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Banco Santander (Brasil) S.A. GAMMA SCORE

Banco Santander (Brasil) S.A.

Date: March 10, 2011 Analysts:

Eduardo G. Chehab Sao Paulo - Brazil Tel: 55-11-3039-9742 Email: [email protected] Oleg Shvyrkov Moscow - Russia Tel: +7-095-783-4045 Email: oleg_shvyrkov @


Overall Company Score* STRONG Maximum is 10

Component Scores:* Shareholder influence Shareholder rights Transparency, audit, and risk management Board effectiveness, and incentives strategic process 6+ 7 7+ 7 S&P credit rating: 12M P/Unit as of 12/2010:

BBB-/Stable/A-3 SANB11, SANB3.


NYSE: (ADRs Level III)




11.6 USD 40 billion

Market Cap (ADRs):

Standard & Poor's has assigned a GAMMA score of 7 to Banco Santander (Brasil) S.A.


The controlling shareholder is, in our opinion, a highly regarded global financial organisation motivated to support the development of Santander (Brasil). Three independent directors sit on the board who provide checks and balances to the major shareholder's influence. Unit owners have voting rights. A dividend policy is in place. Santander (Brasil) does not depend on its parent to fund its activities. Significant efforts have been made to improve transparency and other elements of corporate governance. The web site presents a fair volume of information in Portuguese and English. IFRS financial statements are available and disclosed on a timely basis. The management team is composed of highly experienced professionals, most of whom are locally hired. We deem the enterprise risk management system adequate. The senior executive officer compensation policy is adequate in our view, and also tied to medium term results.

For important information on GAMMA Scores please see the last page of this report.


Shareholder While

One third of board members are Santander (Brasil) executives, which in our view may constrain the purpose of the board to impartially supervise the executives' performance. The existing corporate governance structure and current board composition have been in place less than one year. The free float is below the statutory minimum. Minority shareholders have limited voting powers in our view given the strong influence of the major shareholder. Few board committees in place, forcing the board to rely on information provided by management.

S h a r e h o ld in g s t r u c t u r e ( b y o r d in a r y s h a r e s ) F r e e f lo a t S a n t a n d e r ( S p a in )



1 7 .8 %

8 2 .2 %

Santander Spain, through three holding companies, also holds 80.7% of the preferred shares, while 19.3% are free float. In terms of total capital, the free float currently represents 18.5%.

Executive Summary

Standard & Poor's Governance Services has assigned its governance, accountability, management metrics and analysis (GAMMA) score of `7' to Banco Santander (Brasil) S.A. The Santander group first gained a presence in Brazil in 1957 through an operating agreement with a small bank, Banco Intercontinental do Brasil S.A. At that time various regulations limited the activities of international banks in Brazil. In 1985, Santander was authorised to open a bank wholly owned by its parent company, albeit with restricted activity. Then, in the 1990s, the Brazilian government scrapped the majority of restrictions on international banks' operations in the domestic market. Santander's development really started to gain momentum in Brazil in 1997, when management decided to grow through the acquisition of medium- and large-sized banks such as Banco Geral do Comércio, Noroeste, Meridional/Bozzano Simonsen and Banespa. The most recent relevant acquisition was in 2008, when Banco ABN AMRO Real, which was of comparable size to Santander (Brasil), was acquired. Santander (Brasil) is a full service financial institution, operating in all segments of the traditional banking and insurance activities. In October 2009, with the equity markets more conducive, Santander (Brasil) launched its IPO simultaneously on the Bovespa (Level 2) and the NYSE, raising USD7.3 bln, net of placement expenses, resources that will primarily be utilised to fund its growth programme up to 2013. Santander (Brasil)'s key consolidated figures under IFRS are: 2010 revenues of USD28 bln; net profit of USD4.4 bln; and a ROE of 16.9%. At end-2010, total assets amounted to USD225 bln; its net worth USD26 bln; and its Basel capital adequacy ratio 22.1% (versus the minimum 11% required by Brazil's central bank), reflecting the significant capital increase through the IPO. The P&L figures were almost double the 2007 numbers, for the most part due to the merger of Banco Real. Santander (Brasil) currently employs 54,000 staff, has 2,201 branches, 1,495 mini-branches housed within companies and 18,312 ATMs, concentrated in the southeastern region, where approximately 73% of its branches are located. In terms of total assets, as of December 2009 (last data available), Santander had a 9.3% market share and ranked 3rd among the private banks in Brazil, after Itaú Unibanco (16.2% market share) and Bradesco (12.3%). The largest bank in Brazil, state-owned Banco do Brasil, held a 19.2% market share at that date. Santander (Brasil) is currently rated BBB-/Stable/A-3 by S&P's Credit Rating Services, and broadly in line with Brazil´s sovereign credit rating (please note S&P Credit Rating Services operates entirely separately from S&P Equity Research). Santander group activities are concentrated in ten countries: Spain, Portugal, Germany, the UK, Brazil, Poland, Mexico, Chile, Argentina and the US, together forming one of the largest financial institutions in the world, with total assets of EUR1.2 tln at end-2010, net profit of EUR8.2 bln, shareholders' equity of EUR75 bln, an ROE of 11.8% and a capital adequacy ratio of 13.1%, and employed around 179,000 staff. The parent company is rated AA by S&P's Credit Rating Services.


Santander Group is a highly regarded global financial organisation, motivated to support the development of Santander (Brasil) through its managerial know-how and also through capital injections made in the past to fund its growth. Additionally, Santander (Brasil) was able to launch the largest IPO in Brazil to date, with the bulk of the proceeds earmarked to fund organic growth. We would stress that Santander (Brasil) is not dependent on its parent for funding for its activities. Three independent directors sit on the Santander (Brasil) board, providing checks and balances on the parent company's influence, while the management team is composed of, in our view, highly regarded and experienced professionals. As minority shareholders own units, they automatically have proportional voting rights. Both ordinary and preferred shareholders have 100% tag along rights. There is also a dividend policy in place. The disclosure level within the Santander (Brasil) web site is satisfactory in our opinion, with most of the documents provided in both Portuguese and English. Financial statements have been available both under Brazilian GAAP and IFRS since 2008. Disclosure timing has been good in our view. Santander (Brasil) has had a sound enterprise risk management system in place for several years, adhering to the requirements of Santander Spain, Brazil's central bank, CVM (Brazil's Securities and Exchange Commission), the SEC and SarbanesOxley. We believe the compensation policy for senior executive officers is adequate, with a share scheme providing medium-term incentives.


Three senior Santander (Brasil) executives also sit on the board, in our opinion constraining impartial supervision and evaluation of the executives' performance. The corporate governance structure was only introduced very recently. The ability of the independent directors, who were appointed by the Santander group, to balance the influence of the parent company has not been tested. There are only two board-level committees, both of which have a fairly short history. The free float is still below the threshold required by Bovespa's Level 2 regulations, but has been managed to reach the required 25% over the coming years. Minority shareholders have limited voting powers at shareholders' meetings due to the strong influence of the parent company. The three independent directors were nominated by Santander (Spain).

Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score

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Full report Shareholder Influence - Component Score: 6+

Key Analytical Issues

Santander (Spain) has significant influence over its Brazilian subsidiary. Following the IPO, the Santander group still holds 82.2% of the voting shares in its Brazilian subsidiary (and 80.7% of preferred shares). Most of the policies followed by Santander (Brasil) are determined by its parent company, such as overall strategy, credit policies, dividend distribution, risk control, management structure, technology and internal audit procedures, besides using the same brand name and logo. Santander (Spain) is also a listed company, with its shares widely held, and professional management. Its largest individual shareholder owns roughly 3% of the ordinary shares. We found no immediate material conflicts of interest between Santander (Spain) and its Brazilian subsidiary. The local management team has significant autonomy in terms of management of the Brazilian operations, in our opinion. However, the growth policy is restricted to the domestic market as the parent company already has subsidiaries elsewhere in Latin America. At this stage, we do not believe the parent company would sign off on a geographic expansion plan that included the internationalisation of the Brazilian subsidiary. Of the nine members of the board, three are independent but three are Santander (Brasil) executives. According to the Santander (Brasil) bylaws, the board can comprise up to 12 members, of whom at least 20% must be independent directors as defined by the BM&F Bovespa (Level 2) regulation. Of the current members, three represent Santander (Spain), three are executives (the CEO and the two senior vice-presidents) and three are independents, elected at the AGM but appointed by the majority shareholder. In our opinion, while the presence of three competent independent members with diversified professional backgrounds, improves the checks and balances system on the board, the presence of the three Santander (Brasil) executives constrains one of the main purposes of the board, which is to supervise the management team's performance. A recent exchange of positions saw Mr. Fábio Barbosa leave his role as CEO to become chairman, while Mr. Marcial Portela, the former chairman, became CEO. The management team is composed exclusively of professionals. Senior management is mainly composed of executives from the merged Banco Real, Santander (Spain) and Santander (Brazil). The current team comprises 60 executives, including the CEO, two senior vice-presidents and nine vice-presidents, each with a two-year mandate and the right to be re-elected. Some senior executives report directly to Santander (Spain). Parent company has supported growth at Santander (Brasil). Despite the strong growth in the past 15 years, primarily through the acquisition of six medium- and large-sized financial institutions, the Santander (Brasil) capital structure remains satisfactory in our opinion, as these acquisitions were supported financially by the parent company. For instance, Banco Real was acquired in 2008 by Santander (Spain) from the ABN AMRO group, and the parent company subsequently transferred ownership to Santander (Brasil) through a c.USD24 bln capital increase, demonstrating the parent company's strong commitment to its Brazilian subsidiary. Related-party transactions are in line with market conditions. To fund foreign-currency loans, Santander (Brasil) has outstanding credit lines with its parent and affiliated companies around the world. Indeed, borrowings and deposits with group companies currently represent just over 2% of its total funding. Additionally, there are contracts with certain affiliates for services provided to the Santander (Brasil) IT platform, including software development, hosting and information processing. Such related-party transactions are conducted at arm's length, in line with Santander's internal policy, based on terms that correspond to those that would apply to transactions with third parties, as stated in the Santander (Brasil) audited financial statements. No loans or advances are granted to any member of the board or executive team, as per Brazilian banking legislation. IPO: in October 2009, Santander (Brasil) launched the largest IPO in Brazil to date, raising BRL13 bln, equivalent to USD7.3 bln at that date. Roughly 561 mln units were issued at BRL23.50 (USD13.40) each, both in Brazil and the US. Each unit comprised 55 ordinary shares and 50 preferred shares. Prior to this IPO, Santander had some ordinary and preferred shares in the market, equivalent to 2.1% of the total shares, but with no liquidity, shares that were originated from the banks it acquired and merged in previous years. The existence of these shareholders stemmed from the fact that some did not participate in earlier public offerings, and no other solution could be found. The Santander (Spain) participation in Santander (Brasil), totalling 82.2% of voting shares and 80.7% of preferred shares, is maintained through three holding companies: Grupo Empresarial Santander, S.L., Sterrebeeck B.V. and Santander Insurance Holding, S.L. Related-party transactions: According to Brazilian legislation, a financial institution is not allowed to extend loans to: a) officers and members of the advisory, administrative, fiscal or similar councils, or their respective spouses and family members up to the second degree; b) individuals or corporations owning more than 10% of its capital; or c) corporations in which the financial institution, any officers or board members, or their relatives up to the second degree, own more than 10%.

Shareholder Rights - Component Score: 7

Key Analytical Issues

Unit owners have voting rights. The Santander (Brasil) shareholding structure is split 53:47 ordinary (voting) and preferred shares. Santander (Brasil) was listed on the Bovespa (Level 2) and the New York Stock Exchange (ADR Level III) in October 2009, when 561 mln units were issued. Minority unitholders automatically have voting rights proportionate Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score Page- 3 -

Key Analytical Issues

to their ownership, which we view as a positive. They are also entitled to appoint a proxy to attend shareholders' meetings and vote on their behalf. Preferred shareholders have 100% tag-along rights. The preferred shares included in the units receive dividends equivalent to 110% of those on the ordinary shares, 100% tag-along rights (against the 80% legal minimum), and priority in repayment over shareholders in event of the bank's liquidation. However, as Santander (Spain) holds preferred and ordinary shares in broadly equal proportion to the ratio within the units, shareholders' voting rights are not affected by the ownership of preferred shares. Pre-emptive rights for holders of ADRs are not comprehensive. Holders of units in Brazil have pre-emptive rights to subscribe to shares in any capital increase in proportion to their holding, as is generally the case elsewhere. However, holders of ADRs would not be able to exercise their rights under an issue if Santander (Brasil) failed to file a registration statement under the US Securities Act of 1933. In the 20-F, Santander (Brasil) notes that it may decide, at its discretion, not to file such registration statements. Free float currently below the Bovespa threshold of 25% of total shares. Under Bovespa (Level 2) listing rules, the minimum free float threshold is 25% of total shares, although there is a three-year window to meet this requirement. Santander (Brasil) management has informed us that the requirement will be met by October 2012, although it is possible to apply for a two-year extension upon presentation of a plan. The increase in the free float can be achieved through the issuance of new units or a sale of units held by Santander (Spain), either of which would dilute the latter's ownership. We believe a higher free float could give minorities greater influence at shareholders' meetings. Appointment of independent board members by minorities. A preferred shareholder or a group of preferred shareholders with a stake of at least 10% of total shares and/or ordinary shareholders with at least 15% of voting shares but not a blockholder, can nominate a board member at the AGM. However, the three independent members currently sitting on the board were elected at the April 2010 AGM by Santander (Spain). Board appointments by minorities would be easier if cumulative voting procedures were adopted. However, this is not common practice in Brazil, although the law would allow it where a minimum of 10% of shareholders with voting rights require this, and as an option has not been exercised so far. Dividend policy in place. Although Santander (Brasil)'s bylaws require that dividends account for 25% of adjusted net profit (less legal and contingency reserves), in line with Brazilian corporate law, its current dividend policy recommends the distribution of 50% of adjusted net profit (including interest on own capital). However, payouts have actually been higher in recent years, equivalent to almost 100% of adjusted net profit. Dividends related to FY 10 amounted to almost USD2 bln (BRL3,540 mln), and in 2009 USD800 mln (BRL1,575 mln). However, future recommended payouts may well be lower, depending on, among others, cash flow, financial condition, capital position, investment plans, prospects, legal requirements, economic environment and any other factors Santander may consider relevant at the time. Organisation of shareholders' meetings. In general, the board of directors is the responsible for convening ordinary and extraordinary shareholders' meetings. However, there are some special situations in which shareholders can do this. A shareholder or group of shareholders with at least 5% of the ordinary/preferred shares can call a shareholders' meeting where the board of directors has not done so. With more than 10% of voting shares, they can require the adoption of cumulative votes. In 2010, the AGM was held just three days before the cut-off date set by corporate law and the CVM. Holders representing more than 91% of voting shares attended. The meeting materials were made public 30 days before the AGM, in line with current Brazilian legislation (recently raised from 15 days). Shareholders can attend in person or by proxy. Eight shareholders' meetings were held in 2009, all of them before the IPO; in 2010 there were three. The custodian and share registrar. The units underlying the ADSs are held by Santander (Brasil), acting as custodian, and agent for the depositary, JP Morgan Chase Bank, N.A. Santander (Brasil) also acts as registrar. BM&F Bovespa is custodian of the units traded in Brazil. Units: Santander (Brasil)'s capital of USD36 bln is broadly equally split between ordinary and preferred shares. Shareholders hold units that are depositary certificates, each representing 55 ordinary shares and 50 preferred shares. Of the free float shares, 54% are traded on the NYSE through ADRs, and the balance on Bovespa. Santander's units were included in the Bovespa index as of September 2010, which comprises all highly traded companies on the Brazilian stock exchange. Santander (Brasil) is listed on Bovespa (Level 2), the main characteristics of which are: At least five members on the board, at least 20% of whom are independent. A free float of at least 25% of total shares. Ordinary shares carry voting rights, 100% tag along, while preferred shares have an 80% tag-along, (i.e. the contractually guaranteed right of a minority shareholder to sell his/her stake if the majority shareholder does so), Preferred shares carry voting rights only under special situations, such as a merger or spin-off, agreements with the controlling shareholder or affiliates that must be ratified by a shareholders' meeting, valuation of assets to be used as payment or capital increase, hiring of a specialised company to calculate the economic value of the bank in the event of the cancellation of a listed condition, among others. Preferred shareholders also have the right to appoint one member of the bank's fiscal council and his/her respective alternate, where a fiscal council has been formed. Dividend policy: Under Brazilian corporate law, dividends are generally required to be paid within 6o days of the date on which the dividend is declared unless a shareholders' resolution establishes another payment date (which must occur prior to the end of the fiscal year in which the dividend was declared). Interest on own capital ­ since 1996, Brazilian companies have been permitted to pay dividends calculated as interest on own capital and treat such payments as an expense for tax purposes. Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score Page- 4 -

Shareholders' meetings: Shareholders are notified individually and through publications in the State of São Paulo Official Gazette and a widely circulated newspaper (Valor Econômico) over three days, and through the Santander (Brasil), CVM and SEC web sites 30 days before the meeting date. The materials for the most recent meeting were posted on the company's web site and sent to the stock exchanges, CVM and SEC 30 days before the meeting date, as per current Brazilian legislation (CVM Instruction 481). Resolutions are taken by shareholders representing the absolute majority of ordinary shares. Each ordinary share corresponds to one vote. In 2010, the AGM was held at the Santander (Brasil) head office, as per local corporate law, on April 27, three days before the cut-off date set by the legislation. The 2011 AGM is also scheduled for April 27. At these annual meetings, shareholders approve the previous year's financial statements, both according to the Brazilian GAAP and to IFRS; the independent auditor and audit committee reports; dividends related to the previous fiscal year; the budget for compensation to be paid to executives and board members.

Transparency, Audit and Risk Management - Component Score: 7+ Scope, timing and accessibility of public disclosure

Key Analytical Issues

Ownership information is complete and updated, including all shareholders with participations above 5%. With no minority shareholder currently meeting this threshold, the shareholding chart shows only the three Santander group holding companies. The web site includes a table showing all subsidiaries and the respective ownership structures. Solid financial and operating disclosure. The annual financial statements, annual report, 20-F and quarterly statements are comprehensive, with several footnotes detailing subjects related to management, markets, and operating and financial performance. Santander (Brasil) also presents annual and quarterly financial statements according to IFRS and Brazilian accounting principals, which we view as a strength in terms of disclosure. Satisfactory timing of disclosure. Santander (Brasil) has published all its financial reports before the deadline since it became a listed company. The 2010 financial statement according to Brazilian GAAP was released on February 4, 2011, IFRS statements will be published on March 31. The 20-F form is due to be published in June, in line with SEC requirements. Information regarding extraordinary events has been detailed and timely, in our view. Investor Relations department formed mid-2009. Comprising 12 staff to help investors and analysts, the IR department is also responsible for preparing press releases, ordinary and extraordinary communications and organising several public presentations about the bank's performance during the course of the year. Most are fluent in English. All publishing of financial statements, and some extraordinary events, are followed by a public conference call. The team had a calendar of eight public presentations to analysts and investors in six cities in Brazil for 2010. Satisfactory web site disclosure. The Santander (Brasil) corporate governance structure, shareholding structure, statutory filings, financial statements, social responsibility policy, press releases and presentations are released in both Portuguese and English. Public reports have consistently been filed before the cut-off date. The web site includes a corporate governance section on which Santander (Brasil) discloses its policies, details of its administration structure, comprehensive professional histories for all board members and executive officers, the composition of committees, minutes, bylaws, code of ethics, calendar of corporate events for the year and presentations, among others. Financial statements available date from 2004. However, we believe a chart setting out the governance structure of Santander (Brasil) better detailing the committees subordinated to the board and management would facilitate the understanding of this structure. Social and environmental concern. Santander (Brasil) is currently implementing the environmental and social risk management system that had been in place at Banco Real for several years. Under this system, corporate borrowers are screened for environmental and social concerns, such as contaminated land, deforestation, labour violations and other major environmental and social issues for which there are potential penalties. A specialised team of biologists and geologists monitors customers' environmental practices, and a team of financial analysts studies the likelihood of damage that unfavourable environmental conditions could cause to its customers' financial position and collateral, among others. Monitoring focuses on preserving capital and reputation in the market. Santander (Brasil) intends to expand these screening practices, including training in credit and commercial areas. The bank also directs a portion of its resources annually to social programmes to help develop and enrich the communities in which it operates, but there is no detailed information about these contributions in the web site.

The audit process

Key Analytical Issues

Audit committee in place since 2004: The central bank requires financial institutions above a certain size, as detailed below, to have an audit committee. Up to March 2007, the Santander (Brasil) audit committee composition was the usual for non-listed companies, having some executives as members. The current audit committee comprises four independent members, each with a 1-year mandate, elected by the board of directors. The head of this committee is a professional with significant experience in auditing corporates (Arthur Andersen and KPMG) and banks (Santander and BBVA). Of the three other members, two are former central bank executives and the third is one of the board's independent directors with strong Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score Page- 5 -

Key Analytical Issues

audit, finance and corporate governance knowledge. On average, the audit committee meets twice a week. Only the head of this committee has been working full time at Santander (Brasil), as she sits in on several committees, e.g. product development, ombudsman, compliance, Basel and various executive committees. Reputable external auditor. Deloitte Touche Tohmatsu (Deloitte) has been the independent auditor since 2002, which is also responsible for the audit of the parent company in Spain. While there is no expectation that this independent auditor will be changed in the near future, the partner and managers are replaced at least every five years, as per Brazilian CMV and central bank regulations. Santander is entitled to scrutinise candidates and seek substitutions where it deems necessary. Non-audit services have not been provided by Deloitte to Santander. Brazilian legislation currently allows consulting services by the auditor up to 5% of the annual cost of the audit service provided. In 2009, fees for services provided by Deloitte to Santander were abnormally high, but explained by it auditing the financial statements for the previous three years for Banco Real, Santander and "pro forma" consolidation ahead of the October IPO. Santander (Brasil) financial statements are audited semi-annually while the other two quarterly statements (as of March and September) are only reviewed by the independent external auditors. Deloitte is responsible for auditing the financial statements both under Brazilian accounting principles and IFRS, in addition to effectiveness of internal controls regarding financial reporting, based on criteria established by COSO (Committee of Sponsoring Organizations of the Treadway Commission). Opinions from Deloitte are unqualified. Internal audit. This department, employing around 120 staff, audits all the bank's branches and general processes. The current head of internal audit, a graduate of business administration in Madrid, has been responsible for internal audits since 2005, and has been with the Santander group since 1996. He reports directly to both the parent company's audit department and the local board of directors and audit committee. We view this arrangement as effective in terms of independence of the internal audit function from Santander (Brasil) management and also helpful in terms of sharing expertise. The board receives detailed monthly reports from internal audit, and has formal meetings with the audit committee every quarter. New internal rules related to any financial issue also have to be ratified by internal audit. Both the internal and independent auditors are responsible for monitoring internal control systems, operational risk management and compliance procedures. Audit committee: in accordance with central bank regulations, Brazilian financial institutions with an adjusted net worth above BRL1 bln (c.USD0.5 bln) or that hold third-party assets plus deposits in excess of BRL5 bln are required to have an audit committee composed of at least three members, independent of management, with a maximum mandate of five years. Bovespa does not currently require the formation of an audit committee, but does require that at least one of any audit committee member has significant accounting and audit experience. For listed companies, the audit committee members cannot be executives or employees of the company, bank or affiliate; from its independent audit company; or a member of the fiscal council. The audit committee's main functions are: to assess the effectiveness of the internal and independent audits; to recommend the replacement of independent auditors; to review, prior to publication, semi-annual financial statements, including footnotes, management reports and the independent auditor's opinion; to evaluate fulfilment by management of the recommendations made by the internal and independent auditors; set out and disclose procedures to receive and treat information on the non-fulfilment of the legal and normative provisions applicable to Santander (Brasil), in addition to internal codes and regulations; to meet at least quarterly with the executive team, and the internal and independent auditors to verify implementation of recommendations; and also to advise on how to correct and improve the policies. Fiscal Council: Santander (Brasil) does not have a fiscal council in place. This is an optional independent corporate body appointed by shareholders, whose main tasks would be: to oversee management development; give its opinion on the financial statements before they are published; and provide its opinion on items to be discussed at shareholders' meetings, among other topics. Internal audit and control adopt the guidance and criteria of enterprise risk management at international entities such as COSO, COBIT (Control Objectives for Information and Related Technology) and PCAOB (Public Company Accounting Oversight Board). Each complies with central bank regulations, the principles recommended by the Basel Accord, Public Company Accounting Oversight Board (PCAOB) and Section 404 of the Sarbanes-Oxley Act.

Enterprise risk management

Key Analytical Issues

Sound risk management. The parent company sets the risk management policy for the entire group. Some of the risk management staff transferred from Santander (Spain), including the divisional head, in order to ensure a consistent global approach. The purpose of the team is to effectively identify, measure, mitigate, monitor and report back on credit, market, liquidity and operational risks to the board and executive officers. Committees headed by senior management oversee the financial, credit and market risk reports. Risk policies, procedures and limits are applicable to all units, businesses or portfolios susceptible to one or more of the above mentioned risks. This structure has been frequently updated to comply with requirements from Santander (Spain), Brazil's central bank, CVM, SEC and Sarbanes-Oxley Act, and is also critical for the implementation of the Basel II Accord. Internal control and compliance committees. The members of the compliance and operational risk committees are executives, and one or two also serve as board members. Their function is to manage internal control processes and legal Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score Page- 6 -

Key Analytical Issues

compliance activities; and anti-money laundering and terrorism financing processes. Fifty employees currently work in the internal control and compliance areas, in addition to staff based in several departments, in charge of disseminating the rules related to this area to the other employees and checking compliance. The internal control systems also follow the requirements of Sarbanes-Oxley. Strategic decisions are influenced by risk management considerations. Risk management control is monitored daily and reported to the integrated risk control department, treasury, executive officers and capital allocation committee. All deals factor in the information provided daily by risk management control. The board members receive weekly risk management reports. The asset-liability management strategy is defined by the asset & liability management committee (ALCO), which operates under guidelines and procedures set by Santander (Spain) and the central bank, including limits for positioning in different areas of the Brazilian financial market. The ALCO meets every two weeks to set the funding strategy, structural balance sheet interest rate positions, capital and risk-weighted asset management. Close monitoring of market risks. The Santander (Brasil) board together with the risk committees are responsible for establishing the policies, procedures and limits in terms of market risk, including which businesses to enter and maintain. They also monitor overall performance in terms of risks assumed. Together with the local and global ALCOs, each market risk unit measures and monitors individual market and liquidity risks, and provides figures to these committees. In addition to the daily internal communication of the bank's risk limits to the executive officers and relevant departments, balances are also monitored by the central bank. Operational risks. The executive operational risk committee, which is an independent senior committee with decisionmaking autonomy, defines the strategies and guidelines for management and control of operational, technological and business continuity risks. Supporting information for this committee are two departments to disseminate the cultural, policies, methodologies and tools, including information security, fraud prevention and investigation, operational and technological risk management. Risk management procedures comprises the following: identification of risks related to Santander (Brasil) activities by business, product and services evaluation. The executive committee evaluates whether all risks were measured and acceptable, measurement of losses (expected and unexpected), as is usual in the banking activity, through internally known methodologies, also in stressed scenarios, thus calculating VaR, Probability of Default, Exposure at Default and Loss Given Default on the bank's deals and operations, mitigation through internal control activities, use of additional guarantees and collateral, etc., monitoring of effectiveness of internal controls and correction of processes and their uses, reporting the disclosure of risk and control information to all levels of the organisation, market and regulatory entities.

Board Effectiveness, Strategic Process, and Incentives - Component Score: 7 Board composition

Key Analytical Issues

The nine members of the board of directors are elected at the AGM for two-year-terms; three are Santander (Spain) representatives, three are senior Santander (Brasil) executives and the remaining three are independent directors. In our opinion, the presence of the three Santander (Brasil) executives jeopardises the main purpose of the board, which is to supervise the management team's performance. Further, as the local subsidiary has to follow the parent company's strategy and the free float is relatively limited, in our view the system of checks and balances is compromised by the significant influence of the parent company on key decisions. The board committees' structure at Santander (Brasil) is small and only recently put in place. The audit committee, which is required by the central bank, was formed in March 2007 in its current format. The ombudsman function, also required by the central bank, has been operational for two years, while the appointment and compensation committee was only formed in March 2010. There are plans for the creation of other board committees to provide independent support information to the board. Audit committee composition. The audit committee at Santander (Brasil) comprises four members, all elected by the board of directors and subject to central bank approval. Of its members, one is an independent board member who is a very experienced audit and finance professional. The other three members are highly experienced in accounting, audit and banking activities. Ombudsman department in place. Brazil's central bank requires that financial institutions whose clients are individuals or small companies must have an ombudsman department that works as a communication channel between these institutions and clients, to receive and give proper consideration to complaints from these clients that could not be resolved by their relationship managers. This department is required to send semi-annual quantitative and qualitative performance reports to internal audit, the audit committee, board of directors, executive officers and the central bank. Composition of the appointment and compensation committee. Created some months ago, this committee is coordinated by the board chairman and has other two members: an independent board member and a human resources specialist, who is currently the manager of Spencer Stuart. Its primary objectives are: to identify potential candidates for the board of Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score Page- 7 -

Key Analytical Issues

directors and position of CEO; to manage succession plans; executives assessments; and remuneration policy. Management team structure. The management team at Santander (Brasil) currently comprises 60 executives, including the CEO, two senior vice-presidents and nine vice-presidents, each with a two-year mandate, with no cap on number of terms served, subject to performance. These 12 senior managers meet at least once a week in the executive committee, or EXCO, to discuss the performance of Santander (Brasil), issues related to capital allocation, human resources, strategy, organic growth in progress and special deals, among other topics. In order to provide adequate information for the EXCO meetings, it counts on the support of 15 committees spanning various areas of the group in Brazil, such as compliance, ALCO, sustainability, technology, wholesale and retail deals, legal, products and risk management.

Board effectiveness

Key Analytical Issues

The current board of directors recently constituted. The present board structure was constituted following the merger of Banco Real and the IPO, i.e. very recently. We believe we will be able to better assess board efficiency in terms of having three sitting executives in the coming years. Indeed, we will undertake an annual assessment to ensure the complementarities of the competences of the members. Board decisions are taken on a consensus basis, but in the event of a tie, the chairman has a casting vote. Materials for meetings are usually distributed five days in advance, but in urgent cases, can be sent out just two days before. Board role. To: set corporate strategy guidelines; elect and dismiss executive officers; evaluate the CEO's performance; review business plans and policies; call shareholder meetings whenever it deems convenient; contract or dismiss independent auditors; approve deals that exceed the executive credit committee authority (high credit limits, sale of relevant assets); decide on dividend payments, capital increases, associations, mergers and acquisitions; set budgets and agree financial statements presented by the executive officer team; decide on apportionment of executive officer compensation set at the shareholders meeting and establish bonuses for board members and executive officers; and plan the succession of the main executives. Board meeting frequency is satisfactory. According to the Santander (Brasil) bylaws, quarterly ordinary board meetings should be held, and beyond this as often as necessary. Forty board meetings were convened in 2009, but this was an atypical year due to several, but very relevant, events such as the general reorganisation of the group in Brazil, the merger and integration of Banco Real and subsidiaries and the IPO, among others. Eleven board meetings were held in 2010, a figure we consider acceptable. Written notice of an extraordinary meeting has to be given at least five days in advance, unless a majority of board members set a shorter time frame, but no less than two days. At least one of the three representatives of the parent company will attend every board meetings. Detailed minutes of all board meetings are available on the Santander (Brasil), CVM and SEC web sites. Access to information. The board members must make every effort to ensure they are abreast of Brazilian financial legislation and all matters relevant to the bank's interests. The non-executive board members may participate in some executive officer committees for the purpose of evaluating performances and gaining details of operations. As the board of directors is the highest authority in Santander (Brasil), all relevant deals are clearly detailed to its members. However, presently, only the audit committee reports information directly to the board, something we view as a weakness. Succession process. The Santander (Brasil) policy is to always have an alternative for the main executive positions in case any of the relevant individuals leave the company. The same is also true of the board positions.

Strategic planning process

Key Analytical Issues

Planning process. Santander (Brasil) has a five-year growth strategy. Most of the divisions follow a two-year planning process. The bulk of the IPO proceeds will fund the 2010-13 organic growth plan, which includes the opening of 600 new branches and a significant increase in lending volumes. Santander (Brasil) saw its capital position improve after the IPO in 2009. In December 2010, its capital adequacy ratio was 22.1%, significantly above the minimum required by Brazil's central bank (11%) and Basel accord (8%), supporting the growth plans and we believe ruling out the need for any additional capital at this stage. Santander (Brasil) is not reliant on its parent for funding. In line with the Santander group global funding policy, Santander (Brasil) funds its operations independently of any other group entity. Its main source of funding is customer deposits, as is the case with other banks operating in Brazil. These deposits, combined with its capital, must cover liquidity requirements. Management, helped by the risk control function, assesses funding requirements and the nature of loans and financing approvals. Asset and liability management limits are determined by the ALCO, which in turn operates under guidelines and procedures set by the parent company.

Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score

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Key Analytical Issues

Reasonable external communication. A specific section on the Santander (Brasil) web site details the bank's mission, vision and strategy. Despite satisfactory disclosure of financial statements according to both IFRS and Brazilian GAAP, we view the lack of guidance as a weakness, e.g. expected loan volume growth, product development, service revenues, insurance premiums, operating expenses, profit margins, etc. Santander (Brasil) has a well known economic team. The Treasury team meets every morning to discuss the previous day's performance, forecasts for the current day and events in the domestic and international economies. Its chief economist, who closely supports the Treasury activities, has a strong reputation in the Brazilian financial market.

Board and executive compensation

Key Analytical Issues

Shareholders approve the ceiling on compensation (approx. USD137 mln for 2010) to be paid to the board members (USD2 mln) and executive officers (USD135 mln) at the AGM. Board committee remuneration is established by the board of directors. All board members receive fixed monthly salaries, but the three independent members are also entitled to various benefits, such as health and life insurance, where the six other board members already have these benefits as Santander (Spain) employees. Long-term compensation plans. In an effort to garner executives' commitment long term, Santander (Brasil) has two long-term compensation plans linked to the price of its units. Only executive officers are eligible for these plans. Board members are eligible only if they are also officers. Therefore, executive compensation is part cash (fixed and variable) and part units in Santander (Brasil). The variable income for the senior executives can reach 60% of their annual compensation. Pension fund for all employees. In terms of benefits, all employees of Santander (Brasil) can participate in HolandaPrevi, the group pension scheme, inherited from Banco Real. Contributions equate to 2% of an employee's salary up to a cap (approx. USD2,000 p.a.), and that member can also voluntarily contribute another 2%. Greater compensation disclosure determined by the CVM. Under a new CVM rule, listed companies are now required disclose the lowest, highest and average remuneration paid to executive officers and board members. However, Santander (Brasil), together with other listed companies, has not disclosed this information, based on an injunction obtained by IBEF-RJ on March 2, 2010, that, according to Santander's legal department, supersedes the CVM requirement.

Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score

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GAMMA Scores


company governance, accountability, management metrics, and analysis (GAMMA) score reflects the opinion of Standard & Poor's Equity Research Services GAMMA department on the relative strength of a company's

corporate governance practices as an investor protection against potential governance-related losses or failure to create value. Individual company governance practices and policies are measured against Standard & Poor's corporate governance criteria, which are based on a synthesis of international codes, governance best practices and guidelines of good governance practice. Companies with the same score have, in the opinion of Standard & Poor's, similar company specific governance processes and practices overall, irrespective of the country of domicile. The scores do not address specific legal, regulatory and market environments, and the extent to which these support or hinder governance at the company level, a factor which may affect the overall assessment of the governance risks associated with an individual company (see below `Country Factors').

A GAMMA Score is articulated on a scale of GAMMA-1 (lowest) to GAMMA-10 (highest).

GAMMA-9 and GAMMA-10 -- a company that, in Standard & Poor's opinion, has very strong corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor's opinion, few weaknesses in any of the major areas of governance analysis. GAMMA-7 and GAMMA-8+ -- a company that, in Standard & Poor's opinion, has strong corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor's opinion, some weaknesses in certain of the major areas of governance analysis. GAMMA-5 and GAMMA-6+ -- a company that, in Standard & Poor's opinion, has moderate corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor's opinion, weaknesses in several of the major areas of governance analysis. GAMMA-3 and GAMMA-4+ -- a company that, in Standard & Poor's opinion, has weak corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor's opinion, significant weaknesses in a number of the major areas of governance analysis. GAMMA-1 and GAMMA-2+ -- a company that, in Standard & Poor's opinion, has very weak corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor's opinion, significant weaknesses in most of the major areas of analysis.

Important Note The opinions expressed are the independent opinions of S&P's Equity Research Services GAMMA department and do not reflect the opinions of other areas of Standard & Poor's. Standard & Poor's GAMMA scores and other analytic services are performed as entirely separate activities in order to preserve the independence and objectivity of each analytic process. A GAMMA score is based on current information provided to Standard & Poor's by the company, its officers and any other sources Standard & Poor's considers reliable. A GAMMA is neither an audit nor a forensic investigation of governance practices. Standard & Poor's may rely on audited information and other information provided by the company for the purpose of the governance analysis. A GAMMA score is neither a credit rating nor a recommendation to purchase, sell or hold any interest in a company, as it does not comment on market price or suitability for a particular investor. Scores may also be changed, suspended or withdrawn as a result of changes in, or unavailability of such information.


A `GovernanceWatch' designation may be used to highlight the fact that identifiable governance events and short-term trends have caused a GAMMA Score to be placed on review. GovernanceWatch does not mean that a change to the score is inevitable. GovernanceWatch is not intended to include all the GAMMA scores under review, and changes to the GAMMA Score may occur without the score having first appeared on GovernanceWatch.

Country Factors

Although Standard & Poor's publishes country governance infrastructure analyses from time to time, it is important to note that Standard & Poor's does not currently score individual countries. However, consideration of a country's legal, regulatory and market environment is an important element in the overall analysis of the risks associated with the governance practices of an individual company. For example two companies with the same Company Scores, but domiciled in countries with contrasting legal, regulatory and market standards, present different risk profiles should their governance practices deteriorate i.e. in the event of deterioration in a specific company's governance standards, investors and stakeholders are likely to receive better protection in a country with stronger and better enforced laws and regulations. However, in Standard & Poor's opinion, companies with high GAMMA scores have less governance related risk than companies with low scores, irrespective of the country of domicile. For a full explanation of Standard & Poor's GAMMA Scoring methodology please refer to the latest edition of "Criteria: GAMMA Scores".

Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2010 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. GAMMA scores are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities.

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