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SAFRA GROUP BRAZIL Banco Safra S.A. Banco J. Safra S.A. Safra Leasing S.A. Arrendamento Mercantil J. Safra Asset Management Ltda. J. Safra Corretora de Valores e Câmbio Ltda. Safra Seguros Gerais S.A. Safra Vida e Previdência S.A. JS Administração de Recursos S.A. Banco Safra (Cayman Islands) Limited Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 1 “If you choose to sail upon the seas of banking, build your bank as you would your boat, with the strength to sail safely through any storm.” JACOB SAFRA, founder Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 2 Contents MESSAGE FROM THE CEO page 4 GLOBAL ECONOMY page 14 BRAZILIAN ECONOMY page 34 SAFRA GROUP - BRAZIL page 48 BANCO SAFRA S.A. & SAFRA CONSOLIDATED – FINANCIAL STATEMENTS page 56 BRANCHES IN BRAZIL page 124 ADMINISTRATION BOARD & BOARD OF DIRECTORS page 127 Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 3 KEY FINANCIAL INDICATORS Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 4 MESSAGE FROM THE CEO n 2012 Brazil experienced another year characterized by global turbulence and low growth of the world economy. In addition to the external problems, domestic growth was also frustratingly low owing to crop losses, adverse weather and falling investment in the infrastructure and manufacturing sectors. I On the other hand, it should be stressed that Brazil took important steps from the perspective of a broader time horizon. The government began implementing a reform agenda that is designed to enhance the competitiveness of the Brazilian economy and will have a significant impact in the medium to long term. First of all, a start was made on tax reform in the shape of payroll tax exemption for several key segments of the industrial and service sectors. Another point that deserves emphasis was the announcement of an ambitious plan to auction concessions to private investors in the main infrastructure segments, from ports and airports to highways and railroads. In the coming years this initiative will contribute strongly to Brazil’s economic growth, improve the quality of services provided, and reduce costs for companies and consumers. In 2012 Brazil was again one of the top five recipients of foreign direct investment. FDI totaled US$65.3 billion in the year, confirming that Brazil is one of the most promising countries in the long run. Moreover, despite a fall in the primary fiscal surplus in proportion to GDP, Brazil’s public-sector net debt continued to decline while public finance deteriorated in the developed countries. In this context of low economic growth, decelerating credit and rising loan delinquency rates, the results achieved by Banco Safra in 2012 were consistent with its history and conservative strategy. Year-end liquidity totaled R$14.8 billion. This was equivalent to twice the bank’s equity and in line with the high ratio maintained for the past several years. Total assets reached R$111.5 billion and stockholders’ equity rose to R$7.2 billion. Net income in the year amounted to R$1.3 billion, for a return on equity in the range of 20%. Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 5 Another indicator of the bank’s strong performance was the 36.8% efficiency ratio (the lower the better), down from 50.0% in the previous year and above the industry average, expressing prudent management and the efficacy of our rigorous internal controls. The BIS capital adequacy ratio was 14%, suitably above the 11% minimum set by the Central Bank of Brazil, with Tier I accounting for 9.9%. Here it is worth recalling that the Brazilian financial system begins implementing Basel III in 2013, and that Safra already complies comfortably with the capital adequacy ratios that will be required. We expect 2013 to be a year of transition to a new pattern of growth in Brazil, emphasizing competitiveness and productivity gains via modernization of the tax system, steady improvements to the logistical infrastructure, and growing investment by industry, which will benefit from historically low real interest rates and a more competitive exchange rate, factors corroborated by better prospects for the US and Chinese economies as well as stabilization of the European crisis. To this favorable outlook we must not forget to add the growing importance of investment associated with the 2014 FIFA World Cup and the 2016 Olympics. Rossano Maranhão Chief Executive Officer Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 6 THE BRAZIL WE WANT Antônio Delfim Netto I We all hope this will be the year Brazil wants. Perhaps we can simplify and say we would like to continue to build a social and economic organization compatible with: 1. Complete freedom of enterprise for citizens to find efficient ways to fulfill their material needs; 2. Full use of the available production factors and continuous growth in the productivity of human capital through education, healthcare and innovation incentives for physical capital, keeping production and the rate of expansion of production at the optimal level without inflationary pressures or balance-of-payments deficits; 3. An increase in equality of opportunity for all citizens, enabling what is produced to be more equitably distributed. Today and for the foreseeable future this organization requires a strong, constitutionally controlled state capable of regulating the functioning of the markets and producing public goods efficiently; justice for all; internal and external security; and a currency with a stable value. In other words, the state is responsible for: 1. Regulating the conditions necessary for the full use of markets and allowing markets freely to establish the incentives and relative prices that lead to rising productive efficiency; 2. Organizing itself to produce public goods efficiently, as without these the markets cannot function adequately. II It is hard to ignore the stagnation of per capita GDP in 2012. While this performance can easily be transformed into a “synthesis” of the failures of President Dilma Rousseff’s social and economic policies, this would evidently be a mistake. The year was distinguished by efforts to confront old and new obstacles to growth and by a significant rise in expenditure on education and healthcare, which is actually investment to 6 enhance the future quality of life and the productivity of Brazil’s workforce. This “activism” has been criticized but is a move in the right direction. What is missing is a more harmonious relationship and interface with the private sector. What to expect from 2013? The year’s promises are not written in the stars, much less in the models of our doomsayers. It will be whatever we are wise and capable enough of making it, government and private enterprise working together within the limits of their respective competencies as established in the Constitution. Neither can do it alone. The job of government is to formulate objectives while resigning itself to its low capacity to execute physically and accept that its performance depends on dispensing amicable treatment to private enterprise, transferring investment in infrastructure to the private sector via intelligent auctions and controlling it by means of regulatory agencies that stimulate competition, are stable, and are shielded against party politics. The transfer of “natural” monopolies to the private sector is a highly complex political and technical matter, and it is contaminated by the fact that if such monopolies are uncontrolled they are even more cruel in private hands. It must be acknowledged that when labor unions in these sectors combat privatization they should not be seen as doing so on technical, let alone ideological, grounds. In actuality they are defending the “interests” of those who know they will lose the comfort and benefits received at the expense of consumers who have no alternative. Within the existing institutional context the private sector should be supported by universal stimulus in the shape of relative prices constructed in competitive markets. Subsidies should be clearly earmarked in the budget and reserved for those projects that unquestionably assure a higher social rate of return than the market rate, as is certainly the case with some infrastructure projects. There is no social or economic justification for “picking winners” and subsidizing them, or for creating gigantic oligopsonies and private oligopolies to the detriment of consumers’ interests, much less for strongly protecting industries that produce basic inputs without taking into account the effects of such protection on the prices of the goods that use them. Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 7 These concerns appear to underlie the government’s current policy of activism. It is an illusion to believe that the markets left to themselves will self-organize and produce an efficient equilibrium. It is an even greater illusion to imagine that “economic science” can produce a universal recipe for obtaining such a balance. When God organized the world, He was tough on “economists”, ordering them to study Man, a creature who thinks, resists, imitates, learns, complains, innovates, transmits his experience – and ultimately votes! From moment to moment Man is richer and different, thanks to the accumulation of information and social immersion, all of which makes economic policy an increasingly sophisticated game. The implications of this fact for economics are fundamental: There never is equilibrium. The future will never be the same as the past. Each observation in a time series is not a sample taken at random from an “urn” containing all its possible states. There is nothing like the stable observable universe of the physical world in which for all practical purposes the present reproduces the past and the past anticipates the future, in what is known as an “ergodic” process. Because economic agents incorporate information from the past and are always learning in the present, the future cannot be a repetition of either. Theirs is a “nonergodic” process. These pedestrian observations deny all hope that there can be such a thing as a universal economic theory, independent of history and geography, that could allow us to put social and economic policy “on automatic pilot”, such as the famous “three pillars” to which some of our most notable high priests are attached with almost religious passion. On the other hand, voluntarism based on ignoring the huge amount of knowledge accumulated in the last 250 years, as well as historical experience, cannot sustain a long successful flight. TFP depends on the business “environment” (a more equitable tax burden, stable regulation, encouragement of competition etc.) and on the government’s visible and clear demonstration of its desire to maintain an amicable relationship with the private sector. It is this co-option that kindles investors’ “animal spirits”, stimulates investment in infrastructure, facilitates credit, and offers the prospect of long-term growth. Its improvement, even in the short run, is a significant driver of the growth rate. The workforce expansion problem is both quantitative (the level of employment is high) and qualitative (talent is scarce and takes time to mature). The solution is to stimulate immigration by the qualified professionals available worldwide, accelerate training and participation by working-age professionals, continue to implement ways of relieving the tax burden on wages, and develop institutions that permit free negotiation within companies under union supervision and without violating workers’ constitutional rights. Full capacity utilization requires the redirecting of demand to domestically manufactured consumer goods and capital goods, correcting tax distortions, reducing taxation of exports, and maintaining a relatively devalued exchange rate without sharp fluctuations. In light of the Brazilian economy’s current supply situation, there are grounds to believe growth of about 3.0% is possible in 2013. What about demand? What are the likely sources of demand to drive growth? Aggregate demand can be broken down into four components: 1. Household consumption; 2. Government consumption; 3. Net exports (the difference between exports and imports in the national accounts); 4. Gross fixed capital formation (investment in capital goods and infrastructure). III Never has a relationship of absolute trust between government and private enterprise been as necessary as it is now. Growth in 2013 will result from it. If we look at GDP from a supply perspective, the following depend on it: 1. Total factor productivity (TFP); 2. Expansion of the workforce and improvement in the quality of the manpower employed; 3. Full utilization of installed production capacity. We can expect a certain amount of growth in the first component, even with less expansion in the level of credit, provided the present fiscal policy with its redistributive effects remains in place. As for the second, it would be best to expect only its maintenance or a slight reduction in favor of government investment. The third (net exports) was strongly negative until recently and now appears to be moving to a slightly negative level, perhaps -0.5% of GDP. This leaves us only with alternative four to increase aggregate demand in 2013: strong growth in the rate of gross fixed capital formation by the private sector and government (investment in plant and infrastructure) in proportion to GDP. This rate slowed dramatically from 4.7% in 2011 to less than 4.0% in 2012. 7 Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 8 The 2013 growth rate is entirely in the hands of government, which must recognize that over the past 30 years it has lost the capacity to plan and execute investment. It is time, therefore, to accelerate the concession program so as to transfer investment in infrastructure to the private sector via competent auctions and leverage the capacity created by the maturing of investment for the large-scale international events to be hosted by Brazil. IV Inflation is a kind of “radiator” that dissipates the heat produced by friction in the markets. The causes of this friction can be exemplified non-exhaustively as follows: 1. The inertia naturally caused by the inevitable time taken for demand to adjust to supply in specific sectors (supply shocks, changes in habits); 2. Deficient infrastructure; 3. Institutional and political obstacles that delay adjustments to the supply of basic inputs; 4. Exaggerations committed by the powers that be when they lose all sense and surrender to voluntarism, ignoring the physical constraints imposed by the national accounts; 5. The government’s attempts to protect its revenue by pegging taxes, prices, tariffs or wages automatically to inflation, thereby creating more inflation; 6. Stimulating credit when there are no more production factors available in the right proportion and a rising currentaccount deficit does not permit imports of them; 7. Real wage increases surpassing the physical productivity of labor etc. Thus the inflation rate is a doubtful indicator of aggregate demand. It is simultaneously a cause and effect of income redistribution. Ultimately it is an inverted image of the level of productivity in the economy, a level which rises in proportion to the reduction in the very same “friction” that produces inflation. Reducing Brazilian inflation, which has remained in the range of about 5.2% per year for eight years and which tends to stick to the upper limit of the target range, as it does in every country that practices inflation targeting, is not and cannot be a task of the Central Bank alone. It is a mission for the entire government, involving an increase in efficiency grounded in clearly focused microeconomic reforms that require the support of society. For example, a well-organized labor market that respects workers’ constitutional rights, allows free collective bargaining within each company (not industrywide) under the aegis of a works committee comprising elected representatives of the 8 employees and ignores the legal effects accumulated by corporatism over the years is a powerful instrument for raising labor “productivity” and simultaneously reducing the friction that fuels inflationary pressures. On the other hand, when there are mismatches between the needs of the economy and the supply of skilled labor it is extremely costly to correct for these mismatches by reducing aggregate demand via monetary policy. What is needed are structural measures that increase the supply and quality of labor, especially rapid vocational training and immigration. Brazil’s inflation problem is partly a result of the government’s own behavior: 1. The government’s social policy encourages generous minimum wage hikes that exceed the rise in the average productivity of labor (because they are based on total GDP rather than per capita GDP, with a multiplier for past inflation) and other forms of transfer at the expense of public investment. This reduces the efficiency of the economy although at the same time it contributes to social inclusion, which of course is a welcome and necessary goal. 2. The government’s economic policy tries to combat such inflationary effects with monetary measures while failing to tackle structural and institutional problems with rigor. This is a socially expensive effort that takes a long time to produce results. It gets more complicated when there is a generalized belief that economists have a “recipe” for easily controlling inflation. Suffice it to accept uncritically, as some do, that economic agents are rational optimizers and extend this belief to macroeconomic policy, constructing a “model” (an imaginary world) in which monetary tightening: 1. Makes the inflation rate “converge” to any “target” at the desired speed; 2. In the longer run makes the economy grow in line with “potential GDP”; 3. Brings down unemployment to a level compatible with the inflation target. Nothing complicated there! Forget about agricultural supply shocks, tax increases, changes in the global economic situation, structural imbalances in the labor market, mismatches between social and economic policy, and so on. Inflation above target? Just hike interest rates, even if economic growth is weak! Unfortunately the key findings of a competent paper by three economists at IPEA, a respected think tank, show a more complicated picture: Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 9 1. A single result remains robust in the various econometric experiments performed: Inflation expectations and past inflation play a relevant part in the dynamics of the inflation process. The significance of expectations appears to have increased in the recent past. 2. The short-term impact of unemployment on inflation depends on the set of representative variables used as proxies. In most cases it was negative, as expected. The longterm impact is hard to measure but appears to be negligible. In any event, the real effect of the unemployment rate on inflation was found to be close to zero in the short and long run. 3. Brazilian inflation appears to have little to do with a tradeoff with unemployment and interest rates as claimed by most “macromodels” for the Brazilian economy. V The inflation we are experiencing is grave and has complex structural causes that must be addressed without destroying the civilizatory process of building social inclusion, which has combined expansion of credit with rising real incomes, while reducing income inequality via clearly targeted public policies. First of all, this means reducing the velocity of the redistributive impulse and paying special attention to the organization of the labor market, especially that part of pay policy directly controlled by the government. Secondly, it is necessary to accept that we have suffered a major supply shock caused by the fall in agricultural production, which will probably be corrected for by a rise in production in the 2012-13 crop year. Thirdly, export prices will exert less upside pressure on domestic prices, not only because they appear to have embarked on a calmer period but because local currency depreciation will be weaker. But if today’s consensual diagnosis is that inflation is not caused by excessive demand (and how could it be with GDP growing only 2.5%?) but above all by supply “bottlenecks”, it remains to ask whether a central-bank interest rate of 4%-5% in real terms stimulates or reduces aggregate supply. As for aggregate demand, the effect on consumption is minimal because the real interest rates paid by consumers are very high. The effect on public spending is to transfer income to “rent seekers” to the detriment of workers because of the rising cost of the public debt. It will certainly reduce investment and exert upside pressure on the exchange rate. Ultimately the effect will probably be slightly negative, thus failing to sustain even today’s 2.5% growth, with negligible effects on the inflation rate. So what about the supply side? Here the effect seems clearer. Unblocking supply requires: 1. Increasing public investment and accelerating concession auctions; 2. Stimulating private investment, which requires lower real interest rates and the prospect of a higher return on capital via future demand growth. None of this will be achieved by raising real interest rates. Here too the effect will be ultimately negative. Maybe, just maybe, there will be some effect on the inflation “expectations” formulated by the financial sector. VI Current pessimism about economic policy is evidently exaggerated. This criticism throws overboard all the social progress Brazil is making in the building of a more educated middle class that consequently demands higher quality in public services, and without which it will be impossible to consolidate democratic institutions that contribute to a gradual increase in equality of opportunity. Worse still, it pretends to ignore important advances: approval of a pensions system for civil servants; successful replacement of the regime whereby passbook savings were guaranteed 6% real interest; the effort to reduce the cost of basic inputs (electricity and ports); the learning curve in holding auctions for concessions to infrastructure projects designed to attract private investment; controlling civil service pay rises for three years; the orderly reduction in real interest rates; payroll tax exemption for exporters, which in conjunction with relative local currency depreciation is starting to stimulate the export of manufactured goods; localized cuts in the tax burden; small enhancements of the taxation system etc. And last but not least, a slow but steady improvement in the relationship between the public and private sectors, which should lead business ultimately to acknowledge that economic policy is amicable and aims to enhance competitiveness and productivity. The claim that the famous three pillars of canonical economic policy have been abandoned is not correct. From the fiscal standpoint it is necessary to recognize the pointlessness of “creative accounting”, a venial sin expiated by severe criticism from friends and enemies. Here’s the rub: Does 0.9% GDP growth not justify a countercyclical policy? Do a nominal deficit corresponding to 2.5% of GDP and a 36% net debt-to-GDP ratio amount to abandoning fiscal responsibility? 9 Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 10 From the monetary standpoint, is 6% inflation driven by an agricultural supply shock that will probably weaken in under six months a sign that the Central Bank has abandoned its 4.5% target? Or that it will tend to lose its “autonomy”? When Central Bank Governor Alexandre Tombini says he does not feel comfortable with the behavior of inflation, what does he mean save that he will do what it takes? As for the floating exchange rate, the discussion borders on the ridiculous if you listen to François Hollande, Mario Draghi and Shinzo Abe. Who still believes in an exchange rate “freely determined by the interplay of market forces” based on the “fundamentals”? VII To conclude on a note that is more realistic than optimistic, let me draw your attention to three significant facts: 1. The measure of social welfare proposed by philosophereconomist Amartya Sen, whereby real income growth is corrected by an indicator of income distribution (1-Gini coefficient), has steadily improved since 2003, as shown below: 2. A Datafolha poll of 2,653 people conducted on March 20-21, 2013, suggests a profound cognitive gap between the beneficiaries of the government’s social inclusion policy and the investment agents who must produce the growth in supply required to assure this inclusion. Unless this gap is closed, our society will be forced to leave behind its current state of grace and will face increasing difficulties due to the 10 impossibility of violating a physical law: You can distribute only what has already been produced! Ultimately what has kept Dilma Roussef’s approval ratings relatively high (65%) is her ability to meet the demand for goods and services generated by rising wages and income transfers, but this can only be done permanently by a positive response from the 7% who rated her administration poor or very poor. In other words, by the private investors who must increase supply. The poll discloses other aspects of a similar cognitive gap in readings of the economic situation. While the reports and newsletters put out by financial institutions suggest Brazil is on the verge of stagflation, 76% of Datafolha’s interviewees in the third week of March said this is a good or excellent country to live in, 85% expected the economic situation to improve or remain stable, 77% said the purchasing power of wages will improve or remain stable, and 64% said unemployment will fall or remain stable. Where the gap appears narrower is in Datafolha’s significant finding that only 49% expected inflation to remain stable or fall. Here the government undoubtedly faces a complicated problem, to which many economists believe they have a simple solution: “Raise the real interest rate and generate unemployment”. But as the authors of the poll point out: “The basis for society’s feeling of wellbeing is not confined to the prospect of social mobility, inclusion in the consumer market or access to social policies… but extends to the striking change in the average Brazilian’s sentiment of employability”. According to the survey 75% of those interviewed did not fear losing their jobs and 59% did not believe there was any likelihood they would find themselves unemployed. 3. One of the most extraordinary indicators of the immense progress achieved by Brazilian society thanks to the enhanced and improving focus of the social and economic policies that have been developed since the days of the Empire is the consequences of the terrible droughts that repeatedly descend upon the semi-arid zone of the Northeast region. Only those who are familiar with the Brazilian state’s century-old effort to surmount the effects of these droughts, who witnessed the phenomenon that gave rise to the failed attempt to evacuate the semi-arid zone via construction of the Transamazon Highway in the 1970s, and who saw the tragedies of the droughts in the 1980s with their inhuman “work fronts”, invasions of towns and looting of warehouses by starving mobs in search of food, can appraise the cumulative effects of the experimental policies that accelerated and significantly matured from 2003 on. As recently as 1999, on the brink of the present century, we still had not found the right mechanisms, as evidenced by the formation in that year of yet more “work fronts” involving more than 1 million people. Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:38 PM Page 11 Well, we are currently seeing a drought with the same characteristics and severity as in the 1970s and 1980s, and there are no seismic movements among the low-income population and small farmers. The hunger that once denied their humanity no longer exists. Thanks to markets that work well, to the welfare system introduced in the 1970s and to the improvements made to the Bolsa Família conditional cash transfer program, even the most deprived citizens of the semi-arid zone have the wherewithal to buy food. Moreover, they drink noncontaminated water thanks to a cistern program (over 500,000 have been built since 2003) and army control of supply via water trucks. Livestock still suffers because silage is technically rudimentary. So let us not ignore what has been achieved. Best of all, we must persuade ourselves that thanks to the progress won so far, its availability to the population of the area and its continuity through expanding research and technical assistance our semiarid zone is at last prepared to face future droughts as if they were a “normal” state of affairs. The great truth is that by trial and error we have slowly improved the quality of our institutions and succeeded in paying more attention to structural difficulties. Our main problem continues to be coordinating public management, given the loss of expertise in the past 30 years. It is self-evident that these three points mean much more than material progress. They show the unfolding of a civilizatory process. ANTÔNIO DELFIM NETTO Delfim graduated in economics from the School of Economics & Administration at the University of São Paulo (FEA/USP), where he has had a long academic career, having been Full Professor of Brazilian Economy & Economic Development Theory and subsequently Professor Emeritus. He is a former São Paulo State Secretary of Finance (1966-67), Minister of Finance (1967-74), Ambassador to France (1975-77), Minister of Agriculture (1979) and Minister of Planning (1979-85). During his tenure as finance minister, Brazil enjoyed an “economic miracle” and its economy grew faster than at any time in its history, averaging 9% per annum. As a result, Brazil rose from 48th to eighth position among the world’s economies by size of GDP. The 1973 growth rate of 14.4% remains the all-time record. He was elected to Congress in 1986 and re-elected for four more terms, the last of which began in 2003 and ended in 2007. He is the author of several books on Brazilian economic issues and writes weekly columns published by 70 newspapers and magazines in São Paulo and other states. 11 Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:39 PM Page 12 Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:39 PM Page 13 Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:39 PM Page 14 GLO BAL ECO NOMY Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:39 PM Page 15 Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:39 PM Page 16 1.1. ECONOMIC ENVIRONMENT IN 2012 AND OUTLOOK FOR 2013 Like previous years, 2012 began with widespread expectations that the global economy would succeed in leaving the financial crisis behind and grow at a faster pace. Once again, however, it was soon evident that the wounds inflicted by the 2008 crisis were still far from healing. The extent to which the 2012 performance of the global economy fell short of initial forecasts can be seen from Table 1 (based on IMF data). The European economy’s performance was the most disappointing. While weak growth in continental Europe mainly reflected doubts about the fiscal health of Italy and Spain, in the United Kingdom aggregate demand slumped in response to the tough austerity program and drastic budget cuts implemented by the Conservative-Liberal Democrat coalition. Once again it fell to the world’s central banks to try to stem the economic deterioration. In the eurozone the European Central Bank (ECB) mitigated systemic risk by pledging to do “whatever it takes” to preserve the integrity of the common currency. In the UK and US new rounds of asset buying by the Bank of England (BoE) and the Fed helped to shore up expectations. In Japan, which was still recovering from the earthquake and tsunami, a newly elected government advocated bolder monetary policy measures to revive the economy. Meanwhile, inflation in the developed countries, which at times had surpassed 3.0% in 2011, decelerated significantly and ended 2012 below 2.0%. The reversal was largely due to falling oil prices (Figure 1). Slower growth in the largest economies and dissipation of the uprisings in the Middle East contributed to a reduction in upside pressure on oil prices. Although no eurozone countries applied for financial aid, as had Greece, Ireland and Portugal in previous years, the region’s fiscal crisis continued to have negative effects on the economy and to cause concern on global financial markets. The ECB’s initiative of lending unlimited amounts of liquidity to local banks was immediately met by a positive response and contributed to a calmer start to the year. 16 Af-RelatIngles2012Parte01_RelatBco 7/23/13 12:44 PM Page 17 By mid-2012, however, tension had again built up on the periphery and many analysts saw no alternative for Italy and Spain but to request a financial rescue package. In the case of Spain the situation was more serious. Some provinces formally applied for aid to the central government and distressed commercial banks had to be recapitalized. In Greece, parliamentary elections also resulted in instability in the region. On the other side of the Atlantic, President Barack Obama’s re-election came as no surprise. Although unemployment remained at a historically high level, most Americans, especially in the lower income groups, continued to support the policies implemented during Obama’s first term. Reinvigorated by the election result, Obama began negotiating with the opposition on a deal to attenuate the effects of wideranging budget cuts set to enter into force in early 2013. After an intense process of talks an agreement was sealed between representatives of the Senate and House on the last day of 2012. The deal called for a higher income tax rate only for the wealthiest families, renewal of extended unemployment insurance for another year, and postponement for two months of a decision on what to do about the automatic budget cuts totaling almost $100 billion (known as the “sequester”). Global economic growth was extremely weak in 2012 owing to the political and economic uncertainty that afflicted most of the developed world. As can be seen from Table 2, fourth-quarter GDP growth in the seven most advanced industrial economies (G7) was one of the lowest in recent history. The outlook for 2013 is therefore one of low economic growth in the first half and the expectation of an improvement during the second half. In the eurozone, with the exception of few countries, the process of severely austere fiscal adjustment will continue to weigh against more vigorous economic dynamism, making the ambition of reducing public debt even more complicated and difficult to achieve. In the US, the expiration of several fiscal stimulus measures and the reduction in public spending will mean a slower start to the year in terms of economic growth, followed by a faster second half. In Japan there is considerable expectancy that the policy changes promised by the new government, especially currency devaluation and fiscal and monetary easing, will help the economy overcome yet another recession and the deflation that has now lasted many years. 17 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:32 AM Page 18 1.2. USA In late 2011 the US economy grew more than in any year since the start of the financial crisis. Fourth-quarter GDP growth was 4.1% in annualized terms (Table 3). The economy’s strong performance at the turn of the year led to a sharp rise in market expectations for growth in 2012, but in the ensuing quarters the pace of growth decelerated again. 18 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:32 AM Page 19 The pattern can be seen even more clearly in the labor market data. As shown by Figure 2, the three-month moving average of net job creation by the private sector reached a post-crisis high in February 2012, only to decelerate thereafter. The unemployment rate trended down throughout almost all of 2012, but this was largely to due to discouragement (growing numbers of people who stopped looking for work). In response to the US economy’s loss of momentum in the second half, the Fed announced its third asset-buying program (QE3) in September. Initially its purchases were limited to mortgage-backed securities guaranteed by the government (agency MBS). The Fed’s aim at that time was to support the housing market, which was then beginning to show signs of a more consistent recovery. The novelty was the lack of a time limit for the program, as well as its conditionality, in the sense that the Fed undertook to buy $40 million per month of commercial housing market debt risk until there was a substantial improvement in the labor market. At its last meeting of the year, the FOMC decided to extend QE3 to treasuries and raise the amount of open-ended purchases to $85 billion per month. But the main surprise that came out of the December meeting was the decision to keep the federal funds rate between zero and 0.25% until certain economic variables improved. The post-meeting statement said this exceptionally low range for the federal funds rate would be appropriate at least as long as the unemployment rate remained above 6.5% and inflation 1-2 years ahead was projected to be no more than 2.5%. 19 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:33 AM Page 20 20 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:33 AM Page 21 21 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:33 AM Page 22 This measure was yet another step toward monetary heterodoxy and demonstrated the FOMC’s strong dissatisfaction with the persistently slow pace of reduction in the unemployment rate. The Fed’s purchases of MBS did indeed prove very important as a means of revitalizing the housing market. As evidenced by Figure 3, housing prices rose significantly during the year, and the inventory of unsold houses also fell sharply. Lower inventory levels in turn drove a more vigorous resumption of homebuilding. Investment lost momentum in 2012. Corporate purchases of plant and equipment fell in 3Q12 for the first time since the end of the recession in 2009. The reluctance to invest was largely a reflection of increasing uncertainty about the fiscal outlook, as well as the delicate situation faced by Europe at that time. 22 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:33 AM Page 23 Political issues were important throughout the year. The main political event of 2012 was President Barack Obama’s re-election. He led the polls during the months that preceded the November election and defeated Republican candidate Mitt Romney on the day. However, while Obama won a new presidential term for the Democrats, the Republic opposition kept its majority in the House of Representatives, although the Democrats retained control of the Senate. The gap between the two parties widened during the year, particularly with regard to the best way to address the budget deficit. The parties agreed that something must be done to reduce the enormous deficit but proved unable to reach a consensus on the manner and speed of the necessary adjustment. The situation became even more complicated with the approach of the end of the year when a number of very restrictive fiscal measures were scheduled to take effect. Spending cuts and tax increases corresponding in aggregate to almost 4% of GDP would be triggered automatically on January 1 unless a law was passed to avert this “fiscal cliff”. In the small hours of January 1, 2013, after weeks of intense negotiation involving majority and minority leaders, Congress finally reached a deal, passing laws that avoided higher taxes for middle-class families, renewing extended unemployment insurance for another year and postponing for two months a decision on what to do about the budget sequester amounting to almost $100 billion. On the other hand, the deal allowed payroll tax to return to the original rate of 6.2%, from 4.2% previously. 23 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:33 AM Page 24 Attention will focus in 2013 on the behavior of the economy in response to the federal government’s fiscal adjustment, which will be considerably more strenuous than in previous years. If the projections announced by the Congressional Budget Office (CBO) are correct, this adjustment will be one of the largest seen since world war two, with a negative impact on GDP amounting to almost 2 pp. The US is better placed to tackle this situation than the other developed economies, since the Fed’s quantitative easing programs provide an important counterweight to this severe fiscal adjustment. Even if GDP growth is not particularly robust in 2013, the US economy will look like an oasis compared with the other G7 economies. 1.3. EUROZONE In the eurozone, 2012 began with the hope that the steps taken by the ECB at the end of the previous year would avert additional deterioration in the economy and especially in the banking sector. In December 2011 the ECB announced measures to offer banks additional liquidity as well as lowering rates by another 25 bps. The former measure entailed an innovation known as Long-Term Refinancing Operations (LTROs), comprising an unlimited amount of three-year loans to banks at 1% annual interest. Demand from commercial banks exceeded €1.0 trillion and the list of eligible securities accepted by the ECB as collateral was significantly expanded. The ECB’s initiative initially resulted in significantly reduced financial market stress. As can be seen from Figure 5, Spain’s ten-year sovereign yield fell to 4.8% in 1Q12, from 6.7% at end-2011, while Italy’s fell to 4.8%, from 7.0% in December 2011. 24 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:33 AM Page 25 By the middle of the first half, however, market concern regarding the sustainability of Spain’s public debt had rebounded strongly and the new Spanish government was obliged to announce additional austerity measures in an attempt to reassure investors that the sovereign could remain solvent. In the ensuing months Spain’s five-year credit default swap (CDS), considered a gauge of default risk, rose from 400 bps to over 600 bps (having been about 200 bps in 2010). At this stage of the crisis it was widely expected that Prime Minister Mariano Rajoy would have to apply formally for a financial rescue package from the European Financial Stability Facility (EFSF), following the example set in previous years by Greece, Ireland and Portugal. However, despite Spain’s severe difficulties the government did not request EFSF aid. The fragile situation in the Spanish banking system led the government to announce a major bank recapitalization program in June. Initial estimates pointed to a total capital requirement of up to €100 billion but the amount injected by December was slightly less than €40 billion. 25 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:33 AM Page 26 The decisive turning-point in the crisis that threatened the euro’s existence came in late July when ECB President Mario Draghi said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” From then on the Spanish CDS and the sovereign borrowing rates of the peripheral eurozone countries fell significantly and requests for aid became unnecessary (Figure 7). At the ECB’s September meeting Draghi announced a new program called Outright Monetary Transactions (OMT), designed to safeguard monetary policy transmission throughout the eurozone and prevent the markets from betting against the common currency’s survival. In practice the program involved the purchase of sovereign bonds via the EFSF (later renamed ESM) provided the country concerned agreed to certain conditions, such as spending cuts, tax hikes and structural reforms. The main political events were the French presidential election and two troubled parliamentary elections in Greece. The French election was won by Socialist Party candidate François Hollande in two closely contested rounds with Nicolas Sarkozy, the incumbent who was seeking re-election. President Sarkozy was yet another politician who suffered the consequences of unpopular economic reforms designed to engineer a profound adjustment of public finance. In Greece two elections had to be held in rapid succession before a coalition government could be formed. The first, held on May 6, failed to give any party a clear majority. Attempts to form a coalition government were unsuccessful and ten days later a new election was called for June. At the time it was widely believed that the outcome of this second election would be interpreted as a referendum on whether Greece should remain in the eurozone. The answer would be no if Syriza won, it was thought. However, New Democracy won by less than 3 pp and days later succeeded in forming a coalition government with two other parties. European leaders lauded this result, which laid the foundations for a continuation of severe fiscal austerity in Greece. 26 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:33 AM Page 27 Economic contraction was the logical outcome of fiscal policy throughout the region. As shown by Table 4, the eurozone re-entered recession (defined here as two consecutive quarters of negative growth) in 2Q12. Greece had long faced a very serious economic crisis, and now Italy, Spain and Portugal were deteriorating again. These countries contracted 2.2%, 1.4% and 3.2% respectively in 2012. France emerged from recession in 3Q12 but again contracted in 4Q12. Even in Germany, which until mid-2012 had been relatively immune from this deterioration in the European crisis, economic activity fell more sharply in 4Q12 than at any time since the height of the financial crisis in 2009. The region’s labor market was also severely affected by fiscal austerity. The unemployment rate reached an all-time high of 11.8% in December 2012 (compared with 10.7% in December 2011). Germany’s unemployment rate fell during the period but the labor market continued to deteriorate in other countries. Unemployment rose almost 3 pp in Spain and Portugal, and almost 2 pp in Italy (Figure 8). 27 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:34 AM Page 28 In attempt to improve the complicated economic situation, in July the ECB cut its benchmark refinancing rate (refi) by 25 bps to 0.75%, the lowest ever, but did not venture to implement less conventional monetary measures such as those deployed in the US, UK and Japan, for example. The aim of monetary policy never ceased to be price stability and although the ECB bought sovereign bonds at certain times it never came close to engaging in massive asset buying in order to reduce long-term yields. As a result, monetary policy transmission to all eurozone countries alike was patchy at best. As can be seen from Figure 9, while Germany and France benefited from low interest rates, economic agents in the peripheral countries faced very high rates relatively speaking. Moreover, a large number of commercial banks in the region continued to deleverage and were reluctant to lend except to low-risk borrowers. Small and medium enterprises were therefore jeopardized most by uneven transmission of monetary policy, and SMEs are the largest source of employment in the region. The economic outlook for the eurozone in 2013 remains unfavorable, although the most troubled economies are expected to contract less. Most eurozone countries will continue to implement fiscal austerity measures but at a slower pace, given the growing consensus that fiscal adjustment must be carefully dosed. 28 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:34 AM Page 29 29 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:34 AM Page 30 1.4. ASIA In Asia the contrast between the Japanese economy, which appeared unable to grow or exit deflation, and the region’s robustly growing emerging-market economies remained unchanged. The geopolitical highlight was a deterioration in Sino-Japanese relations due to a longstanding territorial dispute over a number of small islands located south of Japan in the East China Sea. In late 2012 the Japanese government decided to buy the islands for the nation and China protested vociferously. The fall in Japanese exports to China in the period (Figure 10) may well have been due to the intensification of this dispute. Alongside appreciation of the yen and strong dependency on imports of energy commodities, the fall in exports to China led to a record Japanese merchandise trade deficit of US$87.2 billion in 2012 (Figure 11). Imports rose 3.8% in the period while exports fell 2.8%. Because of this fall, as well as weak domestic demand, industrial production contracted 7.9% year over year in 2012. All the above developments had a strong impact on Japanese politics. At the end of the year Prime Minister Yoshihiko Noda resigned in recognition of his loss of support, paving the way for opposition leader Shinzo Abe to win the ensuing election. Throughout the campaign he pledged to combat recession by deploying fiscal stimulus to drive economic growth, while also making monetary easing by the Bank of Japan his prime instrument to put an end to the deflation that has afflicted Japan for many years. The promise of more fiscal and monetary stimulus led the yen to depreciate considerably against the dollar (Figure 12). 30 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:34 AM Page 31 In China it was established early in 2012 that the government would pursue a more moderate growth target. Instead of 8% growth, the target adopted for previous years, the objective would now be growth of 7.5%. According to the government, the priority was to obtain economic growth of better quality. In this direction the authorities gradually introduced a range of macroprudential measures designed to stem speculation in the real estate market. 31 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:34 AM Page 32 China’s merchandise trade surplus rose 47% year over year to US$231.4 billion in 2012. Exports rose 7.9% and imports 4.4%. Consumer price inflation decelerated to 2.5%, from 4.1% in the previous year. Investor fears early in the year that China would not achieve its growth target gave way to relative calm in the second half as rising commodity prices and imports signaled that demand for raw materials was indeed growing (Figure 13). Despite ups and downs during the year, the Chinese economy grew 7.8% in 2012. China is expected to grow at the same pace in 2013 as in 2012, despite the government’s decision to enhance the quality of growth by prioritizing consumption over investment. In Japan attention will focus on evaluating the government’s success in reactivating the economy on a sustainable basis and driving inflation into positive territory. 32 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 33 33 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 34 BRA ZILIAN ECO NOMY 34 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 35 35 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 36 2.1. ECONOMIC GROWTH GDP growth decelerated to 0.9% in 2012, from 2.7% in the previous year. This fell well short of analysts’ expectations. The consensus forecast for 2012 growth in January was 3.3%. In response to the deceleration, both monetary policy and fiscal policy were more expansionary than in 2011. The Central Bank of Brazil, which had begun lowering the target for its benchmark lending rate (Selic) in August 2011, continued to do so for much of 2012 in response to the deteriorating global economic outlook. In October the Selic reached 7.25% per annum, the lowest ever. In the public finance sphere, government expenditure rose while revenue fell owing to tax relief and slower economic growth. In addition to monetary and fiscal stimulus, the government introduced a number of initiatives designed to enhance the competitiveness of the Brazilian economy, especially the manufacturing sector, and promote a resumption of investment. The exchange rate moved to a more favorable level for exports, with local currency depreciation averaging 17% year over year. Several sectors were granted payroll tax cuts or exemption, interest rates on loans extended by BNDES, the national development bank, were lowered, and a significant reduction in electricity prices was announced for 2013. Another highlight was the announcement of an ambitious program of concessions to private enterprise in various infrastructure segments, involving airports, ports, railroads and highways. It was also announced that the National Petroleum Agency (ANP) would resume auctions in 2013, including the presalt layer. The weak performance of the domestic economy in 2012 mainly reflected the behavior of investment on the demand side and of industry on the supply side. Among the components of aggregate demand, gross fixed capital formation (GFCF) decelerated most, falling 4.0% in the year compared with a rise of 4.7% in 2011. Household consumption displayed the lowest growth rate (3.1% in 2012 compared with 4.1% in 2011), in contrast with accelerating government expenditure (up 3.2% in 2012 and 1.9% in 2011). Net exports (exports less imports) had a neutral impact on GDP, with exports rising 0.5% and imports 0.2%, compared with the strong negative impact seen in 2011, when imports rose 9.7% whereas exports rose 4.5%. On the supply side, all sectors of the economy decelerated, led by a fall of 2.3% in agriculture (+3.9% in 2011) and a fall of 0.8% in industry (+1.6% in 2011). GDP growth was positive thanks to 1.7% growth in the service sector (+2.7% in 2011). 36 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 37 2.2. INFLATION AND MONETARY POLICY Inflation measured by the IPCA reached 5.84% in 2012, surpassing the official target (4.5%) but even so improving on this criterion compared with 2011, when the IPCA reached the upper limit of the target band (6.5%). Despite the improvement in 2012 compared with the previous year, the 12-month inflation rate surprised negatively in the second half, when monthly data consistently outpaced expectations. The upside dynamics of inflation from July on derived mainly from accelerating prices of food and services. 37 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 38 A breakdown of the IPCA by group shows more than 70% of the year’s 5.8% inflation coming from Food (+2.2 percentage points), Housing (+1.0 pp) and Personal Expenses (+1.0 pp). The IGP-M accelerated in 2012, rising 7.8% in the year compared with 5.1% in 2011. This reflected accelerating farm prices (+18.8% in 2012 versus +3.1% in 2011), influenced by the rise in commodity prices in 2012. During the course of 2012 the Central Bank’s Monetary Policy Committee (Copom) lowered its target for the Selic benchmark lending rate, following up on the easing cycle begun in August 2011. At its first meeting of the year the Copom cut the Selic by 50 basis points to 10.50% p.a. The pace of easing was stepped up at the March and April meetings with cuts of 75 bps, followed by three cuts of 50 bps in May, July and August to take the Selic to 7.50% p.a. Although the 12-month inflation rate accelerated from July onward, as noted above, the Copom took the view that weak global growth continued to point to a disinflationary bias, justifying the cuts. The easing cycle ended at the October meeting, which cut the Selic by 25 bps and announced that “keeping monetary conditions stable for a sufficiently extended period is the most suitable strategy to assure the convergence of inflation to the target, albeit not in a linear manner”. As a result, the Selic ended the year on 7.25% p.a., an all-time low. 38 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 39 2.3. OUTLOOK The main concern for 2013 remains the growth trajectory of the Brazilian economy, which lost momentum in 2011-12 despite a series of economic policy stimulus measures. While a recovery is expected in 2013, with GDP growth accelerating to 2.2%, the average rate of economic growth in the first three years of the Dilma Rousseff administration is set to be lower than the average seen in the previous decade. It is important to stress that low growth has occurred despite ample monetary easing, with the Selic rate falling to an all-time low, as well as tax breaks for a range of industries. In our view a consistent economic recovery depends on growth in both investment and industrial production. While the weak performance of GFCF reflects above all a lack of business confidence, the manufacturing sector is suffering from a loss of competitiveness due to rising costs and strong foreign competition. Thus a consistent recovery requires more than conventional macroeconomic policy measures. Progress must be made with structural reform, especially in the areas of taxation and concessions to the private sector in the infrastructure sector. To some extent this process began in 2012 with payroll tax exemption for selected industries and the announcement of a program of infrastructure concessions to private enterprise. The process is set to intensify in 2013. Initiatives such as the reduction of electricity prices, extension of payroll tax exemption to other industries and new infrastructure concessions will help enhance the competitiveness of the Brazilian economy and promote sustainable growth in the domestic production of goods and services. The full effect of such initiatives, however, will be felt only in the medium term, and this explains the modest below-potential growth forecast for 2013. Inflation will tend to remain under upside pressure due to strongly rising food prices despite the reduction in electricity prices, and is set to end 2013 in the range of 5.9%. 39 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 40 40 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 41 2.4. KEY ECONOMIC INDICATORS 2.4.1. ECONOMIC ACTIVITY Economic activity in 2012 was characterized by a conspicuous gap between commerce and industry, a dynamic seen since 2008 (Figure 17). Industrial production fell in the year, despite low unemployment and robust consumption. At the same time retail sales continued to grow vigorously thanks to rising incomes and tax cuts extended to segments that depend heavily on credit, such as motor vehicles and white goods. Industrial production contracted 2.6% in 2012, performing significantly worse than in 2011, when it had already displayed a very low growth rate (0.4%). As a result of last year’s performance, the level of industrial production returned to that seen at end-2009. The capital goods industry contracted particularly sharply, falling 11.8%, while intermediate goods and consumer goods fell 1.6% and 0.8% respectively. In contrast, retail sales performed better than in the previous year. The narrow measure, which excludes motor vehicles and building materials, rose 8.4%, compared with 6.7% in 2011. The broad measure also accelerated, rising 8.0% in 2012, up from 6.6% in 2011. The labor market remained robust throughout the year, with the average rate of unemployment falling to 5.5%, an all-time low and below the 2011 average, which was 6.0% (Figure 18). Reflecting the lower supply of available workers compared with previous years, the total wage bill (understood as the number of people in paid employment times average real earnings) rose 6.3% in real terms in 2012, as a result of 2.2% growth in the workforce and a 4.1% rise in real earnings. Despite the fall in unemployment, slower GDP growth affected the formal hiring rate. According to the Labor Ministry’s General Register of Employed & Unemployed Persons (Caged), net formal job creation reached 868,000 in 2012. This was the smallest annual number since 2003 and much less than in 2011 (1,566,000). Formalization of the workforce improved only slightly in the year, reaching 66.0% compared with 65.6% in 2011. This rise was far smaller than in 2010 and 2011, when formalization rose 2.6 pp and 1.8 pp respectively. 41 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 42 2.4.2. CREDIT Overall the performance of the credit market in 2012 was characterized by decelerating growth despite the significant contribution of the state-owned banks, which continued to increase their share of the total stock of credit. This deceleration reflected both a decrease in the willingness of private-sector banks to extend loans owing to high delinquency rates and a decrease in demand for loans from consumers owing to the high debt-to-income ratio. The total stock of credit grew to 53.6% of GDP at end-2012, from 49.1% a year earlier, reaching the highest level of the time series in proportional terms. As noted above, however, the rate of growth decelerated to 16.4%, the lowest since 2009, when credit expansion was affected by the global financial crisis. The stock of unearmarked loans to individuals grew only 10.2% in 2012 (13.2% in 2011), while the stock of unearmarked corporate loans grew 17.0%, decelerating from 20.1% in 2011. Earmarked loans, in contrast, grew 20.7%, although even so this was less than in 2011 (22.4%). 42 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 43 The slower growth of unearmarked loans to individuals reflected the delinquency rate, which rose sharply in 2011 and remained at a historically high level in 2012, ending the year on 8.0%. In our view this was due to the high debt-to-income ratio, i.e. the proportion of household income devoted to debt repayment, and not to the labor market, which performed very favorably. The high delinquency rate had a negative effect on the results of financial institutions, which responded by adopting more conservative lending policies, so that the volume of new consumer loans flatlined for most of 2012 compared with the previous year. Given the reluctance of private-sector banks to extend new loans, the share of public-sector banks in the total stock of credit rose significantly in 2012, reaching 47.6% compared with 43.5% in 2011. While the loan portfolios of private-sector and foreign banks rose 7.5% in 2012, those of public-sector institutions rose 27.8%, in line with their goal of stimulating the economic recovery. In the same direction, in 2Q12 state-owned financial institutions began significantly cutting bank spreads to enable borrowers to pay lower interest rates. Several private-sector institutions later followed suit, so that market rates fell to an all-time low. In unearmarked lending operations, the average rate for loans to individuals fell to 33.9% p.a. in December 2102, compared with 39.7% a year earlier, while the rate for corporate loans fell to 17.9%, from 23.3% at end-2011. 43 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 44 2.4.3. BALANCE OF PAYMENTS In 2012 the current account of the balance of payments ended the year displaying a deficit of US$54.2 billion, or 2.40% of GDP, compared with US$52.5 billion, or 2.12% of GDP, in 2011. This increase of 0.3 pp in proportion to GDP was mainly a reflection of the contraction in GDP in dollar terms, which in turn was due to 17% depreciation of the average exchange rate in 2012. Despite a smaller merchandise trade surplus in 2012 (US$19.4 billion, compared with US$29.8 billion in 2011), the currentaccount balance did not deteriorate significantly because the outflow of dollars in profit and dividend remittances fell 36.8%, reflecting local currency depreciation as well as weaker domestic economic activity (factors that reduce corporate earnings in dollar terms). The deficit in this account totaled US$24.1 billion in 2012, compared with US$38.2 billion in 2011. The deficit in international travel amounted to US$15.6 billion, for practically no change in the year. In the capital and financial account, foreign direct investment (FDI) amply surpassed the current-account deficit, totaling US$65.3 billion in the year (US$66.7 billion in 2011). Thus Brazil’s external deficit was mostly financed by long-term capital. As noted above, the Brazilian Real (BRL) depreciated against the US Dollar (USD) in 2012. The year-end BRL/USD exchange rate (sell) was 2.04, compared with 1.88 in January 2011. A comparison of the average exchange rates for the two years shows that the 2012 average (1.95) devalued 17.0% compared with the 2011 average (1.67). In January-February the BRL appreciated to 1.71 per USD, the lowest exchange rate for the year, depreciating until end-May and thereafter remaining relatively stable in the range of 2.00. This depreciation was induced by government rhetoric designed to devalue the currency in order to make Brazilian exports more competitive, given the weak performance of domestic industry. In addition, the 6% financial transactions tax (IOF) paid by corporations and banks on foreign borrowings was extended to external loans of up to 60 months, and in February the Central Bank resumed intervention in the foreign-exchange market by buying spot dollars for the first time since September 2011. 44 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:39 AM Page 45 In May the inflow of foreign funds lost momentum and even turned negative for a few months. The weaker inflow of dollars led the Finance Ministry to withdraw the tax measures introduced earlier to stem the strong inflow, including a reduction of the maximum foreign loan maturity on which IOF was levied to 24 months in June and then again to 12 months in December. When the exchange rate rose to about 2.10 in November in the context of high inflation, the Central Bank again intervened in the foreign-exchange market, but this time by selling dollars to combat expectations of additional local currency depreciation. The net inflow of foreign funds amounted to US$16.8 billion in 2012, falling sharply compared with 2011 (US$65.3 billion). 2.4.4. PUBLIC FINANCE In 2012 the consolidated public-sector primary surplus totaled R$105.0 billion, or 2.4% of GDP, compared with 3.1% of GDP in 2011. The result was less than the target of R$139 billion set in the 2012 Budget, obliging the government to subtract capital expenditure for investment in infrastructure under the Growth Acceleration Program (PAC), as permitted by law, in order to achieve the primary surplus target. The last time a similar situation had occurred was in 2010. The remainder of the target was made up by redeeming R$12.4 billion (0.3% of GDP) from the Sovereign Wealth Fund (FSB) to bolster federal revenue in the last month of the year. Subtraction of PAC capex and the transfer of funds from the FSB illustrate the difficulty faced by the public sector in achieving the primary surplus target in 2012, a year during which monthly tax collection was consistently disappointing because of weak economic activity and rising expenditure, although much of the latter had been anticipated (mainly owing to the budgeted hike in the minimum wage, to which state pensions and other social security benefits are indexed). The nominal public-sector deficit (primary surplus plus interest expense) totaled R$108.9 billion, or 2.5% of GDP, down 0.14 pp compared with the previous year. Despite the smaller primary surplus the nominal deficit did not deteriorate, thanks to the fall in nominal interest rates. The downtrend in rates seen in the course of the year reflected the Central Bank’s policy of monetary easing and lower inflation than in 2011 measured by the IPCA, to which the federal debt is partly indexed. 45 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:40 AM Page 46 Public-sector net debt (PSND) fell 1.3 pp to 35.2% of GDP in 2012. The contribution of the primary surplus to this fall was 2.4 pp of GDP, while the effect of nominal GDP growth contributed 2.1 pp. Other contributions to the fall came from 8.9% local currency depreciation (1.3 pp of GDP), from parity adjustment to the basket of currencies comprised by net foreign debt (0.1 pp), and from asset recognition (0.1 pp). On the other hand, nominal interest contributed positively to the PSND/GDP ratio to the tune of 4.9 pp. General government gross debt (federal government, INSS, state governments and municipal governments) reached 58.7% of GDP at end-2012, up from 54.2% a year earlier. This rise mainly reflected a reduction in bank reserves due to the lowering of reserve requirements and debt issuance to capitalize public-sector banks such as BNDES. The increase in international reserves during the year also raised the level of gross debt, albeit less so than in previous years. 46 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:40 AM Page 47 47 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:40 AM Page 48 SAFRA GROUP 48 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:18 AM Page 49 49 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:18 AM Page 50 The situation was unfavorable for In accordance with its conservative Total liquidity, considering cash and financial institutions in Brazil in 2012 accounting policy the bank does not cash equivalents as well as owing to decelerating credit, rising recognize deferred tax assets. The year- unencumbered government securities consumer loan delinquencies and high end balance of these assets, mainly considered highly liquid and held in the debt-to-income ratios. deriving from temporal differences in bank’s own portfolio, amounted to loan loss provision, totaled R$1.2 billion. R$14.8 billion at end-2012. This was If they had been booked, the BIS capital equivalent to two times stockholders’ adequacy ratio would have risen to equity, the same high ratio that has been 15.4%. maintained since 2008. its track record. Net income rose 2.1% in Furthermore, Safra’s efficiency ratio Assets under management totaled the year to R$1.3 billion, and improved in 2012, ending the year R$94.7 billion at end-2012 (R$106.5 profitability measured by the return on above the industry average on 36.8% billion in December 2011). average equity (ROAE) was once again (50.0% in 2011). This improvement (the in the range of 20%. lower the efficiency ratio, the better) Despite this combination of factors, which affected both the supply and demand for credit, Banco Safra’s performance in 2012 was consistent with Safra’s consolidated assets totaled R$111.5 billion on December 31, 2012, reflected prudent management and the efficacy of its rigorous internal controls. Even though it already has a large depositor base and a diversified array of funding instruments, the bank unremittingly pursues improvements to for growth of 30.1% compared with the All other indicators continued to position at end-2011 (R$85.7 billion). improve as usual, evidencing the success the quality of its sources of funding. of Safra’s traditional conservatism in During the year it took steps to enhance credit and provisioning, and in funding stability, focusing with particular management of liquidity, which emphasis on individual investors and remained at high levels. In light of this longer maturities by extending the use The BIS capital adequacy ratio was performance the top three rating of bank bonds (letras financeiras), which 14%, comfortably above the 11% agencies – FitchRatings, Moody’s and totaled R$11.1 billion at end-2012 minimum set by the Central Bank of Standard & Poor’s (S&P) – maintained (R$5.3 billion in December 2011). Brazil, with Tier I accounting for 9.9%. their investment grade ratings in 2012. These measures enhanced the efficiency Safra was also highly rated by local of liquidity management and thus agencies RISKbank and Austin Rating. assured greater security for clients. Consolidated stockholders’ equity grew 20.5% year over year, reaching R$7.2 billion at end-2012. Another highlight is the loyalty of its 50 Af-RelatIngles2012Parte01_RelatBco 7/26/13 4:16 PM Page 51 Another highlight is the loyalty of its customers and clients, about one-third of whom have maintained a relationship with the bank for more than ten years, and almost 60% for more than five. The investment funds managed by the group are also significant in size. Excluding the investments in funds of funds booked under Banco Safra’s consolidated assets, these investment funds totaled R$35.2 billion at end-2012 (R$45.1 billion in December 2011). It is also important to note that in 2012 the bank recognized an after-tax profit of R$412 million from the appreciation of securities classified as available for sale. This profit was booked directly to equity and did not affect net income in the period, in compliance with the accounting rules for securities available for sale. Interest income before loan loss provision rose 11.7% year over year to R$3.8 billion. Income from insurance and pensions operations rose 3.8%. Loan loss provision expense less the cumulative value of loans written off totaled R$972 million in the year. Income from service charges and banking fees totaled R$731 million. CREDIT & SERVICES Safra’s loan portfolio excluding guarantees grew 1.5% to R$48.9 billion in 2012 and accounted for a significant proportion of its net income in the period. The loan portfolio including guarantees grew only 0.6% to R$57.3 billion, reflecting the Brazilian economy’s low growth in 2012 and the fall in demand for credit associated with rising delinquency rates. Loans more than 90 days past due corresponded to only 1.6% of the total portfolio in December 2012. This was one of the lowest levels of non-performing loans in the industry, clearly evidencing the efficacy of the bank’s credit management practices and technologies. In conformity with its conservative credit strategy, Safra Group has a policy of not maintaining exposure to risk in the market, so that every day Treasury seeks to match terms and rates for assets and liabilities using the various instruments available. Credit facilities rated AA, A and B, the highest on the risk scale established by the Central Bank, accounted for 92.1% of the portfolio and the balance of total loan loss provision corresponded to 3.4% of the portfolio at end-2012 (2.7% at end-2011). The service sector accounted for the largest proportion of the total loan portfolio when broken down by branch of the private sector, followed by commerce and industry. Credit operations continued to focus on corporate clients in accordance with the bank’s tradition of supporting the productive sector. 51 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:19 AM Page 52 52 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:19 AM Page 53 53 Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:19 AM Page 54 ASSET MANAGEMENT HUMAN RESOURCES CHALLENGES & OPPORTUNITIES Safra Group is responsible for the Banco Safra ended 2012 with 5,541 The Brazilian economy is expected to management, administration and employees, who among other benefits grow faster in 2013, thanks largely to distribution of investment funds, receive first-class medical and dental lower real interest rates and a gradual including the funds administered by care, school and daycare allowances, improvement in the nation’s logistics JS Administração de Recursos S.A. food baskets, and access to a wide array infrastructure. of cultural and social activities organized Assets under management by Safra Asset by their association. Brazilian government’s infrastructure Management totaled R$35.2 billion at end-2012, comprising R$23.7 billion in Payroll expense including taxes, investment plan with a budget of R$235 financial investment funds, R$8.6 million charges, contributions and benefits billion, including roads, railroads, ports, in other investment funds, and R$2.9 totaled R$1.0 billion in 2012. The social airports and a bullet train, as well as billion in pension funds. Including benefits extended to employees and their electricity, oil and gas. R$19.1 billion in funds of funds and dependants amounted to R$79 million. R$3.7 billion in consolidated exclusive The highlight among these was funds, the total value of all funds investment in employee training and amounted to R$58.0 billion. professional development programs. Face-to-face and distance courses In 2012 Banco Safra again ranked involved 19,000 participations and among the leading financial institutions 78,000 training hours in 2012. accredited to act as onlending agents for BNDES, the national development bank, The main programs comprised training with aggregate onlending to the for sales teams, administrative staff and productive sector reaching R$8.6 billion operations support personnel (back in the year. office), and preparatory or refresher courses for mandatory certification (Anbima CPA 10 and CPA 20), Anbima’s CGA Fund Manager Certification Program and the PQO Operational Qualification Program. Safra also maintained its emphasis on support for staff pursuing university degrees, including MBAs and graduate qualifications, and for the training and inclusion of persons with special needs (PSN) in partnership with the Brazilian Federation of Banks (Febraban). 54 In this context it is important to note the Af-RelatIngles2012Parte01_RelatBco 7/23/13 11:20 AM Page 55 55 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 56 BANCO SAFRA S.A. & SAFRA CONSOLIDATED FINANCIAL STATEMENTS BALANCE SHEET PAGE 58 STATEMENT OF INCOME PAGE 62 STATEMENT OF CHANGES IN EQUITY PAGE 63 STATEMENT OF VALUE ADDED PAGE 64 STATEMENT OF CASH FLOWS PAGE 65 NOTES TO THE FINANCIAL STATEMENTS PAGE 66 SUMMARY OF AUDIT COMMITTEE’S REPORT PAGE 120 REPORT OF INDEPENDENT AUDITORS PAGE 121 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 57 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 58 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) BALANCE SHEET AS OF DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) BANCO SAFRA S.A. Notes SAFRA CONSOLIDATED 12.31.2012 12.31.2011 12.31.2012 12.31.2011 63,365,077 55,577,174 72,153,036 61,862,223 301,797 246,604 411,090 380,224 3(c) e 4 e 5 20,290,174 18,804,366 699,371 786,437 20,279,323 18,111,372 1,441,219 726,732 20,627,745 18,805,831 972,129 849,785 20,291,328 18,111,372 1,441,219 738,737 3(d) e 6 10,165,209 3,195,725 6,421,235 434,586 22 113,641 3,342,051 2,498,438 – 80,873 188,582 574,158 13,398,440 6,321,916 6,421,235 302,425 22 127,169 4,163,828 3,117,946 – 42,997 188,582 606,765 225,673 207,538 ASSETS CURRENT ASSETS Cash Interbank investments Money market investments Interbank deposits Foreign currency investments Securities and derivative financial instruments Own portfolio Subject to repurchase agreements Derivative financial instruments Restricted deposits – Brazilian Central Bank Linked to guarantees Securities pledged in guarantee of technical reserves Interbank and interdepartmental accounts Deposits – Brazilian Central Bank Internal transfers of funds and other Credit operations Credit operations (Allowance for loan losses) Other receivables Foreign exchange portfolio Negotiation and intermediation of securities Sundry Other assets – prepaid expenses (continued) 58 3(b) e 4 3(e) e 7 11(b) – – 13(a) 794,136 722,985 71,151 4,508,665 4,449,927 58,738 1,249,455 1,178,292 71,163 5,452,851 5,394,015 58,836 26,153,035 26,467,289 (314,254) 26,282,451 26,693,438 (410,987) 30,290,853 30,671,926 (381,073) 30,101,345 30,662,771 (561,426) 5,632,524 5,211,354 73,172 347,998 912,830 504,567 514 407,749 6,081,780 5,211,354 333,703 536,723 1,372,317 504,567 56,419 811,331 28,202 5,250 93,673 100,330 3(g) e 8 9 13(b) 13(c) 3(i) Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 59 BANCO SAFRA S.A. Notes SAFRA CONSOLIDATED 12.31.2012 12.31.2011 12.31.2012 12.31.2011 NON-CURRENT ASSETS 46,888,742 37,136,747 39,299,279 23,794,403 LONG-TERM RECEIVABLES 43,380,570 33,708,907 38,966,627 23,234,520 3(c) e 4 e 5 1,290,850 1,290,850 1,243,441 1,243,441 1,290,850 1,290,850 1,243,441 1,243,441 3(d) e 6 29,301,561 4,022,741 23,620,832 438,669 278,817 940,502 19,348,724 2,132,921 16,634,394 480,961 – 100,448 20,089,498 4,450,159 11,380,445 193,815 278,817 961,622 4,739,301 1,982,731 – 357,068 – 100,448 11(b) – – 2,824,640 2,299,054 Credit operations Credit operations (Allowance for loan losses) 3(g) e 8 12,235,729 13,162,158 (926,429) 12,708,503 13,156,365 (447,862) 16,877,710 18,179,389 (1,301,679) 16,722,331 17,478,988 (756,657) Other sundry receivables 13(c) 530,800 399,701 686,720 520,689 3(i) 21,630 8,538 21,849 8,758 3,403,891 3,213,686 190,205 3,341,988 3,020,889 321,099 192,649 – 192,649 323,515 – 323,515 Interbank investments Interbank deposits Securities and derivative financial instruments Own portfolio Subject to repurchase agreements Derivative financial instruments Restricted deposits – Brazilian Central Bank Linked to guarantees Securities pledged in guarantee of technical reserves Other assets 3(e) e 7 Investments 3(j) e 15(a) (b) Equity in the results of associates and subsidiaries: Other investments Property and equipment in use Property Other property and equipment assets in use (Accumulated depreciation) 3(k) e 16 63,440 – 152,050 (88,610) 61,043 – 140,772 (79,729) 94,898 – 280,645 (185,747) 207,381 231,158 262,433 (286,210) Intangible assets Intangible assets (Accumulated amortization) 3(l) e 16 40.841 74,746 (33,905) 24.809 47,527 (22,718) 45.105 80,067 (34,962) 28.987 52,492 (23,505) 110,253,819 92,713,921 111,452,315 TOTAL ASSETS 85,656,626 The accompanying notes are an integral part of these financial statements. 59 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 60 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) BALANCE SHEET AS OF DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) BANCO SAFRA S.A. Notes SAFRA CONSOLIDATED 12.31.2012 12.31.2011 12.31.2012 12.31.2011 81,877,354 64,837,776 77,843,168 54,478,444 LIABILITIES AND EQUITY CURRENT LIABILITIES Deposits Demand deposits Savings deposits Interbank deposits Time deposits 3(n) e 10(a) 16,087,466 955,669 1,346,916 8,627,105 5,157,776 26,285,368 811,639 1,207,831 14,249,354 10,016,544 10,867,459 936,365 1,346,916 3,898,125 4,686,053 15,240,480 809,667 1,207,831 3,344,638 9,878,344 Money market funding Own portfolio Third party portfolio Unrestricted portfolio 3(n) e 10(b) 42,555,184 27,865,743 12,441,023 2,248,418 23,458,839 12,754,047 10,704,792 – 42,191,095 27,865,743 12,076,934 2,248,418 23,366,830 12,754,047 10,612,783 – 3(n) e 10(c) 7,872,754 2,667,480 7,429,980 2,667,479 6,979,150 893,604 2,533,964 133,516 6,979,150 450,830 2,533,964 133,515 217,774 210,399 7,375 251,673 248,925 2,748 213,548 210,399 3,149 250,529 248,925 1,604 3(n) e 10(d) 6,229,113 3,572,246 919 2,517,470 138,478 7,781,227 4,653,908 17,252 3,110,067 – 7,146,996 3,572,246 919 3,435,353 138,478 8,036,913 4,634,639 17,252 3,385,022 – 3(e) e 7 2,933,142 3,109,242 3,039,629 2,831,845 9 17(b) 14(c) 3(o) e 11(c) 13(b) 13(d) 5,981,921 9,914 5,162,728 10,463 380,190 – 11,620 407,006 1,283,947 16,740 373,449 9,708 448,114 – 20,688 415,248 6,954,461 12,015 5,162,728 10,463 696,456 234,047 272,910 565,842 2,084,368 20,263 373,449 9,712 722,611 215,280 75,512 667,541 Funds from acceptance and issuance of securities Funds from financial bills, bills of credit and similar notes Securities issued abroad Interbank and interdepartmental accounts Third-party funds in transit Internal transfers of funds Borrowings and onlendings Foreign borrowings Transfer of financial assets Domestic onlendings Lending of shares Derivative financial instruments Other obligations Collected taxes and other Foreign exchange portfolio Social and statutory Taxes and social security contributions Technical reserves – insurance and pension plan Negotiation and intermediation of securities Sundry (continued) 60 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 61 BANCO SAFRA S.A. Notes SAFRA CONSOLIDATED 12.31.2012 12.31.2011 12.31.2012 12.31.2011 NON-CURRENT LIABILITIES 21,129,705 21,860,486 26,362,387 25,162,523 LONG-TERM LIABILITIES 21,103,237 21,822,117 26,335,919 25,124,154 Deposits Interbank deposits Time deposits 3(n) e 10(a) 770,300 195,899 574,401 1,260,220 127,340 1,132,880 1,091,317 195,899 895,418 1,260,220 127,340 1,132,880 Money market funding – Own portfolio 3(n) e 10(b) 2,037,302 3,937,560 2,037,302 3,937,560 3(n) e 10(c) 9,306,036 7,863,820 9,377,145 7,511,019 6,933,579 2,372,457 4,540,969 3,322,851 7,004,688 2,372,457 4,643,295 2,867,724 3(n) e 10(d) 3,119,571 37,119 – 3,082,452 4,643,692 107,376 1,232 4,535,084 5,198,858 37,119 – 5,161,739 5,018,110 126,645 1,232 4,890,233 3(e) e 7 1,375,234 272,262 885,216 439,547 14(c) 3(o) e 11(c) 3(n) e 10(e) 13(d) 4,494,794 1,470,345 – 2,657,265 367,184 3,844,563 1,389,220 – 2,120,428 334,915 7,746,081 1,845,149 2,824,640 2,657,265 419,027 6,957,698 2,156,996 2,299,054 2,120,428 381,220 Funds from acceptance and issuance of securities Funds from financial bills, bills of credit and similar notes Securities issued abroad Borrowings and onlendings Foreign borrowings Transfer of financial assets Domestic onlendings Derivative financial instruments Other obligations Taxes and social security contributions Technical reserves – insurance and pension plan Subordinated debt Sundry DEFERRED INCOME 3(r) 26,468 38,369 26,468 38,369 EQUITY Capital Revenue reserves Carrying value adjustments 17 7,246,760 4,219,440 2,604,150 423,170 6,015,659 3,980,315 2,024,647 10,697 7,246,760 4,219,440 2,604,150 423,170 6,015,659 3,980,315 2,024,647 10,697 110,253,819 92,713,921 111,452,315 85,656,626 TOTAL LIABILITIES AND EQUITY The accompanying notes are an integral part of these financial statements. 61 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 62 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) STATEMENT OF INCOME FOR THE PERIODS ENDED DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) BANCO SAFRA S.A. Notes 2nd six-month period of 2012 2012 2011 9,014,087 4,877,968 3,882,819 10,414,598 4,798,505 5,296,167 9,629,288 10,207,841 6,238,641 5,997,098 2,859,208 3,650,952 – – 9,239 60,849 42,037 189,287 1,483 3,164 (2,627,088) (5,974,496) (149,182) (186,829) (2,239,301) (5,261,024) (207,769) (455,354) – – (387) (1,570) (30,449) (69,719) – 55,683 264,243 – (7,757,169) (77,908) (7,215,746) (454,755) – (8,760) – 236,031 189,387 60,849 55,683 229,956 314,721 4,603 – (5,826,433) (6,795,560) (395,454) (205,052) (4,537,284) (5,922,872) (580,353) (484,473) (222,693) (174,403) (1,570) (8,760) (89,079) – 1,581,296 3,039,591 2,657,429 3,802,855 3,412,281 (490,039) (539,750) 49,711 (761,977) (850,335) 88,358 544,426 (511,203) 1,055,629 (971,985) 150,603 (1,093,397) (919,047) 121,412 1,069,650 1,091,257 (184,813) 160,329 73,426 (509,627) (273,074) (104,595) 2,277,614 (642,805) 322,247 158,806 (968,224) (539,598) (206,763) 3,201,855 (1,421,801) 439,019 118,782 (1,007,782) (527,294) (219,439) 2,830,870 3,562,884 (911,560) (1,517,379) 523,309 506,376 207,863 214,049 (1,143,545) (1,188,850) (585,737) (571,874) (269,298) (281,633) 455,570 – 14,360 (1,202) 906,444 31 906,475 499,817 – 132,108 (41,198) 1,634,809 57 1,634,866 56,563 – 46,291 (327,941) 1,780,054 3,242 1,783,296 – (283) 102,152 98,413 310,814 60,923 (57,118) (354,500) 1,919,310 2,045,505 251 3,190 1,919,561 2,048,695 (222,252) (353,889) 684,223 1,280,977 0.45 0.85 (528,851) 1,254,445 0.81 (638,584) (794,250) 1,280,977 1,254,445 0.85 0.81 STATEMENT OF COMPREHENSIVE INCOME FOR THE PERIODS ENDED DECEMBER 31 PROFIT FOR THE PERIOD 684,223 1,280,977 1,254,445 Carrying value adjustments 644,105 721,563 17,726 Taxes (274,437) (309,090) (6,784) COMPREHENSIVE INCOME 1,053,891 1,693,450 1,265,387 1,280,977 1,254,445 721,563 17,726 (309,090) (6,784) 1,693,450 1,265,387 INCOME FROM FINANCIAL INTERMEDIATION Credit operations Result from transactions with marketable securities Receitas financeiras das operações com Financial income from insurance and pension plan operations 11(d) Foreign exchange transactions 9 Compulsory investments 13(a) Other financial income EXPENSES ON FINANCIAL INTERMEDIATION Result from derivative financial instruments Funds obtained in the market Borrowings and onlendings Financial expenses with pension plan funds 11(d) Financial assets sale or transfer operations Other finance costs 12(c-I e II) GROSS PROFIT ON FINANCIAL INTERMEDIATION BEFORE THE ALLOWANCE FOR LOAN LOSSES RESULT FROM ALLOWANCE FOR LOAN LOSSES Allowance for loan losses 3(g) e 8(b) Recovery of credits written off 3(g) e 8(c) GROSS PROFIT ON FINANCIAL INTERMEDIATION OTHER OPERATING INCOME (EXPENSES) Income from services rendered 13(e) Income from bank fees 13(f) Personnel expenses 13(g) Administrative expenses 13(h) Tax expenses 14(a-II) Equity in the earnings of subsidiary and associated companies 15(a) Result from insurance and pension plan 3(o) e 11(d) Other operating income 13(i) Other operating expenses 13(j) OPERATING PROFIT NON-OPERATING PROFIT PROFIT BEFORE TAXATION INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME 3(q) e 14(a-I) PROFIT FOR THE PERIOD Earnings per shares in R$ (Note 3(a)) 4,208,384 2,301,717 1,853,908 The accompanying notes are an integral part of these financial statements. 62 SAFRA CONSOLIDATED Years 2012 2011 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 63 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) STATEMENT OF CHANGES IN EQUITY FOR THE PERIODS ENDED DECEMBER 31, 2012 AND 2011 (NOTE 17) (ALL AMOUNTS IN THOUSANDS OF REAIS) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) Paid-up capital AT JANUARY 1, 2011 Capital reserves Revenue reserves Retained Carrying earnings value (accumulated adjustments deficit) 2,245,458 72,723 3,295,806 Capital increase – merger of reserves 1,825,510 Merger of reserves 1,257,195 Interest on capital and kind 568,315 Capital decrease – disposal of investment (90,653) Reverse share split – Carrying value adjustments – available-for-sale securities – Interest on capital – Profit for the period – Allocation: Legal reserve – Special reserve – Interest on capital – Dividends – (72,723) (72,723) – – – – – – (1,184,472) (1,184,472) – – (7,528) – (340,065) – – – – – 62,723 863,183 – (665,000) – – – – AT DECEMBER 31, 2011 3,980,315 Capital increase – merger of reserves 350,000 Capital decrease – disposal of investment (110,875) Carrying value adjustments – available-for-sale securities – Profit for the period – Appropriation: Legal reserve – Special reserve – Interest on capital – Dividends – – – – – – 2,024,647 (350,000) – – – 10,697 – – 412,473 – – – – – 64,049 865,454 – – AT DECEMBER 31, 2012 4,219,440 – AT JULY 1, 2012 4,219,440 Carrying value adjustments – available-for-sale securities – Profit for the period – Allocation: Legal reserve – Special reserve – Interest on capital – Dividends – AT DECEMBER 31, 2012 4,219,440 (245) – – – – – 10,942 – – – Total 5,613,742 – – – – – – – 1,254,445 568,315 – 568,315 (90,653) (7,528) 10,942 (340,065) 1,254,445 (62,723) (863,183) (328,539) – – – (328,539) (665,000) – – – – 1,280,977 6,015,659 – (110,875) 412,473 1,280,977 – – – – (64,049) (865,454) (346,756) (4,718) – – (346,756) (4,718) 2,604,150 423,170 – 7,246,760 – – – 2,094,958 – – 53,502 369,668 – – – 684,223 6,367,900 369,668 684,223 – – – – 34,211 474,981 – – – – – – (34,211) (474,981) (170,313) (4,718) – – (170,313) (4,718) – 2,604,150 423,170 – 7,246,760 The accompanying notes are an integral part of these financial statements. 63 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:45 AM Page 64 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) STATEMENT OF VALUE ADDED FOR THE PERIODS ENDED DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) BANCO SAFRA S.A. 2012 SAFRA CONSOLIDATED 2012 2011 Income Financial operations Banking services and income from bank fees Result from allowance for loan losses Result from insurance and pension plan Other operating income and non-operating income 8,865,328 9,014,087 481,053 (761,977) – 132,165 11,566,358 10,414,598 557,801 544,426 – 49,533 9,801,692 9,629,288 731,172 (971,985) 102,152 311,065 11,241,395 10,207,841 720,425 150,603 98,413 64,113 Expenses Financial operations Other operating expenses (6,015,694) (5,974,496) (41,198) (8,085,110) (7,757,169) (327,941) (5,883,551) (5,826,433) (57,118) (7,150,060) (6,795,560) (354,500) Expenses from acquired inputs Facilities Data processing and telecommunications Third party services Financial system services Surveillance services, security and transport Legal and notary fees Other (416,987) (29,930) (36,793) (64,868) (37,996) (13,657) (72,076) (161,667) (411,051) (25,837) (43,691) (70,032) (35,207) (33,258) (82,921) (120,105) (461,226) (31,659) (40,021) (77,037) (40,658) (14,137) (96,582) (161,132) (488,160) (27,513) (52,539) (88,911) (37,500) (34,205) (113,042) (134,450) Gross value added Retentions – depreciation and amortization 2,432,647 (25,505) 3,070,197 (18,599) 3,456,915 (34,527) 3,603,175 (38,030) Net value added generated by the Company Value added received through transfer – Equity in the earnings of subsidiary and associated companies 2,407,142 3,051,598 3,422,388 3,565,145 499,817 56,563 Total value added to distribute 2,906,959 3,108,161 3,422,388 3,564,862 Distribution of value added Personnel Remuneration and profit sharing Benefits Government Severance Indemnity Fund for Employees (FGTS) Labor contingencies Other 2,906,959 968,223 746,932 72,837 34,467 88,883 25,104 3,108,161 885,056 623,054 76,782 41,069 131,188 12,963 3,422,388 1,143,544 899,391 78,750 39,312 97,950 28,141 3,564,862 1,042,676 762,610 77,819 46,454 141,236 14,557 560,653 523,168 373 37,112 871,016 845,049 432 25,535 907,883 860,363 423 47,097 1,222,057 1,186,390 455 35,212 97,106 97,644 89,984 45,684 1,280,977 351,474 929,503 1,254,445 714,281 540,164 1,280,977 351,474 929,503 1,254,445 714,281 540,164 Taxes and contributions Federal State Municipal Remuneration on third parties' capital – rentals Remuneration on own capital Interest on capital Profit reinvested in the period The accompanying notes are an integral part of these financial statements. 64 2011 – (283) Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 65 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) STATEMENT OF CASH FLOWS FOR THE PERIODS ENDED DECEMBER 31, 2012 AND 2011 (NOTES 3 (B) AND 4) (ALL AMOUNTS IN THOUSANDS OF REAIS) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) BANCO SAFRA S.A. 2012 CASH FLOWS FROM OPERATING ACTIVITIES ADJUSTED PROFIT 1,970,894 Profit for the period 1,280,977 Adjustments to profit: Depreciation and amortization 25,505 Allowance for loan losses 850,335 Equity in the earnings of subsidiary and associated companies (499,817) Adjustment to market value of trading securities, derivative financial instruments and hedge (72,426) Provisions for civil, labor and other contingencies 54,027 Provisions for legal, tax and social security obligations (67,217) Interest on subordinated debt 45,621 Provision for current and deferred income taxes 353,889 CHANGES IN ASSETS AND LIABILITIES 2,660,659 (Increase) in interbank investments (3,399,850) (Increase) decrease in securities – for trading (8,108,729) (Increase) decrease in derivative financial instruments (assets/liabilities) 679,698 (Increase) decrease in interbank and interdepartmental accounts (assets/liabilities) 3,680,630 (Increase) in credit operations (248,145) (Increase) decrease in other receivables (71,348) (Increase) decrease in other assets (22,952) Increase (decrease) in deposits (10,687,822) Increase (decrease) in open market funding 17,196,087 Increase (decrease) in entity's own securities (4,388,785) Increase (decrease) in government securities 21,584,872 Increase (decrease) in borrowings and onlendings (3,076,235) Increase in funds from acceptance and issuance of securities 6,913,751 Increase (decrease) in foreign exchange portfolio (assets/liabilities) 82,492 Increase (decrease) in negotiation and intermediation of amounts (assets/liabilities) (81,726) Increase (decrease) in collected taxes and other (6,826) Increase (decrease) in technical reserves – insurance and pension plan operations – Increase in other payables 311,925 Taxes paid (500,291) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,631,553 CASH FLOWS FROM INVESTING ACTIVITIES Dividends received 207,467 Available-for-sale securities (7,569,760) Acquisitions (17,922,416) Sales 10,352,656 Securities held to maturity (303,257) Acquisitions (303,257) Redemptions – Purchase of property and equipment in use (16,997) Sale of property and equipment in use 1,619 Acquisition of assets not for use (13,092) Acquisition of investments (10,466) Sale of investments 131,302 Increase in intangible assets (28,556) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,601,740) CASH FLOWS FROM FINANCING ACTIVITIES Capital reduction – Securities issued abroad (329,701) Subordinated debt 364,965 Interest on capital and dividends paid (351,474) NET CASH PROVIDED BY FINANCING ACTIVITIES (316,210) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,286,397) Cash and cash equivalents at the beginning of the period 8,670,664 Cash and cash equivalents at the end of the period 5,384,267 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,286,397) SAFRA CONSOLIDATED 2011 2012 2011 2,310,411 1,254,445 2,953,803 1,280,977 3,436,129 1,254,445 18,599 511,203 (56,563) 34,527 1,093,397 – 38,030 919,047 283 (407,695) 111,611 307,260 42,700 528,851 129,264 (1,107,436) 1,016,390 (938,696) 26,277 59,297 (224,877) 45,621 638,584 6,266,491 (3,375,518) (12,099,585) 553,502 (135,418) 133,521 389,271 42,700 794,250 (5,805,859) (1,399,426) 2,360,927 (1,079,808) (3,010,968) (9,280,280) 299,119 7,693 5,346,738 (525,605) 545,736 (1,071,341) 2,800,554 5,917,210 (241,844) 4,166,415 (1,438,284) 108,577 6,657 (4,541,924) 16,924,007 (4,388,785) 21,312,792 (709,169) 6,892,898 82,492 (3,963,469) (11,181,349) (304,565) (71,159) 1,933,472 (599,807) 545,736 (1,145,543) 2,739,934 5,747,672 (241,844) 22,136 3,146 – 70,327 (249,220) 2,439,675 (79,886) (8,248) 544,353 (259,505) (500,291) 9,220,294 20,479 3,898 557,901 301,795 (630,510) (2,369,730) 456,432 (1,327,375) (3,142,736) 1,815,361 (64,682) (74,376) 9,694 (19,216) – (5,965) (600,000) 131,304 (17,192) – (12,804,933) (18,569,459) 5,764,526 275,992 (438,257) 714,249 (21,314) 1,808 (13,092) (436) 131,302 (29,531) – 62,340 (42,990) 105,330 (278,275) (324,813) 46,538 (13,805) – (5,965) (1,925) 134,407 (18,739) (1,446,694) (12,460,204) (121,962) (5,024) 1,298,889 821,272 (765,289) 1,349,848 2,342,829 6,327,835 8,670,664 2,342,829 – (329,701) 364,965 (351,474) (316,210) (3,556,120) 9,411,583 5,855,463 (3,556,120) (5,024) 1,298,889 821,272 (765,289) 1,349,848 (1,141,844) 10,553,427 9,411,583 (1,141,844) The accompanying notes are an integral part of these financial statements. 65 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 66 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) 1. OPERATIONS Banco Safra S.A. and its subsidiaries are engaged in asset, liability and accessory operations inherent in the related authorized lines of business (commercial, including foreign exchange, housing loans, credit, financing and investment, and commercial leasing), and complementary activities among which are insurance operations, pension fund, brokerage and distribution of securities, management of credit cards and investment funds, and managed portfolios, in accordance with current legislation and regulations. 2. PRESENTATION OF THE FINANCIAL STATEMENTS a) Presentation of the Financial Statements The financial statements of Banco Safra S.A. and its subsidiaries ("Consolidated") have been prepared and are presented in conformity with accounting practices adopted in Brazil, applicable to institutions authorized to operate by the Brazilian Central Bank (BACEN), and in compliance with Brazilian Corporate Law, and reflect the changes introduced by Laws 11,638/2007 and 11,941/2009, and the standards and instructions of the National Monetary Council (CMN), the Brazilian Securities Commission (CVM), and the Superintendence of Private Insurances (SUSEP), as applicable. The financial statements have been prepared considering leasing operations under the financial method. Thus, the financial result of these transactions is presented together with the credit operations in the Statement of income. The advances on foreign exchange contracts are presented in conjunction with the foreign exchange portfolio for credit operations. The presentation of foreign exchange gains and losses is adjusted so that income and expenses represent only the changes and differences in exchange rates applied to the foreign currency amounts. The consolidated financial statements for Banco Safra S.A. were approved by the Board of Directors on 1/31/2013. b) Consolidation The Balance sheet accounts and the income and expenses between the parent and subsidiary companies, as well as the unrealized profits between the consolidated companies, were eliminated on consolidation. The Exclusive investment funds of consolidated companies are consolidated. The securities and investments included in the portfolios of these funds are classified by transactions and were distributed into types of Notes, in the same categories on which they were originally allocated. The figures of the Cayman Islands agent consolidated in the financial statements of the Bank and its balances, excluding the amounts of transactions with the parent company, converted at the exchange rate prevailing on December 31 are: Assets R$ 7,509,664 (R$ $7,051.645 on 31.12.2011), Liabilities R$ 7,200,635 (R$ 7,193,260 on 31.12.2011) and equity of R$ 1,624,645 (R$ 934,771 on 31.12.2011). Net income for the six months ended December 31 was R$ 94,644 (R$ 87,049 in 2011). The consolidated financial statements include Banco Safra and its subsidiaries shown below, including the exclusive investment funds consolidated on a proportional basis, highlighting: PARTICIPATION (%) 12.31.2012 12.31.2011 Banco Safra (Cayman Islands) Limited (1) J. Safra Corretora de Valores e Câmbio Ltda. Safra Asset Management Ltda. (2) Safra Leasing S.A. – Arrendamento Mercantil Banco J. Safra S.A. J. Safra Participações Ltda. (3) Sercom Comércio e Serviços Ltda. Safra Vida e Previdência S.A. Safra Seguros Gerais S.A. 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 90.98 100.00 99.98 100.00 (1) Entities based abroad. (2) Formerly Safra Distribuidora de Títulos e Valores Mobiliários Ltda. (3)Formerly Safra Cia. Securitizadora de Créditos Imobiliários. This investment, consolidated on a proportional basis at 12.31.2011, was transferred to the controlling stockholder on 4.11.2012, due to the capital decrease of Banco Safra (Note 17(a)). 66 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 67 c) Reclassifications for comparative purposes In the balance sheet, advance payments on foreign exchange These being: • Operating activities are the main income generating contracts in leasing operations, previously classified as activities of the entity that are neither investing nor Obligations for purchase of foreign currency (liabilities), financing activities. Included in this section are the started to be reclassified as foreign currency exchange funding activities that are carried out for the purposes purchases pending settlement (assets). The amount involved of financial intermediation and other operational activities was R$ 1,210,396. We highlight that the above reclassifications that are typical of a financial institution; did not give rise to alteration in profit, equity position, or the earnings per share. • Investing activities are those related to the buying and selling of long-term assets and other investments not included as cash equivalents, such as available-for-sale 3. SIGNIFICANT ACCOUNTING PRACTICES a) Determination of results and held-to-maturity investments; and • Financing activities are those that result in changes Profit is determined on the accrual basis of accounting, which to the size and composition of the entity's and third establishes that it should be included in the results of operations parties' capital. Included in this section are structured for the period in which they occur, simultaneously when they funding activities aimed at raising resources to finance are correlated, regardless of receipt or payment. the Entity itself. The earnings per share for the period ended 12.31.2012 were Cash flows from operating activities are presented using calculated based on the number of shares issued at the base the indirect method. Cash flows from investing and financing date (1,513,299,608). For comparability purposes, the earnings activities are presented based on gross payments and receivables. per share for 12.31.2011 (1,539,217,345) were calculated based on the equivalent amount of shares, taking into consideration c) Interbank investments the adjustment related to the change in shares during the These are stated at cost plus, when applicable, accrued income period, which did not change the equity amount. and monetary and foreign exchange rate variations up to the b) Cash flow I - Cash and cash equivalents: represented by cash and Balance sheet date, on a pro rata basis. d) Securities deposits held at call with financial institutions, recorded in In accordance with Brazilian Central Bank (BACEN) Circular line item 'Cash', interbank deposits, units in investment 3,068/2001, securities are classified according to management's funds, and fixed interest investments retrievable within 90 intention into three specific categories: days, with an immaterial risk of market value variation. 'Cash equivalents' are amounts held for the purpose of settling short term cash obligations and not for investment or other purposes. II - Cash flow statement: prepared in line with the criteria set out in Accounting Standard CPC 03 – Cash flow statements, approved by CMN Resolution 3,604/2008. This standard foresees the cash flow statements being made up of amounts used for operating, investing, and financing purposes. • Trading securities: securities acquired to be actively and frequently traded. The securities are stated in current assets, regardless of their maturities and adjusted to market against income for the period; • Available-for-sale: securities that can be traded but are not acquired to be actively and frequently traded or held to maturity. The income earned is recognized in the Statement of income, and unrealized gains and losses arising from market value fluctuations are recognized in a specific account in equity, net of taxes; 67 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 68 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) • Held-to-maturity: securities which the Bank has the models developed by management and include gathering of intention and financial capacity to hold in portfolio up average prices practiced in the market, applicable at the to their maturity. These securities are stated at cost, plus Balance sheet date. Accordingly, when these items are income accrued. financially settled, actual results may differ from estimates. The reconsideration of how securities are categorized occurs at the point of preparation of the half-year statements, taking into consideration their intended use and financial capacity, in accordance with procedures established by BACEN Circular 3,068/2001. e) Derivative financial instruments Derivative financial instruments used to hedge exposures to g) Credit operations and allowance for loan losses These are recorded at present value based on the index and contractual interest rate, on a pro rata basis, calculated up to the Balance sheet date. The revenues related to transactions that are delayed for 60 days or more are recognized in the statement of income only when received, regardless of their risk level classification. risks through the change of certain characteristics of the The Bank records monthly allowances for loan losses in financial assets and liabilities hedged that are considered highly conformity with the minimum provisioning levels established effective and follow all the requirements of designation and by CMN Resolution 2,682/1999, which requires the documentation under BACEN Circular 3,082/2002 are classification of transactions in nine risk levels, from "AA" classified as accounting hedges according to their nature: (minimum risk) to "H" (maximum risk), and also based on an • Market risk hedge – hedged financial assets or liabilities and the related derivative financial instruments are recorded at market value, with the related gains or losses recognized in the Statement of income; and • Cash flow hedge – hedged financial assets or financial liabilities and the related derivative financial instruments are recorded at market value, with the related gains or losses, net of taxes, recognized in a specific account of equity entitled "Carrying value adjustments". The noneffective hedge portion is recognized directly in the Statement of income. analysis of the risks involved in the realization of the receivables, periodically performed and reviewed by management, which considers, among others, the historical experience with borrowers, the economic scenario and global and specific portfolio risks. For the purposes of presentation in the notes, lending operations and their respective allowances are classified in two groups: i) Normal course and general allowance for loan losses – transactions without delay and/or with installments overdue up to 14 days, and ii) Normal course and specific allowance for loan losses – transactions with installments overdue for more than 14 days. The transactions classified in level "H" are written off against Derivative financial instruments contracted at the request of assets after six months from their classification in this level, and third parties or on own behalf that fail to meet the accounting then are controlled in a memorandum account for at least five hedge criteria established by the Brazilian Central Bank, years and while all collection procedures are not exhausted. especially derivative financial instruments used to manage overall risk exposure, are recorded at market value, with gains and losses recognized directly in income. Renegotiated transactions remain at least at the same risk level in which they were classified. Renegotiated transactions that had already been written off are rated in risk level H, and any 68 f) Market value measurement income from the renegotiation is only recognized when actually The market value measurement methodology (probable received. When a significant amount is paid or new material realizable value) of securities and derivative financial events justify changing a transaction's risk level, the transaction instruments is based on the economic scenario and pricing may be reclassified to a lower risk rating. Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 69 h) Derecognition of financial instruments In accordance with CMN Resolution 3,533/2008, financial assets are derecognized when the contractual rights to the cash flows from these assets expire, or when substantially all the risks and rewards of ownership of the instrument are transferred. When substantially all the risks and rewards are not transferred nor retained, Safra assesses the instrument control in order to determine its maintenance or not in assets. on the economic useful lives of assets, as follows: properties in use – 4%; communication and security systems, facilities, aircraft, and furniture and fixtures – 10%; and vehicles and data processing equipment – 20%. They are adjusted by a provision for impairment losses. l) Intangible assets Correspond to rights in intangible assets that are maintained or used in the Bank and its subsidiaries' activities. Intangible Securities linked to repurchase and assignment of credit assets with finite useful lives are amortized on the straight-line with co-obligation are not derecognized because Safra retains method over the estimated period in which they will generate substantially all the risks and rewards to the extent there is, economic benefits. They are adjusted by a provision for respectively, a commitment to repurchase them at a impairment losses. predetermined amount or to make payments in the event of default of the original debtor of the credit operations. m) Impairment of non-financial assets Financial liabilities are derecognized if the obligation CMN Resolution 3,566/2008 provides the procedures is contractually extinguished or settled. applicable to the recognition, measurement and disclosure of impairment and requires compliance with CPC Technical i) Other assets Pronouncement 1 – Impairment of assets. These correspond basically to assets not held for sale, especially Impairment of non-financial assets is recorded as a loss when those received as payment, and prepaid expenses, whose the book value of an asset or a cash generating unit is higher benefits or services are expected in the future. than its recoverable or realizable value. A cash-generating unit j) Investments is the smallest identifiable group of assets which generates substantial cash flows irrespective of other assets and groups Investments in subsidiary and associated companies in which the Bank has significant influence or its interest is 20% or more of assets. When applicable, impairment losses are recorded in income for the period in which they were identified. of the voting capital are recorded by the equity method of accounting. Other investments refer basically to shares of companies in which the Bank, directly or indirectly, does not have significant influence or does not hold more than 20% of the voting capital and are, therefore, stated at cost, adjusted Non-financial assets are periodically reviewed for impairment, at least on an annual basis, to determine if there are any indications that the assets' recoverable or realizable value is impaired. by a provision for impairment. Dividends received from these Accordingly, in conformity with the above standards, Safra investments are recognized within the result. Group's management is not aware of any material adjustments k) Property and equipment in use Correspond to rights in tangible assets that are maintained or that might affect the ability to recover the amounts recorded in property and equipment and intangible assets at 12.31.2012 and 2011. used in the Bank and its subsidiaries' activities, including those rights received as a result of transactions that transfer the risks, n) Open market funding and borrowings and onlendings rewards, and control of such assets to the Bank. They are The stated amounts include income, monetary adjustments stated at cost, net of accumulated depreciation. Depreciation (on a pro rata basis) and exchange variations, as applicable, is calculated on the straight-line method at annual rates based incurred through the Balance sheet date. 69 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 70 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) Incurred transaction costs, basically relating to amounts paid to a. Insurance: third parties for intermediation, placement and distribution • Provision for unearned premiums (PPNG): corresponds services for entity securities are accounted for against the to the portion of insurance premiums retained securities and are recognized on a monthly basis to the corresponding to the non-elapsed risk period of the appropriate expense account i.e. "pro rata temporis", except insurance contracts, on a pro rata basis. That reserve when the instruments are measured at fair value through the related to retrocession transactions is recognized based profit or loss. on information received from IRB Brasil Resseguros S.A. o) Insurance, reinsurance and supplementary pension plan operations I - Receivables from insurance and reinsurance operations • Premiums receivable – refer to financial resources (RVNE) is recognized to cover risks that were not issued on the date of calculation; • Provision for unsettled claims (PSL): based on estimates flowing to the Bank as receipt of premiums related to of indemnities relating to claims received until the end insurance, recorded on the date of issuance of the of the period, and monetarily restated according to policies. An allowance for loan losses is recorded for SUSEP regulations; these amounts and, in case of non-payment, they are written off through the unilateral cancellation of the insurance coverage; • Reinsurance technical provisions – comprise technical provisions referring to reinsurance operations; Reinsurance operations are carried out in the normal course of activities in order to limit its potential losses. The liabilities related to reinsurance operations are presented gross of their respective recoveries, since the existence of a contract does not exempt the Company from its obligations to the policyholders. • Deferred acquisition costs – include direct and indirect costs related to the origination of insurances. These costs, except for the commissions paid to the brokers and others, are recorded directly in the statement of income, when incurred. The commissions are deferred and are recognized in the statement of income in proportion to the recognition of the revenues with premiums, that is, for the term corresponding to the insurance contract. II - Technical reserves of insurance and supplementary pension plan Insurance and supplementary pension plan reserves are • Reserve for incurred but not reported losses (IBNR): calculated based on actuarial studies and recorded to cover claims that have occurred but not notified by the insured party; • Premium deficiency reserve (PIP): consists of a prospective actuarial calculation, recognized in the event of insufficiency of the unearned premium reserve (PPNG); and • Supplementary premium reserve (PCP): recognized on a monthly basis to supplement the PPNG, and its amount is equal to the difference, if positive, between the average of the sum of amounts calculated daily during the recognition month and the PPNG recorded, considering risks in force, whether written or not. b. Supplementary pension plan: • Reserves for unvested and vested benefits: represent the amount of the obligations assumed with the participants of the defined contribution plans PGBL and VGBL and are recognized according to the methodology established in a technical actuarial note approved by SUSEP; • Contribution deficiency reserve (PIC): recorded annually recorded based on technical actuarial notes, in accordance based on an actuarial valuation to cover occasional with criteria established by SUSEP and National Council insufficiency of mathematical reserves for unvested and of Private Insurances (CNSP) Resolutions 162/2006, and vested benefits; and subsequent modifications: 70 In addition, the Reserve for current risks not issued Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 71 • Administrative expenses reserve (PDA): recognized to cover the administrative expenses of the VGBL and PGBL pension plans and individual life insurance, calculated based on approved methodology in the technical actuarial note. If the result is positive, this amount is recognized in PIP, PIC or any other allowances that may replace them. p) Provisions, contingent assets and liabilities, and legal, tax and social security obligations The recognition, measurement and disclosure of contingent III - Calculation of insurance, reinsurance and supplementary pension plan earnings assets and liabilities and legal obligations are made in conformity with the criteria set forth in the CPC Technical Insurance premiums, net of co-insurance premiums, as well Pronouncement 25 – Provisions, Contingent Liabilities and as acquisition costs are recognized at the point of issue of Contingent Assets, approved by CMN Resolution 3,823/2009 the policy contract or invoice. Insurance premium income and BACEN Circular 3,429/2010, as described below: is recognized into the Statement of income over the course of the policy risk period. This is achieved by establishing an unearned premium reserve, and deferred acquisition costs. Pension plan contributions are recognized as received. Reinsurance premiums are deferred and recognized over the course of the cover period. (i) Contingent assets – possible assets that have come about as a result of a past event but whose existence will only be confirmed by the occurrence or not of one or more uncertain future events that are not fully under the control of the entity. The contingent asset is not recognized in the accounts, but is disclosed in the Notes when it is probable that the asset will be recognized. By extension, when Income and expenses arising from insurance operations with Compulsory Automobile Insurance for Personal Damages (DPVAT) are recognized based on the evidence arises that makes the asset a practical certainty, the asset is no longer contingent and is recognized in the accounts. information received from Seguradora Líder dos Consórcios do Seguro DPVAT S.A. (ii) Contingent liabilities – a present (legal or constructive) obligation as a result of past events, in which it is probable IV - Liability adequacy test that an outflow of resources will be required to settle the In compliance with SUSEP Circular Letter 457/2012, obligation and the amount can be reliably measured, should Safra prepares a Liability Adequacy Test (LAT) every six be recognized by the entity as a provision. If the outflow months. The purpose of this test is to assess the liabilities of resources to settle the obligation is not probable or cannot arising from the contracts of the certificates of insurance be reliably measured, then a contingent liability is created plans (except for DPVAT, DPEM and Housing Insurance instead of a provision. The contingent liability is not of the National Housing System (SFH)) and of open-end registered in the accounts but is disclosed in the Notes, supplementary pension plan, considering the minimum unless the likelihood of having to settle the obligation is assumptions determined by SUSEP and by Safra's own remote. internal actuaries. Contingent liabilities also come about as a result of possible The LAT result will be the difference between: obligations arising from past events and whose existence i) the amount of the current estimates of cash flows; and ii) the sum of the accounting balance of the technical provisions on the base-date (except for PIP and PIC), deducted from the deferred acquisition costs and intangible will be confirmed only by the occurrence of one or more uncertain future events that are not fully under the control of the entity. These possible obligations should also be disclosed. assets directly related to the technical allowances. 71 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 72 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) Obligations are evaluated by Management, based on the calculation continue to be subject to PIS and COFINS rates of 1.65% and best estimates and taking into consideration the opinion 7.6%, respectively. of legal advisors, who create a provision when the likelihood of a loss is considered probable; when the r) Deferred income likelihood is considered possible, then this is disclosed. Refers to income received before fulfillment of the obligation Obligations for which there is a remote chance of loss are that gave origin to it. The recognition, as effective income, will neither provided for or disclosed. be recorded over the term of the transaction. (iii) Legal (tax and social security obligations) – refer to lawsuits challenging the legality or constitutionality of certain taxes. s) Use of accounting estimates The amount under litigation is quantified, accrued and The preparation of financial statements requires management adjusted on a monthly basis. to make estimates and assumptions that, in its best judgment, affect the amounts of certain financial and non-financial assets The judicial deposits not linked to provisions for and liabilities, income and expenses and other transactions, contingencies and legal obligations are updated on a such as: (i) the market value of certain financial assets and monthly basis. financial liabilities and derivative financial instruments; (ii) depreciation rates of property and equipment items; q) Taxes Calculated at the rates below, considering the effective relevant (iii) amortization of intangible assets; (iv) provisions required to cover risks of contingent liabilities; (v) tax credits; (vi) legislation for each tax rate. impairment of trade receivables, and (vii) insurance and Income tax 15.00% pension plan technical reserves. The amounts of the possible Income tax surcharge 10.00% liquidation of these assets and liabilities, financial or otherwise, Social contribution (1) 15.00% may differ from those estimates. Social Integration Program (PIS) (2) Social Contribution on Revenues (COFINS) Service tax (ISS) 0.65% (2) 4.00% Up to 5.00% (1) Non-financial institution subsidiaries continue to be subject to a rate of 9% for this contribution; (2) Non-financial institution subsidiaries that perform a non-cumulative 72 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 73 4. CASH AND CASH EQUIVALENTS BANK CONSOLIDATED 12.31.2012 12.31.2011 12.31.2012 12.31.2011 301,797 4,014,889 281,144 786,437 5,384,267 246,604 7,405,924 291,404 726,732 8,670,664 411,090 4,313,444 281,144 849,785 5,855,463 380,224 8,001,218 291,404 738,737 9,411,583 Cash Open market investments – own portfolio (1) Interbank deposits Foreign currency investments Total (1) At 12.31.2011 included in Consolidated R$ 595,294 referring to repurchase agreements carried out through an exclusive investment fund (Note 6 (b)). The models of management of the liquidity of the bank take into consideration the high liquidity of the free public treasury, with the overall liquidity of Consolidated, represented as follows: CONSOLIDATED Cash and cash equivalents Own portfolio – free government securities – Note 6 (b) Free resources 12.31.2012 12.31.2011 5,855,463 8,925,615 14,781,078 9,411,583 1,980,869 11,392,452 5. INTERBANK INVESTMENTS BANK 12.31.2012 Amounts by maturity Open market investments Own portfolio – National Treasury Securities under resell agreement – Third-party portfolio – National Treasury Short position – National Treasury Interbank deposits (1) Foreign currency investments (Note 19) Total at 12.31.2012 Total at 12.31.2011 12.31.2011 Up to 90 days From 91 to 365 days Over 365 days Total Total 3,784,697 100,978 15,019,669 3,913,911 – – 18,804,366 4,014,889 18,111,372 7,405,924 3,683,719 – 588,432 786,437 5,159,566 19,411,573 8,860,328 2,245,430 110,939 – 15,130,608 867,750 – – 1,290,850 – 1,290,850 1,243,441 12,544,047 2,245,430 1,990,221 786,437 21,581,024 21,522,764 10,705,448 – 2,684,660 726,732 – 21,522,764 CONSOLIDATED 12.31.2012 Amounts by maturity Open market investments Own portfolio – National Treasury Securities under resell agreement – Third-party portfolio – National Treasury Short position – National Treasury Interbank deposits (1) Foreign currency investments (Note 19) Total at 12.31.2012 Total at 12.31.2011 12.31.2011 Up to 90 days From 91 to 365 days Over 365 days Total Total 3,786,162 399,533 15,019,669 3,913,911 – – 18,805,831 4,313,444 18,111,372 7,405,924 3,386,629 – 631,732 849,785 5,267,679 19,423,578 8,860,328 2,245,430 340,397 – 15,360,066 867,750 – – 1,290,850 – 1,290,850 1,243,441 12,246,957 2,245,430 2,262,979 849,785 21,918,595 21,534,769 10,705,448 – 2,684,660 738,737 – 21,534,769 (1) R$ 261,000 (R$ 570,000 at 12.31.2011) of this amount in Bank and R$ 401,000 in Consolidated relates to operations between non-related financial institutions, which are held as guarantees against certain compulsory payments-on-account. 73 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 74 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) 6. SECURITIES a) Breakdown by maturity by class BANK 12.31.2012 Mark-tomarket adjustment Cost No stated maturity Up to From 91 to Over 90 days 365 days 365 days Market value – – – – – – – – – – 2,651,250 2,281,431 407,862 1,849,524 24,045 – 369,819 66,122 – 303,697 28,780,215 15,428,246 7,668,043 7,760,203 13,286,087 13,155,492 19,388,067 562,185 – 562,185 18,354,135 18,119,303 Trading securities National Treasury National Treasury Notes National Treasury Bills Financial Treasury Bills Private entities – Shares Securities issued abroad Shares Bank deposit certificate – Note 19 Eurobonds 9,336,283 8,870,540 6,630,931 2,216,852 22,757 19,176 446,568 145,638 300,910 19 78,124 50,666 5,618 45,052 (4) (354) 27,812 – 27,812 – 9,414,407 8,921,206 6,636,549 2,261,904 22,753 18,822 474,380 145,638 328,722 19 164,460 – – – – 18,822 145,638 145,638 – – 119,986 119,967 119,967 – – – 19 – – 19 Securities available for sale National Treasury National Treasury Notes National Treasury Bills Private securities Debentures (1) Certificates of real estate receivables (CRI) Shares Financial bills Securities issued abroad Eurobonds Bank deposit certificate – Note 19 28,358,592 14,954,862 7,506,169 7,448,693 13,338,337 13,155,492 737,840 737,070 161,874 575,196 281 – 29,096,432 15,691,932 7,668,043 8,023,889 13,338,618 13,155,492 52,531 – – – 52,531 – – – – – – – 8,400 52,250 122,195 65,393 65,393 – – 281 – 489 489 – 8,400 52,531 122,195 65,882 65,882 – – 52,531 – – – – – – – – – – – – – – – – 8,400 – 122,195 65,882 65,882 – 160,057 74,775 – 471,747 35,889 435,858 82,676 – 82,676 – – – 82,676 89,624 82,676 – – – 82,676 – – – – – – – 82,676 – – 15,248 – – – – – – – 216,991 140,897 66,122 74,775 – 251,783 371,769 509,864 43,041 436,193 – – 30,630 Securities held to maturity Government securities – National Treasury Bills Private securities – Promissory Notes Foreign securities – Bank Deposit Certificates Derivative financial instruments – Assets (Note 7) 647,766 225,489 Total at 12.31.2012 38,425,317 1,041,453 Total at 12.31.2011 22,518,294 172,481 Trading securities 2,644,745 6,505 Securities available for sale (1) 19,371,522 16,545 Securities held to maturity (4) 89,624 – Derivative financial instruments – Assets (Note 7) 412,403 149,431 74 Market value 12.31.2011 873,255 39,466,770 22,690,775 2,651,250 19,388,067 89,624 561,834 9,129,961 8,801,239 6,516,582 2,261,904 22,753 – 328,722 – 328,722 – 263,686 263,686 – 263,686 – – – 182,803 438,669 9,576,449 29,301,561 2,691,290 19,348,724 2,542,087 – 9,336 18,867,763 89,624 – 50,243 480,961 74,376 561,834 – 22,690,775 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 75 CONSOLIDATED 12.31.2012 12.31.2011 Cost Mark-tomarket adjustment Market value 15,363,220 12,240,487 10,000,878 2,216,852 22,757 50,312 50,666 5,618 45,052 (4) 15,413,532 12,291,153 10,006,496 2,261,904 22,753 390,230 – – – – 2,957,803 97 19,176 145,657 145,638 19 – – (354) – – – 2,957,803 97 18,822 145,657 145,638 19 225,673 97 18,822 145,638 145,638 – Securities available for sale 16,720,229 739,655 National Treasury 14,983,590 737,506 National Treasury Notes 7,534,897 162,310 National Treasury Bills 7,448,693 575,196 Linked to Technical Reserve – National Treasury Bills – Note 11(b) 91,131 1,379 Private securities 1,580,115 281 Debentures 817,229 – Certificates of real estate receivables (CRI) 8,400 – Shares 52,329 281 Bank Deposit Certificates 579,962 – Financial bills 122,195 – Securities issued abroad 65,393 489 Eurobonds 65,393 489 Bank deposit certificate – Note 19 – – 17,459,884 15,721,096 7,697,207 8,023,889 52,610 – – – 28,924 – – – 92,510 1,580,396 817,229 – 52,610 – – 28,924 24,403 – 33,788 13,523 92,510 1,465,074 779,303 80,384 1,627,921 1,027,564 – – 4,521 – – – – – – 20,265 – – – – 8,400 – 555,176 122,195 65,882 65,882 – 160,957 74,775 364,625 – 473,624 35,889 437,735 15,179 – 15,179 – 15,179 82,676 82,676 – – – 356,848 – 282,471 16,787 265,684 Trading securities National Treasury National Treasury Notes National Treasury Bills Financial Treasury Bills Linked to Technical Reserve – Note 11(b) Investment fund quotas Private entities – Shares Securities issued abroad Shares Eurobonds Securities held to maturity National Treasury Private securities Debentures Promissory Notes Foreign securities – Bank Deposit Certificates 118,282 82,676 35,606 – 35,606 – – – – – – – Derivative financial instruments – Assets (Note 7) 475,490 20,751 Total at 12.31.2012 32,677,220 810,718 Total at 12.31.2011 8,857,345 45,784 Trading securities 5,442,056 7,383 Securities available for sale 2,679,862 16,915 Securities held to maturity 356,848 – Derivative financial instruments – Assets (Note 7) 378,579 21,486 No stated maturity Up to From 91 to Over 90 days 365 days 365 days 1,927,764 10,363,408 1,927,745 10,363,408 1,927,745 8,078,751 – 2,261,904 – 22,753 – – – 19 – 19 8,400 52,610 579,962 122,195 65,882 65,882 – – 52,610 – – – – – 118,282 82,676 35,606 – 35,606 – – – – – 20,427 – 20,427 – 20,427 – – – 496,240 33,487,938 8,903,129 5,449,439 2,696,777 356,848 – 442,840 863,345 788,570 74,775 – 400,065 – 2,732,130 – – – – 5,369,055 2,281,431 407,862 1,849,524 24,045 2,732,130 – – – – – 2,426,208 595,294 – 66,122 66,122 – 297,474 17,080,876 263,686 15,457,410 – 7,697,207 263,686 7,760,203 2,777,161 595,232 33,047 562,185 – – – – – – – – 224,196 78,229 193,815 2,201,311 10,754,290 20,089,497 573,954 2,726,529 4,739,301 43,041 2,318,774 2,299,054 489,182 49,641 2,083,179 16,787 340,061 – 24,944 Market value 18,053 74,377 400,065 – 8,903,129 357,068 75 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 76 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) b) By type BANK Own portfolio National Treasury National Treasury Notes Financial Treasury Bills National Treasury Bills Private securities Debentures (1) Shares Promissory Notes Financial bills Quotas of investment funds (2) Bank Deposit Certificates Certificates of real estate receivables (CRI) Securities issued abroad Eurobonds Shares Bank Deposit Certificates Subject to repurchase agreements National Treasury National Treasury Notes National Treasury Bills Private securities – Debentures (1) Restricted deposits – National Treasury National Treasury Notes National Treasury Bills Linked to guarantees – National Treasury (3) National Treasury Notes Financial Treasury Bills National Treasury Bills Insurance and supplementary pension plan guarantee reserves – (Note 11(b)) Government securities – National Treasury Bills Quotas of investment funds – DPVAT Quotas of investment funds – PGBL and VGBL Derivative financial instruments – Assets (Note 7) Total CONSOLIDATED 12.31.2012 12.31.2011 12.31.2012 12.31.2011 7,218,466 5,561,152 1,643,220 22,306 3,895,626 1,117,053 915,105 71,353 – 122,195 – – 8,400 540,261 65,901 145,638 328,722 4,631,359 1,980,428 294,618 19,266 1,666,544 1,734,989 1,484,909 74,775 15,248 – – – 160,057 915,942 35,889 66,122 813,931 10,772,075 8,925,615 5,007,683 22,306 3,895,626 1,634,921 817,229 71,432 35,606 122,195 97 579,962 8,400 211,539 65,901 145,638 – 5,100,678 1,980,869 295,059 19,266 1,666,544 2,505,686 1,044,351 74,775 265,684 – 595,294 364,625 160,957 614,123 35,889 66,122 512,112 30,042,067 17,801,680 12,497,731 5,303,949 12,240,387 16,634,394 – – – 16,634,394 17,801,680 17,801,680 12,497,731 5,303,949 – – – – – – 278,839 69,873 208,966 188,582 2 188,580 278,839 69,873 208,966 188,582 2 188,580 1,054,143 176,444 447 877,252 674,606 113,242 4,779 556,585 1,088,791 211,092 447 877,252 707,212 145,849 4,778 556,585 – – – – – – – – 3,050,313 92,510 63,715 2,894,088 2,506,592 80,384 58,938 2,367,270 873,255 39,466,770 561,834 22,690,775 496,240 33,487,938 400,065 8,903,129 (1) It includes debentures issued by Safra Leasing S.A. – Arrendamento Mercantil (subsidiary) amounting to R$ 13,039,596 (R$ 17,969,675 at 12.31.2011) – Note 19. (2) At 12.31.2011, Safra Group's exclusive funds were mainly represented by R$ 564,713 of securities under agreement to resell (guaranteed by Government Bonds) with Banco Safra S.A. (3) Relates to derivative guarantees worth R$ 927,936 (R$ 533,365 at 12.31.2011) in Bank and R$ 962,584 (R$ 565,786 at 12.31.2011) in Consolidated, held in custody worth R$ 87,904 (R$ 92,299 at 12.31.2011) in Bank and Consolidated, and amounts for civil and labor suits (Note 12(c-I)) worth R$ 38,303 (R$ 48,942 at 12.31.2011) in Bank and R$ 38,303 (R$ 49,127 at 12.31.2011) in Consolidated. (4) Securities classified as held to maturity, are valued at market value, would present a positive adjustment on 12.31.2012 in the amount of R$ 3,379. 76 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 77 c) Changes of financial assets CONSOLIDATED Available-for-Sale Securities Held-to-Maturity 01.01 to 12.31.2012 01.01 to 12.31.2011 01.01 to 12.31.2012 At the beginning of the period 01.01 to 12.31.2011 2,777,161 2,347,565 356,848 40,495 Acquisition in the period 18,569,459 42,990 438,257 324,813 Sales in the period (2,513,013) (45,918) – – Interest income and redemptions (3,251,513) (59,412) (714,249) (46,538) Interest income and result on realization 1,156,227 474,210 37,426 38,078 721,563 17,726 17,459,884 2,777,161 Adjustments in changes in fair value (1) Balance at the end of the period – – 118,282 356,848 (1) Recorded in Equity. In 2012, there were no reclassifications in securities. d) Developments and market value adjustment BANK CONSOLIDATED 01.01 to 12.31.2012 01.01 to 12.31.2011 01.01 to 12.31.2012 01.01 to 12.31.2011 126,868 (297,803) 23,021 (130,123) 6,505 (600) 7,383 (2,105) 16,545 (431) 18,092 366 (assets and liabilities) 126,538 (279,827) (10,212) (136,519) Fair value hedge (22,720) (16,945) 7,758 8,135 Activity affecting: 793,721 424,671 695,286 153,144 72,426 407,695 (26,277) 135,418 71,619 7,105 42,929 9,488 (assets and liabilities) 64,247 406,365 (3,776) 126,307 Fair value hedge (63,440) (5,775) (65,430) (377) 721,295 16,976 721,563 17,726 920,589 126,868 718,307 23,021 78,124 6,505 50,312 7,383 737,840 16,545 739,655 18,092 (assets and liabilities) 190,785 126,538 (13,988) (10,212) Fair value hedge (86,160) (22,720) (57,672) 7,758 Opening balance – Mark-to-market adjustment Trading securities Securities available for sale Derivative financial instruments Statement of income Trading securities Derivative financial instruments Equity – Available for sale Closing balance – Mark-to-market adjustment Trading securities Securities available for sale Derivative financial instruments 77 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 78 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) 7. DERIVATIVE FINANCIAL INSTRUMENTS The main purpose of the use of derivative financial instruments by Banco Safra and its subsidiaries is to provide to their customers products that hedge these customers' assets against risks from currency and interest rate fluctuations. Furthermore, these instruments are used by the Bank in the daily negotiable assets and payable liabilities in transactions with derivative financial instruments that might affect the payment ability of the entity, taking into consideration the currencies and settlement terms of their assets and liabilities. management of the risks assumed in its operations, including Banco Safra and its subsidiaries' positions are monitored by an the hedging of the portfolio of fixed interest securities and independent control function, which uses a specific system to operations defined by management. manage risk, including calculating the Value at Risk (VaR) The main risks related to the derivative financial instruments with a confidence interval of 99 percent, stress tests, back are: credit risk, market risk, and liquidity risk, as defined below: testing, and other technical resources. The Group has a Market • Credit risk is the exposure to losses in the event of default by counterparties or by debtors of contracted amounts. • Market risk is the exposure to fluctuations in interest rates, Risk Committee, consisting of high-ranked executives, which meets on a weekly basis to analyze the market conditions and a Treasury and Risk Committee, including members of the Executive Committee, which meets on a monthly basis to foreign exchange rates, commodity prices, stock market discuss detailed aspects of Market Risk management, as well as prices, and other values, and due to the type of product, reviewing risk limits, stress scenarios, strategies and outcomes. volume of operations, terms and conditions of the agreement and underlying volatility. 78 • Liquidity risk is the risk arising from mismatches between Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 79 a) Asset and liability accounts BANK 12.31.2012 12.31.2011 Mark-to- Non Deliverable Forward – NDF Option premiums Cost market adjustment 71,834 – Market value Up to 90 days From 91 to 365 days 71,834 25,186 46,648 1,358 155 1,513 1,372 7 2,506 35 2,541 2,541 Over 365 days Market value 61,788 – 134 4,766 Forward – Purchase receivables – Shares Swap – Amounts receivable – – 1,292 549,189 225,299 774,488 208,646 127,307 438,535 477,908 Interest rate – Note 19 192,531 207,693 400,224 29,210 107,177 263,837 181,070 Foreign currency 336,871 29,912 366,783 176,893 18,274 171,616 283,204 11,943 (6,021) 5,922 2,474 1,470 1,978 10,577 7,844 (6,285) 1,559 69 386 1,104 3,057 Commodities Shares Credit default swaps (CDS) 261 – 261 261 22,618 – 22,618 13,777 8,841 Total assets at 12.31.2012 647,766 225,489 873,255 251,783 182,803 438,669 – Total assets at 12.31.2011 412,403 149,431 561,834 30,630 50,243 480,961 561,834 Futures Non Deliverable Forward (NDF) Option premiums (1) Bovespa Index Foreign currency – Note 19 Shares Swap – amounts payable (1) (4,523) (3,495,504) – 46,177 – (4,523) (1,813) (2,710) (3,449,327) (729,026) (1,577,583) (137) (20) (157) (143) (14) (3,494,687) 46,197 (3,448,490) (728,203) (1,577,569) (680) (740,514) – (80,881) (680) (680) (821,395) (201,463) – (392,793) – 16,080 – – – (1,065) (1,142,718) (2,747,269) – 144 (1,142,718) (2,747,413) – (227,139) – (623,312) Interest rate (206,877) (67,504) (274,381) (68,884) (129,737) (75,760) (77,677) Foreign currency – Note 19 (274,409) (23,053) (297,462) (18,179) (183,232) (96,051) (163,099) Bovespa Index Commodities (8,788) (16) (8,804) (8,654) (150) (148,130) 1,313 (146,817) (95,575) (49,329) (30,345) Shares (82,909) 3,928 (78,981) (10,171) Other (19,401) 4,451 (14,950) – Credit default swaps (CDS) Futures (11,711) (21,420) – (11,711) (6,334) (40,252) (308,430) (38,465) (33,854) – (14,950) – – (5,377) (7,618) – (2,240) (21,420) (3,612) (17,808) Total liabilities at 12.31.2012 (4,273,672) (34,704) (4,308,376) (942,248) (1,990,894) Total liabilities at 12.31.2011 (3,358,611) (22,893) (3,381,504) (1,134,422) (1,974,820) – – (1,913) (1,375,234) – (272,262) (3,381,504) 79 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:46 AM Page 80 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) CONSOLIDATED 12.31.2012 Mark-to- Non Deliverable Forward – NDF Option premiums Cost market adjustment 71,834 – Market value 12.31.2011 Up to 90 days From 91 to 365 days Over 365 days Market value 71,834 25,186 46,648 1,358 155 1,513 1,372 7 2,506 35 2,541 2,541 376,912 20,561 397,473 181,059 22,733 193,681 317,022 20,255 2,955 23,210 1,624 2,603 18,983 20,184 336,870 29,912 366,782 176,892 18,274 171,616 283,204 11,943 (6021) 5,922 2,474 1,470 1,978 10,577 7,844 (6,285) 1,559 69 386 1,104 3,057 – 134 61,788 3,883 Forward – Purchase receivables – Shares Swap – Amounts receivable Interest rate Foreign currency Commodities Shares Credit default swaps (CDS) – – 261 – 261 261 – – 22,618 – 22,618 13,777 8,841 – Total assets at 12.31.2012 475,489 20,751 496,240 224,196 78,229 193,815 Total assets at 12.31.2011 378,579 21,486 400,065 24,944 18,053 357,068 Futures Non Deliverable Forward (NDF) Option premiums (1) Bovespa Index Foreign currency Shares Swap – amounts payable (1) (4,523) (3,005,487) – 46,142 (4,523) (1,813) (2,710) (2,959,345) (729,064) (1,577,583) (137) (20) (157) (143) (14) (3,004,670) 46,162 (2,958,508) (728,239) (1,577,569) (680) – (680) (680) (846,965) (80,881) (927,846) (201,462) – 1,292 16,080 – – 400,065 (1,065) (652,697) (2,493,167) – 144 (652,700) (2,493,311) – – (499,245) (227,139) – (767,302) Interest rate (206,877) (67,504) (274,381) (68,884) (129,737) (75,760) (77,256) Foreign currency (380,860) (23,053) (403,913) (18,178) (289,684) (96,051) (307,510) Bovespa Index Commodities (8,788) (16) (8,804) (8,654) (150) (148,130) 1,313 (146,817) (95,575) (49,329) (30,345) Shares (82,909) 3,928 (78,981) (10,171) Other (19,401) 4,451 (14,950) – (11,711) – (11,711) Credit default swaps (CDS) Futures (21,420) (6,334) – (40,252) (1,913) (308,430) (38,465) (33,854) – (14,950) – (5,377) – (7,618) (21,420) (3,612) (17,808) Total liabilities at 12.31.2012 (3,890,106) (34,739) (3,924,845) (942,283) (2,097,346) (885,216) Total liabilities at 12.31.2011 (3,239,694) (31,698) (3,271,392) (880,142) (1,951,703) (439,547) (3,271,392) – – (2,240) – (1) Includes premiums of structured fixed income transactions in the amount of R$ 3,979,296 (R$ 3,156,897 at 12.31.2011) in Bank and R$ 3,489,278 (R$ 2,901,330 at 12.31.2011) in Consolidated – Note 10. 80 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 81 b) Composition by notional value I - By type of operation BANK 12.31.2012 Locations Non Deliverable Forward – NDF 12.31.2011 CONSOLIDATED 12.31.2012 12.31.2011 Notional amount Notional amount Notional amount Notional amount 1,784,424 1,026,236 1,784,424 1,026,236 Bought CETIP 1,230,093 1,017,845 1,230,093 1,017,845 Sold CETIP 554,331 8,391 554,331 8,391 37,314,587 26,136,289 30,369,127 23,731,793 107,907 386,487 107,907 386,487 Option premiums Bought Interbank deposit – DI BM&FBOVESPA 19,401 – 19,401 Foreign currency BM&FBOVESPA 2,089 375,160 2,089 Others BM&FBOVESPA Sold Foreign currency Other CETIP BM&FBOVESPA Forward Sale receivables – Shares BM&FBOVESPA Liability for shares to deliver BM&FBOVESPA Swaps 86,417 11,327 86,417 11,327 37,206,680 25,749,802 30,261,220 23,345,306 37,112,401 25,737,974 30,166,941 23,333,478 94,279 11,828 94,279 11,828 2,547 446,425 2,547 446,425 2,547 1,413 2,547 1,413 – 16,816,542 Interest rate BM&FBOVESPA Interest rate CETIP – 375,160 445,012 16,280,637 – 11,635,312 445,012 9,044,558 527,013 478,500 527,013 478,500 9,134,964 11,668,909 3,652,241 4,156,079 Foreign currency CETIP 5,463,537 1,929,314 5,765,030 2,206,065 Commodities CETIP 1,035,802 1,763,148 1,035,802 1,763,148 Shares CETIP 528,842 241,065 528,842 241,065 Other 126,384 199,701 126,384 199,701 Future 32,460,805 25,431,288 32,460,805 25,431,288 7,569,876 2,766,698 7,569,876 2,766,698 Long positions Interest rate BM&FBOVESPA 4,803,937 2,693,684 4,803,937 2,693,684 Currency coupon BM&FBOVESPA 1,995,939 – 1,995,939 – Shares BM&FBOVESPA 266,327 Foreign currency BM&FBOVESPA 434,400 Other BM&FBOVESPA Short positions 69,273 – 73,014 – 266,327 – 434,400 73,014 69,273 – 24,890,929 22,664,590 24,890,929 22,664,590 Interest rate BM&FBOVESPA 21,080,988 22,547,582 21,080,988 22,547,582 Foreign currency BM&FBOVESPA 321,509 66,736 321,509 66,736 Currency coupon BM&FBOVESPA 3,425,613 Other BM&FBOVESPA 62,819 Credit default swaps (CDS) Total Over-the-counter – 50,272 3,425,613 62,819 – 50,272 423,587 232,205 423,587 232,205 88,801,183 69,553,080 76,674,492 59,912,505 81 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 82 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) II - Locations BANK 12.31.2012 From 91 to 365 days Over 365 days Notional amount Notional amount 12,599,741 23,263,686 19,341,019 55,204,446 16,851,528 4,512,099 8,967,325 19,693,726 33,173,150 52,469,239 Locations CETIP BM&FBOVESPA Over-the-counter 423,587 Total 12.31.2011 Up to 90 days 17,535,427 – – 32,231,011 39,034,745 423,587 232,313 88,801,183 69,553,080 CONSOLIDATED 12.31.2012 From 91 to 365 days Over 365 days Notional amount 11,593,016 21,621,961 9,864,867 43,079,844 9,615,449 4,510,010 8,967,325 19,693,726 33,171,061 50,064,743 – – 423,587 232,313 30,589,286 29,558,593 76,674,492 59,912,505 Locations CETIP BM&FBOVESPA Over-the-counter 423,587 Total 12.31.2011 Up to 90 days 16,526,613 Notional amount c) Credit derivatives Banco Safra makes use of derivative financial instruments of credit in order to offer their customers, through issuance of securities, opportunities to diversify their investment portfolios. Banco Safra held the following positions in credit derivatives, shown at their notional value: BANK AND CONSOLIDATED 12.31.2012 12.31.2011 Risks transferred Credit swap whose underlying assets are: Securities (423,587) (423,587) (232,205) (232,205) Risks received (1) Credit swap whose underlying assets are: Securities 423,587 423,587 232,205 232,205 – – – – (1) Net transferred exposure total Net received exposure total (1) The transferred and received risks refer to the same issuers. 82 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 83 During the period there was no occurrence of a credit event related to the facts set forth in the agreements. d) Hedging of financial assets and financial liabilities The aim of the designated hedge accounting applied by Safra There was no significant effect on the calculation of Required is to protect against the effects of market interest rates (CDI or Regulatory Capital (PRE) at 12.31.2012, in accordance with Libor) or exchange variations to assets and liabilities fair value CMN Resolution 3,490/2007. The credit risk exposures (depending on their nature). of Banco Safra are mitigated, as provided in BACEN Circular 3,360/2007, by guarantee instruments contracted with customers. CONSOLIDATED MTM object to hedge (R$) (2) Market value (R$) 12.31.2011 Hedge derivative instrument Strategy – Market Risk Hedge 12.31.2012 12.31.2011 12.31.2012 Fixed portfolio (1) 14,502,147 16,157,030 235,668 158,475 DI futures (923,871) (863,379) (90,426) (35,562) DI futures (1,207,189) (1,075,220) (158,907) (627,507) (559,838) (15,856) (332,729) (307,399) (28,151) (2,821) DI futures (57,672) 7,758 Notional value (R$) 12.31.2012 12.31.2011 (12,472,870) (13,233,596) Fixed funding, 8.8.2011 – R$ 800,000 (3) 934,715 895,049 (113,283) Fixed swap x Libor1,207,189 1,075,220 Fixed funding, 1.27.2011 – US$ 500,000 (4) Fixed funding, 5.16.2011 – US$ 300,000 (3) Fixed funding – R$ 300,000 Total (3) 949 DDI futures 631,365 573,948 335,356 306,348 (1) Financial assets and liabilities with fixed rates, mainly credit operations and funding – Note 13 (c). (2) Fully recorded in profit (loss). (3) Note 10(c) – Funds from acceptance and issuance of securities. (4) Note 10(e) – Subordinated debt. The effectiveness of hedges designated by Safra for accounting purposes is in accordance with the parameters set out in BACEN Circular 3,082/2002. 83 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 84 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) 8. CREDIT PORTFOLIO a) Credit operations and the related allowance per risk level BANK 12.31.2012 Risk levels AA A B C acquired 15,505,071 4,168,604 933,799 632,603 Financing 7,192,473 174,707 45,122 3,144 D 12.31.2011 E F G H Total Total Borrowings, discounted receivables and portfolios 376,719 147,332 782 55 194,114 11 71,633 631,128 22,661,003 20,472,624 – 397 7,416,691 7,348,184 338 212 285 754,885 773,864 – 507 788 729,838 596,412 Rural and agro-industrial financing 692,831 37,912 18,577 3,684 587 459 Housing loans 556,925 73,788 49,365 37,217 11,171 77 Advances on foreign exchange contracts 1,378,548 31,899 32,137 2,801 1,230 – 1,686 – 874 1,449,175 1,231,581 Onlendings BNDES/FINAME 3,787,407 1,058,655 245,732 158,504 120,974 40,372 13,579 20,884 81,617 5,527,724 7,543,558 Direct consumer credit and leases 815,971 Direct consumer credit Leasing operations Other receivables 106,452 10,696 5,858 4,808 2,135 1,703 1,041 6,802 955,466 1,212,843 814,045 1,229 4,572 277 1,645 305 98 31 365 822,567 726,432 1,926 105,223 6,124 5,581 3,163 1,830 1,605 1,010 6,437 132,899 486,411 502 134,665 670,737 133,720 – – – 443 – – – Total transactions with credit characteristics Past due Normal course Guarantees and sureties 30,062,946 5,652,017 1,335,428 843,811 516,714 190,430 211,431 94,277 209 76,770 113,602 122,458 84,456 77,367 46,474 495,149 5,651,808 1,258,658 730,209 394,256 105,974 134,064 47,803 227,244 38,612,962 39,023,668 – – – 30,062,946 – – – – – – 722,393 39,629,447 39,849,803 – 1,016,485 8,410,541 826,135 8,767,100 Total with guarantees and sureties Minimum allowance required Specific General 30,062,946 5,652,017 1,335,428 843,811 516,714 190,430 211,431 94,277 722,393 48,039,988 48,616,903 – (28,260) (13,355) (25,314) (51,641) (57,128) (105,717) (65,997) (722,393) (1,069,805) (585,309) – (1) (768) (3,408) (12,246) (25,337) (32,532) (495,149) (373,873) – (28,259) (12,587) (21,906) (39,395) (31,791) (67,034) (33,465) (227,244) (461,681) (211,436) – – (62,283) (38,056) (42,264) (28,275) – (170,878) (273,540) (25,314) (113,924) (95,184) (147,981) (94,272) (722,393) (1,240,683) (858,849) Additional allowance – Total allowance – – (28,260) (13,355) (38,683) (608,124) Total transactions with credit credit characteristics at 12.31.2011 Past due at 12.31.2011 Normal course at 12.31.2011 Guarantees and sureties 30,464,013 6,020,038 1,501,509 – 30,464,013 – 799,189 407,193 198,205 50,120 61,861 347,675 39,849,803 1,799 159,218 102,566 103,935 103,646 33,563 34,939 286,469 6,018,239 1,342,291 696,623 303,258 94,559 16,557 26,922 – – – – – – – 826,135 61,206 39,023,668 – 8,767,100 Total with guarantees and sureties at 12.31.2012 799,189 407,193 198,205 50,120 61,861 347,675 48,616,903 – (30,100) (15,015) (23,976) (40,717) (59,462) (25,060) (43,304) (347,675) Specific – (9) (1,592) (3,077) (10,394) (31,094) (16,781) (24,457) (286,469) (373,873) General – (30,091) (13,423) (20,899) (30,323) (28,368) (8,279) (18,847) (61,206) (211,436) (80,795) – Minimum allowance required 84 30,464,013 6,020,038 1,501,509 Additional allowance (9,471) (29,498) (29,719) (55,864) (39,621) (10,019) (18,553) Total at 12.31.2011 (9,471) (59,598) (44,734) (79,840) (121,512) (99,083) (35,079) (61,857) (347,675) (585,309) (273,540) (858,849) Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 85 CONSOLIDATED 12.31.2012 Risk levels AA A B C acquired 15,505,071 4,170,468 933,799 632,603 Financing 7,192,473 174,707 45,122 3,144 D 12.31.2011 E F G H Total Total Borrowings, discounted receivables and portfolios 376,719 147,332 782 55 194,114 11 71,633 631,128 22,662,867 20,474,402 – 397 7,416,691 7,348,184 338 212 285 754,885 773,864 – 507 788 729,838 596,412 Rural and agro-industrial financing 692,831 37,912 18,577 3,684 587 459 Housing loans 556,925 73,788 49,365 37,217 11,171 77 Advances on foreign exchange contracts 1,378,548 31,899 32,137 2,801 1,230 Onlendings BNDES/FINAME 5,909,014 1,610,190 416,788 235,343 169,187 Direct consumer credit and leases1,626,640 Direct consumer credit Leasing operations Other receivables – 1,686 – 52,869 16,692 23,272 874 1,449,175 1,231,581 98,355 8,531,710 8,172,584 4,009,374 374,977 646,939 180,801 69,425 43,052 36,533 183,743 7,171,484 8,873,995 1,475,499 3,884,229 364,366 615,103 159,482 65,407 39,240 33,845 153,856 6,791,027 7,639,236 151,141 125,145 10,611 31,836 21,319 4,018 3,812 2,688 29,887 380,457 1,234,759 133,720 – – – 502 134,665 670,737 443 – – – Total transactions with credit characteristics Past due Normal course Guarantees and sureties 32,995,222 10,108,338 1,870,765 1,561,731 – 777 32,995,222 10,107,561 – – 740,920 270,217 255,893 132,157 265,704 245,801 143,679 115,740 80,298 666,565 1,698,484 1,296,027 495,119 126,538 140,153 51,859 249,507 47,160,470 46,731,208 – – 172,281 – – – – 916,072 48,851,315 48,141,759 – 1,690,845 8,410,541 1,410,551 8,767,100 Total with guarantees and sureties Minimum allowance required Specific General 32,995,222 10,108,338 1,870,765 1,561,731 255,893 132,157 916,072 57,261,856 56,908,859 – (50,535) (18,708) (46,852) (74,058) (81,065) (127,948) (92,514) (916,072) (1,407,752) (875,483) – (4) (1,723) (7,971) (24,580) (43,104) (56,209) (666,565) (575,913) (38,881) (49,478) (37,961) (70,078) (36,305) (249,507) (549,726) (299,570) (22,860) (107,102) (54,006) (51,151) (39,636) – (275,000) (442,600) – (50,531) (16,985) Additional allowance – (131) (114) Total allowance – (50,666) (18,822) 740,920 270,217 (57,870) (858,026) (69,712) (181,160) (135,071) (179,099) (132,150) (916,072) (1,682,752) (1,318,083) Total transactions with credit credit characteristics at 12.31.2011 Past due at 12.31.2011 Normal course at 12.31.2011 Guarantees and sureties 32,175,980 10,534,536 2,091,594 1,798,451 – 2,003 32,175,980 10,532,533 – – 602,738 263,534 81,711 84,848 508,367 48,141,759 243,248 196,196 155,433 63,400 56,252 428,626 1,826,201 1,555,203 406,542 108,101 18,311 28,596 – – 265,393 – – – – 1,410,551 79,741 46,731,208 – 8,767,100 Total with guarantees and sureties at 12.31.2012 602,738 263,534 81,711 84,848 508,367 56,908,859 – (52,665) (20,916) (53,953) (60,270) (79,060) (40,856) (59,396) (508,367) (875,483) Specific – (10) (2,654) (7,297) (19,620) (46,630) (31,700) (39,376) (428,626) (575,913) General – (52,655) (18,262) (46,656) (40,650) (32,430) (9,156) (20,020) (79,741) (299,570) (41,461) (125,713) (119,884) (52,680) (16,334) (25,447) – (442,600) (62,377) (179,666) (180,154) (131,740) (57,190) (84,843) (508,367) (1,318,083) Minimum allowance required 32,175,980 10,534,536 2,091,594 1,798,451 Additional allowance (9,471) (51,610) Total at 12.31.2011 (9,471) (104,275) 85 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 86 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) b) Allowance for loan losses I - Composition of portfolio and allowance for loan losses BANK Credit Portfolio 12.31.2012 Minimum Allowance Required Past Due Normal Total Specific General Total 780,901 21,880,102 22,661,003 (494,420) (414,909) (909,329) 5,843 7,410,848 7,416,691 (529) (1,388) (1,917) 877 754,008 754,885 (436) (849) (1,285) Borrowings, discounted receivables and portfolios acquired Financing Rural and agro-industrial financing Housing loans 5,554 724,284 729,838 (1,098) (3,165) (4,263) Advances on foreign exchange contracts 6,340 1,442,835 1,449,175 (1,670) (735) (2,405) 190,439 5,337,285 5,527,724 (99,961) (39,779) (139,740) 25,585 929,881 955,466 (9,463) (856) (10,319) Onlendings BNDES/FINAME Direct consumer credit and leases Direct consumer credit Leasing operations Other receivables Total Total at 12.31.2011 2,644 819,923 822,567 (659) (93) (752) 22,941 109,958 132,899 (8,804) (763) (9,567) 946 133,719 134,665 (547) 1,016,485 38,612,962 39,629,447 (608,124) (461,681) (1,069,805) 826,135 39,023,668 39,849,803 (373,873) (211,436) (585,309) – (547) CONSOLIDATED Credit Portfolio 12.31.2012 Minimum Allowance Required Past Due Normal Total Specific General Total 781,468 21,881,399 22,662,867 (494,423) (414,907) (909,330) 5,843 7,410,848 7,416,691 (529) (1,388) (1,917) 877 754,008 754,885 (436) (849) (1,285) Borrowings, discounted receivables and portfolios acquired Financing Rural and agro-industrial financing Housing loans 5,554 724,284 729,838 (1,098) (3,165) (4,263) Advances on foreign exchange contracts 6,340 1,442,835 1,449,175 (1,670) (735) (2,405) Onlendings BNDES/FINAME 239,978 8,291,732 8,531,710 (120,335) (54,715) (175,050) Direct consumer credit and leases 649,839 6,521,645 7,171,484 (238,988) (73,967) (312,955) 589,191 6,201,836 6,791,027 (209,115) (65,141) (274,256) 60,648 319,809 380,457 (29,873) (8,826) (38,699) 946 133,719 134,665 (547) Total 1,690,845 47,160,470 48,851,315 (858,026) (549,726) (1,407,752) Total at 12.31.2011 1,410,551 46,731,208 48,141,759 (575,913) (299,570) (875,483) Direct consumer credit Leasing operations Other receivables 86 – (547) Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 87 II - Changes in the provision for credit operations BANK 01.01 to 12.31.2012 Total Constitution/ White- CONSOLIDATED 01.01 to 12.31.2012 Total Total Constitution/ allowance allowance (reversal) White- Total offs allowance allowance (reversal) offs 483,498 825,903 (400,069) 909,329 483,499 825,902 (400,068) 909,330 6,211 (394) (3,901) 1,917 6,211 (394) (3,901) 1,917 753 1,076 (545) 1,285 753 1,076 (545) 1,285 (785) 4,263 5,595 (548) – 2,405 622 1,783 Borrowings, discounted receivables and portfolios acquired Financing Rural and agro-industrial financing Housing loans 5,595 (548) 622 1,783 Onlendings BNDES/FINAME 56,534 114,996 (31,790) 139,740 68,483 147,051 (40,484) 175,050 Direct consumer credit and leases 30,262 9,634 (29,577) 10,319 308,486 285,580 (281,111) 312,955 Advances on foreign exchange contracts Direct consumer credit (785) 4,263 – 2,405 4,151 4,245 (7,644) 752 221,405 268,221 (215,370) 274,256 26,111 5,389 (21,933) 9,567 87,081 17,359 (65,741) 38,699 1,834 547 (1,834) 547 1,834 547 (1,834) 547 585,309 952,997 (468,501) 1,069,805 875,483 1,260,997 Additional allowance 273,540 (102,662) 442,600 (167,600) Total allowance 858,849 850,335 Leasing operations Other receivables Total minimum allowance required – 170,878 (468,501) 1,240,683 1,318,083 1,093,397 01.01 to 12.31.2012 Total Constitution/ White- allowance (reversal) offs 364,128 523,363 (302,182) (728,728) 1,407,752 – 275,000 (728,728) 1,682,752 01.01 to 12.31.2012 Total Total Constitution/ allowance allowance (reversal) White- Total offs allowance (403,014) 875,483 – 442,600 Total minimum allowance required at 12.31.2011 585,309 516,350 762,147 Additional allowance at 12.31.2011 285,700 (12,160) – 273,540 285,700 156,900 Total allowance at 12.31.2011 649,828 511,203 (302,182) 858,849 802,050 919,047 (403,014) 1,318,083 In recognizing the provision above, Banco Safra's Management (R$ 290,371 at 12.31.2011) in Consolidated, of which the does not consider only the minimum provisioning levels provision amounted to R$ 365,313 (R$ 162,737 at 12.31.2011) defined by CMN Resolution 2,682/1999. In addition to the in Bank and R$ 372,439 (R$ 172,770 at 12.31.2011) in minimum provisioning levels, Banco Safra also thoroughly Consolidated. analyzes the risk of loan losses supported by an internal credit rating methodology widely tested and periodically re-evaluated and approved by management. c) Renegotiated loans and recovery of receivables The recovery of receivables amounted to R$ 88,358 in the period (R$ 1,055,629 in 2011) in Bank and R$ 121,412 (R$ 1,069,650 in 2011) in Consolidated. The balance for the period of 2011 includes the amount of R$ 958,534 referring to the judicial approval with an agreement signed between The balance of renegotiated loans amounted to R$ 505,050 (R$ 279,105 at 12.31.2011) in Bank and R$ 513,933 Banco Safra S.A. and Whirlpool S.A. at 7.8.2011 to close the ordinary collection lawsuit filed by Banco Safra since 2001. 87 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 88 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) d) Breakdown of the portfolios and provision by maturity BANK 12.31.2012 12.31.2011 Past due CONSOLIDATED 12.31.2012 12.31.2011 1,016,485 826,135 1,690,845 1,410,551 15 to 30 160,171 280,831 300,645 432,657 31 to 60 223,502 155,407 401,460 302,859 61 to 90 127,924 105,441 221,854 174,460 91 to 180 237,979 154,057 367,054 254,063 181 to 365 266,909 130,399 399,832 246,512 Over 365 160,171 280,831 300,645 432,657 38,612,962 39,023,668 47,160,470 46,731,208 132,871 114,178 156,103 129,306 1 to 30 6,391,594 6,908,247 6,753,733 7,263,620 31 to 60 4,591,459 4,882,526 4,972,796 5,234,226 61 to 90 3,176,097 3,281,356 3,511,115 3,623,711 91 to 180 6,591,510 5,648,353 7,595,331 6,586,069 181 to 365 5,200,085 5,422,540 6,980,743 7,090,323 Over 365 12,529,346 12,766,468 17,190,649 16,803,953 Total 39,629,447 39,849,803 48,851,315 48,141,759 Past due operations: Normal course Installments overdue in days: Overdue up to 14 Outstanding installments in days: Nonaccrual amounts receivable greater than 60 days past due are R$ 632,812 (R$ 389,897 at 12.31.2011) in Bank and R$ 988,740 (R$ 675,035 at 12.31.2011) in Consolidated and over 90 days R$ 504,888 (R$ 284,456 at 12.31.2011) in Bank and R$ 766,886 (R$ 500,575 at 12.31.2011), in Consolidated. e) Breakdown of the portfolios by activity BANK 12.31.2012 12.31.2011 CONSOLIDATED 12.31.2012 12.31.2011 Private Sector: Rural 762,598 784,034 787,289 789,086 Industry 11,682,648 12,579,457 12,558,799 13,063,215 Commerce 12,408,291 11,546,973 13,028,102 11,999,890 1,111,381 777,584 1,112,568 781,050 11,919,866 12,426,684 15,377,570 14,801,899 1,340,308 1,442,340 5,582,632 6,413,888 Financial institutions Other services Individuals Housing Total 88 404,355 292,731 404,355 292,731 39,629,447 39,849,803 48,851,315 48,141,759 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 89 f) Concentration of credit CONSOLIDATED 12.31.2012 12.31.2011 10 major customers 4,599,212 4,752,187 40 major customers 6,225,456 5,771,226 50 major customers Subtotal 100 major customers 3,574,037 3,458,297 14,398,705 13,981,710 Other customers 34,452,610 34,160,049 Total 48,851,315 48,141,759 12.31.2012 12.31.2011 8,410,541 5,327,261 13,737,802 8,767,100 5,259,254 14,026,354 5,816,984 1,511,101 6,409,717 6,096,861 2,543,445 5,386,048 g) Credit commitments (off-balance) The off-balance amounts referring to financial guarantee contracts are as follows: CONSOLIDATED Guarantees, sureties and other guarantees provided Credit limits committed (2) Total Contractual term: Falling due in up to 90 days Falling due from 91 to 365 days Falling due after 365 days (1) (1) Refer to liabilities for guarantees. Sureties and other guarantees provided. (2) Refer to credit limits granted and not used, characterized by the cancellation option by Safra, with the average term of 90 days. 9. FOREIGN EXCHANGE PORTFOLIO Assets Exchange purchases pending settlement (M.E.) and Obligations for exchange purchase (M.N) Foreign exchange variation Interbank for timely settlement Other Receivables for exchange sales (M.N) and Exchange sales pending settlement (M.E.) Foreign exchange variation Interbank for future settlement Interbank for timely settlement (–) Advances received Other Total Foreign exchange transactions BANK AND CONSOLIDATED 12.31.2012 12.31.2011 Liabilities Assets Liabilities 2,102,209 65,010 1,992,373 44,826 2,018,596 – 1,992,373 26,223 271,031 140,206 4,515 126,310 131,168 – 4,515 126,653 3,109,145 – 1,121,758 1,982,095 (30,320) 35,612 5,211,354 60.849 3,144,132 5.043 1,121,758 1,982,095 – 35,236 5,162,728 – 233,536 – 187,839 9,754 (8,382) 44,325 504,567 55.683 242,281 219 187,839 9,754 – 44,469 373,449 – 89 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 90 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) 10. OPEN MARKET FUNDING, BORROWINGS AND ONLENDINGS, AND MANAGED FUNDS At December 31, funds raised comprised the following: CONSOLIDATED 12.31.2012 (1) Deposits (a) Short Long Term Term 6,969,334 895,418 Open market funding – own securities (b) 10,265,520 BANK 12.31.2012 12.31.2011 12.31.2011 Total Short Long Term Term 7,864,752 11,895,842 Total 1,132,880 13,028,722 Total Total 8,034,762 13,168,894 2,037,302 12,302,822 12,754,047 3,937,560 16,691,607 12,302,822 16,691,607 7,004,688 13,983,838 2,533,964 4,643,295 2,763,175 138,155 Funds from financial bills, bills of credit, and similar notes(c) Structured fixed income transactions 6,979,150 (2) Deposits from customers Interbank deposits (a) 2,706,473 Open market funding (b) Marketable debt securities abroad (c) Subordinated debt (e) Market Resources Borrowings and onlendings (d) Total funds raised 31,925,575 450,830 – 36,274,530 6,948,378 195,899 – 4,094,024 3,344,638 31,925,575 10,612,783 2,372,457 2,823,287 2,657,265 2,657,265 133,515 – 2,901,330 3,979,296 3,156,897 9,851,890 39,798,918 38,229,609 40,092,331 127,340 – 3,471,978 8,823,004 14,376,694 10,612,783 32,289,664 10,704,792 2,867,724 3,001,239 3,266,061 3,456,367 2,120,428 2,120,428 2,657,265 2,120,428 5,225,621 41,500,151 14,090,936 5,115,492 19,206,428 47,035,994 30,658,281 5,397,476 12,345,854 5,018,110 13,055,023 8,036,913 9,348,684 12,424,919 70,143,385 21,343,310 91,486,695 52,074,877 19,985,492 72,060,369 94,614,287 83,175,531 Managed funds (f) – – 35,177,656 – – 45,085,690 – – Total funds under management – – 126,664,351 – – 117,146,059 – – (1) Does not include Interbak deposits. (2) Funds recorded in derivative financial instruments (Note 7(a)). (3) Does not include own securities. 90 3,489,278 26,920,477 10,720,213 37,640,690 29,947,028 3,898,125 (3) 782,805 7,177,259 13,912,729 7,074,933 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 91 a) Deposits BANK 12.31.2012 Demand deposits Savings deposits Interbank deposits Time deposits Total at 12.31.2012 Total at 12.31.2011 12.31.2011 No maturity date Up to 90 days From 91 to 365 days Over 365 days Total Total 955,669 1,346,916 – – 2,302,585 2,019,470 – – 1,503,862 1,974,862 3,478,724 12,921,841 – – 7,123,243 3,182,914 10,306,157 11,344,057 – – 195,899 574,401 770,300 1,260,220 955,669 1,346,916 8,823,004 5,732,177 16,857,766 27,545,588 811,639 1,207,831 14,376,694 11,149,424 – 27,545,588 CONSOLIDATED 12.31.2012 Demand deposits Savings deposits Interbank deposits Time deposits Total at 12.31.2012 Total at 12.31.2011 12.31.2011 No maturity date Up to 90 days From 91 to 365 days Over 365 days Total Total 936,365 1,346,916 – – 2,283,281 2,017,498 – – 1,399,555 1,824,156 3,223,711 4,114,491 – – 2,498,570 2,861,897 5,360,467 9,108,491 – – 195,899 895,418 1,091,317 1,260,220 936,365 1,346,916 4,094,024 5,581,471 11,958,776 16,500,700 809,667 1,207,831 3,471,978 11,011,224 – 16,500,700 b) Open market funding BANK 12.31.2012 Own portfolio National Treasury Own securities Third-party portfolio – National Treasury Unrestricted portfolio – National Treasury Total at 12.31.2012 Total at 12.31.2011 12.31.2011 Up to 90 days From 91 to 365 days Over 365 days Total Total 17,600,223 3,848,855 12,441,023 – 33,890,101 14,024,258 – 6,416,665 – 2,248,418 8,665,083 9,434,581 – 2,037,302 – – 2,037,302 3,937,560 17,600,223 12,302,822 12,441,023 2,248,418 44,592,486 27,396,399 – 16,691,607 10,704,792 – – 27,396,399 CONSOLIDATED 12.31.2012 Own portfolio National Treasury Own securities Third-party portfolio – National Treasury Unrestricted portfolio – National Treasury Total at 12.31.2012 Total at 12.31.2011 12.31.2011 Up to 90 days From 91 to 365 days Over 365 days Total Total 17,600,223 3,848,855 12,076,934 – 33,526,012 13,932,249 – 6,416,665 – 2,248,418 8,665,083 9,434,581 – 2,037,302 – – 2,037,302 3,937,560 17,600,223 12,302,822 12,076,934 2,248,418 44,228,397 27,304,390 – 16,691,607 10,612,783 – – 27,304,390 91 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 92 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) c) Funds from acceptance and issuance of securities BANK 12.31.2012 12.31.2011 Up to 90 days From 91 to 365 days Over 365 days Total Total 2,875,872 4,103,278 6,933,579 13,912,729 7,074,933 Financial bills 1,733,845 2,494,666 6,822,949 11,051,460 5,300,453 Agribusiness credit Notes 1,013,360 1,145,701 66,660 2,225,721 1,564,558 Mortgage bills 64,678 68,714 797 134,189 168,571 House Loan Bills 63,989 394,197 43,173 501,359 41,351 38,590 855,014 2,372,457 3,266,061 3,456,367 38,646 – 885,225 923,871 863,379 Funds from financial bills, bills of credit and similar notes Securities issued abroad Medium Term Note (Reais) – Hedge – Nota 7 (d) Medium term notes (U.S. dollar) – Hedge – Note 7 (d) – 3,141 624,366 627,507 559,838 Medium term notes (fixed) – Hedge – Note 7 (d) – – 332,729 332,729 307,399 Medium term Notes (Yen) – Note 19 (c) – 443,178 – 443,178 455,452 Medium Term Note (Other) – 409,941 533,605 943,546 1,273,247 (56) (1,246) (3,468) (4,770) (2,948) Total at 12.31.2012 2,914,462 4,958,292 9,306,036 17,178,790 – Total at 12.31.2011 604,939 2,062,541 7,863,820 10,531,300 10,531,300 Incurred transaction costs – Note 3 (n) CONSOLIDATED 12.31.2012 Up to 90 days Funds from financial bills, bills of credit and similar notes 12.31.2011 Over 365 days Total Total 2,875,872 4,103,278 7,004,688 13,983,838 7,177,259 Financial bills 1,733,845 2,494,666 6,822,949 11,051,460 5,300,453 Agribusiness credit Notes 1,013,360 1,145,701 66,660 2,225,721 1,564,558 Mortgage bills 64,678 68,714 797 134,189 168,571 House Loan Bills 63,989 394,197 43,173 501,359 41,351 – 71,109 71,109 102,326 2,372,457 2,823,287 3,001,239 Debentures Securities issued abroad Medium Term Note (Reais) – Hedge – Nota 7 (d) – 38,590 412,240 38,646 – 885,225 923,871 863,379 Medium term notes (U,S, dollar) – Hedge – Note 7 (d) – 3,141 624,366 627,507 559,838 Medium term notes (fixed) – Hedge – Note 7 (d) – – 332,729 332,729 307,399 Medium Term Note (Other) – 410,345 533,605 943,950 1,273,571 (1,246) (3,468) (4,770) (2,948) Incurred transaction costs – Note 3 (n) 92 From 91 to 365 days (56) Total at 12.31.2012 2,914,462 4,515,518 9,377,145 16,807,125 – Total at 12.31.2011 604,939 2,062,540 7,511,019 10,178,498 10,178,498 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 93 d) Borrowings and onlendings BANK 12.31.2012 Foreign borrowings (1) Transfer of financial assets 12.31.2011 Up to 90 days From 91 to 365 days Over 365 days 1,871,301 1,700,944 37,120 529 390 Total Total 3,609,365 4,761,284 18,484 – 919 Lending of shares 138,478 – – 138,478 Domestic onlendings 799,659 1,717,811 3,082,452 5,599,922 7,645,151 National Treasury 9,511 32,599 56,145 98,255 124,435 – BNDES 94,429 201,396 361,667 657,492 1,350,755 FINAME 695,719 1,483,816 2,664,640 4,844,175 6,169,961 Total at 12.31.2012 2,809,967 3,419,145 3,119,572 9,348,684 – Total at 12.31.2011 2,944,064 4,837,163 4,643,692 12,424,919 12,424,919 CONSOLIDATED 12.31.2012 Foreign borrowings (1) Transfer of financial assets Lending of shares 12.31.2011 Up to 90 days From 91 to 365 days Over 365 days 1,871,301 1,700,944 37,120 529 390 138,478 Total Total 3,609,365 4,761,284 – 919 18,484 – – 138,478 – Domestic onlendings 1,056,440 2,378,913 5,161,739 8,597,092 8,275,255 National Treasury 9,511 32,599 56,145 98,255 124,435 BNDES 137,398 320,188 762,347 1,219,933 1,373,372 FINAME 909,531 2,026,126 4,343,247 7,278,904 6,777,448 Total at 12.31.2012 3,066,748 4,080,247 5,198,859 12,345,854 – Total at 12.31.2011 3,023,192 5,013,721 5,018,110 13,055,023 13,055,023 (1) Linhas de crédito destinadas para financiamentos de importações e exportações. 93 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 94 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) e) Subordinated debt I - Analysis of balance BANK AND CONSOLIDATED Issue Maturity 12.31.2012 12.31.2011 Index 2006 2016 698,767 699,279 106% of CDI 2010 2016 751,309 345,929 144,576 2010 (1) 128,015 IPCA + interest of 7.19% to 7.7% 2010 (2) 2016 203,736 206,241 114% of CDI 2020 13,244 11,673 IPCA + 7.27% 2012 2019 195,579 – IPCA + interest 4.99% to 6.28% 2012 Bank Deposit Certificates (CDB) (1) (3) Financial bills (LF) 2019 128,173 – 114% CDI (4) 2019 51,699 – 114% CDI 2012 (5) 2022 8,098 – IPCA + interest 3.89% to 10.92% (5) 2022 3,618 – 113% CDI Medium term Notes – 2012 (5) 2022 2,586 – IPCA + interest 4.41% to 10.92% Hedge – Note 7 (d) 2011 (1) 2021 1,207,189 1,075,220 2,657,265 2,120,428 2012 2012 Total US$ + 6.75% (1) Operations with half yearly interest payments. (2) Operations with interest to be paid upon the settling of the contract. (3) Of the amount issued, R$ 1,429 (R$ 1,430 at 12.31.2011) is in the portfolio. (4) Operations approved by Bacen on 10.18.2012, established by Letter 09062/2012-BCB/DEORFCOFI1. (5) It is in process of approval with BACEN. II - Transactions BANK AND CONSOLIDATED 01.01 to 12.31.2012 At the beginning of the period 2,120,428 1,027,905 91,084 129,452 Funding 364,965 821,272 Interest paid (147,133) (137,333) Exchange variation abroad Appropriation to income Interest Variation in mark-to-market adjustment (hedge) Balance at the end of the period 94 01.01 to 12.31.2011 227,921 279,132 192,754 180,033 35,167 99,099 2,657,265 2,120,428 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 95 f) Managed funds The Safra Group is responsible for the management, administration and distribution of shares of investment funds, including funds managed by a company JS Administração de Recursos S.A. (related party), as follows: 12.31.2012 12.31.2011 23,721,372 36,822,896 8,566,196 5,895,524 2,890,088 2,367,270 35,177,656 45,085,690 Funds in quotas 19,103,437 16,790,952 Exclusive funds 3,669,672 595,294 57,950,765 62,471,936 Financial investment funds Other financial investment funds Pension funds Total funds under management Total shareholders' funds (1) (1) (1) Includes financial investments in Banco Safra S.A. of R$ 4,090,314 (R$ 4,937,359 at 12.31.2011), basically represented by resale agreements backed by government bonds. Income from fund management, administration and share distribution fees, recorded in 'Income from services rendered', totals R$ 47,003 (R$ 107,466 in 2011) in Bank and R$ 212,436 (R$ 201,809 in 2011) in Consolidated (Note 13(e)). When included revenue from related party the amount is R$ 409,260 (R$ 393,729 in 2011) – Note 19. 11. INSURANCE, REINSURANCE AND SUPPLEMENTARY PENSION PLAN OPERATIONS a) Receivables from insurance and reinsurance operations CONSOLIDATED 12.31.2012 12.31.2011 Premiums receivable 27,683 18,415 Reinsurance technical allowances 17,501 18,124 Deferred acquisition costs 15,017 13,737 3,649 4,847 63,850 55,123 Other insurance operating receivables Total – Note 13 (c) 95 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:47 AM Page 96 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) b) Securities pledge in guarantee of technical reserves CONSOLIDATED 12.31.2012 12.31.2011 3,050,313 2,894,088 – 824,953 376,044 304,586 57,970 79,845 6,508 2,061,986 157,617 1,083,536 820,833 7,149 156,225 92,510 63,715 17,501 3,067,814 2,506,592 2,367,270 33,364 812,764 424,927 176,313 104,658 92,003 14,863 1,502,831 – 852,193 650,638 18,311 139,322 80,384 58,938 18,124 2,524,716 Securities and derivative financial instruments Quotas of investment funds – PGBL/VGBL Subject to repurchase agreement – Debentures/NTN-B Private securities Bank Deposit Certificates (CDB)(1) Financial bills Debentures Shares Promissory notes National Treasury National Treasury Notes Financial Treasury Bills National Treasury Bills Other Other securities Government securities – National Treasury Bills Quotas of investment funds – DPVAT agreement Receivables from reinsurance operations Total (1) Includes R$ 27,737 (R$ 100,103 at 12.31.2011) in subordinated CDB operations. c) Technical reserves I - Analysis CONSOLIDATED Insurance Pension Plan 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Reserve for unvested and vested benefits Provision for unearned premiums Provision for unsettled claims DPVAT agreement Incurred but not reported losses (IBNR) Premium and contributions insufficiency – benefits to be granted Contribution deficiency reserve – benefits to be granted Liability Adequacy Test (LAT) Supplementary premium reserve Administrative expenses Other Total 96 – 62,003 19,559 63,757 1,791 – 51,188 17,312 58,983 2,275 – – – – 656 – – 147,766 – – 736 – – 130,494 Total 12.31.2012 12.31.2011 2,893,777 – – – – 2,367,208 – – – – 2,893,777 62,003 19,559 63,757 1,791 2,367,208 51,188 17,312 58,983 2,275 16,422 15,866 16,422 15,866 13,631 2,791 – 608 114 2,910,921 15,866 – – 751 15 2,383,840 13,631 2,791 656 608 114 3,058,687 15,866 – 736 751 15 2,514,334 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 97 II - Changes in the mathematical provision for supplementary pension plans CONSOLIDATED 01.01 to 12.31.2012 01.01 to 12.31.2011 2,367,208 475,884 97,726 (269,540) (194) 222,693 2,893,777 1,823,389 400,551 257,711 (288,660) (186) 174,403 2,367,208 Opening balance Contributions Net transfers accepted Redemptions Benefits paid Financial restatement Closing balance d) Result from insurance and supplementary pension plan CONSOLIDATED Income from financial intermediation Financial income from insurance and supplementary pension plan operations Financial expenses from insurance and supplementary pension plan operations Results from insurance, reinsurance and supplementary pension plan operations Premium income Changes in technical reserves Changes in technical reserves Changes in allowances for Liability Adequacy Test (LAT) Claims expenses Selling expenses Other income and expenses (1) Income from rendering of services with pension funds management – Note 13(e) Total 31.12.2012 31.12.2011 13,338 236,031 (222,693) 102,152 151,926 (13,495) (10,704) (2,791) (1,328) (37,582) 2,631 25,325 140,815 14,984 189,387 (174,403) 98,413 130,009 (13,087) (13,087) – (2,395) (21,142) 5,028 21,526 134,923 (1) Includes the net result of the DPVAT agreement. e) Liability adequacy test The calculation of the Liability Adequacy Test (LAT) carried out at 12.31.2012 resulted in the establishment of an additional allowance of R$ 2,791. proceeding, which claimed the recovery of the amounts from undue payments arising from CPMF on fundraising transactions and investment of Company's funds – in the period from 2002 to 2007. The income for offset was recorded in December 2011 and is disclosed in the Statement of income as a reduction factor 12. CONTINGENT ASSETS AND LIABILITIES AND LEGAL OBLIGATIONS – TAX AND SOCIAL of expenses for tax and pension plan contingencies (Note 13 (j)). b) Provisions and contingent liabilities SECURITY Contingent liabilities are as follows: a) Contingent assets Safra Leasing S.A. Arrendamento Mercantil requested to the I - Civil lawsuits Federal Revenue Secretariat (SRF) the authorization of tax Civil lawsuits are represented basically by indemnity claims for credits of R$ 84,218, originated with the decision of the legal property and/or moral damages due to direct consumer credit 97 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 98 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) operations, collections and loans, protests of notes, inclusion causes and usual, or as special, when there is a special of customer data in the credit reporting agencies and characteristic in the lawsuit received, arising from the understated inflation adjustments to saving accounts in significance of the amount involved, or from matter with connection with economic plans. corporate importance or different from ordinary lawsuits. These lawsuits are evaluated when a court notification is The allowance recorded for mass lawsuits received is calculated received, and are classified as mass, when related to similar on a monthly basis at the average historical cost of payments of causes with insignificant amount, or as special, when there is a lawsuits terminated in the last 12 months. This average cost is special characteristic in the lawsuit received, arising from the restated quarterly and multiplied by the amount of outstanding significance of the amount involved, or from matter with lawsuits in the portfolio on the last business day of the month. corporate importance or different from ordinary lawsuits. The special lawsuits are evaluated individually concerning the The allowance recorded for mass lawsuits received is calculated likelihood of loss, and are periodically reviewed and quantified on a monthly basis at the average historical cost of payments based on the judicial stage, on the proof presented and on the of lawsuits terminated in the last 12 months, also considering jurisprudence in accordance with the evaluation of the average of the fees paid in the same period. This average management and internal lawyers. The provision is recorded at cost is restated quarterly and multiplied by the amount the full amount for proceedings classified as a probable loss. of outstanding lawsuits in the portfolio on the last business day of the month. The special lawsuits are evaluated individually concerning the At 12.31.2012 and 2011, there are no unrecognized contingent liabilities referring to the amounts involved in the lawsuits whose loss is classified as possible. likelihood of loss, and are periodically reviewed and quantified based on the judicial stage, on the proof presented and on the III - Other risks jurisprudence in accordance with the evaluation of Specific contingencies quantified and provided for per management and internal lawyers. The provision is recorded individual evaluation, basically represented by Salary at the full amount for proceedings classified as a probable loss. Variations Compensation Fund (FCVS) provisions. Unrecognized contingent liabilities amount to R$ 232,784, IV - Tax and social security lawsuits referring to the amounts involved in the lawsuits whose loss is classified as possible. Mainly represented by administrative proceedings and lawsuits related to municipal and federal taxes. II - Labor lawsuits Lawsuits filed to claim alleged labor rights derived from the labor legislation specifically relating to financial institutions, especially overtime. These labor lawsuits are evaluated when a court notification is received, and are classified as mass, when related to similar 98 These are individually quantified when the notification of the proceedings is received, based on the amounts assessed and are accrued monthly. The provision is recorded at the full amount for proceedings classified as a probable loss. Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 99 c) The provisions recorded and the related changes for the periods are as follows I - Civil, labor and other BANK 01.01 to 12.31.2012 Labor Other Civil Opening balance Monetary adjustment/Charges (2) Changes in the period reflected in income (3) Amount recorded Reversal Payments Closing balance 12.31.2012 (1) Closing balance 12.31.2011 (1) Guarantee deposits (4) Guarantee securities (5) Total amounts guaranteed at 12.31.2012 Guarantee deposits(4) Guarantee securities(5) Total amounts guaranteed at 12.31.2011 184,357 12,754 2,242 11,442 (9,200) (18,859) 180,494 184,357 22,508 1,251 23,759 24,696 2,197 26,893 157,705 – 88,883 95,903 (7,020) (55,476) 191,112 157,705 47,901 37,053 84,953 31,464 46,745 78,209 15,779 776 23,707 23,707 – – 40,262 – – – – – – – Total 357,841 13,530 114,832 131,052 (16,220) (74,335) 411,868 342,062 70,409 38,303 108,712 56,160 48,942 105,102 01.01 to 12.31.2011 Total 246,230 – 211,053 227,554 (16,501) (99,442) 357,841 CONSOLIDATED Civil Opening balance Monetary adjustment/Charges(2) Changes in the period reflected in income (3) Amount recorded Reversal Payments Closing balance 12.31.2012 (1) Closing balance 12.31.2011 (1) Guarantee deposits(4) Guarantee securities(5) Total amounts guaranteed at 12.31.2012 Guarantee deposits(4) Guarantee securities(5) Total amounts guaranteed at 12.31.2011 222,786 15,377 3,828 15,054 (11,226) (22,583) 219,408 222,786 29,665 1,251 30,915 32,207 2,382 34,589 01.01 to 12.31.2012 Labor Other 165,749 – 97,950 105,511 (7,560) (59,759) 203,941 165,749 50,020 37,053 87,072 32,263 46,745 79,008 15,779 776 23,707 23,707 – – 40,262 – – – – – – – Total 404,314 16,153 125,485 144,272 (18,786) (82,342) 463,611 388,535 79,685 38,303 117,988 64,470 49,127 113,597 01.01 to 12.31.2011 Total 270,793 – 240,427 258,043 (17,616) (106,906) 404,314 (1) Note 13 (d) (2) Recorded in other finance costs. (3) Notes 13 (j) – Civil and other contingencies 13 (g) – Labor contingencies (4) Note 13 (c) (5) Note 6 (b) 99 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 100 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) II - Tax and Social Security Contingencies and Legal Obligations BANK 01.01 to 12.31.2012 Tax and social Security Legal Contingencies Obligations Opening balance Monetary adjustment/Charges(2) Changes in the period reflected in income (3) Amount recorded (4) Reversal 01.01 to 12.31.2011 Total (1) Total 340,039 585,502 925,541 615,683 11,454 38,620 50,074 52,956 (117,654) 363 (117,291) 301,921 31,959 363 32,322 302,637 (149,613) – (149,613) – – – Payments Other changes 1,046 – 1,046 Closing balance at 12.31.2012 234,885 624,485 859,370 Closing balance at 12.31.2011 340,039 585,502 925,541 Guarantee deposits at 12.31.2012 (5) 46,779 10,244 57,023 Guarantee deposits at 12.31.2011 (5) 25,523 10,244 35,767 (716) (47,617) 2,598 – 925,541 CONSOLIDADO 01.01 to 12.31.2012 Tax and social Security Legal Contingencies Obligations Opening balance Monetary adjustment/Charges(2) Changes in the period reflected in income Amount recorded (3) Payments Other changes Total (1) Total 586,760 642,282 1,229,042 838,628 24,213 42,298 66,511 70,246 (291,751) 363 (291,388) 372,063 94,311 Reversal(4) 01.01 to 12.31.2011 94,674 372,779 (386,062) – (386,062) (716) – – (53,038) – 2,259 2,259 363 – 1,143 Closing balance at 12.31.2012 321,481 684,943 1,006,424 – Closing balance at 12.31.2011 586,760 642,282 1,229,042 1,229,042 Guarantee deposits at 12.31.2012 (5) 59,498 17,360 76,858 (5) 32,858 10,244 43,102 Guarantee deposits at 12.31.2011 (1) Note 14(c) (2) Recorded in other finance costs at 12.31.2012 and disclosed in Note 13(j) at 12.31.2011. (3) Tax and social security contingencies – Note 13(j); Legal obligations recognized within tax expenses. (4) Mainly comprising: (i) R$ 126,251, consisting of the reversal of the contingency for fines and charges related to the suit challenging the calculation base used to determine the social integration program contribution (PIS) and social contribution on revenues (COFINS), on June 30, 2012, since the classification of the likelihood of loss was change to remote subsequent to the decision handed down by the Regional Federal Court on July 27, 2012; and (ii) R$ 260,670, consisting of the reversal of the ISS contingency related to Leasing operations, on 12.31.2012, the classification of which was changed following the judgment of the matter by the Superior Court of Justice (STJ) (5) Note 13(c). 100 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 101 III - The main lawsuits involving tax and social security R$ 669,463 (R$ 627,462 at 12.31.2011) in Consolidated, contingencies are as follows concerning the calculation and payment of taxes on income, Tax and social security contingencies: considered as sales and services revenue. Fully collateralized by bank guarantees. • Provisional Contribution on Financial Movements (CPMF) – Cash Management: tax assessment related to the product 13. OTHER ACCOUNTS Cash Management, because the tax authorities claimed that there was settlement/payment of receivables, at the risk and a) Central Bank Deposits expense of third parties, without the related credit in the At 12.31.2012, Central Bank deposits of R$ 722,985 (R$ beneficiary's account, and also, pursuant to Article 5, I, of 4,449,927 at 12.31.2011) in Bank and R$ 1,178,292 (R$ Law 9,311/1996, attributing the liability for payment of this 5,394,015 at 12.31.2011) in Consolidated were substantially tax to the Bank and Consolidated, an amount of R$ 100,166 made up of compulsory collections. The gain arising from (R$ 96,050 at 12.31.2011). compulsory collections subject to remuneration was R$ 189,287 (R$ 264,243 in 2011) in Bank and R$ 229,956 (R$ 314,721 in Legal obligations: 2011) in Consolidated, and has been disclosed in the Statement • Calculation basis of PIS and COFINS, amounting to of income as compulsory investments. R$ 609,003 (R$ 570,682 at 12.31.2011) in Bank and b) Negotiation and intermediation of securities BANK 12.31.2012 12.31.2011 ASSETS Debtors pending settlement 73,172 (1) 1,124 (1) – 56,419 77,090 34,600 184,565 21,304 51,424 31 51,424 32 Financial assets and commodities pending settlement 20,624 483 20,624 483 LIABILITIES AND EQUITY 11,620 20,688 272,910 75,512 1,242 1 129,010 26,169 Creditors pending settlement (1) Settlement and clearinghouse (1) Financial assets and commodities pending settlement Other – – 333,703 Stock exchanges – margin deposits Settlement and clearinghouse – 514 CONSOLIDATED 12.31.2012 12.31.2011 – 117,621 23,534 9,679 20,000 25,496 24,979 699 687 783 830 (1) Refers basically to transactions on stock exchanges recorded by J. Safra Corretora de Valores e Câmbio Ltda. 101 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 102 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) c) Other receivables BANK 12.31.2012 12.31.2011 Deferred tax assets – Note 14 (b-I) Debtors for deposits in guarantee of contingencies Tax and social security contingencies and legal obligations (1) Civil, labor – Note 12 (c-I) Taxes and contributions to be offset Active operations to be processed Assignment of loans receivable Equalization rate for credit operations Receivables from insurance and reinsurance operations – Note 11 (a) Hedge market adjustment – Note 7 (d) Other Total 178,624 180,887 110,478 70,409 32,001 19,074 741 189,316 – 235,668 42,487 878,798 155,287 218,872 162,712 56,160 26,727 95,092 10,242 78,865 – 158,475 63,890 807,450 CONSOLIDATED 12.31.2012 12.31.2011 265,556 211,176 131,491 79,685 66,399 108,008 741 189,316 63,850 235,668 82,729 1,223,443 261,871 234,517 170,047 64,470 161,190 320,413 10,242 78,865 55,123 158,475 51,324 1,332,020 (1) Payments linked to tax and social security contingencies and legal obligations are disclosed in Note 12 (c-II). d) Other payables BANK 12.31.2012 12.31.2011 Provision for contingent liabilities – civil, labor and other – Note 12 (c-I) Provision for payments to be made Foreign creditor amounts Credit card administration obligations Passive operations to be processed Roll over of amounts to release Other Total 411,868 171,872 52,735 84,466 23,275 357 29,617 774,190 357,841 92,672 98,687 100,186 12,696 67,788 20,293 750,163 CONSOLIDATED 12.31.2012 12.31.2011 463,611 210,278 52,735 84,466 29,134 85,835 58,810 984,869 404,314 100,489 98,700 100,186 15,678 269,535 59,859 1,048,761 e) Income from services rendered BANK 12.31.2012 12.31.2011 Custody and investment management fee (Note 10(f)) Broker fees Collections Guarantees provided Credit card operations Exchange services Other Total 102 47,003 – 69,742 142,164 39,079 19,189 5,070 322,247 107,466 – 67,765 190,702 53,529 13,317 6,240 439,019 CONSOLIDATED 12.31.2012 12.31.2011 212,436 19,326 69,742 142,234 41,741 19,192 18,638 523,309 201,809 18,416 67,765 135,342 55,813 13,317 13,914 506,376 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 103 f) Income from bank fees BANK Credit operations Charges on DOC/TED transfers Packages of services and registrations Other current account services Total 2012 2011 72,181 13,465 10,464 62,696 158,806 52,676 14,185 11,934 39,987 118,782 CONSOLIDATED 2012 2011 72,960 13,465 58,742 62,696 207,863 53,161 14,185 106,716 39,987 214,049 g) Personnel expenses BANK Remuneration and profit sharing Benefits Payroll taxes Sub-total Labor contingencies – Note 12 (c-I) Dismissal of employees Sub-total Total 2012 2011 618,746 72,837 162,653 854,236 88,883 25,105 113,988 968,224 623,054 76,782 166,032 865,868 131,188 10,726 141,914 1,007,782 CONSOLIDATED 2012 2011 748,835 78,750 189,868 1,017,453 97,950 28,142 126,092 1,143,545 762,610 77,819 195,057 1,035,486 141,236 12,128 153,364 1,188,850 h) Administrative expenses Facilities Rent – Notes 19(c) and 17(a) Publicity and advertising Data processing and telecommunications Third party services Travel Financial system services Security and surveillance services Transport Protection of information Depreciation and amortization Legal and notary fees Other Total BANK 2012 29,230 97,106 12,354 36,793 64,868 32,413 37,996 13,657 19,726 73,811 25,505 72,076 23,363 539,598 2011 25,837 97,644 9,225 43,691 70,032 15,977 35,207 11,522 21,736 68,971 18,599 82,921 25,932 527,294 CONSOLIDATED 2012 2011 31,659 27,513 89,984 45,684 14,648 11,224 40,021 52,539 77,037 88,911 34,641 17,839 40,658 37,500 14,137 11,939 20,239 22,266 75,564 81,809 34,527 38,030 96,582 113,042 16,040 23,578 585,737 571,874 103 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 104 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) i) Other operating income BANK 2011 CONSOLIDATED 2012 2011 30.509 3.432 – 12.350 46.291 291.751 3.977 2.640 12.446 310.814 2012 2011 CONSOLIDATED 2012 2011 25.949 79.865 27.535 99.191 – 15.249 41.198 228.192 19.884 327.941 – 29.583 57.118 217.287 38.022 354.500 2012 Reversal of tax and social security contingencies and adjustment of taxes to be offset and judicial deposits – Note 12 (c-II) Recovery of charges and expenses Rental income Other Total 117.654 3.294 – 11.160 132.108 33.003 3.432 11.074 13.414 60.923 j) Other operating expenses BANK Debtors for deposits in guarantee of civil and other contingencies – Note 12(c-I) Tax and social security contingencies – provisions and adjustment – Note 12 (c-II) Other Total 14. TAXES a) Analysis of expenses for income tax and social contribution I - Reconciliation of income tax and social contribution charges BANK 12.31.2012 12.31.2011 Profit before taxation Charges (income tax and social contribution) at standard rates – Note 3(o) Permanent (additions) deductions Equity in the results of domestic subsidiary and associated companies 104 CONSOLIDATED 12.31.2012 12.31.2011 1.634.866 1.783.296 1.919.561 2.048.695 (653,946) (713,318) (767,824) (819,478) 199,927 11,678 – (114) Exchange gain (loss) on investments abroad Interest on capital credited individually Dividends and interest on foreign debt bonds Non-deductible expenses, net of non-taxable income Deferred tax assets not recognized in the period/recognized in previous periods 74,459 138,703 13,182 14,285 59,155 267,436 24,490 11,586 77,231 138,703 13,860 28,563 62,465 267,436 24,860 23,977 (140,499) (189,878) (129,117) (353,396) Income tax and social contribution for the period (353,889) (528,851) (638,584) (794,250) Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 105 II - Tax expenses BANK 12.31.2012 12.31.2011 CONSOLIDATED 12.31.2012 12.31.2011 PIS/COFINS Service tax (ISS) Municipal real estate tax (IPTU) Tax on financial transactions (IOF) Other 155,079 30,018 4,712 8,308 8,646 185,422 20,600 4,088 8,235 1,094 207,415 38,027 4,768 8,471 10,617 234,673 29,539 4,665 8,598 4,158 Total 206,763 219,439 269,298 281,633 b) Deferred taxes I - Origin of income tax and social contribution BANK At 12.31.2011 Provision for contingencies Civil Labor Other Other Total deferred tax assets on temporary differences – Note 13(c) Amount Record Amount Realized At 12.31.2012 133,966 73,743 60,223 – 21,321 58,186 9,695 39,451 9,040 13,357 (36,238) (11,240) (24,998) – (11,968) 155,914 72,198 74,676 9,040 22,710 155,287 71,543 (48,206) 178,624 Amount Record Amount Realized At 12.31.2012 64.689 12.185 43.464 9.040 48 22.480 87.217 10.587 97.804 (40.458) (13.540) (26.918) – (164) (15.834) (56.456) (37.663) (94.119) 176.460 87.710 79.710 9.040 48 30.312 206.820 58.736 265.556 CONSOLIDATED At 12.31.2011 Provision for contingencies Civil Labor Other Adjustment to market value of trading securities Other Total deferred tax assets on temporary differences Income tax and social contribution losses Total deferred tax assets – Note 13 (c) 152.229 89.065 63.164 – 164 23.666 176.059 85.812 261.871 (1) Expensed to carrying value adjustments in equity. II - Deferred tax liabilities Excess depreciation Adjustment to market value of derivative financial instruments Adjustment to market value of available-for-sale securities (1) Monetary adjustment of judicial deposits Total – Note 14 (c) 12.31.2012 BANK 12.31.2011 185,942 103,212 315,709 7,974 612,837 374,168 74,278 6,618 8,615 463,679 CONSOLIDATED 12.31.2012 12.31.2011 513,881 15,604 316,485 8,460 854,430 893,019 19,388 6,766 8,781 927,954 (1) Expensed to carrying value adjustments in equity. 105 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 106 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) III - Expected realization of deferred tax assets on temporary differences, income tax and social contribution losses and deferred taxes on excess depreciation. BANK Tax Credits on Temporary Differences Period 2013 2014 2015 2016 2017 2018 to 2024 Total Present Value (*) Period 2013 2014 2015 2016 2017 2018 to 2024 Total Present Value (*) Provision for Deferred Taxes and Contributions Net Deferred Taxes (202,508) (206,505) (57,187) (32,500) (31,682) (82,455) (612,837) (545,155) (154,901) (169,931) (25,133) (740) (1,053) (82,455) (434,213) (385,800) 47,607 36,574 32,054 31,760 30,629 – 178,624 159,155 CONSOLIDATED Deferred Tax Assets Income Tax and Social Temporary Contribution Differences Losses Total 53,393 42,313 37,793 37,405 35,916 – 206,820 184,317 25,428 31,754 1,554 – – – 58,736 55,051 Provision for Deferred Taxes and Contributions 78,821 74,067 39,347 37,405 35,916 – 265,556 239,368 (447,974) (165,742) (87,389) (38,814) (31,854) (82,657) (854,430) (775,597) Net Deferred Taxes (369,153) (91,675) (48,042) (1,409) 4,062 (82,657) (588,874) (536,229) (*) For adjustment to present value, the CDI projected interest rate for future periods was used, net of tax effects. At 12.31.2012, unrecognized deferred tax amounts on temporary differences amounted to R$ 881,364 (R$ 698,962 at 12.31.2011) in Bank and R$ 1,188,181 (R$ 979,450 at 12.31.2011) in Consolidated. c) The tax and social security obligations are shown below BANK 12.31.2012 12.31.2011 Income tax and social contribution payable Taxes and contributions payable Provision for deferred taxes and contributions – Note 14 (b-II) Tax and social security contingencies and legal obligations – Note 12 (c-II) Total 106 317,760 60,568 612,837 859,370 1,850,535 287,857 160,257 463,679 925,541 1,837,334 CONSOLIDATED 12.31.2012 12.31.2011 607,554 73,837 853,789 1,006,424 2,541,604 530,406 192,205 927,954 1,229,042 2,879,607 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 107 15. INVESTMENTS a) Investments – Equity in the earnings of subsidiary and associated companies 12.31.2012 Lucro Líquido Patrimônio (Prejuízo) Líquido Exercício Part, % Domestic: Safra Leasing S.A. 744,049 Safra CVC Ltda. 126,114 Safra Asset Management Ltda. (1) 210,031 Banco J. Safra S.A. 271,621 Sercom Comércio e Serviços Ltda. 1,237,351 Elong Adm. Rep. Ltda. 158,557 Safra Vida e Previdência S.A. 137,588 Safra Seguros Gerais S.A. 69,060 – J. Safra Participações Ltda. (2) Other – 12.31.2011 Valor Contábil do Investimento Resultado de Equivalência Exercício Valor Resultado de Contábil do Equivalência Investimento Exercício 2,954,371 499,535 2,783,114 29,194 283,003 6,977 12,308 35,012 83,704 9,548 54,080 10,965 – – 100 100 100 100 100 100 100 100 – – 744,049 126,114 210,031 271,621 1,237,351 158,557 137,588 69,060 – – 283,003 6,977 12,308 35,012 83,704 9,548 54,080 10,965 3,938 – 599,052 119,176 197,723 236,609 1,252,725 149,009 143,221 58,002 27,597 – 141,986 4,928 7,278 (293,503) 83,564 11,985 62,452 7,481 3,525 (502) 282 100 259,315 282 237,775 27,369 3,213,686 499,817 3,020,889 56,563 Foreign: Banco Safra (Cayman Islands) Limited. 259,315 Total at 12.31.2012 Total at 12.31.2011 (1) Formerly Safra Distribuidora de Títulos e Valores Mobiliários Ltda. (2) Formerly Safra Cia. Securitizadora de Créditos Imobiliários. This investment was transferred to the controlling stockholder on 4.11.2012, due to the capital decrease of Banco Safra (Note 17(a)). b) Other investments At 12.31.2012, other investments are mainly represented by shares and quotas of unrelated parties, stated at cost, in the amount of R$ 185,372 (R$ 316,675 at 12.31.2011) in the Bank and R$ 185,433 (R$ 316,678 at 12.31.2011) in the Consolidated. 107 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 108 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) 16. PROPERTY AND EQUIPMENT IN USE AND INTANGIBLE ASSETS a) Analysis BANK 12.31.2012 Cost Permanent assets Facilities, furniture and equipment in use IT and data processing equipment Construction in progress Transportation system Other Intangible assets – Software 12.31.2011 Accumulated Property Accumulated Property Depreciation/ and Equip- Depreciation/ and Equip- Amortization ment, net Amortization ment, net 152,050 (88,610) 63,440 140,772 Cost (79,729) 61,043 49,138 (23,938) 25,200 46,433 (22,508) 23,925 74,857 11,187 12,097 4,771 74,746 (56,590) – (5,998) (2,084) (33,905) 18,267 11,187 6,099 2,687 40,841 71,212 7,646 10,710 4,771 47,527 (49,433) – (5,511) (2,277) (22,718) 21,779 7,646 5,199 2,494 24,809 CONSOLIDATED 12.31.2012 Property Accumulated Property Depreciation/ and Equip- Depreciation/ and Equip- Amortization ment, net Amortization ment, net 280,645 – – (185,747) – – 94,898 – – 493,591 220,677 12,481 (286,210) (111,341) (10,130) 207,381 109,336 2,351 66,896 (37,540) 29,356 66,156 (34,341) 31,815 76,995 11,254 120,044 5,456 80,067 (57,810) – (87,812) (2,585) (34,962) 19,185 11,254 32,232 2,871 45,105 72,978 7,646 110,201 3,452 52,492 (52,540) – (75,533) (2,325) (23,505) 20,438 7,646 34,668 1,127 28,987 Cost Permanent assets Properties for use Rental properties – Note 17(a) Facilities, furniture and equipment in use IT and data processing equipment Construction in progress Transportation system Other Intangible assets – Software 12.31.2011 Accumulated Cost b) Changes in property and equipment and intangible assets BANK Property and Equipment 2012 2011 Opening Balance Acquisitions Disposals Exchange variation and transfers Depreciation/amortization expenses Closing Balance 108 61,043 17,993 (1,619) (996) (12,981) 63,440 51,986 22,263 (1,898) – (11,308) 61,043 Intangible Assets 2012 2011 24,809 28,129 (165) 592 (12,524) 40,841 14,908 17,323 (131) – (7,291) 24,809 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 109 CONSOLIDATED Property and Equipment 2012 2011 Opening Balance Acquisitions Capital decrease – Note 17(a) Disposals Exchange variation and transfers Depreciation/amortization expenses Closing Balance 17. EQUITY a) Shares 207,381 18,407 (109,277) (1,808) 1,309 (21,114) 94,898 Intangible Assets 2012 2011 263,358 26,543 – (18,320) (33,737) (30,463) 207,381 28,987 29,104 (32) (192) 651 (13,413) 45,105 17,815 18,870 – (131) – (7,567) 28,987 approved by transferring the investment in J. Safra Participações Ltda. with a value of R$ 110,875, to the controlling stockholder by way of the extinction of 25,917,737 The capital of Banco Safra S.A. is represented by 757,637,598 common shares (730,695,526 at 12.31.2011) and 755,662,010 (728,790,192 at 12.31.2011) preferred shares of stockholders domiciled in Brazil, with no par value, totaling 1,513,299,608 shares. This process was approved by the BACEN on 6.21.2012. This transactions resulted in a reduction of R$ 109,277 in investment and net permanent assets in the Consolidated balance sheet. (1,459,485,718 at 12.31.2011). Changes in capital were as follows: At the Extraordinary General Stockholders Meeting held on 4.11.2012, a capital reduction of Banco Safra S.A. was Common At 12.31.2011 Capital decrease – AGE 4.11.2012 Capital increase – AGE 6.15.2012 (1) At 12.31.2012 730,695,526 (12,975,786) 39,917,858 757,637,598 Number of shares Preferred Total 728,790,192 (12,941,951) 39,813,769 755,662,010 1,459,485,718 (25,917,737) 79,731,627 1,513,299,608 Total Capital 3,980,315 (110,875) 350,000 4,219,440 (1) With Revenue reserves and approved by Central Bank of Brazil at 7.23.2012. b) Dividends At the Extraordinary General Meeting held on 12.28.2012, The stockholders have a right to a minimum dividend the stockholders approved and paid the dividend of R$ 4,718, equivalent to 1% of the capital corresponding to common and referring to the profit for 2012. preferred shares, respectively. In line item "Social and Statutory" is included the amount At the Extraordinary General Meeting held on 12.21.2012, of R$ 10,463 (R$ 9,708 at 12.31.2011) in the Bank and the stockholders approved interest on capital on 12.28.2012 R$ 10,463 (R$ 9,712 at 12.31.2011) in the Consolidated, totaling R$ 346,756, which, net of income tax represents which relates to dividends and interest on own capital payable R$ 294,743. The amount of R$ 5,608 was calculated based from previous periods. on the TJLP variation of 2008 and R$ 341,148 calculated based on the TJLP variation of 2012. 109 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 110 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) financial agents), debentures, financial investments, derivatives c) Revenue reserves Revenue reserves Legal Special (1) 12.31.2012 12.31.2011 and other securities. There is also the credit risk in connection 2,604,150 168,647 2,435,503 2,024,647 104,599 1,920,048 with financial agreements not recorded in the Balance sheet, (1) Reserve consists aiming to promote the formation of resources for future development of these resources to capital, payment of interim dividends, maintaining operating margin compatible with the development such as loan commitments or pledging of collaterals, sureties and guarantees. The Credit Risk Management Committee concentrates the Credit Risk governance to ensure a total vision across the entire credit life cycle. In order to ensure the necessary of the company's and / or expansion of their activities. independence of the risk function, this committee comprises d) Changes in the carrying value adjustment of the financial executive officers and superintendents responsible for assets available for sale Corporate Risk Management, Credit Analysis, Policies, At the beginning of the period Adjustments in changes in fair value Securities available for sale Deferred taxes Balance at the end of the period 01.01 to 12.31.2012 01.01 to 12.31.2011 10,697 412,473 721,563 (309,090) 423,170 (245) 10,943 17,726 (6,783) 10,697 (1) Note 6 (a). Modeling and Portfolio Management, Monitoring, Collection and Validation. Depending on the nature of the issue, the Committee may refer it to the Board of Directors. b) Market risk Market risk is the possibility of losses arising from fluctuations in market prices in the positions held. Banco Safra tracks its total exposure to market risks, measured 18. RISK MANAGEMENT Banco Safra has a set of rules and procedures to ensure compliance with legal provisions, regulatory standards, best market practices, and its internal policies. Banco Safra concentrates its operating, liquidity and market risk by the daily Value at Risk (VaR) at a 99% confidence level, adopting as a policy a maximum expected loss of less than 3% of its regulatory capital. To be able to comply with this regulation, the Bank sets targets for Treasury that are compatible with this risk exposure. management frameworks on the Corporate Risk Board and Banco Safra's market risk assessments also include the use of its credit risk management framework on the Credit Analysis stress metrics, contemplating crises in historical periods and Department, thus establishing the basis for compliance with prospective stressed economic scenarios, in addition to the the prevailing regulations. effects of stress among risk factor families. Additionally, stop loss limits are established. a) Credit risk new products or financial instruments that may introduce new arises when a counterparty causes a financial loss by failing to risk factors for Treasury management. As it is responsible for meet a contractual obligation. Significant changes in the economy or in the financial health of a specific segment of industry that represent a concentration in the portfolio held by Banco Safra can result in losses that differ from those provided mark-to-market pricing processes and result and risk calculation, the approval of the Market Risk area is required before new products are implemented. for in the Balance sheet date. Therefore, Banco Safra carefully The policies that govern market risk management – Market controls the exposure to credit risk. Risk Policy and Market Risk Limits Policy – are disclosed to Exposures to this type of risk mainly arise from direct loan operations, indirect loan operations (with the intermediation of 110 The Market Risk area actively participates in the approval of Banco Safra is exposed to credit risk, which is the risk that Treasury, control and support areas (liquidity and market risk managers, internal audit, internal controls and compliance, Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 111 liquidity and market risk validation and information Capital adequacy and the use of regulatory capital are technology) through the corporate intranet, in addition monitored by Banco Safra, through techniques based on to the disclosure of the Market Risk management framework to guidelines established by the Basel Committee, as implemented the public. by the Brazilian Central Bank (BACEN), for oversight purposes. The required information is submitted to the c) Liquidity risk Liquidity risk consists of the possibility that the Bank may not have sufficient financial resources to honor its commitments as appropriate body on a monthly basis. The bank authority requires that each bank or group of bank institutions maintains a minimum regulatory capital ratio of 11%. a result of mismatches between payments and receipts, considering the different currencies and settlement terms of rights and obligations. To manage liquidity risk, there are committees for the Banco Safra's regulatory capital is divided into two tiers (Note 20): Tier I capital – share capital, retained earnings and reserves for the recognition of retained earnings. management of assets and liabilities, convened every month, Tier II capital – qualified subordinated debt and unearned with the objective of defining the liquidity strategies to be income arising from the measurement at fair value of shares followed in a two-year horizon. Cash is monitored on a daily available for sale. basis and reported to the responsible managers and officers. Risk-weighted assets are measured through a hierarchy of five Banco Safra submits to the Brazilian Central Bank the liquidity risk weights determined according to the nature of each asset risk reports determined by CMN Resolution 2,804/2000, with and its corresponding liability – in addition to reflecting specifications established by BACEN Circular 3,393/2008. estimated market, liquidity and credit risks and other associated These reports are prepared based on management information risks – considering all possible guarantees. A similar treatment of the Investment Risk area to comply with the prevailing is adopted for the exposure that is not accounted for, with regulations. some adjustments being made to reflect the more contingent The Investment Risk area uses statistics and projections on the behavior of payments and receipts to assess impacts on cash nature of potential losses. e) Operating risk over time in a series of scenarios: planning or normality, run off, stress and hard stress and there is also the possibility of using an arbitrary scenario. The results from the application of these scenarios are discussed at the meetings of the Committee of Assets and Liabilities. Operating risk is the possibility of incurring losses from failure, deficiency or inadequate internal procedures, personnel and systems, or external events. Operating risk also includes the legal risk associated with the inappropriateness or deficiency in agreements entered into by d) Capital management Banco Safra and its subsidiaries, as well as sanctions arising Banco Safra's capital risk management objectives encompass a from non-compliance with legal provisions and damages to concept wider than "equity" and include the following aspects: third parties arising from the activities performed by Banco - Comply with the requirements established by the regulatory bodies of the bank markets where it operates; - Safeguard its operating capacity so that it continues providing return to stockholders and benefits to other stakeholders; and - Maintain a solid capital base to support the development of Safra and its subsidiaries. The legal risk is assessed on a continuous basis by Banco Safra´s legal areas and specific Committees with that scope. This definition excludes the risk of reputation or image as well as other risks, such as strategic or business risks. its business. 111 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:49 AM Page 112 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) The Operating Risk Area is an independent control unit, resale, obtainment of the price movement benefits, effective, segregated from the internal audit. The Operating Risk Area is expected or as the result of arbitrage. This portfolio has rigid responsible for meeting the requirements arising from BACEN limits defined by the risk controllers and are monitored on a Resolution 3,380/2006 on the need for identification, daily basis. evaluation, monitoring, control and mitigation of operating risk, as well as for the preparation and maintenance of the Operating Risk Policy. It is also responsible for Internal Control and Compliance activities. The Banking portfolio covers all operations that do not fall into the Trading portfolio, and are typically, structural operations for the institutions business lines and the respective hedges that may or may not be made through the use of derivatives. As a f) Sensitivity analysis (Trading and Banking portfolios) result, the derivatives in this portfolio are not used for speculative purposes. In accordance with the classification criteria for operations foreseen within CMN Resolution 3,464/2007 and BACEN Circular 3,354/2007 and the New Capital Agreement of BASEL II, financial instruments are divided into Trading portfolio (Trading) and Structural portfolio (Banking). The sensitivity analysis below is a simulation and does take into consideration Management's ability to react were such circumstances to occur, which would certainly mitigate the losses that would be incurred. In addition to this, the impacts presented below do not represent accounting losses as the The Trading portfolio consists of all operations, including methodology used is not based on Safra's accounting practices. derivatives, held for the purposes of trading or for hedging of other instruments used for this strategy. They are held for TRADING PORTFOLIO Risk Factors Shares Commodities Coupon and currencies Fixed income Options 112 Risk of Variation in Share price variation Operations subject to price variation Foreign currency coupon rate and exchange rate variation Variation in interest rates denominated in Real Foreign currency coupon rate and exchange rate variation Total without correlation Total with correlation 1 12,31,2012 Scenarios 2 3 (745) (71) (18,623) (1,784) (37,245) (3,569) (3,178) (7,457) (100,272) (866,294) (198,673) (1,673,956) (46) (11,497) (7,905) (1,147) (988,120) (856,662) (2,295) (1,915,738) (1,656,565) Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:50 AM Page 113 TRADING AND BANKING PORTFOLIO Risk Factors Shares Commodities Coupon and currencies Fixed income Options Risk of Variation in Share price variation Operations subject to price variation Foreign currency coupon rate and exchange rate variation Variation in interest rates denominated in Real Foreign currency coupon rate and exchange rate variation Total without correlation Total with correlation 1 12.31.2012 Scenarios 2 3 (745) (71) (18,623) (1,784) (37,245) (3,569) (2,998) (138) (86,621) (18,386) (172,145) (35,382) (46) (3,998) (1,037) (1,147) (126,561) (29,167) (2,295) (250,636) (58,043) The sensitivity analysis was carried out using the following or liabilities in active markets (Level 1), the data that are scenarios: directly or indirectly observable as assets or similar liabilities • Scenario 1: Application of movements of one basis point in the interest rates, and 1% in price variations based on market information (BM&FBovespa, Anbima etc.). Example: the Real/Dollar rate used was R$ 2.0643 and the 1 year pre-fixed rate was 7.15% per year. • Scenario 2: Application of a movement of 25% in the respective curves or prices, based on the market. Example: the Real/Dollar rate used was R$ 2.5549 and the 1 year pre-fixed rate was 8.92% per year. (level 2), identical assets or liabilities in illiquid markets and unobservable market data that reflect the very premises of the Safra when pricing an asset or liability (Level 3). This maximizes the use of observable inputs and minimizes the use of unobservable inputs to determine fair value. To arrive at an estimate of fair value of a financial instrument measured based on unobservable market, Safra first determines the appropriate model to be adopted and the lack of monitoring of significant data, evaluates all data based on relevant experience in lead data evaluation, including but not • Scenario 3: Application of a movement of 50% in the respective curves or prices, based on the market. Example: the Real/Dollar rate used was R$ 3.0659 and the 1 year pre-fixed rate was 10.71% per year. g) Fair value of financial assets and liabilities limited to, yield curves, interest rates, volatilities, prices on equity or debt, exchange rates and credit curves. Also, with respect to products that are not exchange traded, the decision of Safra should be considered to assess the appropriate level of valuation adjustments to reflect counterparty credit quality, the actual amount of credit, liquidity constraints and I - Methodology of calculating market value parameters unobservable when relevant. Although it is believed The fair value of financial instruments are determined based that the valuation methods are appropriate and consistent on the price that would be received to sell an asset or paid to with those prevailing in the market, the use of different transfer a liability in a transaction conducted between methodologies or assumptions to determine the fair value independent participants at the measurement date, without of certain financial instruments could result in a different favoritism. There are different levels of data that must be used estimate of fair value at the reporting date and / or settlement. to measure the fair value of financial instruments: the observable data that reflect quoted prices for identical assets 113 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:50 AM Page 114 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) II - Rating level of financial assets and liabilities at fair value CONSOLIDATED Level 1 Trading securities 14,655,414 National Treasury 12,291,153 Private securities Securities issued abroad Linked to Technical Reserve – Note 11 (b) National Treasury Private securities Securities available for sale National Treasury Subject to Technical Reserve – National Private securities Securities issued abroad Derivative financial instruments – Assets 758,118 – 18,822 Total 15,413,532 12,291,153 97 18,919 145,638 19 145,657 2,199,801 758,002 2,957,803 2,061,986 2,061,986 137,815 758,002 895,817 16,630,914 828,970 17,459,884 15,721,096 92,510 817,308 – 25,159 – 15,721,096 – 92,510 763,088 1,580,396 65,882 65,882 471,081 496,240 Non Deliverable Forward (NDF) – 71,834 71,834 Option premiums – 1,513 1,513 Term 2,541 Swaps – amounts receivable – Credit default swaps – CDS Futures Derivative financial instruments – Liabilities – 2,541 397,473 – 261 22,618 – (21,420) 397,473 261 22,618 (3,903,425) (3,924,845) Non Deliverable Forward (NDF) – (4,523) (4,523) Option premiums – (2,959,345) (2,959,345) Swaps – amounts payable – (927,846) (927,846) – (11,711) Credit default swaps – CDS Futures Strategy – Fair value hedge – Note 7(d) Fixed portfolio (21,420) – (11,711) (21,420) – 11,410,851 11,410,851 – 14,502,147 14,502,147 Fixed rate funding, 08.08.2011 – R$ 800,000 – (923,871) (923,871) Fixed funding, 01.27.2011 – US$ 500,000 – (1,207,189) (1,207,189) Fixed funding, 05.16.2011 – US$ 300,000 – (627,507) (627,507) Fixed funding – R$ 300,000 – (332,729) (332,729) (1) At 12.31.2012 and 2011 there were no transactions classified in Level 3. 114 12.31.2012 (1) Level 2 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:50 AM Page 115 h) Exchange rate exposure maximum Director's and Board members remuneration was The value of exposures to gold, foreign currency and assets and liabilities subject to exchange differences, including derivatives financial instruments and permanent foreign investments, as Net national exposure Bought Sold Net foreign exposure Bought Sold Total net exposure 72,549 10,779,653 (10,707,104) (277,771) 8,752,935 (9,030,706) (205,222) management came to R$ 73,911 (R$ 40,236 in 2011) in Banco Safra S.A. and R$ 73,911 (R$ 72,688 in 2011) in Consolidated. presented to the legal authorities, are: CONSOLIDATED 12.31.2012 established at R$ 136,000. Remuneration received by The Group does not possess any long-term benefits, contract 12.31.2011 (87,680) 8,004,834 (8,092,514) (105,438) 7,733,473 (7,838,911) (193,118) The risk management structures in relation to market, credit and operating risk are on the Banco Safra website (www.safra.com.br). The risk management report will be available at this address within the time period established by BACEN Circular 3,477/2009. termination benefits, or share-based payment arrangements for any key management personnel. b) Ownership interest: Integral interest from Joseph Yacoub Safra. c) Related-party transactions Transactions between related parties are disclosed in accordance with CMN Resolution 3,750/2009. These are arms length transactions, in the sense that their value, period of execution, and rates involved are the market average at the time of the transaction. Transactions between consolidated companies were eliminated for the purposes of the consolidated financial statements and continue to be considered void of risk. 19. RELATED-PARTY TRANSACTIONS a) Management remuneration At the Remuneration Committee Meeting held in 3.15.2012 and subsequent General Meetings of Stockholders, the 115 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:50 AM Page 116 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) BANK Assets / (Liabilities) Cash Banco Safra Luxemburgo Safra National Bank of New York Open market fundraising – Banco J. Safra S.A. Aplicações em moedas estrangeiras Banco Safra Luxemburgo Safra National Bank of New York Securities and derivative financial instruments Debêntures – Safra Leasing S.A. – Arrendamento Mercantil Banco Safra (Cayman Islands) Limited, Accounts receivable/(payable) Demand deposits Interbank deposits Banco J. Safra S.A. Safra Leasing S.A. – Arrendamento Mercantil Banco Safra Luxemburgo Safra National Bank of New York Other companies Open market funding – Banco J. Safra S.A. Securities issued abroad Banco Safra Luxemburgo Banco Safra (Cayman Islands) Limited. Interbank and interdepartmental transactions – Banco J. Safra S.A. Derivative financial instruments – Assets/(Liabilities) Banco J. Safra S.A. Sercom Comércio e Serviços Ltda. (1) Sudafin Repres. e Participações Ltda. (1) Other companies Negotiation and intermediation of securities Brokerage expenses Rental expenses J. Safra Participações Ltda. Kiama S.A. Other companies (1) Refer to structured fixed income transactions. 116 Income / (Expenses) 12.31.2012 12.31.2011 35,559 28,356 7,203 84,869 64,264 20,605 – 772,443 547,658 224,785 – 709,049 – 709,049 2,100 2,125 368 1,757 – 931 – 931 13,368,318 18,706,443 1,406,410 1,981,460 Subsidiary 13,039,596 Subsidiary 328,722 17,969,675 736,768 1,340,841 65,569 1,904,871 76,589 Related Party Related Party Subsidiary Related Party Related Party Subsidiary Subsidiary Related Party Related Party (178) 22,563 (19,300) (1,973) (6,096,650) (11,625,211) (4,000,207) (1,537,188) (700,406) (9,171,851) (446,919) (176,582) (416,914) (371,306) (532,204) (368,284) Related Party Subsidiary (67,000) (507,505) (64,327) (443,178) (92,009) (514,530) (59,078) (455,452) Subsidiary (4,230) (1,144) Subsidiary Subsidiary Subsidiary (113,003) 365,388 (436,259) (53,759) 11,627 (1,277) – – – Subsidiary (2) Related Party 2012 2011 34 34 – 20 20 – – – – – (665,110) (1,356,787) (140,755) (242,352) (488,551) (1,068,599) (13,808) (6,192) (8,127) (1,896) (13,869) (37,748) (7,880) (15,826) (5,433) (10,393) (12,712) (22,002) (4,497) (17,505) – – (97,374) 145,843 (255,259) – 12,042 266,928 258,597 (25,946) (759) 35,036 137,169 128,780 (7,110) – 15,499 (9) – (238) (24,670) (11,133) (13,537) – – (420) (61,641) (48,843) (9,407) (3,391) – – – – – Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:50 AM Page 117 CONSOLIDATED Assets / (Liabilities) Income / (Expenses) 12.31.2012 12.31.2011 Cash Banco Safra Luxemburgo Safra National Bank of New York 43,994 35,164 8,830 94,085 72,396 21,689 – Foreign currency investments Banco Safra Luxemburgo Safra National Bank of New York 835,792 547,658 288,134 721,055 – 721,055 2,178 368 1,810 985 – 985 Marketable securities and derivative financial instruments – Banco Safra Luxemburgo Demand deposits Interbank deposits Banco Safra Luxemburgo Safra National Bank of New York Other companies – (5,174) (1,216,949) (446,919) (416,914) (353,116) 437,735 (452) (582,572) (176,582) (371,306) (34,684) – – (29,299) (13,808) (8,127) (7,364) 1,339 – (8,207) (6,192) (1,896) (119) Securities issued abroad – Banco Safra Luxemburgo Funds from acceptance and issue of securities – Debentures Emerald Gestão de Investimentos Ltda Fundação Filantrópica Vick e Joseph Safra Escola Beit Yaacov Irati Imóveis e Representações Ltda Other companies (64,327) (71,109) (9,744) – (41,446) (2,461) (17,458) (59,078) (102,327) – (62,719) – (10,896) (28,712) 5,433 (7,309) (638) (3,936) (731) (359) (1,644) 4,497 (8,431) – (4,338) – (336) (3,757) (1,423) (8) – – – – – 30,380 – (33,977) (53,316) (22,703) (16,993) (13,620) 32,147 – (24,582) (3,391) – – (3,391) – – Derivative financial instruments – Assets/(Liabilities) – Banco Safra Luxemburgo Negotiation and intermediation of securities Insurance commissions – Canárias Corretora de Seguros S.A. Rental expenses J. Safra Participações Ltda. (2) Exton Participações Ltda. Other companies Funds managed – Note 10 (f) Financial investments Revenue from management fees and fund management – JS Asset Management S.A. – (37) – – – – – (4,090,314) – (4,937,359) – 2012 2011 45 45 196,824 31 31 – 191,920 (2) In March 2012, this company held subsidiary interest in Consolidated, as from April 2012 it was classified as related party – Note 2 (b). 117 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:50 AM Page 118 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2012 AND 2011 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE STATED) (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE) 20. OPERATIONAL LIMITS The institutions authorized to operate by the Brazilian Central Bank (BACEN) are required to maintain a regulatory capital above the minimum of 11% of the required regulatory capital, in accordance with their operational risks. Regulatory Capital (PR) is as follows: CONSOLIDATED FINANCIAL 12.31.2012 12.31.2011 Regulatory Capital (PR) Tier I Equity Intangible assets excluded from tier I Carrying value adjustment excluded from tier I Tier II Subordinated debt Carrying value adjustments Required Regulatory Capital (PRE) CONSOLIDATED 12.31.2012 12.31.2011 9,628,920 8,043,906 9,628,920 8,043,906 6,823,590 5,979,632 6,823,590 5,979,632 7,246,760 6,015,659 7,246,760 6,015,659 – (25,330) – (25,330) (423,170) (10,697) (423,170) (10,697) 2,805,330 2,064,274 2,805,330 2,064,274 2,382,160 2,053,577 2,382,160 2,053,577 423,170 10,697 423,170 10,697 7,750,419 6,835,390 7,583,667 6,690,143 6,882,790 6,551,790 6,695,660 6,391,684 Credit risk – Exposures weighted by risk factors (PEPR) PCAM – Exchange variation exposure 167,744 167,744 – Market risk 404,439 101,826 404,439 101,826 311,979 81,322 311,979 81,322 21,996 14,918 21,996 14,918 Trading portfolio interest rate exposure (PJUR) Fixed rate denominated in Real (PJUR1) Foreign currency coupon (PJUR2) – 257,317 48,552 257,317 48,552 Price index coupon (PJUR3) 32,666 17,852 32,666 17,852 Operations subject to commodity price variation (PCOM) 10,745 1,367 10,745 1,367 Operations subject to stock price variation (PACS) 81,715 19,137 81,715 19,137 295,446 181,774 315,824 196,633 13.7 12.9 14.0 13.2 Operating risk (POPR) Basel Index [PR*100/(PRE/0.11)] Amount of PR calculated for covering the interest rate risk of operations not classified in the trading portfolio (RBAN) Capital margin (PR-PRE-RBAN) 118 345,899 24,771 345,899 24,771 1,532,602 1,183,745 1,699,354 1,328,992 Af-RelatIngles2012Parte02_Layout 1 7/23/13 10:50 AM Page 119 21. OTHER INFORMATION a) Insurance policy b) Audit committee The Audit Committee is made up of five members nominated by the Board. Four of these are directors of the Bank, with the Despite Banco Safra and its subsidiaries having a reduced risk from the non-concentration of assets in one place, the Bank nonetheless has the policy of insuring these assets to a level necessary to cover any eventual claims. other being independent. The Committee's aim is to monitor and accompany: the effectiveness of internal controls, the quality and integrity of the financial statements, and the work of the internal and independent auditors. 119 Af-RelatIngles2012Parte03_Layout 1 7/23/13 10:52 AM Page 120 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) SUMMARY OF AUDIT COMMITTEE’S REPORT The Audit Committee of Safra Financial Group was created by statutory provision in accordance with National Monetary Council (CMN) Resolution 3918 of May 27, 2004. Safra Financial Group has a single Audit Committee, which is part of the structure of Banco Safra S.A., the Group’s lead institution. The Audit Committee has five members appointed by the Board of Directors, four of whom are directors of the company, and one of whom is independent. A full-time secretary coordinates the committee’s activities. The Audit Committee operates in accordance with its bylaws and an annual work plan. In 2012 the committee’s main evaluation and supervision activities, which were conducted in the second half of the year, covered the following items: a) Planning and performance of independent and internal audits; b) Solutions to recommendations and orders received from regulatory bodies; c) Structure and functioning of Group companies’ internal controls; d) Integrity and quality of the financial statements and the respective reports; e) Confirmation of aspects relating to the independence and lack of restrictions on the actions of independent and internal auditors; f) Appraisal of compliance by the management of Safra Financial Group with the recommendations of independent and internal auditors; g) Integrity and quality of the financial statements in accordance with the applicable laws and regulatory standards; h) Activities of the Ombudsman; i) Activities to prevent money laundering and combat terrorism financing. In addition to the above, the committee accompanied the activities of a team of inspectors from the Central Bank of Brazil and oversaw the solutions adopted to implement their requests and recommendations. In light of the work carried out, the Audit Committee recommends that the Board of Directors approve the consolidated financial statements dated February 6, 2013, referring to the year ended December 31, 2012. São Paulo, february 6, 2013 120 Af-RelatIngles2012Parte03_Layout 1 7/26/13 5:03 PM Page 121 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) REPORT OF INDEPENDENT AUDITORS To the Management and Shareholders of Banco Safra S.A. São Paulo – SP We have audited the individual balance sheets of Banco Safra S.A. ( “Bank”), which comprise the balance sheet drawn up as at December 31, 2012, the related statements of income and comprehensive income for the year and six months then ended, and the statement of cash flow for the year ended December 31, 2012, and the consolidated financial statements of Banco Safra S.A. and its subsidiaries and affiliates (“Consolidated”), comprising the balance sheet drawn up as at December 31, 2012, and the related consolidated statements of income, comprehensive income and changes in equity for the year and six months then ended and the consolidated statement of cash flow for the year ended December 31, 2012, as well as the summary of significant accounting practices and other explanatory notes. Management’s Responsibility for Financial Statements Management of Bank is responsible for the preparation and fair presentation of the financial statements in accordance with the financial reporting standards adopted in Brazil as they apply to the financial institutions authorized to operate by the Central Bank of Brazil, and for the internal controls deemed necessary to assure the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Independent Auditors’ Responsibility Our responsibility is to express an opinion on the financial statements based on our audit, conducted in accordance with Brazilian and international auditing standards. These standards require that we comply with ethical principles and plan and perform the audit to obtain reasonable assurance that the financial statements are free from material misstatement. 121 Af-RelatIngles2012Parte03_Layout 1 7/26/13 5:03 PM Page 122 BANCO SAFRA S.A. AND BANCO SAFRA S.A. AND SUBSIDIARIES (”SAFRA CONSOLIDATED”) REPORT OF INDEPENDENT AUDITORS An audit involves performing selected procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including assessment of the risks of material misstatement in the financial statements, whether due to fraud or error. In making such risk assessments, the auditor considers the internal controls relevant to the preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the institution’s internal controls. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present accurately and fairly, in all material respects, the financial and equity positions of Banco Safra S.A. and of Banco Safra S.A. and its subsidiaries and affiliates as at December 31, 2012, the results of its operations for the year and six months ended on that date and its cash flow for the year then ended, as well as the consolidated results of its operations and its cash flow for the year ended December 31, 2012, in accordance with the generally accepted accounting practices adopted in Brazil as they apply to the financial institutions authorized to operate by the Central Bank of Brazil. 122 Af-RelatIngles2012Parte03_Layout 1 7/23/13 10:52 AM Page 123 Other Matters Value Added Statements We have also examined the individual and consolidated value added statements (VAS) for the year ended December 31, 2012, drawn up by management and presented voluntarily. These statements were submitted to the same audit procedures as described above and in our opinion are adequately presented in all material respects with regard to the financial statements considered in aggregate. São Paulo, february 6, 2013 PRICEWATERHOUSECOOPERS Luiz Antonio Fossa Auditores Independentes Accountant CRC nº. 2SP000160/O-5 CRC nº. 1SP196161/O-8 123 Af-RelatIngles2012Parte03_Layout 1 7/23/13 10:52 AM Page 124 º BANCO SAFRA S.A. HEADQUARTERS Av. Paulista, 2100 Tel.: (11) 3175.7575 Cep: 01310-930 SÃO PAULO (SP) Guarulhos International Airport of São Paulo 1º floor - Wing B Tel.: (11) 2413.8100 Fax: (11) 2413.8107 Cep: 07141-970 Alphaville - Barueri Al. Rio Negro, 1084 - lj. 2 Tel.: (11) 4166.6500 Fax: (11) 4166.6544 Cep: 06454-000 Angélica Rua Maranhão, 527 Tel.: (11) 3829.2200 Fax: (11) 3829.2202 Cep: 01240-001 Aricanduva Av. 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Dantas Barreto, 514 Tel.: (81) 2122.1250 Fax: (81) 2122.1277 Cep: 50010-360 CUIABÁ (MT) Av. Hist. Rubens de Mendonça, 1757 Tel.: (65) 2121.7400 Fax: (65) 2121.7403 Cep: 78050-000 PARANÁ (PR) Curitiba Batel Al. Dr. Carlos de Carvalho, 555 - 23º Tel.: (41) 2102.5555 Fax: (41) 2102.5540 Cep: 80430-180 RIO DE JANEIRO (RJ) Barra da Tijuca Av. das Américas, 500 Tel.: (21) 2122.8111 Fax: (21) 2122.8132 Cep: 22640-100 FORTALEZA (CE) Aldeota Av. Santos Dumont, 2750 Tel.: (85) 4006.5900 Fax: (85) 4006.5914 Cep: 60150-161 Fortaleza Rua Barão do Rio Branco, 1411 Tel.: (85) 4006.6200 Fax: (85) 4006.6244 Cep: 60025-061 Curitiba Rua Marechal Deodoro, 240 Tel.: (41) 2106.1420 Fax: (41) 2106.1439 Cep: 80010-010 Portão Rua Carlos Dietzsh, 120 Tel.: (41) 2106.5000 Fax: (41) 2106.5002 Cep: 80330-000 GOIÂNIA (GO) Centro-Oeste Av. República do Líbano, 2030 - sl. A Tel.: (62) 4005.4220 Fax: (62) 4005.4246 Cep: 74115-030 Cascavel Rua Barão do Cerro Azul, 1266 Tel.: (45) 2101.5200 Fax: (45) 2101.5210 Cep: 85801-080 Goiânia Av. República do Líbano, 2030 Tel.: (62) 4005.4244 Fax: (62) 4005.4229 Cep: 74115-030 Londrina Av. Higienópolis, 270 Tel.: (43) 2101.9440 Fax: (43) 2101.9484 Cep: 86020-040 Nova Suíça Av. T63, 1509 Quadra 585 - Lote 01 Tel.: (62) 3237.9800 Fax: (62) 3237.9802 Cep: 74280-235 Maringá Rua Santos Dumont, 2699 Tel.: (44) 2101.4700 Fax: (44) 2101.4710 Cep: 87013-050 MACEIÓ (AL) Rua do Sol, 154 Tel.: (82) 2121.5200 Fax: (82) 2121.5244 Cep: 57020-070 RIO GRANDE DO SUL (RS) Porto Alegre Corporate Porto Alegre Rua Mariante, 11 Tel.: (51) 4009.5554 Fax: (51) 4009.5567 Cep: 90430-181 Private Leblon Rua Dias Ferreira, 190 - sala 702 Tel.: (21) 3797.4300 Cep: 22431-050 Rio Branco Av. Rio Branco, 80 Tel.: (21) 2122.3400 Fax: (21) 2122.3432 Cep: 20040-070 SALVADOR (BA) Iguatemi Av. Tancredo Neves, 148 Shopping Center Iguatemi Bahia Tel.: (71) 2106.8320 Fax: (71) 2106.8328 Cep: 41828-900 Salvador Av. Estados Unidos, 14 Tel.: (71) 2106.4500 Fax: (71) 2106.4527 Cep: 40010-020 SANTA CATARINA (SC) Blumenau Rua 7 de Setembro, 673 Tel.: (47) 2123.6600 Fax: (47) 2123.6640 Cep: 89010-201 Chapecó Av. Getúlio Dorneles Vargas, 927 Tel.: (49) 3661.1100 Fax: (49) 3661.1102 Cep: 89802-002 Criciúma Rua Saldanha da Gama, 3954 Tel.: (48) 2101.3200 Fax: (48) 2101.3203 Cep: 88802-470 Bonsucesso Rua Cardoso de Morais, 247 Tel.: (21) 2131.2300 Fax: (21) 2131.2332 Cep: 21032-000 Florianópolis Rua Arcipreste Paiva, 187 Tel.: (48) 2107.3535 Fax: (48) 2107.3536 Cep: 88010-530 Candelária Praça Pio X, 17 Tel.: (21) 2199.2818 Fax: (21) 2199.2927 Cep: 20040-020 Joinville Rua do Príncipe, 158 Tel.: (47) 2101.7600 Fax: (47) 2101.7634 Cep: 89201-000 Castelo Av. Erasmo Braga, 277 Tel.: (21) 2122.5010 Fax: (21) 2122.5031 Cep: 20020-000 SÃO LUIZ (MA) Av. Cel. Colares Moreira, 07 - lj. 01 Tel.: (98) 2109.9620 Fax: (98) 2109.9630 Cep: 65075-440 Copacabana Av. Atlântica, 1782 - lj. A e B Tel.: (21) 2545.1920 Fax: (21) 2545.1903 Cep: 22021-001 VITÓRIA (ES) Av. Nossa Senhora dos Navegantes, 451 Tel.: (27) 2121.1777 Fax: (27) 2121.1788 Cep: 29050-335 Ipanema Rua Visconde de Pirajá, 240 Tel.: (21) 2141.2100 Fax: (21) 2141.2132 Cep: 22410-000 BRANCHES OUTSIDE BRAZIL Niterói Av. Ernani do Amaral Peixoto, 479 Tel.: (21) 2199.5600 Fax: (21) 2199.5632 Cep: 24020-072 Cayman Islands P.O. Box 1034 KY1-1102, Harbour Place, 4th Floor, 103 South Church Street, Grand Cayman, Cayman Islands Luxembourg 10-12, Boulevard F.-D. Roosevelt, L-2450, Luxembourg 125 Af-RelatIngles2012Parte03_Layout 1 7/23/13 10:52 AM Page 126 126 Af-RelatIngles2012Parte03_Layout 1 7/26/13 5:36 PM Page 127 BANCO SAFRA S.A. Administration Board Carlos Alberto Vieira president Rossano Maranhão Pinto Alberto Joseph Safra David Joseph Safra João Inácio Puga Silvio Aparecido de Carvalho Board of Directors Rossano Maranhão Pinto chief executive officer Agostinho Stefanelli Filho Alberto Corsetti Eduardo Pinto de Oliveira Eduardo Sosa Filho Hélio Albert Sarfaty Hiromiti Mizusaki João Eduardo de Assis Pacheco Dacache Luiz Carlos Zambaldi Márcio Appel Murilo Robotton Filho Paulo Sérgio Cavalheiro Sérgio Luiz Ambrosi Sidney da Silva Mano Silvio Aparecido de Carvalho Walton Magalhães de Campos Filho 127 Af-RelatIngles2012Parte03_Layout 1 7/23/13 10:52 AM Page 128 To obtain copies of this Banco Safra Annual Report, please write to: Superintendência de Comunicação do Grupo Safra – Avenida Paulista, 2100 – 8º andar – São Paulo – SP – Brasil – CEP 01310-930 Design: Bloch Graulich Whelan Inc./New York