Banco Santander Brasil SA (BSBR) 2016 Q4 法說會逐字稿

Good morning, and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil SA results. Present here are Mr. Sergio Rial, Chief Executive Officer; Mr. Angel Santodomingo, Executive Vice President, Chief Financial officer; and Mr. Andre Parisi, Head of Investor Relations.

All the participants will be on listen-only mode during the presentation, after which we will begin the question and answer session, when further institutions will be provided. (Operator Instructions).

The live webcast of this call is available at Banco Santander's Investor Relations' website, www.santander.com.br/ir, where the presentation is available for download. We would like to form the questions received via webcast, who have answering priority. (Operator Instructions).

Before proceeding, we wish to clarify that forward-looking statements may be made during the conference call relating to the business outlook of Banco Santander Brasil operating and financial projects and targets based on the beliefs and assumptions of the Executive Board, as well as information currently available.

Such forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and, hence, depend on circumstances that may or may not occur. Investors may be aware that general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander Brazil and may cause actual results to substantially differ from those in the forward-looking statements.

I'm Andre Parisi, Head of our Investor Relations. And it's my pleasure to welcome you to Santander Brazil's 2016 earnings conference call.

This past year, we had several important achievements, which will be presented today by our CEO, Mr. Sergio Rial. Then our CFO, Mr. Angel Santodomingo, will provide more details on our fourth-quarter and full-year results. Now let me turn it over to Mr. Sergio Rial, who will start our call.

A very good morning. Thank you, Andre. So a very good morning again. I'm just making sure the mic is working, so I apologize for that and absent time. But delighted to be here with you to talk about the year 2016.

So I would suggest we go to slide 4. And the presentation starts trying to show you three important pillars of what we have accomplished in the last 12 months. One is to talk about our commercial transformation, what we have done in the different businesses of Santander here in Brazil; the strengthening of businesses, which historically have had important positions, stronghold positions; and the one that is by far the most important one, customer satisfaction.

On slide 4, I think you see a couple of important words. One is the speed. I think one of the things we've done in 2016 is we certainly have accelerated the metabolism of the organization, so I think we certainly delivered. And we are, today, leading an organization faster that is capable to respond in a much more agile and nimble way than I think we've done in the last couple of years.

The second one is innovation. And I think that is somehow, and partially, captured in -- when you see the digital transformation that we have done, not only retail, but also in different parts of the business.

And last but not least is the construction of a very client centric culture, around which the whole future strategy of the Company really resides. We do believe deeply that there is a space for banks and for a bank in Brazil that actually can delight, it can do, transact and interact with customers in a different way and certainly in a more consistent and better way than I think we've seen in the past.

On the right side of the same slide, very quickly, one of the key highlights of the year has been asset quality. So I think we are pleased to basically deliver what we said we were doing. I think we could see it, and you're going to see that more clearly through the words of our CFO, Angel, when you see the evolution of the NPL throughout 2016.

Efficiency also moves in the right direction. Here we still have a long way to go. I think we are a lot more ambitious than I think the number we are posting, 48.8%.

Another very important highlight of the year is the growth of commissions, partially explained by the customer activity and the capacity of the organization to have developed different levels of loyal customers, which is reflected on the next item. But again, we really believe this is the beginning or can still be achieved for the Company.

Last but not least, a very important cornerstone of the organization, which has had, historically low ROEs. I think we have constantly said and reaffirmed, and I do it again, our commitment to profitability. ROE is an important measure. And we are happy to see that in the last quarter we're already very close to 14%, having posted 13.9%, pretty much on the right track to deliver the 15.6% that we have articulated in our Investor Day back in 2015 in London.

So moving now to slide 5, let me go a little bit deeper on the commercial transformation of what we have done. So on slide 5 we see a couple of things which are important. And I'll basically touch a few words. One is when we say new work methodologies, that we have today around 500 people working inside of the organization in what we call agile desks. Those are multifunctional teams working with the only pursuit of delivering products that are actually potential solutions for gaps that we see in customers' product menu, if you will.

Brazilian banks have been, historically, very much a pool in terms of banks produce and then they basically try to put it in the marketplace. We're trying to really reverse over time to stop bringing the gaps, customer insights, inside of the organization so that we can actually start differentiating ourselves.

Some of that is captured in the ratings the Santander Internet banking and the app mobile has received. So here you see on the Apple Store we have received a 4.5 rating out of 5. On the Google Play, 4.2. So this is somehow recognition from consumers of the quality responsiveness, but more importantly, customer friendliness of the devices and apps that we are creating.

Transactions in mobile in Santander in 2016, as you have seen here, have jumped 100%. Sales in ecommerce have tripled in 2016. Biometrics, as you can see it, we have moved the organization to 6.3 million.

And this is all signals of a very singular story, which is this digital transformation that we are embarking. And we are not embarking on digital transformation because it's fashionable or just because it is embedded in a cost culture. No, we are doing that because it is the right thing from a customer experience point of view, especially in a country as vast and as complex as Brazil, and certainly with limited infrastructure.

On the bottom of that slide, the important piece here is with the digitalization as we're talking from a customer perspective, we have also done a number of things internally to automate processes that were before conducted manually at the branch level. So that's how we explain agility. We have automated a number of processes.

Those products, we're talking about 93% of all those products are today done, automated, throughout all the branches. We have around 3,431 branches in the country, which has allowed commercial branches, the typical branches, to actually become more spaces to actually sell. So they're becoming less and less factories and they're becoming more and more sales offices. So these are just signals of the commercial transformation.

On slide 6, still on the commercial transformation, here are a couple of important things. Still on retail, credit cards. So we have actually gained market share. We ended the year with a market share in credit cards over 13% and we've done it in the right way. There is a - there is still a long way for us to reach the level of profitability that we expect to see out of our credit card portfolio.

So remember that we had, historically, and still do, a significant credit card portfolio segment that is called free, very important. It does create the right level of loyalty, but certainly from a profitability point of view was certainly the segment that, in my view, was historically challenged. And we are doing things so in a way that customers can actually become more engaged and can actually become more profitable, even holding a card free -- a card fee free as we have.

We have launched Santander Way. This is nothing more than a credit card financial instrument, but important to see the level of downloads. And very important, with the Citibank divesture of retail, we were able to retain and to gain the commercial agreement with American Airlines on a co-branded card with Santander.

So this was a business that it's the global business of Citibank. And this business did not go with the acquirer, so we were able to retain it. And we're talking here somewhere between 300,000 to 400,000 customers and some of them are, of course, important customers. American Airline has the largest market share of routes to Florida.

Agro, historically a 2% market share, a 3% market share for Santander, a real opportunity. We have been able to really put a strategic intent to at least be able to represent, in Agro, our natural market share quota. This is a story under construction. I think more to come. But here you can clearly see that we were able just on the pure liability side, capture an issuance of LCA of more than BRL7 billion. And this is, of course -- those are relatively cost-effective liability instruments.

And last but not least is our ambition on the small and medium enterprise. This is a business which we started about three years ago. We have a very ambitious plan for the next five years. We do see ourselves as one of the natural champions of SMEs in the country. We only see perhaps two other banks competing in that space in a sustainable way, so this is one of the areas that you're probably going to see more growth, more content in the years to come.

Next slide, slide 7. We talk about our acquiring business GetNet, a business that was started from scratch. And we are pleased to see -- and I think the numbers speak for themselves. I think what we have seen here is -- what's the reason for this incredible progress? I would say a couple of things. One, very effective integration with the bank. So we have a well-oiled, integrated commercial franchise between GetNet and the retail franchise and wholesale.

Second, what's the part of the reasons for this performance? Second, we are a lot more skewed towards retail in our business than we are towards wholesale. Our competitors are structurally a lot more skewed towards the wholesale segment, around 60%, while for Santander, actually our acquiring business is exposed to roughly 60% in the retail space, which is, of course, profitability significantly higher.

And third, I think it's just part of the commercial transformation that I think we have discussed before. And those numbers, those are numbers primarily related to POS with companies, as we call it, or enterprises.

We have launched our product for individuals at the end of last semester. And I think we're going to see a boost, potentially, in numbers coming from this new device for individuals, taxi drivers, doctors, individuals who are not necessarily enterprises, but are still businesses or conduct important businesses for us to capture.

And I will not mention the numbers, but you can see a jump of 30% in revenues.

On slide 8, which is the second pillar about strengthening the leading businesses, GCB, our investment bank in Brazil, we certainly moved. It has been a phenomenal year. It was by far the best year of our investment banking business, corporate investment banking, in the country.

M&A, in terms of volumes, number one house. Pretty impressive, taking into account that we certainly have tough competitors, both foreign and local.

And on the consumer finance side, our car finance business, I think we have mentioned, and Angel has mentioned that perhaps throughout the year, our disruptive digital platform, which has eliminated most of the paperwork in the way people buy cars through dealerships has allowed us to actually grow market share by 3%.

So we basically ended the year with roughly 23%, 24% market share in the consumer finance company. And more importantly than that, the quality of the sales has actually increased tremendously. As mentioned, asset quality absolutely under control.

And, as you can see, we are now basically creating an important database through a number of customers coming for fast simulations through their dealerships. So just on average, we are seeing about 1.1 million consumers through our systems asking for simulation. So this is going to be a very fertile ground for cross-sell with our retail franchise. Not yet in any way done. This is the story of the years to come.

On slide 9, customer satisfaction, this is work in progress. Far from being an end in itself. But I think what I'm proud, on behalf of the team, to see is to see the transformation again of loyal customers to 3.7 million having an important and direct impact on the Group's consolidated goal. Brazil here plays a very important role. See the growth in digital customers; a 45% growth, and in number of digital transactions.

So all in all, in the right way. But even for a company that is still -- that poses itself as part of its core strategy being customer centric, being number two in high income, being number two in middle income, is not where we would like to be. So here there's quite a bit of more work to do on customer satisfaction.

On the employee side, for me, as important as any other quadrant. I think what you're going to see more and more is not only a culture to serve, but also a culture that will measure customer satisfaction. So we're going to be introducing, in the Company, net promoter score, as you see in other retail franchises. And the NPSs will start becoming a metric that we will be pursuing.

All in all, positive environment and highly engaged organization.

On slide 11, most of you have seen the Group's results yesterday. So an important contribution of Brazil, a contribution that I think will continue to grow over time as we believe there is plenty of growth for Santander in Brazil to capture. So I think we are proud. I mean we are proud to be a significant piece.

But more importantly than the number itself is the quality of the earnings that again we were able to generate. I think Brazil has been an important part of being able to create business models that are indeed capable of generating capital and I think we did play an important role for the Group's capital generation. That's nothing more than an obligation.

So whether it's the liability side, paying attention to the liability side of the balance sheet, as we have done last year, but also the growth in fees, as you have seen, and businesses that are perhaps less capital intensive, have helped Brazil and the Group to actually post the numbers you have seen yesterday.

With that, I stop. I used 20 minutes. And I will pass then the word to our CFO, Angel.

Thank you, Sergio. Morning, everybody, and thank you again for participating in this results presentation.

I will start, as always, by the macro side. That is in slide 13. And despite the recent climb in GDP growth estimates, we remain confident that we will see a gradual rebound in activity.

You probably know a lot of these figures, so I'm not going to elaborate a lot around them. But let me underline four main ideas, quick ideas.

Domestic inflation has been falling steadily, provoking a consensus that there is room for interest rates to continue to decline throughout 2017 reaching single digit territory.

We are seeing -- a second one would be that we are seeing clear progress on the fiscal adjustments agenda, which we believe should help business confidence to continue its upward trend this year, thereby playing a major role in the recovery of the Brazilian industry and investments, albeit at a moderate pace.

The third point is that there has been a continued reduction in industry inventories.

And the fourth point I would underline is that we see an utterly positive outlook for agribusiness.

All in all, we reiterate our expectation that Brazil's GDP will resume growth throughout this year.

So starting with the results, and that's slide 15, let me -- I will go into the detail in next slides, but let me underline the main ideas around our results. As we have always said, we are committed to delivering consistent and sustainable earnings growth as we strive to keep improving our bottom line every quarter.

This is the eleventh out of the last 12 quarters in which we have proven -- we have improved our profit. In 2016, I think we managed to achieve solid growth and this movement was supported by a host of factors.

To name a few, that, as I said, I will go into the detail in the next slides, we note that the Bank continued to enjoy a comfortable capital and liquidity position. Our loan portfolio was affected by Brazil's macroeconomic environment, but the individuals' segment remained resilient, helped by payroll loans. Asset quality kept at healthy levels and better than our peers thanks to proactive risk management.

Greater customer loyalty that Sergio was addressing, resulted in increased revenues underpinned by a combination of liability management that I have told to you in the past quarters, and good market activity, with these growing at the promised double-digit pace.

And finally, rigorous cost control led, once again, our annual expenses growth to be below inflation. As a consequence, net income reached BRL7.3 billion in 2016, a remarkable achievement in our history.

Next slide, that's slide 16, you may see the quarter evolution of our net profit. As I said, total net profit was EUR7.3 billion in 2016, 11% higher than in the previous year. On top of this performance, last year we announced BRL5.3 billion in dividends, of which BRL3.9 billion were interest on capital. These figures prove we are on the right track to keep delivering sustainable and resilient growth.

On slide 17 we show the main concepts of our quarterly earnings, about which I will go into more detail later on.

First, I would like to draw your attention to three events this quarter. There, as I mentioned, there has been a distribution of interest on capital within the dividend payment reaching the total amount of BRL3.85 billion during the year, BRL3.35 billion in this quarter, and resulting in a positive impact of around 900 -- BRL905 million in the tax expense line.

The second point would be that in NII there was an asset adjustment resulting in an impairment of securities in the amount of BRL388 million.

The third one is that given the aforementioned downward revision in economic forecasts, we recognize an additional credit provision for loan losses of BRL517 million attributed to the corporate segment.

Thus, excluding these adjustments, let me highlight the following P&L figures that you can see in the slide.

On the revenue front, net interest income decreased by 5.3% relative to the third quarter due to the weaker market activity. Nevertheless, we present a strong growth in the quarter in both credit and liability NII. In the year, NII increased by 6.3% due to funding and market activities also.

Fees advanced by a strong 12%, 12.4% in the quarter and 15.6% in the full year, maintaining the mentioned double-digit growth pace.

On the expenses side, allowances for loan losses fell by 5%, 5.5% in the quarter, totaling BRL10.5 billion in 2016, an 8.2% increase year on year.

Finally, general expenses were held under control. In the year-on-year comparison, costs rose 5.7%, making the fourth consecutive year of growth below inflation, or saving in real terms.

Let me elaborate on the details of each of these lines in the following slides.

So next slide, which is slide 18, shows the evolution of our net interest income, the NII, which totaled BRL31.5 billion in 2016, or 6.3% higher than in 2015, with 5.3% lower - a lower level compared on a quarterly basis.

Highlights were credit revenues increased 3.7% in the quarter due to a combination of a rise in volumes and the spreads. In the year, credit revenues also posted an improvement despite the decline in volumes. With that, spreads grew by almost 40 basis points last year as the impact of the portfolio mix adjustment was offset by the positive price movement during the period. I have elaborated during previous quarters on this change of mix and price.

Revenues from funding also had a stellar 2016 growing by an astounding 31% year on year. In fact, the plans that we have been sharing with you over the last five quarters already are now being reflected in the P&L.

And finally, market activities, which is, as you know, included in the others concept, came back to normal levels considering the historical base after two exceptional quarters, the second and the third quarter as you can see the figures in the slide. And consequently, market activity presented a good result at the year level and a decline in the quarter.

In the next slide we elaborate around asset volumes. Our expanded loan portfolio totaled BRL322 billion in 2016, which means an increase of 3.8% in the quarter and a decline of 2.5% in the year.

Our credit portfolio grew by 3.9% in fourth quarter and decreased 1.6% in the full year. So this is an important point because although the Brazilian environment has been weak, reflected, obviously, in the year-on-year comparison, we finalize 2016 with a quite positive growth rate in the last quarter, showing again good customer engagement or loyalty.

This was the second consecutive quarter of expansion in our loan portfolio, which came in coupled with a widespread improvement across all client segments, suggesting that the worst is behind us, and that from now on the loan portfolio could see gradual growth.

The individuals' portfolio continued to deliver a resilient performance, expanding by 3.4% over the previous quarter and 7.8% in the year. Payroll lending and credit cards remain as the primary growth drivers.

This quarter we must also highlight the performance of consumer finance, and Sergio elaborated a little bit on what has happened there, which advanced by 2.7% Q on Q and posted a positive growth in 2016, amid an especially difficult year for the car sector. This recent performance improvement was foiled by the implementation of that disruptive digital platform that Sergio was addressing, which was experiencing significant productivity gains for the business and which I have shared details during past quarters. The reflection of all that is seen on the volume evolution.

Continuing with the good news, the SME and corporate portfolios recorded quarterly growth of 1.9% and 5.5% respectively. On a full-year comparison, both portfolios are still performing at negative rates, but at a lower pace than in previous quarters.

If we exclude the ForEx variation, SME would have posted a decline of 6% year on year and corporates would be negative territory at 2.3% year on year.

On next slide, on slide 20, you can see how our funding has evolved. Funding from clients climbed 2.3% in the quarter and 3.6% in the year. Let me underline the positive performance of savings and deposits during the second half of 2016 in response to our initiatives to enhance client engagement levels.

Total funding reached BRL552 billion in fourth Q of 2016, representing an increase of 4% in the quarter and 7% in the year.

Our next slide, slide 21, as we have been saying since the beginning of 2016, fees' revenue growth is a consequence of improvements in our product and services quality coupled with a continuous effort to foster greater loyalty of our client base and I think this can be easily seen in this slide.

Considering improvements in our loyal customers' client base, I would like to highlight the performance of current accounts, credit cards and collection services. This situation is an improvement which has led to a positive 12% growth Q on Q.

In the year, total fee income reached almost BRL14 billion, presenting an outstanding growth of well into double digit, almost 16% over 2015, and in line with our goal of delivering double-digit growth in 2016.

Moving to slide 22, let's talk about asset quality. NPL over 90 days dropped 10 basis points in fourth Q 2016, reaching 3.4%. Individuals and corporate NPLs decreased at the same pace. It is important to highlight that the early delinquency rate declined 70 basis points, 7 0, in the quarter. That means our asset quality remains under control at comfortable levels, especially considering the usual lag between economic activity and NPLs.

This continues to reflect the strength of our risk model and confirms that all actions we have taken and commented in the last two, three years, such as portfolio risk and diversification, were the appropriate measures to protect the quality of our assets. As a consequence of the decline in the over 90 days' portfolio, the coverage ratio increased to 212%, which, in our view, is a healthy level, especially in a moment in which we may be going out of recession.

Loan loss provisions, in the next slide, totaled BRL10.5 billion in 2016, implying an 8% rise over the previous year and a 5.5% decrease in the quarter. This has allowed us to maintain cost of risk also under control at below 4%, at 3.7%, a similar level compared to 12 months ago. The full-year results reflect the still challenging economic scenario that I have mentioned in Brazil and, at the same time, will re-enforce our confidence on our proactive risk management.

Slide 24 we may see how expenses have evolved. As stated in previous conference calls, Santander Brasil's character is well known by our cost discipline and lean mindset. Staying true to those values, our total expenses amounted to BRL18.3 billion in 2016, growing 5.7% in 12 months.

Excluding non-recurring effects that we had in fourth Q, like the lump sum bonus paid to employees in accordance with 2016 collective bargaining agreements, total expenses would have increased by 4.8%, which is also well below inflation in the period.

So, costs grows 8.9% in the quarter, also affected by the seasonal impact from the collective bargaining agreements I am mentioning.

All in all, we reaffirm our commitment to a strict cost control discipline. In the last four years we have achieved expense savings of 25% in real terms and going forward we expect to keep our expenses growing close to inflation.

Next slide, on slide 25, we present our main performance ratios, which have also shown progress. Efficiency improved in the year-on-year comparison and stood at almost 49%, 48.8% at the end of the year.

Our recurrence ratio rose to 75%, 74.9%. Every time that we make strides in this indicator we bring more predictability and resilience to our results. Thanks to these advances, return on equity keeps increasing at a gradual but steady, pace, reaching, as Sergio mentioned, 13.9% in the quarter - in the fourth quarter, which is a good starting point for 2017.

We will remain committed to continuously improving our profitability in line with our guidance already shared with you in the past Investor Days.

Our relentless push to achieve stronger results is guided by our mission to establish a competitive position against our peers and meet our shareholders' expectations, but always maintaining good solvency levels.

Speaking about this, in the next slide you will notice that both our liquidity and capital positions remain solid with stable funding sources and an adequate funding structure. The loan to deposit ratio reached 86% last year, which is quite a comfortable level.

The BIS ratio fell to 16.3%, primarily due to a drop in the adjusted regulatory capital in response to the dividends announced.

Remember that we announced in fourth Q close to BRL4.75 billion in dividends. Despite that decline, our capital ratios remain health with a core equity Tier 1 level of 15.3% and a Tier 1 level of 16.4%.

As I said, total dividend paid - total dividends paid in 2016 reached BRL525 billion - (sic - see slide 26, "BRL5.25 billion"), which is 5.4% of our average market cap in the fourth quarter.

Those will be the details in the numbers and the results of fourth Q. Now I would like to give the floor to Mr. Sergio Rial again.

Thank you, Angel. So, I think on slide 28, which are basically trying to summarize what we have articulated, but I think we are pleased to deliver what we said we would do, so I think that has to be the baseline. But this is -- I think Santander has shown over the last couple of quarters a level of consistency and predictability that we work very diligently each and every day in order to consolidate that position.

So, I want to make sure that we assure our commitment to being a bank that is committed to higher levels of profitability, working on effective commercial transformation. We do see ourselves as a formidable alternative to the existing banking system in the country. We will continue to pay adequate attention to quality of assets. I think this is not going to change and I think this is probably going to be one of the questions looking at 2017.

But as we enter 2017 I would like to leave you with a couple of thoughts. One is, we certainly have a better macro than we had when we entered 2016. Certainly, it's my personal opinion that I think we're certainly going to have a much more benign commodity cycle than I think we have seen, again, in the last two years. I think we enter Brazil with clear indication, not only lower interest rate, which is important from a purchasing power point of view, but also a Brazil that is going to be benefitting from, again, a better commodity cycle, highest record level of agro crop and unemployment probably showing some signs -- improving signs towards the second half of this year.

Consequently, I think this may be good news over time for banks in terms of volume. One of the things we haven't seen in 2016 for sure has been credit growth, so hopefully we're going to see better signals towards the end of second half.

A lower interest rate environment does not mean challenges around profitability in banking, particularly in Brazil. I speak for myself. In the case of Santander, we still have a long way to actually optimize the thrust, the capacity of our liability.

So, we have a pretty strong balance sheet. We have a pretty strong customer base through which we believe we have plenty of room to do and to generate more value for shareholders, but also for customers, through the liability side. So, from a spread point of view, I remain cautiously optimistic in the sense that I don't think we're going to see, with the decline of interest rates, a very -- a much more difficult environment, much to the contrary.

All in all, good. I would like to thank you all for not only following the stock, but also supporting us in many different occasions. Rest assured that the commitment to deliver consistently higher ROE pretty much based on organic growth and commercial activity on what we have, and gaining market share where it makes sense, will continue to be our motive.

Thank you very much and I think we're going to be open for questions now.

Thank you. (Operator Instructions).

Moving to our Q&A, first question comes from Philip Finch, UBS. With NPL trends improving 4Q, what are your expectations for loan loss provisions in 2017?

Okay, thank you Philip. I would say that NPL trends should be -- should follow the macroeconomic behavior that we could see throughout the year. Let me go a little bit backwards to put in context things. We will go back -- we are speaking of 2016, so if we will go back just 12 months. January 2016 we were speaking of an inflation of around 11%. We are now speaking of an inflation below 5%.

We had the CVAs around 500 basis points of Brazil. Today we have the CVAs around 250 basis points.

The dollar was at 4, a little bit over 4. Today it's below 3.2.

GDP, everybody was speaking of minus 3.5%, 4%. Today we are already speaking of positive territory and gaining momentum. Interest rates etc.

So, the macro environment -- Sergio was also mentioning this in his last words. The macro environment is clearly improving, so NPL trends, with some delay always that you may discuss, will tend to follow that behavior.

Now, I hear the question is both -- is in between segments how we could see this evolving, first, and, secondly, with what intensity we will see this behavior.

We tend to be positive. We tend to see the macroeconomic momentum gaining pace throughout the year, and we have an important variable here, which are interest rates. If monetary policy follows what the market is considering today, which is moving to a single-digit interest rate level, the impact that that is going to have across the board, meaning not only the bargain ratio, but confidence, investment, consumption, the impact that that may have could easily help the economy in a more positive way that we are seeing today.

So, I would say NPLs would tend to follow that.

Unemployment is an important variable also, disposable income at the same pace. And we will try in our case to continue with the same policies, which means what I mentioned in my presentation, diversification, de-risking, considering obtaining a leverage in volume growth, as you have seen in past periods.

Okay, let me just add two other points on the NPLs. So, I think on the wholesale side, a big difference in 2017 is, I do believe, companies are going to be able to access the equity markets, so on the wholesale side, which wasn't absolutely open for Brazilian companies back in 2016. So, equity markets are open.

And, more importantly, fixed income market -- international fixed income markets are not only open, but at unprecedented price levels which wasn't very clear back in 2016. So, that helps potentially to de-lever the wholesale side both in terms of duration, but also in terms of capital structure.

On the second point, if you look at 2016 performance, particularly the fourth quarter, where we have seen the biggest improvement has been on the individual dimension, 100 basis points' drop third quarter to fourth quarter. I personally believe that this trend, based on product mix that we have done, but also of very close monitoring, should not change. So, I think the individual piece I don't think we would see surprises.

Next question comes from Eduardo Nishio, Plural. Stepping back a bit out of the quarter and looking ahead for the next two years we have seen several downgrades on GDP, interest rates going to 1 digit, regulators changing rules with some negative implications for banking profits. What's your view in terms of the bank environment regarding to spreads, profitability, loan growth etc. and what's Santander strategy under this scenario? Could you please talk about the regulatory changes that are taking place recently?

Thank you, Eduardo. I think let's start with the regulatory changes. So, I think what we are seeing on the credit card changes, which is basically transforming, to a large degree, the product into a revolving credit line, it is in itself a good thing. It's unsustainable for a country to continue to post the level that I think we have seen historically on credit cards.

But I also see positive regulatory changes. I think we have seen interesting discussions around the compulsory. So we may be seeing changes around how much we are basically seeing guided credit in Brazil.

I think I'm going to -- I'm more optimistic in seeing a bias towards deregulation than I'm actually going to see regulation. I think where we're going to see regulation is probably on what is structurally excesses in terms of - and I think the banking industry will most likely self-regulate itself than wait for the regulator. So, I would see banks becoming a lot more proactive in self-regulation.

And at the same time I would see banks pushing to more deregulation. And I think one of the good things that we're seeing is BRL30 billion of EFTGS, the social security funds, coming to the economic scheme. So moving from the state hands back to individuals' hands, which are probably going to be allocating it better. So I find the environment, if you ask me, I'm positive, really positive relative to 2016. It's all relative to 2016.

And last, but not least, we have formidable competitors, absolutely formidable, but everyone is in a different stage. Everyone is going through a different cycle. Some are integrating businesses. Some are reassessing their capital structure. Some are looking at businesses that could be, or not, IPO'd. So, everyone has a different -- on the contrary, we are 100% focused on our operations, so there is no distraction whatsoever in a franchise that still has a lot of opportunities to be extracted as shown over the last 11 quarters.

Eduardo, adding to that in terms of the financial system and variables and how we see this evolving -- going in the future, as the macroeconomic situation improves, as I was mentioning, the normal situation will be to have some pressure on asset spreads. While the volume starts to offset, for the NII in absolute terms analysis it starts to compensate of several EBITDA trends.

So I would say on the asset side, a mean would be stable under pressure as economy gets momentum. As you know, today consensus and, in general terms, estimations are speaking of a positive GDP growth, but not extraordinary positive growth. So, I would say that we will still have a 2017 which is relatively positive, or could be relative positive in terms of NIM.

And do recall that in our case, in Santander Brasil's case, we still are securing these liability and funding plans that I have shared with you in the past, so that should also give some support, give some help to the total NIM and the total NII compared to the past and compared to the financial system as a whole.

Profitability we also already discussed. We are in the positive trend and we will maintain that.

And loan growth, again, saying the same thing, probably will be -- we expect a positive year. Mid-single digit or around mid-single digits will be the normal trend.

Next question from Nishio, Plural and [Yuri Hoshoff] from JP Morgan. Can you please talk a bit more about the non-recurring items? Why did you decide to classify a large portion of the interest on capital tax benefit as non-recurring?

Also, if you could please talk about the additional allowance for loan losses unsecured transaction, non-recurring adjustments.

Okay, thank you Eduardo and Yuri. Well, I think I already gave a little bit of a light when I was presenting the general P&L. We had an interest on capital dividend that totaled, in the full year, BRL385 billion and that generated a positive impact of BRL905 million in the tax expense line.

On the NII we made an adjustment of an impairment of securities that had -- by an amount of BRL388 million.

And basically the other adjustment that we made, which was worth BRL517 million, was considering these lower expectations with growth -- economic GDP growth and in general terms the economic environment. We thought it wise to do a corporate loan loss provision of this amount, of BRL517 million. So, that's about it. There is not too much to be said around this. These three items were the three items I mentioned in my introductory words.

Next question comes from Jorg Friedemann, Citi. We appreciate the strong improvement on ROE, but we still find that convergency to peers is lacking stronger contribution from capital light activities such as asset management and insurance, but one agreeing not as capital light as the former. With the recent movement in Spain, with the Bank buying back its asset management division globally, is there any conversation with Santander Spain to transfer asset management and insurance underwriting back to Brazil?

Thanks for the question. I think when we had articulated the target for 2018 it was really business as usual, right, with the portfolio that we have. All your questions are absolutely valid. I think we have a number that we have articulated back in the investor conference. Your question is, is our number going to converge with our peers'. There is absolutely a question around portfolio too, as you correctly pointed out.

The first task has already been made. I think the fact that we have bought back our asset management business is really, really good. A big piece of this business does reside in Brazil. We do see Brazil becoming more and more of an important, if you will, factory for some of the Latin American firms or funds that are going to be highly multi-market. And I think the retail franchise, and particularly the affluent market segment that we are building very successfully in Santander Brasil will benefit tremendously.

But, answering straight, so there are no plans whatsoever at this point in time to do any type of transfer, or accounting transfer. I think the insurance piece from a strategic point of view is pretty much on our radar, of course. It is still a country where insurance is an important piece. We have shown that in 2016 a big chunk of the commission growth is actually the distribution effort of Santander. So if the distribution effort of Santander can yield those levels, imagine if we would have, indeed, an insurance company.

If we were today -- just today from a revenue point of view, on peer distribution of the insurance products we would be among the five insurance companies in the industry, and that's without a real factory. So, I think your question is right and I reassure you that (technical difficulty).

Morning gentlemen. Thanks for taking questions. A couple of questions here if you could indulge me. First, what should we expect for your tax rate going forward? Of course, you have the big interest on capital, but the amortization of the goodwill from the ABN Amro acquisition in Brazil is running out. Where should we expect this to settle in 2017 and, subsequently, in 2018?

Second, Angel, you talked a little bit about margin pressure coming from lower rates. How quickly do you think your book reprice list at the lower spreads that are going to most likely start coming in as rates go down to 9.5, as you have in your forecasts?

Okay, thank you. Tax rate is always a difficult variable to estimate, because, as you know, there are different variables affecting on different directions. I would say that generally speaking we should trend -- you are quite correct in terms of the goodwill that is finalizing, but generally speaking I would say that we should trend towards the 20%, 25%. That's a trend. This is always something that --

Remember, in Brazil there is a lot of taxes being paid throughout the -- in the P&L that is not only the final tax rate. We have the PIS Cofins. We have different -- other taxes that we already pay throughout the P&L. But I would say, trending wise, that would be my best guess estimate.

In terms of NIM, I wouldn't like to leave the sensation that we are already under spread pressure. I don't think so. If you analyze the quarter, we were able to improve (inaudible) in 12 basis points and, basically, half of that was mix, half -- around half mix, half price. So, I would say that we are still in an environment that, as the economy is not jumping and boosting, that spread is -- that pressure is not there.

I was more elaborating on the medium term clearly, going towards the end of the year, or going into 2018, what could happen with both NII and NIM, but I don't see it full term. We are not seeing that pressure yet, but we have to be realistic and we have to see that it will, and may, come in the near future.

Thank you. Just one follow-up. On your 15.6% ROE target for 2018, what tax rate do you have there? I think that might be an easier question to answer.

The 15.6% ROE is our -- I didn't hear quite exactly the question was -- the 15.6% is?

So your target ROE, what tax rate --

Can you repeat your question, sorry?

What tax rate do you consider for your -- on your target ROE?

We are working with the levels I said to you. We are working with levels around 20%, 25% and as time goes by that will be going up. Sorry, I didn't hear you.

Thank you.

Mr. Rafael Frade from Bradesco would like to make a question.

Hi gentlemen. Good morning everyone. Just a follow-up on -- maybe I missed the explanation from previous question regarding the interest on equity in the quarter. I would like to understand why you classify as non-recurring.

And a second point would be related to your de-rating of your credit portfolio. We saw a major increase in the AA rating. I would like to understand if there were some changes in rating, or this is really that the increase in the portfolio in the quarter was mostly on AA. So, if you could give a little color on this would be great.

Okay, thank you. Again, I already elaborated on the specific issues of this fourth Q. The kind of non-recurring is something that, given the economic environment, we thought it wise to do this on the corporate side just thinking in 2017. That's about it.

We specify the corporate side because we wanted to give you some more information more than the typical provision -- loan loss provisions. And obviously we had other positive impacts and one of them was this tax capacity. So, as I said, a normalized, I would say, year -- of year-end will of optimizing in the strength and in the balance sheet.

The second question was -- which was the second question? I didn't write it down. Frade, are you there? Sorry, the AAA classification, you are right. Well, nothing specific. If you analyze, we had like -- if I remember well we had 36% of weight of the AAA -- AA, sorry, portfolio. And that moved. I think it's to 37%, 38%, so I wouldn't extrapolate specific issues or things around there.

It's just Q-on-Q movements that, depending on how clients move, what is the evolution, if they go or not into better or worse positions, but there is not an issue around a general move that we see in terms of improvement, or the other way round. I don't think the issue is to be significant.

Mr. [Lucas Locke] from Credit Suisse would like to make a question.

Hi, Marcelo Telles from Credit Suisse. (Inaudible). I have two questions, one a more specific one. We saw in all the decline in NII, also the lower NII in the quarter, mainly hit by lower trading revenues. I was wondering if this is a bit the new level we should expect. I understand there's a lot of illiquidity on that. But given that the level in this quarter was below the average for the first nine months of the year, it would be nice to have some color whether this is going to be a trend if you have a higher number, or if this should be the recurring level going forward.

And my second question is regarding your capital. Clearly, you have a comfortable capital position and my question to you is if you'd consider doing any sort of capital optimization down the road. I know you already pay -- you already have a very high payout. In the past you've done a capital reduction and we've seen, of course, the Santander Banks doing a capital reduction -- not capital reduction, but capital utilization strategy there. So how should we think about your capital structure at this point? Thank you.

Thank you, Marcelo. Within NII, the part that is called others is always a difficult one. You are right, compared to the third and fourth Q it's a lower level. If you take the historical average, not only the year average, we have always been in the region of 1.34 to 1.5, always minimum in the majority of the quarters, 1.5, 1.6, so we are more or less returning to that historic average.

Difficult to estimate. If you ask me, for example, starting first Q if we were going to have a historic quarter in terms of market NII, I wouldn't have guessed that. So we had, as I said, a very good quarter the first Q. I would say, for example, we have -- we are having, or we have had a good January compared to the previous October, November and December, so we will --

Obviously, we will strive to keep this line improving, but I would say that moving from that -- those historical levels we'll probably have to have an explicit explanation. I would clearly concentrate on the credit and funding side of the NII. Those are business BAU, business as usual. This is reflecting our kind of efforts with both clients, products and spreads. And the others will have to come -- the maximum will come, but will have to come with a little bit of volatility.

In terms of capital, I would say that at this point of time we are not thinking of doing any kind of operation. We have a comfortable level of capital, as I have shared with you in the past. You were quite correct saying how we managed that, which is through a high level of payout.

As I mentioned, we paid an important amount of dividends last year, BRL5.25 billion, and our way of looking at this is to use capital both of the stock, but specifically on the margin, at a profit -- from a profitable way. So, what's our plan? To keep on using capital in a profitable way, increasing and improving that profitability that we have shared with you.

So, the Bank is on that kind of mindset from the first employee to the last one. And that is being transferred to the commercial arena, to the non-commercial arena, and that will continue in the near future. But at this point of time, as I said, no plans.

Very helpful. Thank you so much.

Thank you. The Q&A session is over and I wish to hand over to Mr. Angel Santodomingo for his closing remarks.

Okay, so thank you very much everybody again. I'm quite happy to have presented these good results for the full year. We look forward to 2017 to clearly maintaining this way of delivering and I really hope to share this with you in the near future. Thank you so much and good day.

Banco Santander Brasil's conference call has come to end. We thank you for your participation and have a nice day.