2013 Annual Report

RISK MANAGEMENT Our assessment model includes instruments such as collecting social and environmental information via a standard questionnaire; the submission of environmental studies, licenses, authorizations and certifications; and technical visits by specialists. Upon detecting any non- compliances, the Bank works collaboratively so that the firm and/or project remedies the problem by adjusting to laws, covenants and contracts in force. The exception is any operations with clients involving bonded labor and child labor; using non-certified native wood, without a green stamp (FSC or Cerflor); firms that operate in mining or manufacturing any products containing asbestos; or performing any activities that encourage illegal gambling and prostitution, directly or indirectly. Under any of these circumstances the loan is automatically refused and the firm is excluded from the Santander Brazil client list. In addition to holding the Bank harmless from financing activities that put in risk either public health or the environment, the social and environmental analysis is an important tool to assess the financial risk of both projects and clients requesting loans. The Bank's experience shows there is a frequent connection between social and environmental problems and financial issues. This correlation occurs because the non-compliance with social and environmental criteria generates regulatory, compliance and reputational risks which may result in a reduction in cash flow, loss of assets while damaging the firm's reputation. On the other hand, businesses that ensure the well-being of both their employees and the environment they work in tend to have a more efficient management and therefore more chance of honoring their financial commitments and generating good business. In order to be qualified to work with social and environmental risk, the team participates in 4-hour classroom seminars. The session includes concepts and application of the Social and Environmental Risk Practice for the concession of loans and acceptance of clients. The seminar is held on a quarterly basis for groups of 20 employees, usually credit analysts and relationship managers. In 2013, 34 new employees and 40 active employees participated in social and environmental risk training sessions. Throughout the year, Santander Brazil was actively involved in discussions on the review of the scope of the Equator Principles to become in force in January 2014. The Bank also discussed Edital 41 of the Brazilian Central Bank which regulates the topic of social and environmental responsibility in financial institutions. Issue addressed* Progress SOME ACTIVITIES OF THE SOCIAL AND ENVIRONMENTAL RISK DEPARTMENT IN 2013 Client/project sector Manufacturing industry in the Southeast Real Estate Project in the South A large manufacturing firm in the Southeast Sugar Mills in the Southeast An individual in the Midwest A high rate of work-related accidents. Contaminated Land Environmental liability Social, environmental and legal compliance by sugarcane farmers Bonded labor Client has implemented improvements as suggested by the Bank in Safety & Health area. The Bank visited the jobsite to identify environmental liabilities while defining environmental remediation action during the construction phase. The team performed a detailed study of environmental liabilities to include in the credit analysis. As part of the analysis for some loans, the Bank verified the documentation of sugarcane suppliers. The Bank cut off the relationship. (*) The issues addressed may have to do with the compliance with the Bank's social/environmental risk policy, the Equator Principles, the National Agreement for the Eradication of Bonded Labor or any combination thereof. Notes: All information on risk management structure and procedures is filed at Santander and is available to the Central Bank of Brazil and other regulatory agencies. Furthermore, information on Risk Management is disclosed in the quarterly financial statements in line with principles of transparency. For additional information on Risk Management, please visit: Santander/Institucional/Governança Corporativa/gerenciamento de riscos 46 Annual Report 2013 4. Operational Risks Operational risk management is about errors in internal processes and/or systems and by individuals or external events that may cause financial loss and affect business continuity while impacting negatively the Bank stakeholders. In order to face these risks, Santander Brazil has in place a Control and Management Model for operational risks, which represents a competitive and strategic factor. The Model is applicable to all employees during the performance of their daily activities and supports the alignment with the Grupo Santander guidelines, the Basel Accords and the Brazilian Currency Board (CMN) regulations. In 2013 the Bank implemented improvements in operational risk management, such as: Improved security in electronic channels (ATMs, Customer Service and Internet Banking) while strengthening authenticity validation mechanisms in the transactions effected, which resulted in a drop in losses and client complaints; Periodical tests in business continuity in order to ensure the performance of Santander activities under a crisis scenario; Improvement of the risk self-assessment in the Organization while increasing transparency and commitment in the culture of managing operational and technological risks. 47

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