 6,898,057
Capital reserves 34,335 28,301
Revaluation reserves 570 593
Profi t reserves 891,624 458,777
Adjustment to market value – securities and derivative fi nancial instruments 128,800 (215,790)
Treasury shares (38) (12)
Retained earnings 78,366 367,011
Total Liabilities and Stockholders´ Equity 107,185,735 88,934,407
The accompanying notes are an integral part of these fi nancial statements.
2006 2005
FINANCIAL INCOME 14,497,483 13,001,568
Lending operations 7,176,852 5,533,082
Leasing operations 83,840 85,859
Securities transactions 5,399,247 5,092,647
Income from insurance, pension plan and capitalization operations 544,509 513,005
Derivative fi nancial instruments 827,882 1,148,266
Foreign exchange operations 82,898 241,504
Compulsory investments 382,255 387,205
FINANCIAL EXPENSES (9,062,440) (7,337,481)
Funding operations (6,613,840) (5,708,368)
Adjustment of interest on technical reserves for insurance, pension
plan and capitalization operations (441,907) (400,125)
Borrowings and onlendings (484,717) (411,514)
Allowance for loan losses (note 9.d) (1,521,976) (817,474)
GROSS PROFIT FROM FINANCIAL OPERATIONS 5,435,043 5.664,087
OTHER OPERATING (EXPENSES) INCOME (3,793,559) (3,161,384)
Income from services rendered (note 26) 2,836,265 2,305,801
Income from insurance, pension plan and capitalization operations (note 19.b) 232,095 188,277
Personnel expenses (note 27) (1,926,271) (1,963,468)
Other administrative expenses (note 28) (2,609,545) (2,448,697)
Tax expenses (note 29) (728,787) (694,531)
Equity in affi liates 3,873 486
Other operating income (note 30) 666,020 1,109,504
Other operating expenses (note 31) (2,267,209) (1,658,756)
INCOME FROM OPERATIONS 1,641,484 2,502,703
NONOPERATING (EXPENSES) INCOME (note 32) (46,884) (369,296)
INCOME BEFORE TAXES ON INCOME AND MINORITY INTEREST 1,594,600 2,133,407
INCOME AND SOCIAL CONTRIBUTION TAXES (note 35) (9,478) (88,648)
Provision for income tax (124,105) (208,840)
Provision for social contribution tax (41,500) (79,682)
Deferred tax credits 156,127 199,874
PROFIT SHARING (300,238) (260,429)
INCOME BEFORE MINORITY INTEREST 1,284,884 1,784,330
MINORITY INTEREST (25,026) (40,021)
NET INCOME 1,259,858 1,744,309
The accompanying notes are an integral part of these fi nancial statements.
SANTANDER BANESPA COMBINED FINANCIAL STATEMENTSSTATEMENTS OF INCOMEFor the years ended December 31, 2006 and 2005In thousands of Brazilian reais – R$
combined fi nancial statements
101
2006 2005
SOURCES OF FUNDS 25,124,371 25,259,576 ADJUSTED NET INCOME 1,791,752 2,594,184 NET INCOME 1,259,858 1,744,309 Adjustments to net income: Equity in affi liates (3,873) (486) Depreciation and amortization 412,792 511,045 Goodwill amortization 126,068 102,279 Provision for adjustment related to acquisition and development of software - 227,300 Allowance for losses on other assets (3,246) 9,659 Recognition (reversal) of provision for valuation of other investments 80 - Exchange variation on foreign branches 73 78 CAPITAL INCREASE (NOTE 23.D) 124,277 835,364 CHANGE IN DEFERRED INCOME 3,997 (21,199)MINORITY INTEREST (469) (22,650)UPDATING OF STOCK EXCHANGE MEMBERSHIPS 1,073 679 INVESTMENT GRANTS 2,118 547 REVALUATION RESERVE 11 (793)CORPORATE RESTRUCTURING (1,355) 3,782 ADJUSTMENT TO MARKET VALUE – SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS 344,495 - FUNDS FROM THIRD PARTIES 22,858,472 21,869,662 INCREASE IN LIABILITIES 17,670,173 21,543,593 Deposits 2,001,577 7,074,084 Money market funding 5,474,578 9,050,620 Funds from acceptance and issuance of securities 457,563 - Borrowings and onlendings 2,342,428 - Interbank and interbranch accounts 334,252 42,943 Derivative fi nancial instruments 874,271 954,479 Other liabilities 6,185,504 4,421,467 DECREASE IN ASSETS 5,051,079 181,348 Other assets - 181,348 Interbank investments 4,957,529 - Leasing operations 93,550 - DISPOSAL OF PERMANENT ASSETS 137,220 144,721 Assets not in use 106,498 84,759 Property in use 29,926 56,185 Investments 796 3,777 USES OF FUNDS 25,534,227 24,556,755 ADJUSTMENT TO MARKET VALUE – SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS - 558,059 PURCHASE OF OWN SHARES 37 12 DIVIDENDOS E JUROS SOBRE CAPITAL PRÓPRIO PROPOSTOS (Nota 23.b) 1,152,813 3,118,739 ADDITIONS 370,127 303,489 Assets not in use 100,002 72,155 Property in use 253,881 216,627 Investments 16,244 14,707 DEFERRED CHARGES 364,222 328,422 INCREASE IN ASSETS 23,647,028 19,161,809 Interbank investments - 2,882,502 Securities and derivative fi nancial instruments 11,980,361 5,629,685 Interbank and interbranch accounts 408,501 536,857 Lending operations 8,379,922 6,240,856 Leasing operations - 43,704 Other receivables 2,392,437 3,828,205 Other assets 485,807 - DECREASE IN LIABILITIES - 1,086,225 Funds from acceptance and issuance of securities - 757,766 Borrowings and onlendings - 328,459 INCREASE IN CASH (409,856) 702,821 REPRESENTED BY: Cash: Beginning of period 1,592,432 889,611 End of period 1,182,576 1,592,432 INCREASE IN CASH (409,856) 702,821
The accompanying notes are an integral part of these fi nancial statements.
SANTANDER BANESPA COMBINED FINANCIAL STATEMENTSSTATEMENTS OF CHANGES IN FINANCIAL POSITION For the years ended December 31, 2006 and 2005In thousands of Brazilian reais – R$
Capital reserves Stock Capital Tax Goodwill exchange Capital increase incentives reserve memberships
Balances as of december 31, 2004 5,391,177 657,434 21,427 5,401 1,467
Capital increase (note 23.d) 1,099,248 (263,884) - - -
Corporate restructuring (6,804) 20,886 (997) (223) -
Adjustment to market value – securities and derivative
fi nancial instruments - - - - -
Updating of stock exchange memberships - - - - 679
Tax incentives - - 547 - -
Revaluation reserve - - - - -
Treasury shares - - - - -
Dividends paid (note 23.b) - - - - -
Legal reserve - - - - -
Destinations:
- Legal reserve - - - - -
- Statutory reserve - - - - -
- Proposed/paid dividends (note 23.b) - - - - -
- Interest on capital (note 23.b) - - - - -
Balances as of december 31, 2005 6,483,621 414.436 20,977 5,178 2,146
Capital increase (note 23.d) 417,636 (293,359) - - -
Corporate restructuring (40,202) (1,225) 2,744 - 99
Adjustment to market value - securities and derivative
fi nancial instruments - - - - -
Updating of stock exchange memberships - - - - 1,073
Tax incentives - - 2,118 - -
Revaluation reserve - - - - -
Treasury shares - - - - -
Cancelation of treasury shares - - - - -
Dividends paid (note 23.b) - - - - -
Net income - - - - -
- Legal reserve - - - - -
- Reserve for dividend equalization (Nota 23.d) - - - - -
- Proposed/paid dividends (note 23.b) - - - - -
- Interest on capital (note 23.b) - - - - -
Balances as of december 31, 2006 6,861,055 119,852 25,839 5,178 3,318
The accompanying notes are an integral part of these fi nancial statements.
SANTANDER BANESPA COMBINED FINANCIAL STATEMENTSSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the years ended December 31, 2006 and 2005In thousands of Brazilian reais – R$
combined fi nancial statements
103
Profi t reserves Reserve for securities and
Revaluation Legal Statutory dividend derivative fi nancial Treasury Retained reserve reserve reserve equalization instruments shares earnings Total
1,506 312,147 57,917 - 342,004 - 1839,379 8,629,859
- - - - - - - 835,364
(120) (77) (30) - 265 - (9,118) 3,782
- - - - (558,059) - - (558,059)
- - - - - - - 679
- - - - - - - 547
(793) - - - - - - (793)
- - - - - (12) - (12)
- - - - - - (1,705,899) (1,705,899)
- - - - - - 1,744,309 1,744,309
- 88,820 - - - - (88,820) -
- - - - - - - -
- - - - - - (1,007,894) (1,007,894)
- - - - - - (404,946) (404,946)
593 400,890 57,887 - (215,790) (12) 367,011 7,536,937
- - - - - - - 124,277
- 58,184 (57,887) - 95 (1) 36,838 (1,355)
- - - - 344,495 - - 344,495
- - - - - - - 1,073
- - - - - - - 2,118
(23) - - - - - 34 11
- - - - - (37) - (37)
- (12) - - - 12 - -
- - - - - - (476,897) (476,897)
- - - - - - 1,259,858 1,259,858
- 64,243 - - - - (64,243) -
- - - 368,319 - - (368,319) -
- - - - - - (485,233) (485,233)
- - - - - - (190,683) (190,683)
570 523,305 - 368,319 128,800 (38) 78,366 8,114,564
accompanying notes
1. Operations
Santander Banespa operates in Brazil through Banco Santander Banespa S.A. and other entities, as stated in note 4. Banco Santander Banespa S.A., controlled by Banco Santander Central Hispano S.A., with headquarters in Spain, is the lead institution of the fi nancial and non-fi nancial group with the Central Bank of Brazil (Bacen). Banco Santander Banespa S.A. is a corporation with main offi ces at Rua Amador Bueno, 474, Santo Amaro, Sao Paulo, SP, and operates as a multiple service bank, conducting operations such as commercial, foreign exchange, investment, credit and fi nancing and mortgage loan portfolios and, through related entities, insurance, pension plan, capitalization, leasing, asset management, and securities and insurance brokerage operations. Transactions are conducted within the context of a group of fi nancial institutions that operate on an integrated basis in the fi nancial markets. Banco Santander Banespa S.A.’s going-public process is under approval by the Brazilian Securities Commission (CVM).
2. Corporate Restructuring
a) Merger of Banco Santander Brasil S.A., Banco Santander S.A. and Banco do Estado de São Paulo S.A. - BANESPA into Banco Santander Banespa S.A.
The Extraordinary Stockholders’ Meting held on August 4, 2006 approved, pursuant to the provisions of article 223, §3, of Law 6404/76, the fi ling of a request for the going public of Banco Santander Meridional S.A. (BSM) with the Brazilian Securities Commission. On the same date, the change of its name from Banco Santander Meridional S.A. to Banco Santander Banespa S.A. was also approved.
On August 31, 2006, the Extraordinary Stockholders’ Meetings of Banco Santander Banespa S.A. (formerly Banco Santander Meridional S.A.), Banco Santander Brasil S.A. (BSB), Banco Santander S.A. (BSSA) and Banco do Estado de São Paulo S.A. - Banespa (Banespa) approved the proposed corporate restructuring in accordance with the “Protocolo e Justifi cação da Incorporação do Banco Santander Brasil S.A., Banco Santander S.A., e Banco do Estado de São Paulo S.A. – Banespa pelo Banco Santander Meridional S.A.” (Protocol and Justifi cation for the Merger of Banco Santander Brasil S.A., Banco Santander S.A., and Banco do Estado de São Paulo S.A. – Banespa into Banco Santander Meridional S.A), declaring as effective the corporate restructuring. As a consequence, the stockholders of BSB, BSSA and Banespa (Merged Companies) received shares of Banco Santander Banespa S.A. (Merging Company) and the Merged Companies were wound up, with Banco Santander Banespa S.A. becoming the universal successor of the Merged Companies to all their assets, rights and obligations, and becoming the lead institution of the fi nancial and non-fi nancial group with Bacen.
I. Reasons and Benefi ts of the Merger
The purpose of the corporate restructuring was to unify the brand, improve the business strategy focus on customers, users, business partners and the market, and streamline operations. From the legal viewpoint, it simplifi ed the corporate structure of the Companies, with reduction of administrative costs, especially those related to legal and regulatory obligations. From the accounting standpoint, it allowed the Group to improve its equity structure.
II. Corporate and Business Acts prior to the Merger
In the meetings held on July 26, 2006, the Boards of Executive Offi cers of BSM, BSB, BSSA and Banespa and Banespa’s Board of Directors approved the proposal for corporate restructuring under the terms of the Protocol and Justifi cation for the Merger and its submission to stockholders for approval.On July 27, 2006, the announcement of the merger was published in the newspaper Gazeta Mercantil and Diário Ofi cial do Estado de São Paulo, presenting the details of the corporate restructuring.
NOTES TO THE COMBINED FINANCIAL STATEMENTSFor the years ended December 31, 2006 and 2005Amounts in thousands of Brazilian reais – R$, unless otherwise stated
105
III. Valuation of Stockholders’ Equity
Book Value Valuation. The Companies’ stockholders’ equity were valued at their respective book values, pursuant to valuation reports prepared on July 26, 2006 by the specialized fi rm Deloitte Touche Tohmatsu Auditores Independentes. These valuations were performed according to a criterion for determination of the Companies’ net equity value, based on the balance sheets as of June 30, 2006, which were duly audited.
Market Value Valuation. In compliance with the provisions of article 264 of Law 6,404/76, on July 26, 2006 the Companies’ stockholders’ equity were valued at their market values by the specialized fi rm KPMG Corporate Finance Ltda. These valuations were performed according to the same criteria and base date, i.e. June 30, 2006, based on the Companies’ audited fi nancial statements.The Companies’ management established the share exchange ratios for the mergers, based on the book value valuation of the Companies’ stockholders’ equity.
IV. Equity Changes
The Mergers were made through transfers of stockholders’ equity of the Merged Entities to the equity of the Merging Entity, based on the audited balance sheets as of June 30, 2006.The equity changes occurred between the date of the referred balance sheets and the merger date (August 31, 2006) were booked directly in Banco Santander Banespa S.A. (formerly Banco Santander Meridional S.A.). The Merged Companies’ credit and debit balances were transferred to the Merging Company’s accounting books. There were no unrecorded liabilities or contingent liabilities in BSB, BSSA and Banespa assumed by Banco Santander Banespa S.A., as the legal successor of these Companies.
V. Capital and Stockholders’ Equity Increase
As a result of the corporate restructuring, the capital of Banco Santander Banespa S.A. increased by R$5,337,861, from R$1,493,587 to R$6,831,448 and its stockholders’ equity increased by R$5,756,950.
VI. Other Relevant Information
In December 2006, the legal merger process was concluded, with the approval of the corporate acts by BACEN and its fi ling with the Junta Comercial do Estado de São Paulo (São Paulo State Division of Corporations).Banco Santander Banespa S.A.’s going-public process is under approval by the CVM.
b) Merger of Santander Banespa Companhia de Arrendamento Mercantil into Santander Brasil Arrendamento Mercantil S.A.The Extraordinary Stockholders’ Meting held on November 30, 2006 approved the “Merger Agreement of Santander Banespa Companhia de Arrendamento Mercantil into Santander Brasil Arrendamento Mercantil S.A.” (Merger Agreement) entered into on November 13, 2006.As a result of the merger, the stockholders of Santander Banespa Arrendamento Mercantil (Merged Company) received shares of Santander Brasil Arrendamento Mercantil S.A (Merging Company) and the Merged Company was wound up and Santander Brasil Arrendamento Mercantil S.A. became the successor to all its assets, rights and obligations.
The purpose of the corporate restructuring was to streamline the Companies’ operations and reduce administrative, operating and fi nancial costs.On November 14, 2006 announcement of the merger was published in the newspaper Gazeta Mercantil and Diário Ofi cial do Estado de São Paulo, presenting the details of the merger occurred on November 14, 2006.
accompanying notes
3. Presentation of fi nancial statements
The fi nancial statements of the entities included in the combined fi nancial statements of Santander Banespa have been prepared in accordance with accounting practices established by Brazilian Corporate Law, standards established by the National Monetary Council (CMN), Bacen, the CVM and the Superintendence of Private Insurance (SUSEP), as applicable. In the preparation of the combined fi nancial statements, not only the ownership control was considered, as established by Brazilian corporate law, but also the actual operating control characterized by common management in Brazil or operation in the Brazilian market under the same brand.
In the preparation of the combined fi nancial statements, equity in affi liates, signifi cant balances arising from transactions among domestic branches, foreign branches and subsidiaries, and unrealized profi ts between these entities have been eliminated. Minority interest is recorded in a separate caption in stockholders’ equity and in the statements of income. The balances stated in the jointly controlled subsidiaries’ balance sheets and statements of income were consolidated in proportion of its interest in the subsidiary’s capital.
The information of the leasing companies was reclassifi ed by means of off-book adjustments, in order to refl ect their fi nancial position in the consolidated statements in accordance with the fi nancial method of accounting for leasing transactions.
The preparation of fi nancial statements requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the fi nancial statements, and the reported amounts of revenues and expenses for the reporting periods. Since Management’s judgment involves making estimates concerning the likelihood of future events, actual amounts could differ from those estimates.
4. Companies included in the combined fi nancial statements
Adjusted Net Ownership stockholders’ Total income interest Entities equity assets (loss) - %
Indirect subsidiaries - Banco Santander Central Hispano, S.A.Financial sectorBanco Santander Banespa S.A. 8,019,898 104,971,203 767,311 97.97%Banco Santander S.A. (1) - - 425,570 99.93%Banco Santander Brasil S.A. (1) - - (26,077) 97.97%Banco do Estado de São Paulo S.A. - Banespa (1) - - 466,839 98.10%Insurance sectorSantander Seguros S.A. 338,650 4,550,360 121,040 98.99%Other sectorsSantander Brasil Investimentos e Serviços S.A. 37,948 58,609 1,621 100.00%Universia Brasil S.A. 1.698 2,752 (5,603) 99.99%Indirect subsidiaries and Jointly-owned subsidiariesFinancial sectorSantander Brasil S.A. Corretora de Títulos e Valores Mobiliários 112,527 246,311 21,796 100.00%Banespa S.A. Corretora de Câmbio e Títulos 79,942 283,405 39,105 100.00%Santander Distribuidora de Títulos e Valores Mobiliários Ltda. 11,529 18,169 1,149 100.00%Santander Brasil Arrendamento Mercantil S.A. 498,595 3,775,287 21,160 99.99%Santander Banespa Companhia de Arrendamento Mercantil (2) - - 38,836 100.00%Santander Banespa Asset Management Distribuidora de Títulos e Valores Mobiliários Ltda. (3) 79,679 99,652 15,859 100.00%Insurance sectorSantander Capitalização S.A. 59,349 691,610 46,764 100.00%Banespa S.A. – Serviços Técnicos, Administrativos e de Corretagem de Seguros 68,407 203,513 27,254 99.99%Santander Banespa Seguros S.A. 48,862 92,407 16,442 100.00%Other sectorsSantander Banespa Administradora de Consórcios Ltda. 3,518 3,670 89 100.00%Norchem Participações e Consultoria S.A. 41,320 54,506 5,609 49.99%Santander Brasil Participações e Empreendimentos S.A. 139,883 142,988 18,280 100.00%Santander Companhia Securitizadora de Créditos Financeiros (4) 122,410 122,698 16,827 100.00%Agropecuária Tapirapé S.A. 5,795 5,849 165 99.06%
107
(1) Company merged into Banco Santander Banespa S.A. (see note 2).
(2) Company merged into Santander Brasil Arrendamento Mercantil S.A. (see note 2).
(3) On October 23, 2006, Santander Banespa Asset Management Ltda. obtained approval from Bacen to operate as a fi nancial institution, specifi cally as securities dealer, and its name was changed to Santander Banespa Asset Management Distribuidora de Títulos e Valores Mobiliários Ltda.
(4) Subsidiary of Santander Brasil Participações e Empreendimentos S.A.
5. Signifi cant accounting practices
a) Results of operationsDetermined on the accrual basis of accounting and includes income, charges and monetary or exchange variations earned or incurred through the balance sheet date, determined on a daily pro rata basis.
For insurance companies, insurance premiums recorded upon issuance of the related policies/invoices are recognized as premiums written. The respective revenue is deferred on a daily pro rata basis over the insurance policy/invoice period, through the recording of an unearned premium reserve, calculated based on the net retention of premiums written. Commissions and other acquisition costs are also deferred over the policy/invoice period. Income from pension plan contributions and capitalization certifi cates are recorded in income upon receipt.
b) Current and long-term assets and liabilitiesStated at their realizable or settlement amounts, respectively, and include income, charges and monetary or exchange variations earned or incurred through the balance sheet date, determined on a daily pro rata basis. When applicable, allowances for valuation are recorded to refl ect market or realizable values. The allowance for loan losses is based on analyses of outstanding lending operations (past due and current), past experience, future expectations, and specifi c portfolio risks, as well as on the risk assessment policy of the Bank’s management for recognition of allowances, including requirements under Bacen standards and instructions.
Receivables and payables due within 12 months are recorded in current assets and liabilities, respectively, except for trading securities, which are totally classifi ed in current assets, in conformity with Bacen Circular 3,068/01.
c) SecuritiesSecurities are presented in accordance with the following recognition and accounting valuation criteria:
I - Trading securities.
II - Available-for-sale securities.
III - Held-to-maturity securities.
“Trading securities” include securities acquired for the purpose of being actively and frequently traded and “Held-to-maturity securities” include those which the Bank intends to maintain in its portfolio to maturity. “Available-for-sale securities” include those which cannot be classifi ed in categories I and III. Securities classifi ed in categories I and II are stated at cost plus income earned through the balance sheet date, calculated on a daily pro rata basis, and adjusted to market value, refl ecting the increase or decrease arising from this adjustment in: (1) The related income or expense account, in income for the period, when related to securities classifi ed as “Trading
securities”, net of tax effects.(2) Separate caption in stockholders’ equity, when related to securities classifi ed as “Available-for-sale securities”, net of tax
effects. The adjustments to market value on sale of these securities are transferred to income for the period.
accompanying notes
Securities classifi ed as “Held-to-maturity securities” are stated at cost, plus income earned through the balance sheet date, calculated on a daily pro rata basis, and recorded in income for the period; provisions for losses are recognized whenever there are permanent losses on the realizable value of these securities.
d) Derivatives Derivatives designated as hedge may be classifi ed as:
I - Market risk hedge
II - Cash fl ow hedge
Derivatives designated as hedge and the respective hedged items are adjusted to market value, considering the following:(1) For those classifi ed in category I, the increase or decrease is recorded in income or expense for the period, net of tax
effects.(2) For those classifi ed in category II, the increase or decrease is recorded in a separate caption in stockholders’ equity, net of
tax effects.
e) Prepaid expensesFunds used in advance payments, whose benefi ts or provision of services will occur in future years, are recorded as “prepaid expenses”, over the term of the respective agreements.
f) Permanent assetsStated at cost and include:
f.1) InvestmentsAdjustments to investments in affi liates are determined under the equity method of accounting and recorded as equity in affi liates. Other investments are stated at cost, reduced to market value, when applicable.
f.2) Property and equipmentDepreciation of property and equipment is determined under the straight-line method at the following annual rates: buildings - 4%, installations, furniture, equipment in use, communication and security systems - 10%, and data processing systems and vehicles - 20%.
f.3) Deferred chargesCosts classifi ed under deferred charges are amortized over a maximum period of 5 years when applicable to the acquisition and development of software, and 10 years for other costs, considering the benefi t period of the expense and the terms of rental contracts.
Goodwill on investment acquisition and its respective reduction account, reserve for maintenance of integrity of the merging entity’s stockholders equity, are amortized over a period of up to 10 years, based on the expected future income.
g) Technical reserve for insurance, pension plan and capitalization operations
g.1) Insurance and pension planI - Unearned premium reserve
The unearned premium reserve is recorded as established by CNSP Resolution 162/2006, related to the risk coverage period, calculated on a daily pro rata basis over the individual unelapsed period of the policies or invoices, for all signifi cant insurance lines in effect in the month of recording, or related to them.
II - Mathematical reserves and benefi ts
Represent the amount of the obligations assumed in the form of annuity and lump sum plans, determined by means of actuarial calculations based on the capitalization system.
109
III - Reserve for unsettled claims
The reserve for unsettled claims is calculated on an estimated basis, considering the notices of claims received according to the company’s experience for each insurance line, net of recoveries of ceded coinsurance and reinsurance.
IV - Reserve for claims incurred but not reported – IBNR reserve
The reserve for claims incurred but not reported was calculated according to SUSEP Circular 283/2005. The reserve for DPVAT (mandatory insurance) agreement, included in the balance of reserve for claims incurred but not reported, is recorded based on information provided by the management of DPVAT agreement of the Brazilian Federation of Insurance and Capitalization Companies (Fenaseg).
g.2) CapitalizationThe technical reserve for capitalization operations is determined by a percentage applied to the amounts received from underwriters, as established in the technical actuarial note of each product and in the general conditions of each proposal, adjusted monthly by the basic prime rate applied to savings deposits and capitalized at the rate of 0.5% per month, and may be redeemed under the conditions described in the respective capitalization certifi cate. Monetary adjustment and interest on technical reserves are recorded as monetary expenses.
h) Pension planThe actuarial liabilities related to pension plans are recorded based on an actuarial study made by independent actuaries in accordance with CVM Resolution 371.
Expenses related to sponsors’ contributions to the plans are recognized on the accrual basis.
i) Contingent assets and liabilities and legal obligations
i.1) Contingent assetsContingent assets are not recorded, except when there are real guarantees or unappealable court decisions, for which a favorable outcome is practically certain. Contingent assets whose likelihood of favorable outcome is probable, when existing, are only disclosed in the fi nancial statements.
i.2) Contingent liabilitiesContingent liabilities are recorded based on the nature, complexity and history of lawsuits, and on the opinion of the in-house and outside legal counsel when the risk of loss on the administrative or judicial proceeding is considered as probable and the amounts can be reasonably determined.
i.3) Legal obligations - taxes and social securityRefers to lawsuits challenging the legality or constitutionality of tax obligations that, irrespective of the evaluation of their likelihood of favorable outcome, are fully recognized in the fi nancial statements, except for cases that Management considers, based on experts’ evaluation and the status of the lawsuit, will not produce effects on the balance sheet.
j) Deferred incomeRefers to income received before the completion of the term of the obligation that gave rise to it, including non-refundable income, mainly related to guarantees and collaterals provided and credit card annual fees. Deferred income is recorded in income over the term of the respective agreements.
k) Income and social contribution taxesIncome tax is calculated at the rate of 15% plus a 10% surcharge; social contribution tax is calculated at the rate of 9%, after adjustments determined by tax legislation. Deferred tax assets and liabilities are computed basically on certain temporary differences between book and taxable income, tax losses, and adjustments to market value of securities and derivatives.
As provided for by Bacen Circular 3,171 of December 31, 2002, CVM Resolution 273, of August 20, 1998, CVM Instruction 371, of June 27, 2002, and SUSEP Circular 295, of June 14, 2005, the Bank’s expected realization of tax credits, as shown in note 12, is based on the projection of future results and is supported by a technical study.
accompanying notes
6. Interbank Investments
2006 2005 Up to From 3 to Over 3 months 12 months 12 months Total Total
Money market investments 3,268,810 - - 3,268,810 7,821,698 Own portfolio 1,362,171 - - 1,362,171 62,980 Treasury bills 83 - - 83 8,773 National Treasury bills 1,287,992 - - 1,287,992 - National Treasury notes 387 - - 387 - Securities issued abroad by the Brazilian government – Brady bonds 73,709 - - 73,709 54,207 Third-party portfolio 1,906,639 - - 1,906,639 6,178,303 Treasury bills 1,922 - - 1,922 - National Treasury bills 1,904,717 - - 1,904,717 6,178,294 National Treasury notes - - - - 9 Sold position - - - - 1,580,415 Federal Government securities – National Treasury - - - - 1,580,415 Interbank deposits 192,715 409,079 582,446 1,184,240 681,992 Foreign-currency investments 856,491 - - 856,491 1,763,380 Provision for losses - - (200) (200) (200)Total 4,318,016 409,079 582,246 5,309,341 10,266,870
7. Securities
2006 2005 Effect of wadjustment to market value on Book BookCategories Cost Income Equity Value Value
Trading securities 25,751,276 248,550 - 25,999,826 15,954,569 Government Securities 20,671,114 106,761 - 20,777,875 11,526,703 Private Securities 5,080,162 141,789 - 5,221,951 4,427,866 Available-for-sale securities 12,190,919 - 167,259 12,358,178 10,672,045 Government Securities 9,902,244 - 348,325 10,250,569 9,220,822 Private Securities 2,288,675 - (181,066) 2,107,609 1,451,223 Held-to-maturity securities 5,012,946 - - 5,012,946 4,910,024 Government Securities 4,973,330 - - 4,973,330 4,849,770 Private Securities 39,616 - - 39,616 60,254 Subtotal 42,955,141 248,550 167,259 43,370,950 31,536,638 Derivatives (Assets) 1,095,578 77,840 - 1,173,418 1,027,369 Total 44,050,719 326,390 167,259 44,544,368 32,564,007Derivatives (Liabilities) (1,966,143) (44,935) - (2,011,078) (1,136,807)
111
2006 Without Up to From 3 to From 12 to OverComposition by maturity maturity 3 months 12 months 36 months 36 months Total
Government Securities - 13,552,820 6,621,711 5,190,317 10,636,926 36,001,774 National Treasury bonds - 1,166 1,106 2,046 - 4,318 Brady bonds - 1,366 - - 47,597 48,963 Global 40 - 16,421 14,517 21 515,945 546,904 Treasury certifi cates (1) - 443,844 20,162 - 60,567 524,573 Securitized credit - 19,748 - 42,532 10,286 72,566 National Treasury bills - 9,390,000 6,160,764 1,352,687 - 16,903,451 Treasury bills - 101,848 288,971 1,183,715 20,712 1,595,246 National Treasury notes NTN A - - 875 - 120,448 121,323 National Treasury notes NTN B - 30,305 17,830 1,538,856 3,657,857 5,244,848 National Treasury notes NTN C (2) - 3,263,524 2,423 233,228 1,917,115 5,416,290 National Treasury notes NTN D - 884 - 21,000 - 21,884 National Treasury notes NTN F - 254,117 - 618,538 4,170,422 5,043,077 National Treasury notes NTN P - - - - 67 67 Agricultural debt securities - 29,597 115,063 197,694 115,910 458,264 Private Securities 5,324,429 156,415 167,975 628,659 1,091,698 7,369,176 Shares 1,497,106 - - - - 1,497,106 Bank certifi cates of deposit - - - 39,616 - 39,616 Investment fund quotas for guarantee Constituídos-Garantidores of PGBL/VGBL benefi t plans 3,582,957 - - - - 3,582,957 Receivables Investment Fund (3) - - 2,122 401,907 146,557 550,586 Investment fund quotas 244,366 - - - - 244,366 Debentures - 31,167 22,432 145,880 698,296 897,775 Eurobonds - 138 408 28,307 - 28,853 Promissory notes - 115,070 141,992 - - 257,062 Certifi cates of real estate receivables – CRI - 10,040 1,021 12,949 246,845 270,855
Total 5,324,429 13,709,235 6,789,686 5,818,976 11,728,624 43,370,950
2006 2005 Adjustment to market value Book BookTrading securities Cost – Income Value Value
Government Securities 20,671,114 106,761 20,777,875 11,526,703 Brady bonds 45,160 3,803 48,963 96,999 Global 40 337,768 3,730 341,498 418,883 Treasury certifi cates 6,268 (44) 6,224 - Securitized credit 1.494 (298) 1,196 - National Treasury bills 16,088,711 33,759 16,122,470 8,964,057 Treasury bills 441,463 187 441,650 829,227 Central Bank notes - - - 418,856 National Treasury notes NTN B 2,323,415 51,646 2,375,061 686,193 National Treasury notes NTN C 313,541 (3,593) 309,948 87,273 National Treasury notes NTN D 22,080 (196) 21,884 25,215 National Treasury notes NTN F 730,703 30,507 761,210 - Agricultural debt securities 360,511 (12,740) 347,771 - Private Securities 5,080,162 141,789 5,221,951 4,427,866 Shares 600,389 140,380 740,769 569,656 Investment fund quotas for guarantee of PGBL/VGBL benefi t plans 3,582,957 - 3,582,957 2,766,627 Receivables Investment Fund (3) 550,586 - 550,586 759,952 Investment fund quotas 242,904 - 242,904 226,085 Debentures 74,673 1,209 75,882 72,353 Eurobonds 28,653 200 28,853 33,193 Total 25,751,276 248,550 25,999,826 15,954,569
accompanying notes
2006 Without Up to From 3 to From 12 to OverTrading securities Maturity 3 months 12 months 36 months 36 months
Government Securities - 8,810,246 6,292,211 2,703,146 2,972,272 Brady bonds - 1,366 - - 47,597 Global 40 - 10,306 1 21 331,170 Treasury certifi cates - - - - 6,224 Securitized credit - 751 - - 445 National Treasury bills - 8,730,000 6,160,764 1,231,706 - Treasury bills - 6,329 21,960 397,832 15,529 National Treasury notes NTN B - 13,387 8,875 672,858 1,679,941 National Treasury notes NTN C - 1,590 2,419 232,804 73,135 National Treasury notes NTN D - 884 - 21,000 - National Treasury notes NTN F - 38,477 - - 722,733 Agricultural debt securities - 7,156 98,192 146,925 95,498 Private Securities 4,566,630 1,142 4,805 430,214 219,160 Shares 740,769 - - - - Cotas de Fundos Especialmente Constituídos - Garantidores de Planos de Benefícios - PGBL/VGBL 3,582,957 - - - - Cotas de Fundos de Investimento em Direitos Creditórios - FIDC (3) - - 2,122 401,907 146,557 Cotas de Fundo de Investimento 242,904 - - - - Debêntures - 1,004 2,275 - 72,603 Eurobonds - 138 408 28,307 - Total 4,566,630 8,811,388 6,297,016 3,133,360 3,191,432
2006 2005 Adjustment to market value Book BookAvailable-for-sale securities Cost – Equity Value Value
Government Securities 9,902,244 348,325 10,250,569 9,220,822 National Treasury bonds 4,142 176 4,318 7,041 Global 40 192,799 12,607 205,406 227,049 Treasury certifi cates (1) 69,260 5,173 74,433 790,570 Securitized credit 74,805 (3,435) 71,370 73,977 National Treasury bills 775,957 5,024 780,981 1,548,165 Treasury bills 1,153,241 355 1,153,596 323,657 Central Bank notes - - - 875,501 National Treasury notes NTN A 140,946 (19,623) 121,323 128,342 National Treasury notes NTN B 2,776,855 88,449 2,865,304 1,321,935 National Treasury notes NTN C (2) 512,059 69,352 581,411 1,187,295 National Treasury notes NTN D - - - 397,460 National Treasury notes NTN F 4,092,747 189,120 4,281,867 2,246,017 National Treasury notes NTN P 86 (19) 67 52 Samurai bonds - - - 15,399 Agricultural debt securities 109,347 1,146 110,493 78,362 Private Securities 2,288,675 (181,066) 2,107,609 1,451,223 Shares (4) 921,470 (165,133) 756,337 234,962 Investment fund quotas 1,462 - 1,462 - Debentures 837,302 (15,409) 821,893 832,813 Promissory notes 257,062 - 257,062 94,327 Real estate bonds - - - 50,053 Certifi cates of real estate receivables - CRI 271,379 (524) 270,855 181,143 Mortgage notes - - - 57,925
Total 12,190,919 167,259 12,358,178 10,672,045
113
2006 Without Up to From 3 to From 12 to Over 36 Available-for-sale securities maturity 3 months 12 months 36 months months
Government Securities - 1,050,007 329,500 2,487,171 6,383,891 National Treasury bonds - 1,166 1,106 2,046 - Global 40 - 6,115 14,516 - 184,775 Treasury certifi cates (1) - - 20,162 - 54,271 Securitized credit - 18,997 - 42,532 9,841 National Treasury bills - 660,000 - 120,981 - Treasury bills - 95,519 267,011 785,883 5,183 National Treasury notes NTN A - - 875 - 120,448 National Treasury notes NTN B - 16,845 8,955 865,998 1,973,506 National Treasury notes NTN C (2) - 13,284 4 424 567,699 National Treasury notes NTN F - 215,640 - 618,538 3,447,689 National Treasury notes NTN P - - - - 67 Agricultural debt securities - 22,441 16,871 50,769 20,412 Private Securities 757,799 155,273 163,170 158,829 872,538 Shares (4) 756,337 - - - - Investment fund quotas 1,462 - - - - Debentures - 30,163 20,157 145,880 625,693 Promissory notes - 115,070 141,992 - - Certifi cates of real estate receivables – CRI - 10,040 1,021 12,949 246,845 Total 757,799 1,205,280 492,670 2,646,000 7,256,429
2006 2005 Book BookHeld-to-maturity securities (5) Value Value
Government Securities 4,973,330 4,849,770 Treasury certifi cates (1) 443,916 490,887 National Treasury notes NTN B 4,483 - National Treasury notes NTN C (2) 4,524,931 4,358,883 Private Securities 39,616 60,254 Bank certifi cates of deposit 39,616 60,254 Total 5,012,946 4,910,024
2006 Up to From 3 to From 12 to OverHeld-to-maturity securities (5) 3 months 12 months 36 months 36 months
Government Securities 3,692,567 - - 1,280,763 Treasury certifi cates (1) 443,844 - - 72 National Treasury notes NTN B 73 - - 4,410 National Treasury notes NTN C (2) 3,248,650 - - 1,276,281 Private Securities - - 39,616 - Bank certifi cates of deposit - - 39,616 -
Total 3,692,567 - 39,616 1,280,763
(1) The treasury certifi cates are held in custody of the Clearinghouse for the Custody and Financial Settlement of Securities (CETIP) and are monetarily adjusted based on the domestic general price index (IGP-DI) plus interest of 12% per year.(2) Monetarily adjusted based on the general market price index (IGP-M) plus interest of 12% per year, payable semiannually through January 1, 2031.(3) O Receivables Investment Fund (FIDC) shares are calculated based on the value of the receivables and other fi nancial assets in the respective portfolios, less the amounts of the respective provisions that take into consideration aspects related to the debtors, their guarantors and the corresponding transaction’s characteristics, according to accounting standards and practices for evaluating credits, and are not adjusted to market value.(4) Refers principally to shares of CESP - Cia. Energética de São Paulo - R$743,793 (2005 - R$225,698). In June 2005 the shares issued by AES Tietê were sold and generated proceeds of R$635 million. (5) The market value of Held-to-Maturity Securities as of December 31, 2006 is R$6,333,947 (2005 - R$5,556,378).
accompanying notes
In accordance with BACEN Circular 3068, article 8, of November 8, 2001, Santander Banespa declares to have fi nancial capacity and intention to hold to maturity the securities classifi ed as Held-to-Maturity Securities. In January 2007, due to the transfer of pension benefi t obligations, R$3,478,816 of securities classifi ed as held-to maturity securities were transferred to Banesprev – Fundo Banespa de Seguridade Social (Banesprev), and R$573.191 was reclassifi ed to available-for-sale securities (Note 34.d). Held-to-maturity securities transferred to Banesprev were fully classifi ed in current assets.
The market value of securities is computed based on the average quotation on organized markets and their estimated cash fl ows, discounted to present value using the applicable interest rate curves, which are considered representative of the market conditions at the balance sheet date.
The principal interest rate curves are obtained from futures and swap contracts traded on the Commodities and Futures Exchange (BM&F). Adjustments to these curves are made whenever certain points are considered illiquid or when due to unusual reasons they do not fairly represent market conditions.
8. Interbank Accounts
Composed of restricted deposits with Bacen to cover compulsory obligations for demand deposits, savings deposits and time deposits, and of payments and receipts pending settlement, represented by checks and other documents sent to clearinghouses (assets and liabilities).
9. Credit Portfolio and Allowance for Losses
a) Composition of credit portfolio
2006 2005
Lending operations 34,107,763 25,140,083 Loans and discounted receivables 16,873,451 12,417,324 Financing 13,322,894 9,744,763 Rural, agricultural and industrial fi nancing 2,595,640 1,864,521 Real estate fi nancing 1,232,424 1,008,575 Securities fi nancing 60,694 74,067 Infrastructure and development fi nancing 22,660 30,833 Leasing operations 402,284 490,301 Advances on foreign exchange contracts (1) 1,525,914 1,494,899 Other receivables (2) 1,472,855 1,857,004 Total 37,508,816 28,982,287
(1) Classifi ed as a reduction of “Other liabilities”.(2) Include receivables for guarantees honored, debtors for purchase of assets, notes and credits receivable (basically credit cards and rural product notes – CPR), income receivable from advances on foreign exchange contracts, and receivables from export contracts.
b) Composition of credit portfolio by business sector
2006 2005
Private sector 37,337,944 28,684,479 Industrial 10,424,303 7,124,961 Commercial 3,624,999 3,885,316 Financial institutions 115,708 265,523 Services and other 7,043,614 5,068,320 Individuals 12,302,955 9,296,612 Housing 1,230,725 1,010,850 Rural 2,595,640 2,032,897 Public sector 170,872 297,808 Federal 137,994 162,512 State 4,977 - Municipal 27,901 135.296 Total 37,508,816 28,982,287
115
c) Classifi cation of credit portfolio by risk level and respective allowance for loan losses (CMN Resolution 2682/99) Minimum Balance Allowance requiredRisk allowance 2006 2005 level required (%) Current Past due(1) Total Total 2006 2005
AA - 22,209,452 - 22,209,452 15,072,734 - - A 0.50% 11,454,383 - 11,454,383 10,907,525 57,272 54,538 B 1% 317,553 399,921 717,474 623,924 7,175 6,240 C 3% 446,658 430,582 877,240 323,766 26,317 9,713 D 10% 133,405 320,972 454,377 829,198 45,438 82,920 E 30% 19,497 194,551 214,048 142,591 64,214 42,778 F 50% 16,637 191,206 207,843 104.372 103,922 52,187 G 70% 9,064 178,312 187,376 97,527 131,163 68,270 H 100% 58,540 1.128,083 1,186,623 880,650 1,186,623 880,650 Total 34,665,189 2,843,627 37,508,816 28,982,287 1,622,124 1,197,296
(1) Includes current and past-due operations.
d) Changes in allowance for loan losses
2006 2005
Balances as of January 1 1,197,296 915,908 Allowances recognized 1,521,976 817,474 Write-offs (1,097,119) (538,744)Other changes (29) 2,658 Balances as of December 31 1,622,124 1,197,296 Recoveries (1) 355,003 209,781
(1) Recoveries are recorded in Income from Lending and Leasing Operations. In November 2006, a credit assignment without co-obligation was performed, related
to operations previously written off to loss, for the amount of R$28,198.
10. Foreign Exchange Portfolio
2006 2005AssetsExchange purchased pending settlement 3,214,229 2,963,839 Advances in local currency (206,095) (138,120)Rights to foreign exchange sold 2,900,291 1,994,679 Income receivable from advances 29,749 23,031 Term bills in foreign currency 2,843 16,161 Total 5,941,017 4,859,590
PassivoForeign exchange purchased 3,344,623 2,998,558 Exchange sold pending settlement 2,788,026 1,961,514 Advances on foreign exchange contracts (1,525,914) (1,494,899)Liabilities for sales made 2,027 24,855 Payables in foreign currencies 1,020 855 Total 4,609,782 3,490,883
Memorandum accountsOpen import credits 292,355 152,097 Confi rmed export credits 163,208 54,567
accompanying notes
11. Trading Account
2006 2005
AssetsStock exchanges – guarantee deposits 214,773 424,156 Debtors pending settlement 175,450 160,801 Clearinghouse transactions 19,047 7,116 Transactions pending settlement 14,116 22,232 Other 411 83 Total 423,797 614,388
Liabilities Creditors for loan of shares 306,587 352,593 Creditors pending settlement 190,358 116,240 Transactions pending settlement 42,862 29,856 Clearinghouse transactions 36,088 31,067 Commissions and brokerage fees payable 4,140 6,042 Total 580,035 535,798
12.Tax Credits
a) Nature and origin of recorded tax credits Balance as of Balance as of 12/31/2005 Recognition Realization 12/31/2006
Allowance for loan losses 624,661 261,879 (147,449) 739,091 Reserve for civil contingencies 68,903 10,597 (6,851) 72,649Reserve for tax contingencies 460,667 82,119 (42,806) 499,980 Reserve for labor contingencies 344,038 1,361 (33,759) 311,640 Reserve for maintenance of integrity of stockholders’ equity 888,488 - (221,032) 667,456 Adjustment to market value of trading securities and derivatives 113,884 56,879 (32,961) 137,802 Accrual for pension plan 862,757 244,595 (220,211) 887,141 Other temporary provisions 352,507 118,644 (172,364) 298,787 Total tax credits on temporary differences 3,715,905 776,074 (877,433) 3,614,546 Tax loss carryforwards 392,089 58,171 (188,714) 261,546 Social contribution tax – Executive Act 2158/2001 1 771,088 7,415 (57,686) 720,817 Total tax credits 4,879,082 841,660 (1,123,833) 4,596,909 Unrecorded tax credits (1,495,357) (14,978) 457,025 (1,053,310)Subtotal of recorded tax credits 3,383,725 826,682 (666,808) 3,543,599 Insuffi cient depreciation of leased assets 2,050 83 (2,133) - Adjustment to market value of available-for-sale securities 188,555 15,311 (144,596) 59,270 Deferred income from derivatives - 2,511 (2,468) 43 Total recorded tax credits, net 3,574,330 844,587 (816,005) 3,602,912
117
b) Expected realization of recorded tax credits
Temporary Temporary differences differences Tax lossYear IRPJ CSLL carryforwards CSLL 18% Total Recorded
2007 1,072,820 215,171 41,860 29,723 1,359,574 1,251,440 2008 744,965 257,253 86,015 26,377 1,114,610 600,879 2009 333,883 109,507 130,223 128,719 702,332 477,699 2010 476,142 156,807 1,724 104,642 739,315 669,418 2011 78,996 12,060 1,724 126,993 219,773 167,690 2012 a 2014 69,781 18,901 - 304,363 393,045 376,473 2015 a 2016 8,746 1,123 - - 9,869 - 2017 a 2019 13,119 1,685 - - 14,804 - 2020 a 2021 8,746 1,123 - - 9,869 - Após 2021 29,881 3,837 - - 33,718 -
Total 2,837,079 777,467 261,546 720,817 4,596,909 3,543,599
Due to differences between accounting, tax and corporate criteria, expected realization of tax credits should not be taken as indicative of future net income.
The expected realization does not consider the tax credit of the adjustment to market value of available-for-sale securities, insuffi cient depreciation of leased assets and deferred income from derivatives.
c) Present value of deferred tax creditsThe present value of total tax credits is R$3,813,709 (2005 – R$4,073,153) and the present value of recorded tax credits is R$2,969,980 (2005 – R$2,827,074). The present value was calculated taking into account the expected realization of temporary differences, tax loss carryforwards, and social contribution tax at the rate of 18% (Executive Act 2158/01) and the average funding rate projected for the corresponding periods.
13. Other Receivables – Other
2006 2005
Escrow deposits for: Tax claim appeals 1,145,682 943,399 Labor claim appeals 1,163,007 973,068 Other 205,788 199,946 Credit cards 1,041,176 713,640 Rural product notes 195,083 353,873 Receivables 22,303 182,046 Other receivables 7,232 595 Contract guarantees – former controlling stockholders (Note 22.h) 901,281 - Recoverable taxes 484,795 290,035 Reimbursable payments 188,837 85,516 Devedores por Compra de Valores e Bens 92,038 410,111 Receivables from export contracts 88,865 174,579 Salary advances/other 23,890 37,652 Tax incentive options 11,004 32,981 Other debtors 54,820 70,561 Total 5,625,801 4,468,002
14. Other Assets
Refers principally to assets not in use, composed of real estate and vehicles received in settlement of liabilities in the amount of R$32,000 (2005 – R$33,797), net of allowance for valuation, and temporary investments in the amount of R$11,431, net of allowance for investment losses.
accompanying notes
Prepaid expenses
2006 2005
Business formalization expenses (1) 578,686 64,554 Commissions 79,183 70,728 Other 46,095 76,527 Total 703,964 211,809
(1) Refers to commercial partnership agreements with the private and public sectors to assure exclusivity for bank services of payroll credit processing and payroll loans, maintenance of collection portfolio, supplier payment services and other banking services. These agreements are usually effective for 3 to 5 years and include the agreement with the Rio de Janeiro Municipal Government in the amount of R$359,797.
15. Property and Equipment
2006 2005 Cost Depreciation Net Net
Real estate 298,287 (177,130) 121,157 129,930 Buildings 221,273 (177,130) 44,143 49,570 Land 77,014 - 77,014 80,360 Other 1,401,399 (829,422) 571,977 501,973 Installations, furniture and equipment 387,508 (170,666) 216,842 169,005 Sistemas de segurança e comunicações 150,417 (77,792) 72,625 58,822 Data processing equipment 855,111 (575,917) 279,194 268,969 Other 8,363 (5,047) 3,316 5,177
Total 1,699,686 (1,006,552) 693,134 631,903
16. Deferred Charges
2006 2005 Cost Amortization Net Net
Goodwill 479,607 (479,607) - 121,370 Leasehold improvements 501,969 (176,528) 325,441 251,589 Acquisition and development of software 941,109 (386,234) 554,875 749,855 (-) Provision for adjustment related to acquisition and development of software - - - (227,300)Other 108,226 (26,421) 81,805 80,049 Total 2,030,911 (1,068,790) 962.121 975,563
In the fourth quarter of 2006, the goodwill related to the acquisition of Banco Noroeste S.A. was fully amortized (balance in 2005 - R$73,907), and the amount of R$73,907 (2005 – R$89,068) was recorded in income. The goodwill related to the purchase of shares of Banco Santander Brasil S.A., whose unamortized balance was R$50,192 in December 2005, was fully accrued and recorded in income (2005 – R$11,802). The goodwill resulting from the mergers was R$1,962,529 (2005 – R$2,613,199), which was fully offset against the reserve for maintenance of integrity of the merging company’s stockholders’ equity, and the amount of R$694,663 (2005 – R$1,041,485) of amortization expense and the same amount of revenue from reversal of reserve were recorded in income.
17. Money Market Funding and Borrowings and Onlendings
2006 2005 Without Up to From 3 to Over maturity 3 months 12 months 12 months Total Total
Deposits 10,967,397 7,543,263 4,540,278 8,694,628 31,745,566 29,743,989 Money market funding - 22,294,400 663,626 2,516,682 25,474,708 20,000,130 Funds from acceptance and issuance of securities - 112,684 144,716 1,177,933 1,435,333 977,770 Borrowings and onlendings - 3,258,739 3,446,687 3,255,215 9,960,641 7,618,213 Total 10,967,397 33,209,086 8,795,307 15,644,458 68,616,248 58,340,102
119
a) Deposits
2006 2005 Without Up to From 3 to Over maturity 3 months 12 months 12 months Total Total
Demand deposits 4,728,481 - - - 4,728,481 4,238.319 Savings deposits 5,061,171 - - - 5,061,171 4,802,534 Interbank deposits - 34,620 204,935 11,880 251,435 227,896 Time deposits 861,140 7,508,643 4,335,343 8,682,748 21,387,874 20,366,183 Other deposits 316,605 - - - 316,605 109,057
Total 10,967,397 7,543,263 4,540,278 8,694,628 31,745,566 29,743,989
b) Money market funding
2006 2005
Up to From 3 to Over 3 months 12 months 12 months Total Total
Own portfolio 13,648,980 663,626 2,516,682 16,829,288 12,177,672 Third parties 1,641,290 - - 1,641,290 6,228,949 Linked to trading portfolio operations 7,004,130 - - 7,004,130 1,593,509
Total 22,294,400 663,626 2,516,682 25,474,708 20,000,130
c) Funds from acceptance and issuance of securities
Issuance Maturity Currency Interest rate 2006 2005
Eurobonds (1) novembro-05 maio-09 R$ IPCA + 6% 174,199 160,954 Eurobonds abril-05 abril-08 R$ 17,65% 164,378 169,004 Eurobonds (1) abril-06 agosto-10 R$ IPCA + 6% 126,362 - Eurobonds julho-05 julho-08 US$ 5,00% 119,634 126,428 Eurobonds (1) março-06 agosto-10 R$ IPCA + 6% 91,277 - Eurobonds (1) março-06 agosto-10 R$ IPCA + 6% 75,993 - Eurobonds (2) fevereiro-06 fevereiro-15 R$ IGP-M+ 8,20% 75,598 - Eurobonds (1) dezembro-05 maio-09 R$ IPCA + 6% 74,287 68,750 Eurobonds (1) fevereiro-06 agosto-24 R$ IPCA + 6% 68,982 - Eurobonds (1) janeiro-06 maio-09 R$ IPCA + 6% 52,350 - Eurobonds (2) dezembro-05 agosto-15 R$ IGP-M + 8,45% 51,985 45,140 Structured notes dezembro-06 janeiro-07 R$ 90,5% CDI 51,469 86,471 Eurobonds janeiro-04 julho-06 US$ 3,88% - 237,693 Other 155,233 83,330 Securities issued abroad 1,281,747 977,770 Real estate credit notes 153,586 -
Total 1,435,333 977,770
(1) Indexed Linked Sovereign Notes (2) Indexed Linked Credit Event Notes
d) Borrowings and onlendings
2006 2005 Up to From 3 to Over 3 months 12 months 12 months Total Total
Foreign borrowings 2,866,279 2,354,588 747,781 5,968,648 5,110,574 Import and export fi nancing lines 2,648,397 2,349,025 555,361 5,552,783 4,325,956 Other credit lines 217,882 5,563 192,420 415,865 784,618 Domestic onlendings 392,460 1,092,099 2,507,434 3,991,993 2,507,639
Total 3,258,739 3,446,687 3,255,215 9,960,641 7,618,213
accompanying notes
Export and import fi nancing lines are funds raised from foreign banks, for use in commercial foreign exchange transactions, related to the discounting of export bills and export and import pre-fi nancing, falling due through 2017 and subject to fi nancial charges corresponding to exchange variation plus interest ranging from 0.15% to 10.95% p.a. (2005 – 0.15% to 6.47% p.a.).
Domestic onlendings – offi cial institutions are subject to fi nancial charges corresponding to the Long-Term Interest Rate – TJLP, exchange variation of the BNDES basket of currencies, or US dollar exchange variation, plus interest rate in accordance with the operating limits of the BNDES System.
18. Taxes and Social Security
Taxes and social security liabilities comprise taxes payable and amounts being challenged in the courts.
2006 2005
Reserve for tax contingencies (note 22) 2,130,453 2,016,844 Reserve for tax contingencies – responsibility of former controlling stockholders (Note 22.h) 560,833 - Provision for deferred taxes 457,329 308,293 Taxes payable 172,699 225,077 Accrued taxes on income 3,342 5,151 Total 3,324,656 2,555,365
Nature and origin of deferred tax liabilities
Balance as of Balance as of 12/31/2005 Recognition Realization 12/31/2006
Adjustment to market value of trading securities and derivatives 197,932 54,224 (27,803) 224,353 Adjustment to market value of available-for- sale securities and derivatives 105,945 41,689 (3,053) 144,581 Excess depreciation of leased assets 4,109 2,596 (1,536) 5,169 Deferred income from derivatives (1) - 137,567 (54,638) 82,929 Revaluation reserve 307 88 (98) 297
Total 308,293 236,164 (87,128) 457,329
(1) Income from derivatives to be taxed on a cash basis, according to Law 11,051/04, regulated by Federal Revenue Service (SRF) Regulatory Instruction 575/05.
19. Insurance, Pension and Capitalization Operations a) Technical Reserve for Insurance, Pension Plan and Capitalization Operations
2006 2005
Insurance 250,533 161,777 Unearned premium 133,375 78,070 IBNR (claims incurred but not reported) 54,106 42,419 Claims payable 63,052 41,288 Pension plan 3,779,686 2,962,249 Unvested benefi ts 3,759,677 2,937,388 Vested benefi ts 14,049 13,684 Financial surplus 2,476 4,801 Future policy benefi ts 724 3,382 IBNR 415 671 Risk fl uctuation 288 647 Unexpired risks 203 243 Other technical reserves 1,854 1,433 Capitalization 606,059 494,040 Mathematical reserve for redemptions 592,671 476,119 Drawings 8,173 14,205 Other 5,215 3,716
Total 4,636,278 3,618,066
121
b) Income from Insurance, Pension Plan and Capitalization Operations
2006 2005
Insurance 180,624 163,545 Premium income 373,686 299,611 Change in technical reserve (55,304) (37,271) Claims expenses (120,695) (88,221) Other insurance income (expenses) (17,063) (10,574)Pension Plan 39,994 15,586 Income from contributions 972,006 982,104 Redemption expenses (517,114) (570,498) Change in technical reserve (425,093) (414,440) Benefi t expenses (3,499) (2,982) Other pension plan income (expenses) 13,694 21,402 Capitalization 51,021 47,760 Net income from capitalization certifi cates 300,967 286,683 Change in technical reserve 5,966 (2,319) Redemption and drawing expenses (263,930) (241,350) Other capitalization income (expenses) 8,018 4,746 Trading (39,544) (38,614)Total 232,095 188,277
20. Subordinated Debts
Consist of securities issued according to National Monetary Council (CMN) Resolution 2837/2001, which are used as Level II Reference Equity, for calculating the operating limit. Interest Issuance Maturity Amount rate 2006 2005
Perpetual Bonds (1) setembro-05 Indeterminado US$500 milhões 8,70% 1,071,583 1,173,178 Subordinated Certifi cates of Deposit (2) junho-06 julho-16 R$1,500 milhões 105% CDI 1,613,559 - Subordinated Certifi cates of Deposit (2) outubro-06 setembro-16 R$750 milhões 104,5% CDI 773,026 - Subordinated Certifi cates of Deposit (2) julho-06 a outubro-06 julho-16 R$547 milhões 104,5% CDI 577,871 -
Total 4,036,039 1,173,178
(1) Perpetual bonds issued by Banespa Grand Cayman with quarterly interest payments. These bonds do not have a maturity date or mandatory redemption, although they may, at the discretion of Banco Santander Banespa S.A. and with prior authorization by Bacen, be redeemed in full in December 2010 or on any subsequent interest payment date.(2) Subordinated certifi cates of deposit issued by Banco Santander Banespa S.A. with yield paid at the end of the term together with the principal.
21. Other Liabilities – Other
2006 2005
Reserve for labor and civil contingencies (note 22) 1,202,265 1,279,608 Reserve for labor and civil contingencies - responsibility of former controlling stockholders (Note 22,h) 340,448 - Sale of right to receipt of future fl ow of payment orders from abroad (1) 862,653 942,961 Credit cards 1,012,821 743,171 Accrued liabilities Personnel expenses 383,657 363,061 Administrative expenses 280,000 235,674 Other payments 5,982 11,959 Payables for acquisition of assets and rights 236,473 258,784 Payables for business formalization expenses 42,948 - Credits assigned to Caixa Econômica Federal 21,873 - Commissions payable on insurance premiums written 27,349 5,163 Payables to suppliers 61,691 66,893 Creditors for unreleased funds 38,637 24,981 Other 442,719 426,940 Total 4,959,516 4,359,195
(1) Liability for sale of right to receipt of future fl ow of payment orders receivable from foreign correspondent banks, in the amount of US$400 million, with charges equivalent to 5.5% p.a., payable semiannually. The principal will be paid in 9 semiannual installments from September 2007 to September 2011.
accompanying notes
22. Contingent Assets and Liabilities and Legal Obligations – Taxes and Social Security
The fi nancial and non-fi nancial companies of Santander Banespa group are parties to tax, civil and labor lawsuits and administrative proceedings in the normal course of their business.
Reserves were recognized based on the nature, complexity and history of the lawsuits, and the opinion of the in-house and outside legal counsel. Santander Banespa’s policy is to accrue the full amount of lawsuits whose likelihood of unfavorable outcome is probable.
Legal obligations - taxes and social security were fully recognized in the fi nancial statements, except for the cases in which Management considered, based on experts’ evaluation and the status of the lawsuit, will not produce effects on the balance sheet for Santander Banespa’s companies.
Santander Banespa’s Management understands that the recognized reserves are suffi cient to cover possible losses on the lawsuits. The adoption of CVM Resolution 489, of October 3, 2005, did not produce effects on Santander Banespa’s income and stockholders’ equity.
a) Contingent assetsIn 2006 no contingent assets were accounted for.
b) Balance of contingent liabilities and legal obligations by nature
2006 2005
Reserve for tax contingencies (1) 2,130,453 2,016,844
Reserve for labor and civil contingencies (note 21) 1,202,265 1,279,608
Reserve for labor contingencies 964,941 1,052,896
Reserve for civil contingencies 237,324 226,712
Total 3,332,718 3,296,452
(1) Classifi ed under the caption “Other liabilities - taxes and social security” (note 18), includes mainly legal obligations.
c) Changes in contingent liabilities and legal obligations
2006 Tax Labor Civil
Balance as of January 1 2,016,844 1,052,896 226,712
Recognition (1) 155,658 196,588 93,283
Reversal of reserve (33,669) (724) (6,019)
Write-offs due to payment (8,380) (283,819) (76,652)
Balance as of December 31 2,130,453 964,941 237,324
Escrow deposits - other receivables (2) 683,852 339,316 31,290
Escrow deposits - securities (2) 31,478 32,957 19,879
(1) Includes the accrual for tax contingencies for the period, recorded under “Tax Expenses”.(2) Do not include escrow deposits for possible and/or remote contingencies and appeal deposits.
d) Legal obligations - taxes and social securityRefer to judicial and administrative proceedings involving tax and social security obligations, as described below:
Difference in CSLL (social contribution tax) rate – R$1,196,991: challenges the payment of the difference in CSLL rate from 8% to 18% applied to fi nancial institutions, in disagreement with the constitutional principle of equal treatment. A court injunction was obtained. On June 15, 2005, the former Banespa received an unfavorable decision from the lower court. The Bank appealed to the Federal Regional Court and is awaiting decision on the lawsuit.
123
Deductibility of CSLL from IRPJ (corporate income tax) – R$371,712: seeks deduction of CSLL expense from income tax calculation. A court injunction was obtained. Subsequently, the former Banespa received an unfavorable decision and fi led an appeal with the Federal Regional Court, which was received for remanding and supersedeas effects. Concurrently, the Bank fi led for suspension of the alleged debt and, on March 29, 2000, the judge authorized the escrow deposit. The lawsuit has not yet been judged by the Court.
Plano Verão (economic stabilization plan) IRPJ/CSLL – R$81,961: Lawsuit seeking elimination of infl ation effects resulting from the Summer Plan in the income and social contribution tax basis. The lower court issued a decision unfavorable to the Bank and, after an appeal was fi led, the Federal Regional Court rendered a decision acknowledging the application of the rate of 42.72%. Appeals fi led are awaiting judgment.
FGTS (severance pay fund) – R$50,381: Lawsuit claiming the unconstitutionality of charges created by Supplementary Law 110/01 equivalent to 10% on the balance of FGTS accounts in the event of dismissal without cause and 0.5% on compensation to employees. The companies were successful in this lawsuit relating to 2001 and, with respect to the other years, are awaiting the conversion into cash of the escrow deposits made.
e) Tax contingencies Refer to judicial and administrative proceedings related to taxes and social security classifi ed, based on the legal counsel’s opinion, as probable loss risk, for which reserves were recorded. The matters in dispute refer to the following:
ISS (service tax) – Financial Institutions - refers to administrative and judicial proceedings with several municipalities that require the payment of ISS on several revenues from operations that usually do not qualify as service provision. The amount involved is R$69,512.
INSS (social security contribution) – refers to administrative and judicial proceedings seeking collection of social security contribution and salary premium for education on amounts that normally are not of a salary nature. The updated amount involved is R$142,546.
f) Labor contingencies These are lawsuits brought by labor unions and former employees claiming labor rights they understand are due, especially payment for overtime and other labor rights, including retirement benefi t lawsuits.
The lawsuits are controlled individually and the reserves are recognized based on previous court decisions and the history of payments made, including settlements, in labor lawsuits and the stage of each lawsuit.
g) Civil contingenciesRefer to lawsuits for indemnity and review of lending agreements.
Lawsuits for indemnity seek indemnity for property damage and/or pain and suffering, relating to the consumer relationship, principally with undue protest, return of checks, inclusion of debtors’ information into the credit restriction master fi le, elimination of infl ation effects in escrow deposit accounts and other matters.
Lawsuits for review refer to challenges of lending agreement clauses by customers.
There are also lawsuits fi led by minority stockholders of the former Banco Noroeste against corporate acts in 1998 and 1999. Although there are unfavorable decisions from the lower court, experts believe that the Bank has good chances of overturn of such decisions through the appeals fi led with the São Paulo State Court of Justice.
The lawsuits are controlled individually based on the legal counsel’s evaluation of success and classifi cation, taking into consideration the status of each lawsuit, law and previous court decisions.
accompanying notes
h) Other Lawsuits under the Responsibility of Former Controlling Stockholders Refer to tax, labor and civil lawsuits in the amounts of R$560,883, R$220,673 and R$119,775, respectively, recorded under “Other liabilities - taxes and social security” (note 18) and “Other liabilities - other” (note 21) which are the responsibility of the former controlling stockholders of the acquired companies. The lawsuits have guarantees under the agreements signed at the time of the acquisitions in the amount of R$901,281, recorded under “Other receivables - other” (note 13). These lawsuits have no effects on the balance sheet for Santander Banespa.
i) Contingent Liabilities Classifi ed as Possible Loss Risk Refer to judicial and administrative proceedings involving tax, civil and labor matters assessed by the legal counsel as possible loss risk, which were not accounted for. The main lawsuits are:
Deductibility of Expenses on Allowance for Loan Losses – Administrative collection by the Federal Revenue Service in view of the deduction from the IRPJ and CSLL basis of losses on lending operations performed in 1998 and 2000. The Bank is awaiting judgment and understands that the collection is undue since the expenses met the deductibility conditions of Law 9430/96 since they referred to defi nitive losses. The amount involved is R$175,636.
CPMF (Tax on banking transactions) on Customer Operations – in May 2003, the Federal Revenue Service issued an Infraction Notice against Santander Distribuidora de Títulos e Valores Mobiliários Ltda. (Santander DTVM) and another Infraction Notice against the former Banco Santander Brasil S.A., both in the amount of R$290 million. The notices refer to the collection of a CPMF tax credit on transactions conducted by Santander DTVM in the management of its customers’ funds and clearance services provided by the Bank to Santander DTVM, according to the agreement between these two companies, in 2000, 2001 and the fi rst two months of 2002. Both companies consider that the tax treatment adopted was adequate since said transactions were subject to CPMF at zero rate. The Bank is awaiting judgment of the administrative proceedings by the Board of Tax Appeals. The amount involved of each of the lawsuits is approximately R$460 million.
Addition to the Price on the Purchase of Shares of Banco do Estado de São Paulo S.A. - Banespa - the former Banco Santander S.A. (former controlling stockholder of Banespa) fi led an ordinary action claiming the inexistence of legal relationship before the National Treasury in relation to item 3.1 of the Banespa’s Share Purchase and Sale Agreement. Such item provided for the payment of an addition to the minimum price should Banespa be released from the tax contingency recognized at the time of the privatization upon the setting of the minimum price. The updated involved amount is approximately R$246 million. After an unfavorable lower court decision, the Bank is awaiting a decision on the appeal at the court and understands that the collection is undue since the payment of the tax contingency by Banespa did not qualify under the hypotheses included in the agreement that could generate addition to the price paid.
Semiannual Bonus or Profi t Sharing – labor lawsuit relating to the payment of a semiannual bonus or, successively, profi t sharing to retired employees from the former Banco do Estado de São Paulo S.A. - Banespa, hired by May 22, 1975. This lawsuit was fi led by Banespa’s Retirees Association. The involved amount is not disclosed due to the current stage of the lawsuit and the possibility of affecting its progress.
23. Stockholders’ Equity
a) CapitalCapital is represented mainly by registered shares without par value, stated as follows by the companies:
Shares in thousands Common Preferred Total
Banco Santander Banespa S.A. Brazilian residents 488,977 2,002,163 2,491,140 Foreign residents 65,403,988 55,260,993 120,664,981 Total 65,892,965 57,263,156 123,156,121
125
Shares in thousands Common Preferred Total
Santander Seguros S.A. Brazilian residents 12,190 12,148 24,338 Foreign residents 1,918,614 1,918,493 3,837,107 Total 1,930,804 1,930,641 3,861,445 Santander Brasil Investimentos e Serviços S.A. Foreign residents 6,463 6,349 12,812 Total 6,463 6,349 12,812 Universia Brasil S.A. Foreign residents 268,979 537,958 806,937
Total 268,979 537,958 806,937
b) Dividends In accordance with the bylaws, the stockholders of each company are entitled to minimum dividends of 25% of net income for the year, adjusted according to legislation.
2006 2005 Common Preferred Total Total
Banco Santander Banespa S.A. Dividends from retained earnings 132,943 73,090 206,033 - Dividends from net income for the year 114,012 108,988 223,000 21,875 Interest on capital (1) 66,464 63,536 130,000 20,000 Banco Santander S.A. (2) Dividends from retained earnings 78,783 78,783 157,566 1,664,065 Dividends from net income for the year 125,000 125,000 250,000 991,410 Interest on capital (1) - - - 241,629 Banco Santander Brasil S.A. (2) Dividends from retained earnings - - - 15,745 Interest on capital (1) 25,440 24,060 49,500 106,485 Santander Seguros S.A. Dividends from retained earnings 61,745 61,745 123,490 39,736 Dividends from net income for the year 12,500 12,500 25,000 25,900 Interest on capital (1) 8,220 8,220 16,440 50,728 Santander Brasil Investimentos e Serviços S.A. Dividends from retained earnings - - - 42,264 Dividends from net income for the year 185 200 385 2,000 Subtotal 1,181,414 3,221,837 Dividends between companies and minority stockholders (28,601) (103,098)
Total 1,152,813 3,118,739
(1) Interest on capital is gross of income tax and was calculated as part of the mandatory minimum dividends. In conformity with the provisions of Law 9,249/05, interest on capital recuded the income and social contribution tax expense. (2) Companies merged into Banco Santander Banespa S.A., in accordance with Extraordinary Stockholders’ Meting held on August 31, 2006 (see note 2).
c) Reserve for Dividend EqualizationLimited to 50% of capital, this reserve is intended to provide funds for the payment of dividends, including dividends in the form of interest on capital, or advance payments, for purposes of compensation to stockholders
accompanying notes
d) Capital increase
2006 2005
Banco Santander Banespa S.A. Extraordinary Stockholders’ Meeting – 06/29/05 - 431,000 Extraordinary Stockholders’ Meeting – 12/29/05 - 428,600 Universia Brasil S.A. Extraordinary Stockholders’ Meeting – 02/04/05 - 2,175 Extraordinary Stockholders’ Meeting – 07/08/05 - 1,853 Extraordinary Stockholders’ Meeting – 03/16/06 1,521 - Extraordinary Stockholders’ Meeting – 08/03/06 1,678 - Santander Seguros S.A. Extraordinary Stockholders’ Meeting – 12/19/06 (1) 122,321 - Subtotal 125,520 863,628 Unrealized capital (1) (1,243) - Capital increase between companies and minority stockholders - (28,264)Total 124,277 835,364
(1) The stockholders exercised their preemptive right in the subscription of shares of Santander Seguros in the period from December 20, 2006 to January 19, 2007. Of the total, 15,092 thousand shares (7,460 thousand common shares and 7,632 thousand preferred shares), equivalent to R$1,243 of unrealized capital as of December 31, 2006, were not subscribed.
24. Operating Ratios a) Basel agreement (operating limit)
Brazilian fi nancial institutions are required to maintain stockholders’ equity commensurate with their asset exposure risk, weighted by factors varying from 0 to 300%, and ratio of equity to risk-weighted assets of at least 11%. This ratio is determined on a consolidated basis, Santander Banespa is in complice with the aforementioned limit, as shown bellow:
Operating assets (1)
2006 2005
Risk-weighted assets Reduced risk: 20% 335,909 588,997 Reduced risk: 50% 2,565,399 2,445,962 Normal risk: 100% 55,153,129 41,204,804 Risk: 300% 9,980,637 9,973,626 Total risk-weighted assets 68,035,074 54,213,389 Basel Agreement rate 11% 11%Required stockholders’ equity to assets 7,483,858 5,963,473 Swap credit risk 349,557 116,731 Interest rate risk 484,473 461,717 Required stockholders’ equity 8,317,888 6,541,921
Adjusted stockholders’ equity 7,975,611 7,423,939 Tax credit reduction – Resolution CMN 3059 (225,883) (193,646)Adjusted stockholders’ equity – TIER I 7,749,728 7,230,293 Subordinated debt 3,874,864 1.173,178 Adjusted stockholders’ equity – TIER II 11,624,592 8,403,471 Margin 3,306,704 1,861,550 Ratio – TIER I 10.25% 12.16%Ratio – TIER II 15.37% 14.13%
(1) Index calculated based on the consolidated fi nancial statements of the fi nancial institutions.
b) Fixed assets to equity ratio
Brazilian fi nancial institution are required to maintain stockholders’ equity commensurate with their investments in permanent assets. The fi xed assets to equity ratio cannot exceed 50% of stockholders’ equity, adjusted pursuant to prevailing regulations. As of December 31, 2006 and 2005, Santander Banespa is in compliance with the aforementioned ratio, with fi xed assets to equity ratio of 16.50% and 22.96%, respectively.
127
25. Related-party transactions
Transactions among the companies of Santander Banespa are carried out under usual market rates and terms, comparable to those applied in transactions with unrelated parties.
The principal transactions and balances are as follows:
Assets (Liabilities) Income (Expenses) 2006 2005 2006 2005
Cash 16,054 5,823 - - Banco Santander Central Hispano, S.A. 16,042 5,812 - - Other 12 11 - - Interbank investments 651,467 1,714,486 65,531 39,912 Banco Santander Central Hispano, S.A. 651,467 1,714,486 65,531 39,912 Securities and derivatives 46,278 2,339 315,282 - Banco Santander Central Hispano, S.A. 44,481 2,339 308,962 - Santander Overseas Bank-Puerto Rico 1,797 - 6,320 - Lending operations 73,387 5,377 2,784 365 Santander Overseas Bank-Puerto Rico 73,387 5,377 2,784 365 Foreign exchange portfolio – assets 360,828 786,435 - - Banco Santander Central Hispano, S.A. 360,828 786,435 - - Receivables from affi liates - 5,837 - - Banco Santander Central Hispano, S.A. - 5,837 - - Money market operations - - (1,923) - Banco Santander Central Hispano, S.A. - - (1,923) - Borrowings and onlendings (961,796) (431,411) (14,127) (13,917)Banco Santander Central Hispano, S.A. (393,131) (212,970) - (10,224)Santander Overseas Bank-Puerto Rico (568,180) (218,441) (14,127) (3,693)Banco Santander Brasil Intl Limited (485) - - - Foreign exchange portfolio - liabilities (355,432) (789,650) - - Banco Santander Central Hispano, S.A. (355,432) (789,650) - - Derivatives (21,489) (2,451) (13,645) - Banco Santander Central Hispano, S.A. (21,489) (2,371) (135,645) - Santander Overseas Bank-Puerto Rico - (80) - - Dividends and bonuses payable (995,561) (1,200,700) - - Grupo Empresarial Santander, S.L. (995,561) (1,200,700) - - Payables to affi liates (10) - - - Banco Santander Central Hispano, S.A. (10) - - - Outside service expenses - - (29,160) (16,981)
Other - - (29,160) (16,981)
26. Income from services rendered
2006 2005
Income from fund management 646,402 531,157 Checking account services 589,058 531,904 Lending operations 588,903 370,594 Insurance 198,315 192,879 Credit cards 219,938 162,513 Receiving services Collection 127,014 131,724 Bills, taxes and fees 78,935 79,837 Securities brokerage and placement services 128,178 111,398 Guarantees provided 55,533 40,001 Other 203,989 153,794 Total 2,836,265 2,305,801
accompanying notes
27. Personnel expenses
2006 2005
Compensation 1,117,898 1,257,771 Charges 484,451 416,536 Benefi ts 287,270 249,594 Training 27,400 29,531 Other 9,252 10,036 Total 1,926,271 1,963,468
28. Other administrative expenses
2006 2005
Outside and specialized services 811,388 562,335 Depreciation and amortization 412,792 511,045 Advertising, promotions and publicity 255,722 268,281 Communications 213,481 198,553 Data processing 211,504 228,188 Rentals 163,122 145,981 Transportation and travel 137,052 120,189 Security services 97,761 83,762 Asset maintenance and upkeep 80,825 93,502 Utilities 60,274 59,967 Financial system services 59,333 87,471 Materials 31,346 19,764 Other 74,945 69,659 Total 2,609,545 2,448,697 29. Tax expenses
2006 2005
COFINS (tax on revenue) 429,898 419,810 ISS (service tax) 136,826 114,493 PIS/PASEP (tax on revenue) 70,005 68,893 Other 92,058 91,335 Total 728,787 694,531
30. Other operating income
2006 2005
Monetary adjustment of escrow deposits 128,837 136,555 Monetary adjustment and recovery of taxes 81,756 - Monetary adjustment of recoverable taxes 58,175 6,950 Recovery of charges and expenses 64,086 42,178 Reversal of operating accruals Tax (note 22.c) 33,669 62,446 Labor (note 22.c) 662 291,699 Civil (note 22.c) 6,019 209,082 Other 132,230 157,090 Interest received 22,529 64,750 Monetary variations on assets 62,717 46,948 Dividends and bonuses 13,118 7,830 Other 62,222 83,976 Total 666,020 1,109,504
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31. Other operating expenses
2006 2005
Interest and updating of pension plan (note 34) 708,860 474,948 Operating accruals Tax (note 22.c) 139,692 197,839 Labor (note 22.c) 196,588 76,881 Civil (note 22.c) 93,731 19,619 Other 89,722 69,272 Discounts granted 183,873 112,572 Goodwill amortization(1) 126,068 102,279 Commissions 90,213 47,372 Legal fees and costs 76,505 37,067 Credit cards 56,436 61,775 Serasa/SPC (credit reporting agency) 42,597 30,314 Interest on sale of right to receipt of future fl ow of payment orders from abroad 47,487 52,790 Exchange variation – foreign branch 38,424 81,458 CPMF/IOF (taxes on banking transactions) 28,897 26,077 Amortization of business formalization expenses(2) 45,898 5,096 Monetary variation on liabilities 19,193 25,729 Brokerage fees 16,149 20,245 Amortization of unrecognized actuarial losses 35,583 24,105 Other 231,293 193,318 Total 2,267,209 1,658,756
(1) In 2006 includes expense on provision for goodwill on the purchase of shares from Banco Santander Brasil S.A., in the amount of R$43,993.(2) Refers mainly to the amortization of expenses on the acquisition of payroll credit rights (note 14).
32. Nonoperating (expenses) income
2006 2005
Income from rentals 1,327 1,518 Losses on other investments (1,428) (339)Capital losses (30,107) (71,578)Loss on sale of investments (1,725) (646)Recognition/reversal of allowance for losses on other assets 3,430 (9,659)Allowance for losses on tax incentive investments (7,882) (27,674)Losses on sale of assets 4,638 (5,027)Provision for adjustment related to acquisition and development of software - (227,300)Expenses on assets not in use (30,592) (27,511)Other, net 15,455 (1,080)Total (46,884) (369,296)
33. Instrumentos Financeiros Derivativos
Santander Banespa follows the policy of reducing market risks arising from its operations through derivatives. Market risk management is performed by an independent area, whose practices include the measurement and monitoring of limits formally established by internal committees, portfolio risks, sensitivity to interest rate fl uctuations, exchange risk exposure and liquidity gaps, among other practices, providing for the monitoring of risks related to fl uctuations in asset prices and interest rates and other factors which may affect Santander Banespa’s portfolio position in the different markets in which it operates.
Market risk is the exposure to interest rates, exchange rates, price of goods, price of shares and other according to the type of product, volume of operations, term and conditions of the agreement and underlying volatility.
Credit risk is the exposure to losses in the event of default by a counterparty. The exposure to credit risk in futures contracts is minimized by daily payment in cash. Swap agreements are subject to credit risks in the event the counterparty is unable or unwilling to fulfi ll its contractual obligations.
accompanying notes
Derivatives designated as hedge have credit risks equal to or less than the related fi nancial instrument risk.
Operating risk is the probability of fi nancial losses resulting from inadequate or failed people, processes and systems or any other adverse market conditions.
Market value for swaps is computed based on the estimated cash fl ow, discounted to present value according to the applicable interest rate curves, representative of the market conditions at the balance sheet date. For options, Santander Banespa adopts statistical models that consider the volatility of the asset price and interest rates representative of the market conditions at the balance sheet date.
The principal interest rate curves are obtained from futures and swap contracts traded on the BM&F. Adjustments to these curves are made whenever certain points are considered illiquid or when due to unusual reasons, they do not fairly represent market conditions.
As of December 31, derivatives were as follows:
2006 2005 Trades TradesSwap Asset Liability Net Asset Liability Net
CDI (interbank deposit rates) 20,980,544 10,429,191 10,551,353 7,752,835 3,407,948 4,344,887 Fixed interest rate – R$ 4,860,359 1,587,681 3,272,678 3,538,696 915,718 2,622,978 Fixed interest rate – foreign currency 416,247 736,013 (319,766) 34,983 690,284 (655,301)Indexed to referential rate (TR) 1,785,184 3,009,997 (1,224,813) 37,545 371,393 (333,848)Indexed to euro 182,356 121,467 60,889 36,688 107,195 (70,507)Indexed to dollar – PTAX 2,828,139 14,233,824 (11,405,685) 1,771,377 6,633,502 (4,862,125)Indexed to IGPM 3,931,803 3,138,915 792,888 1,919,288 2,302,268 (382,980)Indexed to LIBOR 1,907,240 1,536,137 371,103 605,120 511,887 93,233 Indexed to Yen 127,238 677,662 (550,424) 136,184 431,148 (294,964)Other indexes 418,524 1,555,248 (1,136,724) 44,738 92,164 (47,426)Total 37,437,634 37,026,135 411,499 15,877,454 15,463,507 413,947 Market value 432,984 503,578 Composition by counterpartyCustomers 25,725,839 25,314,944 410,895 10,440,201 10,054,921 385,280 Related parties 1,985,566 1,977,272 8,294 668,340 673,772 (5,432)Financial institutions 9,726,229 9,733,919 (7,690) 4,768,913 4,734,814 34,099 Total 37,437,634 37,026,135 411,499 15,877,454 15,463,507 413,947 Composition by maturitUp to 3 months 10,337,141 10,270,717 66,424 5,028,880 4,956,097 72,783 From 3 to 12 months 9,490,070 9,446,865 43,205 6,314,088 6,124,785 189,303 Over 12 months 17,610,423 17,308,553 301,870 4,534,486 4,382,625 151,861 Total 37,437,634 37,026,135 411,499 15,877,454 15,463,507 413,947 Composition by marketBM&F 15,793,074 15,759,999 33,075 6,712,791 6,685,378 27,413 Over the counter 21,644,560 21,266,136 378,424 9,164,663 8,778,129 386,534 Total 37,437,634 37,026,135 411,499 15,877,454 15,463,507 413,947
2006 2005 Premium Premium Market Market Options – dollar Notional Cost value Notional Cost value
Call option purchased position 2,529,603 32,738 9,816 4,090,800 115,233 128,472 Put option purchased position 1,334,012 26,796 30,736 874,375 21,131 23,697 Call option sold position (20,336,293) (504,019) (440,390) (12,526,568) (314,169) (299,973)Put option sold position (15,634,847) (825,162) (831,070) (8,795,121) (425,837) (419,996)
Total (32,107,525) (1,269,647) (1,230,908) (16,356,514) (603,642) (567,800)
131
Composition by maturity 2006 2005
Up to 3 months (4,319,687) (12,430,874)From 3 to 12 months (17,875,849) 695,068 Over 12 months (9,911,989) (4,620,708)Total (32,107,525) (16,356,514)
2006 2005 Premium Premium Market Market Options – other (1) Notional Cost value Notional Cost value
Call option purchased position 19,676,933 121,743 122,777 8,546,617 75,278 44,619 Put option purchased position 5,161,337 42,565 45,536 1,161,826 21,335 15,583 Call option sold position (29,773,615) (134,252) (93,041) (8,986,464) (95,294) (68,657)Put option sold position (13,782,049) (71,331) (122,258) (3,732,309) (21,970) (19,710)Total (18,717,394) (41,275) (46,986) (3,010,330) (20,651) (28,165)
(1) Includes shares, indexes and Brady bonds.
2006 2005Futures Contracts Notional Notional
Exchange coupon – DDIAsset position 7,479,303 5,054,091 Liability position (2,463,929) (1,557,791)Interest rates (DI1 and DIA)Asset position 12,209,205 17,220,850 Liability position (5,242,252) (6,187,116)Dollar (Dol)Asset position 2,202,047 1,091,103 Liability position (40,955) (1,224,553)C Bond (BCB)Liability position - (24,482)Global 2040Liability position (32,347) - Index Asset position 134,285 380,766 Liability position (258,509) (229,695)EuroAsset position 3,891 - Treasury BondsLiability position (508,783) (553,870)MetalLiability position (555) - Sugar Liability position 15,676 - Corn Liability position (11,878) - Soy Liability position (14,984) - Total 13,470,215 13,969,303 Composition by maturity 2006 2005
Up to 3 months 23,228 5,143,872 From 3 to 12 months (1,756,551) (1,222,177)Over 12 months 15,203,538 10,047,608
Total 13,470,215 13,969,303
accompanying notes
The amounts pledged to guarantee BM&F transactions were comprised by federal government securities in the amount of R$2,388,449 (2005 - R$2,316,847).
2006 2005
AssetsSwap – Differentials receivable 726,458 733,141 Forward purchases receivable 66,580 5,410 Forward sales receivable 82,471 - Exercisable option premiums – shares 71,122 41,948 Exercisable option premiums – transactions pending settlement 137,743 170,423 Other derivatives 89,044 76,447 Total 1,173,418 1,027,369
2006 2005
Liabilities Swap – Differentials payable 293,474 226,111 Forward purchases payable 63,512 11,708 Option premiums – shares 32,132 41,894 Option premiums – transactions pending settlement 1,454,627 766,442 Other derivatives 167,333 90,652
Total 2,011,078 1,136,807
34. Pension plan a) Benefi t plans granted to merged employees of Banco do Estado de São Paulo S.A. – Banespa
I) Banco Santander Banespa maintains a pension plan, granted to merged employees of Banco do Estado de São Paulo S.A. – Banespa hired by May 22, 1975. As of December 31, 2006, the plan covers 150 active participants and 13,141 retirees/pensioners.
Based on the independent actuary’s report, the position of the benefi t plans is as follows:
Actuarial assumptions adopted in the calculations 2006 2005
Nominal discount rate for actuarial obligations (1) 16.5% 17.4%Expected nominal rate of return on plan assets 16.5% 17.4%Estimated long-term infl ation rate 4.0% 4.8%Estimated nominal salary increase (1) 4.0% 4.8%Estimated nominal benefi t increase (1) 4.0% 4.8%General mortality table AT-2000 AT-2000Disability table Mercer disability table Mercer disability tableExpected turnover rate 0.1/(length of service + 1) up 0.1/(length of service + 1) up to 50 years old 50 years oldRetirement probability 100% when fi rst eligible 100% when fi rst eligible(1) In 2005, benefi t adjustments according to the terms of the Collective Bargaining of Banespa were not estimated.
Reconciliation of assets and liabilities 2006 2005
Present value of actuarial obligations 4,019,160 4,166,940 Adjustments for allowed deferrals Unrecognized actuarial gains (losses) (83,683) (232,350)Accrued net actuarial liability 3,935,477 3.934,590 Payments in the year (680,005) (619,809)Expenses recognized for the period 680,892 448,509 Current service cost (interest) 1,473 2,239 Interest on actuarial obligations 679,419 446,270 Expenses to be recognized in 2007 64,842 - Current service cost (interest) 568 - Interest on actuarial obligations 64,274 -
133
II) For employees hired on or after May 23, 1975, the Bank and its subsidiaries sponsor other plans through BANESPREV – Fundo Banespa de Seguridade Social, for the purpose of granting pension benefi ts supplementary to those granted by Social Security, as defi ned in the basic regulations of each plan.
II.a) Defi ned benefi t planPlan IPlan I, fully defrayed by the Bank, covers employees hired on or after May 22, 1975, and those hired by May 22, 1975 who are also entitled to death benefi ts. As of December 31, 2006, the benefi ciaries of this plan are 405 active participants and 10,665 retirees/pensioners.
Plan IIEffective July 27, 1994, when the new text of the Statutes and Basic Regulations of Plan II came into effect, Plan I participants who opted for the new plan began contributing 44.94% of the funding rate established by the actuary for each year. As of December 31, 2006, the benefi ciaries of this plan are 6,449 active participants and 5,857 retirees/pensioners.
Banespa Pension PlanDue to the privatization process, the Banespa Pension Plan was created. This plan, effective January 1, 2000, is managed by Banesprev and granted only to employees hired by May 22, 1975.
Based on the independent actuary’s report, the position of the benefi t plans is as follows:
Actuarial assumptions adopted in the calculations 2006 2005
Nominal discount rate for actuarial obligations 14.4% (1) 15.3%Expected nominal rate of return on plan assets 14.4% (1) 15.3%Estimated long-term infl ation rate 4.0% 4.8%Estimated nominal salary increase 4.0% 4.8%Estimated nominal benefi t increase 4.0% 4.8%General mortality table AT-2000 AT-2000Disability table Mercer Mercer disability table disability tableExpected turnover rate 2.00% 2.00%Retirement probability 100% when fi rst eligible 100% when fi rst eligible(1) Except for Banespa Pension Plan, for which the nominal rate of 15.4% was used.
2006 2005
Fair value of plan assets 3,612,495 3,330,842
Present value of funded actuarial obligations 3,083,562 2,689,438
Difference between present value of obligations and fair value of assets 528,933 641,404
Adjustments for allowed deferrals:
Unrecognized actuarial losses 46,143 -
(-) Unrecognized actuarial gains 433,564 90,941
Net actuarial assets (1) 141,512 550,463
Recognized actuarial losses 17,714 -
Contributions for the period 27,043 34,865
Sponsor’s estimated contributions for 2007 16,915 -
(1) Pursuant to article 49, item “g”, of CVM Resolution 371, the aforementioned asset was not recorded in the fi nancial statements of Banco Santander Banespa.
accompanying notes
II.b) Defi ned contribution planPlan IIIBanco Banespa Banespa also sponsors Plan III, a defi ned contribution plan, offered to employees of the Banespa Group hired on or after May 23, 1975, previously enrolled in Plans I and II. In this plan, contributions are made both by the sponsor and participants. Plan IVPlan IV covers employees hired on or after November 27, 2000, in which the sponsor contributes only to risk benefi ts and administrative costs. Contributions made to Plans III and IV amounted to R$1,077 (2005 - R$560) and sponsor’s estimated contributions for 2007 are R$22.
III) The Bank contributes to Cabesp - Caixa Benefi ciente dos Funcionários do Banco do Estado de São Paulo, an entity
responsible for covering medical and dental expenses of employees hired before Banespa’s privatization in 2000.
2006
Fair value of plan assets 2,430,500 Present value of obligations 2,028,008 Net assets 402,492
Contributions for the period 21,240
b) Benefi t plans of merged employees of Banco Santander Brasil S.A. and employees of Banco Santander Meridional S.A.
Banco Santander Banespa sponsors SANPREV - Santander Associação de Previdência, a private pension entity, for the purpose of granting pension benefi ts supplementary to those granted by Social Security, in conformity with Supplementary Law 109/2001. The plan has the following characteristics: Sponsors: Banco Santander Banespa S.A., Sanprev - Santander Associação de Previdência, Santander Brasil Arrendamento Mercantil S.A., Santander Brasil S.A. - Corretora de Títulos e Valores Mobiliários, Santander Seguros S.A., Santander Brasil Participações e Empreendimentos S.A., Santander Banespa Asset Management Distribuidora de Títulos e Valores Mobiliários Ltda., Universia Brasil S.A. and Santander Brasil Investimentos e Serviços S.A. Types of Plans:- Plan I was established on September 27, 1979 as a defi ned benefi t plan for employees of plan sponsors and has been in the process of discontinuance since July 1, 1996. As of December 31, 2006, the benefi ciaries of this plan are 9 active participants and 139 retirees/pensioners. - Plan II provides a risk coverage for the employees of plan sponsors and is funded exclusively by the sponsors through monthly contributions equivalent to 0.77% (2005 - 0.77%) of payroll, and is structured as a defi ned benefi t plan. Monthly contributions are apportioned as follows: 0.27% (0.27% in 2005) for risk benefi ts and 0.50% (0.50% in 2005) for the administrative program. As of December 31, 2006, the benefi ciaries of this plan are 4,879 active participants and 29 retirees/pensioners.
- Plan III provides period-certain annuity and monthly life annuity for employees of contributing sponsors and was structured as a defi ned contribution plan, whereby contributions are freely made by participants starting at 2% of the contribution salary. As of December 31, 2006, the benefi ciaries of this plan are 4,985 active participants and 276 retirees/pensioners.
Financial and Actuarial Methods: - Plan I - capitalization (supplementary benefi ts for length of service, supplementary benefi ts for disability, supplementary benefi ts for temporary pension and death) and simple coverage method (supplementary benefi ts for sickness and birth allowance).
135
- Plan II - capitalization (supplementary benefi ts for temporary pension, supplementary benefi ts for disability and death) and simple coverage method (supplementary benefi ts for sickness and birth allowance).
- Plan III - capitalization (monthly life annuity).
Based on the independent actuary’s report, the position of the benefi t plans is as follows: Actuarial assumptions adopted in the calculations 2006 2005
Nominal discount rate for actuarial obligations 10.2% 11.1%Expected nominal rate of return on plan assets 10.2% 11.1%Estimated long-term infl ation rate 4.0% 4.8%Estimated nominal salary increase 4.0% 5.9%Estimated benefi t increase rate 4.0% 4.8%General mortality table AT-2000 AT-2000Disability table Mercer disability Mercer disability table tableExpected turnover rate null nullRetirement probability 100% when fi rst eligible 100% when fi rst eligible 2006 2005
Fair value of plan assets 124,600 103,114 Present value of actuarial obligations, by plan: 70,943 73,791 Plan I 60,972 63,257 Plan II 9,971 10,534 Net assets 53,657 29,323 Sponsor’s estimated contributions for 2007 802 - Contributions for the period - Plans II and III (defi ned contribution) 2,361 2,474
Pursuant to article 49, item “g”, of CVM Resolution 371, no actuarial asset was recorded in the sponsors’ fi nancial statements as a result of the plan surplus. c) Benefi t plans of employees of companies merged into Banco Santander Meridional S.A.
Banco Santander Banespa S.A., as successor to the fi nancial institutions that were succeeded by Banco Santander Meridional S.A., is the sponsor of pension plans for employees, established as defi ned benefi t plans. As of December 31, 2006, the benefi ciaries of these plans are 1 active participant and 1,413 retirees/pensioners.
Based on the independent actuary’s report, the position of the benefi t plans is as follow: Actuarial assumptions adopted in the calculations 2006 2005
Nominal discount rate for actuarial obligations 16.5% 17.4% (12% + infl ation)Expected nominal rate of return on plan assets 16.5% 17.4% (12% + infl ation)Estimated long-term infl ation rate 4.0% 4.8%Estimted nominal salary increase 4.0% 4.8%Estimated nominal benefi t increase 4.0% 4.8%General mortality biometric table AT – 2000 AT – 2000Disability table no applicable no applicableExpected turnover rate 0.0% 0.0%Retirement probability 0.0% 0.0%
accompanying notes
Reconciliation of assets and liabilities 2006 2005
Present value of actuarial obligations 169,906 173,524 Adjustments for allowed deferrals – Unrecognized actuarial losses (13,129) (35,221)Accrued net actuarial liability 156,777 138,303 Payments in the year (27,363) (25,582)Expenses recognized for the period – Interest on actuarial obligations 27,968 26,439 Amortization of unrecognized actuarial losses 17,869 24,105 Expenses to be recognized in 2007 25,946 -
Interest on actuarial obligations 25,946 -
d) Subsequent eventBeginning in January 2007, the payment of pension plan benefi ts set forth in the Personnel Regulation of Banco do Estado de São Paulo S.A. - Banespa (Banespa), merged into Banco Santander Banespa S.A. on August 31, 2006, and Clause 44 of the 2004/2006 Collective Labor Agreement (Agreement for Voluntary Migration to the New Pension Plan System), started to be made by Banesprev, a pension plan entity. For this purpose, the Bank created Pension Plan V (Plan V), which was approved by the Secretariat for Pension Plans (SPC) according to Administrative Rule 879 of January 11, 2007.
On January 12, 2007, with the implementation of Plan V and the transfer of liabilities and assets to Banesprev, the Bank’s commitments are as follows:
Present value of funded actuarial obligations 4,019,160 Vested benefi ts 3,981,807 Unvested benefi ts 37,353 Fair value of plan assets (1) 3,598,816 Present value of liabilities in excess of fair value of assets 420,344 Adjustments for allowed deferrals - unrecognized actuarial gains (losses) 83,683 Accrued net actuarial liability 336,661
(1) Securities in the amount of R$3,478,816 and cash in the amount of R$120,000 were transferred.
The balance of unamortized obligation will be paid by the Bank through a monthly contribution estimated at R$5,274 over a term of 250 months. In order to secure the payment of this obligation, the Bank will keep government securities, which will remain classifi ed as held-to-maturity securities, equivalent to R$505,623 of the portfolio balance as of December 31, 2006.
Additionally, as a result of this event, government securities classifi ed as held-to-maturity securities in the amount equivalent to R$573,191, as of December 31, 2006, were reclassifi ed in January 2007 to available-for- sale securities. As a result, the Bank’s stockholders’ equity will be increased by R$117,920.
e) Variable Compensation Program
Expenses in the amount of R$3,699 (2005 - R$4,344) were recorded on a pro-rata basis, in connection with the executive variable compensation program based on the controlling stockholder’s share appreciation, and the compensation can be received from January 15, 2008 to January 15, 2009, provided that certain assumptions are net.
137
35. Income and social contribution taxes
2006 2005 IRPJ CSLL IRPJ CSLL
Income before taxes (IRPJ and CSLL), net of profi t sharing 1,294,362 1,294,362 1,872,978 1,872,978 Interest on capital (190,683) (190,683) (404,946) (404,946)Unrealized gains (losses) (5,739) (5,739) 28,250 28,250 Income before taxes (IRPJ and CSLL) 1,097,940 1,097,940 1,496,282 1,496,282 Total IRPJ and CSLL charges at the rates of 25% and 9%, respectively (274,485) (98,815) (374,071) (134,665)Additions (deductions) on IRPJ and CSLL charges 246,100 91,293 225,962 75,308 Equity in affi liates 968 349 - - Temporarily nondeductible provisions (17,247) (6,580) 17,957 (741)Reserve for maintenance of integrity of stockholders’ equity 162,525 58,509 260,371 93,734 Adjustment to market value 1,795 681 12,788 4,604 Nondeductible expenses and provisions (57,133) (19,644) (12,431) (2,219)Tax loss carryforwards 28,056 10,703 (43,264) (16,185)Merged companies’ taxed income 45,068 16,225 - - Other additions (deductions) 82,068 31,050 (9,459) (3,885)IRPJ/CSLL expense - current (28,385) (7,522) (148,109) (59,357)Provision for IRPJ/CSLL – merged companies (18,720) (7,662) - - Provision for deferred IRPJ/CSLL (73,854) (26,316) (58,099) (20,325)Provision for deferred income tax (53,366) (19,323) - - Provision for deferred income tax – Adjustment to market value (19,428) (6,993) (56,457) (20,325)Provision for deferred income tax – Excess depreciation of leased assets (1,060) - (1,642) - Deferred IRPJ/CSLL tax asset 168,256 (12,129) 156,744 43,130 IRPJ/CSLL tax credits 152,673 (18,477) 111,151 27,409 Adjustment to market value 17,633 6,348 43,669 15,721 Insuffi cient depreciation (2,050) - 1,924 - Income tax expense – foreign countries (3,146) - (2,632) -
Recorded IRPJ/CSLL 44,151 (53,629) (52,096) (36,552)
36. Adjusted balance sheet and statement of income by business segment
Santander Banespa operates through its companies in the fi nancial (commercial, foreign exchange, investment, credit and fi nancing, mortgage loan and leasing portfolios and securities brokerage and dealership operations), insurance (insurance, pension plan, capitalization and insurance brokerage operations) and other segments (see note 4). 2006 Adjustment/ Combined balance sheet Financial Insurance Other Elimination Combined
AssetsCurrent and long-term assets 100,000.013 5,413,798 264,625 (271,312) 105,407,124 Cash 1,177,786 9,437 907 (5,554) 1,182,576 Interbank investments 5,309,341 - - - 5,309,341 Securities and derivatives 39,513,363 4,986,662 218,517 (174,174) 44,544,368 Lending and leasing operations 32,950,377 - - - 32,950,377 Other assets 21,049,146 417,699 45,201 (91,584) 21,420,462 Permanente 2,070,671 16,299 3,369 (311,728) 1,778,611 Total do Ativo 102,070,684 5,430,097 267,994 (583,040) 107,185,735
accompanying notes
2006 Adjustment/ Liabilities and stockholders’ Financial Insurance Other Elimination Combined
Equity Current and long-term liabilities 94,015,393 5,021,204 59,159 (190,774) 98,904,982 Deposits 31,925,294 - - (179,728) 31,745,566 Money market funding 25,474,708 - - - 25,474,708 Funds from acceptance and issuance of securities 1,435,333 - - - 1,435,333 Borrowings and onlendings 9,960,641 - - - 9,960,641 Technical reserve for insurance, pension plan and capitalization operations - 4,636,278 - - 4,636,278 Other liabilities 25,219,417 384,926 59,159 (11,046) 25,652,456 Minority Interest 1 20 - 166,168 166,189 Stockholders’ Equity 8,055,290 408,873 208,835 (558,434) 8,114,564 Total liabilities and stockholders’ equity 102,070,684 5,430,097 267,994 (583,040) 107,185,735
2006 Adjustment/ Combined statements of income (1) Financial Insurance Other Elimination Combined
Financial income 13,932,279 555,878 36,276 (26,950) 14,497,483 Financial expenses (8,647,483) (441,907) - 26,950 (9,062,440)Income from services rendered 2,638,543 198,347 1,605 (2,230) 2,836,265 Income from insurance, pension plan and capitalization operations - 175,791 - 56,304 232,095 Personnel and administrative expenses (4,453,685) (114,400) (12,051) 44,320 (4,535,816)Other operating expenses (2) (2,227,195) (42,585) (5,777) (50,546) (2,326,103)Nonoperating (Expenses) Income (46,831) 194 2,048 (2,295) (46,884)Income and Social Contribution Taxes 106,683 (112,092) (4,069) - (9,478)Profi t sharing (297,852) (1,692) (694) - (300,238)Minority Interest - - - (25,026) (25,026)
Net income 1,004,459 217,534 17,338 20,527 1,259,858
(1) Insurance commissions received by the banks were reclassifi ed from the fi nancial companies group to the insurance companies group.(2) Tax expenses, investments in affi liates, other operating income and other operating expenses.
37. Other information
a) Co-responsibility and risks on guarantees provided on behalf of customers, recorded in memorandum accounts, amounted to R$10,480,793 (2005 - R$7,322,135). b) The total net book value of investment funds managed by Santander Banespa is R$41,260,951 (2005 - R$31,668,190) and the total net book value of managed investment funds is R$46,005,087 (2005 - R$40,378,402). c) The insurance coverage in effect as of December 31, 2006 covering global bank risks, fi re, vehicle and other risks, amounts to R$1,919,159 (2005 - R$1,231,122). Bankers’ blanket insurance was contracted for Banco Santander Banespa with coverage of R$220,227, which can be used separately or jointly, provided that it does not exceed the contracted amount. d) At the meeting held on October 26, 2006, the Executive Board approved the sale of assets and liabilities of the Tokyo branch to Banco Itaú S.A. for US$1,500 thousand and, provided that certain requirements of the agreement are met one year after the transfer, there will be an additional receipt of up to US$7,500 thousand. In December 2006, the assets and liabilities were sold and the premises are under liquidation according to Japanese legislation.
139
e) As of December 31, 2006, restricted operations were as follows: Assets Income (Liabilities) (Expense)
Restricted operations on assets Lending operations 266,020 8,461 Liabilities – restricted operations on assets Other liabilities (265,937) (8,371)Net income 90
There are no default operations or court challenges regarding restricted operations on assets or funds raised to be used in these operations.
To the Management of the Entities ofSantander Banespa (see note 4 to the combined fi nancial statements)São Paulo - SP
1. We have audited the accompanying combined balance sheets of Santander Banespa as of December 31, 2006 and 2005, and the related combined statements of income, changes in stockholders’ equity, and changes in fi nancial position for the years then ended, all expressed in Brazilian reais and prepared under the responsibility of the Entities’ management. Our responsibility is to express an opinion on these fi nancial statements.
2. Our audits were conducted in accordance with auditing standards in Brazil and comprised: (a) planning of the work, taking into consideration the signifi cance of the balances, volume of transactions, and the accounting and internal control systems of the Entities, (b) checking, on a test basis, the evidence and records that support the amounts and accounting information disclosed, and (c) evaluating the signifi cant accounting practices and estimates adopted by Management, as well as the presentation of the fi nancial statements taken as a whole.
3. In our opinion, the combined fi nancial statements referred to in paragraph 1 present fairly, in all material respects, the fi nancial position of Santander Banespa as of December 31, 2006 and 2005, and the results of its operations, the changes in stockholders’ equity, and the changes in its fi nancial position for the years then ended in conformity with Brazilian accounting practices.
4. The combined fi nancial statements referred to in paragraph 1 include the individual fi nancial statements of the Santander Banespa entities that operate under a common management in Brazil, as mentioned in notes 3 and 4 to the combined fi nancial statements, and are presented for purposes of disclosing additional non-mandatory information on Santander Banespa.
5. The accompanying combined fi nancial statements have been translated into English for the convenience of readers outside Brazil.
São Paulo, January 31, 2007
DELOITTE TOUCHE TOHMATSU Francisco A. M. Sant’AnnaAuditores Independentes Engagement PartnerCRC nº. 2 SP 011609/O-8 CRC nº. 1 SP 120424/O-8
INDEPENDENT AUDITORS’ REPORT
141
The Audit Committee of Santander Banespa in compliance with the National Monetary Council (CMN) Resolution 3,198/04, was composed, until December 27, 2006, of six members, of which three members were independent of the executive board and the other three members were executive directors*. As of December 27, 2006, the Central Bank of Brazil (Bacen) approved the deliberations of the Extraordinary General Meetings held on August 31, 2006, that proposed the Bylaws reform, the election of the Board of Directors of Banco Santander Banespa S.A., and the merger of Banco Santander Brasil S.A., of Banco Santander S.A., and of Banco do Estado de São Paulo S.A. – Banespa into Banco Santander Banespa S.A., Therefore, since the approval, the Audit Committee of Santander Banespa has adopted the rules according to item I, article 13 of Resolution CMN 3,198, that provides that all members of the audit committee be independent and that they report to the Board of Directors.
Under prevailing legislation, Management is responsible for the preparation, disclosure and integrity of the fi nancial statements, and for the adoption of the best practices in internal control systems and procedures, in order to ensure compliance with Brazilian accounting practices and rules and regulations of the Bacen, Brazilian Securities Commission (CVM) and National Monetary Council.
The independent auditors are responsible for planning and performing the audit of the individual and consolidated fi nancial statements of Santander Banespa.
The Audit Committee assists Santander Banespa’s Management in the oversight of the fi nancial reports, evaluation of the effectiveness of the system of internal controls, the independence of the auditors, and the performance of the internal and independent audits. The Audit Committee is also responsible for recommending corrections and improvements of policies, practices and priorities identifi ed in the course of its work.
The Audit Committee formally held nine meetings in the second half of 2006 and January 2007 to conduct the work inherent in its duties, also devoting special attention to the merger of the banks, that consolidated the activities in Brazil, to the analysis of the impact of the new accounting and disclosure rules applicable to contingent assets and liabilities, to the discussion of the allowance of doubtful losses provision criteria, and to the subsequent event related to the transference of Banespa´s employees and retired pension’s fund.
In addition, for the purpose of fulfi lling its duties and responsibilities, the Audit Committee’s coordinator, indicated by the other independent members, devotes full time to this function, and participates as a guest on the Operating Risks Executive Committee, on the Analysis, Resolutions and Compliance Committee, on the Legal Executive Committee, Technology Executive Committee and on the Basel II Local Technical Committee. Regarding its duties:
1. The Audit Committee proceeded to monitor the work developed by the Internal Control area, in conformity with Resolution CMN 2,554/98, and the results of the Sarbanes-Oxley Act certifi cation work, for consolidation with the process of the headquarters. In addition, the Audit Committee discussed Santander Banespa´s plans to comply with Resolution CMN 3,380/06, related to the implementation of the management and operational risks control area.
2. With regard to the internal audit work, the Audit Committee analyzed the reports on the work developed in the second half of 2006 and followed up on the conclusions and implementation of the prior reports’ recommendations.
3. As for the work of the independent auditing fi rm Deloitte Touche Tohmatsu Auditores Independentes, the Audit Committee proceeded with the follow-up of the treatment given to the internal control issues raised in the detailed reports and anticipated the discussion of the main issues related to the fi nancial statements ended December 31, 2006.
4. The Audit Committee proceeded with the review of the fi nancial statements for the fi nancial institutions of Santander Banespa, to confi rm their quality. In this respect, it monitored the fi nancial statement closing for the six-month period, prior to disclosure, and met with the independent auditors and Santander Banespa’s professionals directly responsible for the accounting area and the preparation of the fi nancial statements.
As a result of the evaluations based primarily on the information received from Management, internal and independent audits, and the area in charge of the corporate monitoring of internal controls, the Audit Committee concluded that the work developed is effective and provides transparency and quality to the fi nancial statements of Santander Banespa.
Audit CommitteeSão Paulo, January 31, 2007
Ana Isabel Pérez Pérez* Maria Elena Cardoso FigueiraJosé Tomás Otero Ubago* Ramón Sánchez Diez*Sérgio Darcy da Silva Alves Taiki Hirashima
SUMMARY OF THE AUDIT COMMITTEE REPORT FOR SANTANDER BANESPA
CORPORATE INFORMATION
Investor RelationsRua Amador Bueno, 474 – 4th fl oor04752 000 – São Paulo – SP – BrazilTel.: (55 11) 5538 8654Fax.: (55 11) 5538 8361E-mail: [email protected]
Stock ExchangesTicker on the Bovespa:Banco Santander Banespa ON – SANB3Banco Santander Banespa PN – SANB4
Independent AuditorsDeloitte Touche Tohmatsu Auditores Independentes
Site The site www.santander.com.br contains detailed information on the history of the Group in Brazil, its growth, mission, main indicators, reports and balance sheets, amongst other items. In the website www.gruposantander.com, the item on the main Legal Information for the Shareholder menu contains data related to the Grupo Santander Central Hispano worldwide the corporate governance section presents the following documents:
By-laws
Regulations governing the
Shareholders Meeting
Board of Directors Regulations
Annual Corporate Governance
Report
Report of the Auditing and
Compliance Commission
Stock Market Code of Conduct
General Code of Connduct
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Credits
CoordinationInvestor Relations Area
Concept, Editorial and Design ProjectsCorpBrasil Comunicação CorporativaThe Global Consulting Group
English VersionJohn Fitzpatrick
PhotosDaniel RosaDavilym Dourado (Private Banking)Deco RodriguesEduardo SimõesJoão Luiz MusaNancy Campus (Salamanca)Paulo Uras NetoRefl exus FotosSérgio Zacchi (College Preparation Course)
PrinterStilgraf
AcknowledgementsWe thank all Bank employees who helped in the creation of this report.
Future expectations arising from a reading of this report should consider the risks and uncertainties which involve any activities such as political and economic changes, volatility in interest rates and the exchange rate, infl ation, changes in the law, competitive aspects and other factors, and those interested should evaluate carefully the information contained herein.
www.santander.com.br
www.santander.com.br
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