Sergio Rial - Chief Executive Officer Angel Santodomingo - Chief Financial Officer Gustavo Sechin - Head of Investor Relations

Good morning and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil SA's Results. Present here Mr. Sergio Rial, CEO, Mr. Angel Santodomingo, CFO, and Mr. Gustavo Sechin, Head of Investor Relations. All the participants will be in listen-only mode during the presentation, after which we'll begin the question-and-answer session when further instructions will be provided. [Operator Instructions]. The live webcast of this call is available at Banco Santander's Investors Relation website at www.santander.com.br/ri where the presentation is also available for download. We would like to inform that the questions received via webcast will have answering priority. [Operator Instructions]. Each participant is entitled to ask one question. 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 projections, targets based on the beliefs and assumptions of the Executive Board as well on 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 as depend on circumstances that may or may not occur. Investors must be aware that general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander Brasil and may cause actual results to substantially differ from those in the forward-looking statements. I will now pass the word to Mr. Sergio Rial. Please, Mr. Rial, you may proceed.

Well, thank you very much. I would like to start by again thanking everyone. I'd like to also give a welcome to Gustavo, who is our new Head of Investor Relations joining us in this important call, and of course our CFO, Angel will then take this conversation further with all of you. The reason why I'm here is to at least to try to provide some context for the news on my migration to the Board. A couple of thoughts and parenthesis: One, I'm not leaving Santander as a Group. I remain very much committed to both, Santander Brasil, but also to Santander Group. Second, succession has been really planned over the last two years. We had an extensive and well thought process, very much linked with the Local Board and the Group Board, primarily also due to the materiality of Brazil and South America for the whole group. We had an extensive research, both externally and internally. I started the process since the day I joined the company as a CEO. So there were a number of names on the list, and then I'm very glad that as a CEO they are very much supported by the Board, which is the Board's prerogative at the end, the succession. I was able to actually indicate the person and the executive that I think will take Santander Brasil in a second phase. Mário has been part of the team for the last four years, part of the ExCo. I had the opportunity to test, see, observes, challenge, not only him, but also other potential names, and I'm very much convinced that on the back of his technical background, leadership style, commitment and an incredible unlimited curiosity, let alone that he's got more ambition than I do for the business overall,…

Okay, thank you Sergio. Good morning, everyone. Hope you are doing well. What I will do from now is share with you the presentation of our results, our 2Q results and then we will open as always the session for Q&A. So we are starting with the presentation in the first slide, on slide four. The first idea is, I mean we saw how Santander has integrated business system in Brazil, which serves over 50 million clients, reaching thousands of customers who use our platforms on a day-to-day basis allows us to leverage business opportunities. Our channels received more than 500 million visits every month. The auto platform alone for example which includes Webmotors, Santander Auto and Santander Financiamentos generates over 35 million monthly interactions. It’s also worth noting the banks initiatives in new businesses in open waters with platforms such as Sim and emDia, which will enable us to further accelerate the pace of customer acquisition and loyalty. So in the next slide you can see the high volume of active or potential customers passing through our channels, which provides us with good growth opportunities. This is a growth clearly trend. We offer a comprehensive range of service channels from which customers can select the type of service that best suits their needs, whether it’s digital, remote, physical or experiment. We currently have about 17.3, a little more than 17 million customers who surf through digital channels each month. This has allowed us to increase our sales by more than 2x over the last year, while lowering execution costs. In the remote channel, thanks to the new service model, we are already exceeding 300,000 sales per month, and it’s just stated. Similarly, the physical channel continues to see a high volume of people in clients, non-clients in our stores…

[Operator Instructions] I will now pass the words to Mr. Gustavo Sechin. Please Mr. Sechin, you may proceed making the questions sent via webcast. It's important to do the reading of the webcast question stating the name and house on the list.

So, good morning everyone. So our first question, we have a question from Gustavo who has wrote in from Bradesco and also from Thiago from UBS.

Although the NII with clients expanded in the quarter, the net inter-margin with clients decreased quarter-over-quarter, despite the stronger growth in lines with better interest rate. What could explain such a decrease despite the better mix? Do you believe that the NII with clients should improve in the upcoming quarters? Any color on how could the loan mix NII growth in the coming would be very useful.

Okay, thank you. I think we have – two discussions here, which is the NII and the NIM no. The NII was mentioned in the question. We are seeing good growth on the client side, so NII in absolute terms is growing given volume, given volume in terms of clients and given volume in terms of growth of the portfolio. I already presented that the credit portfolio is growing at about 15%, almost 16% if we exclude the ForExing. So that capacity of growth, those more than 600 new clients per month that we are achieving, those new, almost more than 2 million clients that we will have active clients that we will probably have by year end, etc., all that is continuously affecting the different lines of revenues and specifically the NII. So my guess there is that we should continue in a positive direction. Now, if we speak of the NIM, there you have to consider how you, obviously a bowl for how you dilute or not due to spreads going forward and here it plays a couple of things; it plays the mix and it plays usually the funding costs, no. The funding costs has been rising as we all know given the situation in terms of the deals we received and the spreads we have – if you compare the spreads historically, we have – our levers that are the same ones are similar to the 1Q of last year, better than 4Q and a little bit lower compared to 1Q. So we have stabilized that decrease that is present, we have seen in the past, and even improving compared to 3Q and 4Q last year, which means that the trend is at least flattish if not improving in the different approach. We have approached in which we are improving the spreads, we have approached in which we are stabilizing them. So looking forward NIM will be pressed by volume, because for the growth we have capital and we are deploying capital to that growth of credit and at the same time it will be to somehow diluted by that spread. I will see NII clearly in the positive territory and NIM will be there, around flattish depending on that final volume growth.

Thank you, Angel. So our next question comes from Pedro Leduc from Itaú BBA.

Angel, can you discuss a little bit more about first your technology new initiative, of course in creating everything in a separate entity from the bank. Is it going to only provide service to the bank or other components like Getnet?

Yeah, we presented – thank you Pedro for the question. We presented first, which is this new technological company in which we will be including around 3,000 direct employees in another branch of external advisors or external forces. What are we trying to do? The first thing that we are trying to do is compete level, at the same level with what we would call today technological providers, okay. I'm not speaking of competitors of the bank, I’m speaking of technological providers, and for that building a new company in which you compete as I said in all senses. You compete hand-to-hand to those developers given their need for talent and their need for good professionals in that arena, we thought it was key. The second idea is that this company first will provide services as already sent for other companies and why not in the future to sell data services to the market. So we will be building a new profitable in the future, but very efficient in the first part, provider for the bank or usually leveraging that to the market in the future.

Thank you, Angel. So the next question that we have here is from Flavio Yoshida from Bank of America.

Fee income come very strong in the quarter. Should we expect such a pace of growth in the coming quarters? Do you believe that the insurance business and the cards should continue benefitting this line?

Thank you, Flavio. Well, you're right. I mean fees are strong, but again I would like to underline that they are strong as a consequence of what is happening in the bank. I have been presenting for you for several quarters already and years, whatever the study was in terms of client attendance, MPAs, in terms of attracting new clients and in terms of moving clients from the less profitable to the higher profitable segment or usually based on service and capacity of attending them. The MPAs are presented to you, the 63 or 62.7, the 63 points I presented to you is close to the highest on this one. We have been moving in the last quarters in between 61 to 63. I remember to you that we had started at 40 and we have been, last year we were throughout several quarters at the 50’s, 57, 58, etc. So it is clear that the bank is giving better service. When you give better service, you gain more clients, and when you gain more clients and they are happy with your service, they use you more, so transactionality clearly improves, and this is how – and this is why you can see what – I mean you said in your question; I mean credit cards 40% year-on-year, insurance is 30% year-on-year – excuse me – funds is 50% year-on-year, credit operations 21%, but I will also underline for example current account. I have already always said to you that current account fees should tend to suffer [ph], and as you can see there, they are in the positive territory. Even considering the famous PIX effect, this new payment system that we have in Brazil by which you can pay immediately to another person and even compensating for that, that we have not – we are not – in a part of our transactions, we are not charging the money transfer fees. Even with that we have current account on the positive territory, again demonstrating that growth capacity. Now going forward, again the same answer. We are – we have clearly ended the quarter in a strong way in terms of clients and activity and transactionality. We are not changing that intention, so we will keep on including insurance in which you mentioned in the question, including insurance which I believe is one of the good stories going forward for the next years, not next quarters. We believe that growth, client growth and moving clients to more transactionality is a way of maintaining that high return on equity through fees.

Thank you, Angel. So our next question comes from Thiago from UBS and this relates to our cost of risk Angel.

So that was, your cost of risk was 2.7 in the 2Q 2001, which is below the pre-COVID level. This factor assumes that the quality of the portfolio is better now than in the past and the cost of risk should be super lower than the pre-COVID level in the coming years.

Okay, thank you Thiago. You're right, I mean the cost of risk is being maintained at lower levels, what are unattractive levels. I think that and I can speak of this as a fact, I think you will buy from me the element that we have already showed to the market, our risk capacity. I mean I don't think this is something for the future. This is already – Santander Brasil has clearly very good risk capacities. I showed to you last quarter, we have the lowest, volatile credit cost in the industry during the last years. It's not only again quarters, its years. So that means that I would say we have to somehow control this part of the P&L. Again, flat is absolute numbers in provisioning with credit portfolio growing 16% adjusted by the ForEx of 15%. Going forward, I always discussed with you. I think this depends on how our macro view is with respect to the country. If the country stabilizes, the degree of liquidity that it has with very good growth, I do think we are going to have a very good economic growth pattern in the second semester for example, with good growth and again stabilized, I wouldn’t see why the cost of risk should increase. Now, if the situation gets volatile or not only because of Brazil, I’m speaking, generally speaking, obviously confidence will go down and we could see some kind of marginally. I would like to underline marginally, never a trend. But for the time being we don't see kind of leading indicators that we should be worried about. We don't see deterioration. We see – I showed to you the pro-rated portfolio, $50 billion 12 months ago, $35 billion now. So people are paying NPLs, both heavy arrears and 90 days NPL in that portfolio improving. So I do think that things are controlled, but I would link that answer to the macro question there.

Thank you, Angel. So our next question comes from Jorg from Citibank.

Although the transition in the management had been planned for sometime, the announcement was a bit surprising given Rial as a Chairman of the Board and the Group Board. Is it reasonable to assume that this is a primary neutral care in the transition in Brazil and that in the future he may equip other executive positions in the Group.

Thank you, Jorg. Well, you heard Sergio no. I think he was absolutely clear. He's not leaving, he's not going away. He's staying, he's staying as Chairman of Santander Brasil and he will be absolutely involved in continuing the trend you have seen in the last years. So he continues as also member of the Group's Board as he has been in the last also times. He continues in both as Chairman of Ebury, which is something as you probably know that the Group bought also some time ago. He's also involved in the Board of Pagonxt, this payments holding company. The Group is constructed and was building with [inaudible]. So I mean we could outweigh anything, but he is absolutely devoted and focused on maintaining what we have been delivering as a team and I'm sure Mario will continue with that positive initiatives and positive ideas and you will see that in the next years okay.

Thank you, Angel. Our next question comes from Vito [ph] from [inaudible].

Getnet TPV is up 11% Q-over-Q despite the meaningful change in active merchant and revenues are only worked by a small amount Q-on-Q. What explains this dynamic? Maybe more business with large merchants. What are the recent margin trends should you see in the market. You have a light rebalance in the funding mix. What is the optional funding mix that you would like to maintain in the long term?

Okay, thank you Vito. Getnet, I think that – well, first of all as you know the operation has been approved by the Central Bank division. The Central Bank, now we are in a process with the local SEC and the U.S. SEC and I don't know, but it looks like somehow by the end of this quarter we should be at least – it doesn't depend on us the timing, but the best estimate I have up to now is that one. Getnet is having very good trends. Getnet, first of all what we have seen basically or I would say due and somehow to the pandemic situation I think it will be the change of mix. If you remember Getnet has always been like 60/40 – 60 with 30, 40 wholesale and this trend has reverted in the last year to increase in wholesale weight compared to the retail. The objective is to again grow in the retail business. We have devoted external channel for that, it’s shown, but I mean the management of the TPV is key for us. We have several TPI’s there. We have the TPV that we mentioned and what we do even growing in wholesale is clearly managing that TPV. We managed with the margin. I remember today that we are in the range of 58% to 60% in those last two quarters. That is 10 percentage points better than 12 months ago, which was 48%. But let me give you a couple of numbers: Amount of turnover growing year-on-year close to 80%; anticipation growing year-on-year 90%, 9-0; client base growing year-on-year close to 20%; E-commerce with a market set of 33% in the country in the first semester, e-commerce doubling, growing close to 100%, 99%. So, I mean, I think that the trends of Getnet speak for themselves, no. Again, I remember you that the numbers you have seen from the bank are in the 2Q, only the 2Q do not include Getnet’s number, and as it will be listed in the next weeks or months, you will start to have that information in a more detailed basis coming from both Pedro the CEO and [inaudible] the CFO or Investor Relation Jim [ph].

[Operator Instructions] Our first question comes from Mr. Jorge Kuri with Morgan Stanley.

Hi! Good morning everyone and congrats on the great numbers and all the best of luck to Sergio and to Mario in his new role. Can I ask a question about your NII growth for the next 12 months? It seems that the different parts that drive it are all moving in the right direction. You mentioned strong economic growth in the second half of the year, which should push credit up. The mix is improving, SME loans, consumer loans are growing faster than corporate loans, and then you have the leak rates which are going up rapidly in what is likely an asset sensitive balance sheet. So is it fair to say that we should see a strong acceleration of your NII growth over the next 12 months. And if you can help us quantify what that could be, would be very useful. Thank you.

Thank you, Jorge. You have two components the NII clients and non-clients. On the client side you're right. I mean we are seeing good volume growth with client growth in – a number of clients coming in the bank. So as I said I would expect a client NII on a positive territory and specifically we do see what I said I expect. I expect the country to grow close to 5%, 6% GDP and that would be considered in the second semester, always thinking that as always you know, specifying that the pandemic allows to kind of have a normal life. But you do have the other side, which is the non-clients side, no. I mean I already mentioned in the past quarters and specifically last quarter that the non-client part which has come down to somewhere around the 2 billion treasury is going pretty well, but it had a very good 1Q and a more normal 2Q and you have again what we always discussed around the portfolio. So with all that in mind, as you have seen what was in 2Q of last year at 2.6 billion has come down to 2 billion and so that is kind of a gradual process while we have gained close to R$400 million, R$500 million on the client side. So those are two trends. Again, I always say to you, be aware of the whole activity of non-client side, but the trends, speaking of 12 to 18 months should be a stronger client, a part of the NII and probably will depend on the volatility. I am not going to give an estimation here, but obviously being volatile, but having a non-client NII which does not have a strong growth rate.

So thank you that. But does that all add up? Is the expectation flattish combined to NII over the next 12 months, because one thing offsets the other? Is it to have double digit growth? I guess what I’m looking for is a little bit more of the magnitude and quantification of the possible outcome.

I would say that the NII as a total should be in the positive territory, not double – I wouldn’t speak of double digit. I would say yes, positive trend.

Our next question comes from Mr. Marcelo Telles with Credit Suisse.

Hi everyone! And congratulations once again on the great results, well deserved. My question is regarding you're lending appetite. I mean clearly you've been growing the loan book very nicely, and was particularly surprising to see a big growth in the SME portfolio, growing more than the 6% sequentially. And my question is, is this a factor of you increasing your risk appetite as per your credit risk models or this is really the impact of you keeping everything, your risk stable and it’s just a matter of more demand for credit. So how should we think about you’re quite a risk policies and a risk appetite to the current stage. Thank you.

Thank you, Marcelo. I think it has to do again with that capacity of attracting clients more than risk modeling and changes on what we already had. I showed to you in the first slides the growth of clients, and when you do have that amount of hundreds of thousands of clients going in or usually you do have reflects on the several parts of the P&L and on the balances. I would say that we have to differentiate here a little bit. If you remember we have had a little bit of – kind of two phases in the last three, four years. The first phasing which retailed, individuals were growing growth and corporates etc. were not. That has stabilized and even reversed last year and specifically with the pandemic. A lot of the companies, corporates increased debt significantly, not knowing what was going to happen and probably to some extent in an excessive way, and that is regarding obviously 12 months ago or six to 18 months afterwards, as they realize that the situation is not as bad, it’s not bad at all, but I mean it’s not as bad as they expected. So probably what we will see is more growth on the retail side, SME side and a smaller in the corporate and by far much smaller on the larger corporates, okay. Because of two ideas, first is competition from other funding points like capital markets or even the equity market and secondly, when you start to favor those type of growth rates, the spread is then too narrow. And I have said before in the last seven years I have been here, is that we do not fight for market share, we do not fight for volume, we fight for profitability, and this is going to continue like that in the future. So if those kind of operations or in the large corporates given the competition from those other funding points, it starts to be narrow enough we will just let it go as we have done in the past and I can share this with you at different times. So thank you Marcelo.

Our next question comes from Mr. Thiago Batista with UBS.

Hi! Congratulations for the results, very good numbers. My question is about the capital position also then there. So if you look at the capital position now, the bank has got a capital of 12.6, Tier 1 of about 14%, I think 13.7%, so very good level of capital. So with the end they had, is it possible to see the bank operating with a higher leverage, so this is feasible in the near future.

Yeah, thank you Thiago. You are right, I mean we do have capital levels represented of almost 15% is ratio and 12.6 core equity one. First, management of capital will continue to be in the line of funding that credit growth and that operational risk and market risk which is very low by the way that we have in the bank. I have always said to you, I mean if we think of risk weighted assets growing at around, what we have to wait 10%, 11%, 12% and our return on equity that we have above 20%, you end up with a payout ratio at around 50%, so that's kind of the general thing. Let me say with you what we have done in the 1Q and what we have announced in the 2Q. In the 1Q as you know, we – the board approved and paid by the bank 3 billion in dividends as regular dividends, which compared to 1 billion the previous year. The previous year as you know we were limited by the Central Bank, so that means that we were a little bit – and I mentioned to you in the call, to all of you, that it gave kind of a signal of how we're think. Now the board has approved a 3.4 billion dividend for this that will be paid by the first days of September. If I’m not right, that will be already in the price during July. That is already 6.4 billion of dividends in the first six months. This dividend payment that I am saying to you that has just been approved, which is interest on capital, 100% interest on capital is 3.4 billion. It means around 60 basis points, a little bit less or 60 basis points of core equity Tier 1, which means that the 12.6 goes down to 12 as we speak. So I have always said to you, I mean the 12 to 11.5, we want to stay us at 11. I mean this bank can clearly run at those levels of capital. But I will lead you with a main idea here, which is Santander on top of being a growth story, and top of you know a growth story, its paying a nice amount of dividend. I mean 6.4 billion already over our market cap in six months is 4%. So analyze we were speaking of 8%, if we analyze it. I’m not giving any guidance at this point.

Our next question comes from Mr. Domingos Falavina with J.P. Morgan.

Hi! Good morning everyone, Angel, and congrats on the results! Indeed very strong figures. Just two questions: I think your answer to Kuri on the NII outlook is super helpful. But like I guess, if you could shed a little bit more light on what’s happening with the current figures, I guess more than forecast, because we're seeing basically loans just started growing about 15% right and the NII with clients going 4%, but you are adding a lot of kind of resecured loans or high risk spread loans I should say. So if you could kind of share with us, just like qualitatively what are the lies that are growing NII closer to loan book, if you were to break it down like automobile or draft, credit card and unsecured consumer loans in general and co-op if you can put together. And what we are growing at 4% or below or even shrinking year-on-year. Just to kind of understand what are the main promoters or detractors of the NII when you are looking year-on-year. Second question is on Getnet. I mean you mentioned a lot of very strong operational figures, but one things its doubt to me here and I’m sorry, I haven’t looked at the full release, is that EBITDA grew – I mean volumes grew a lot, right; EBITDA, grew a little bit, but earnings actually shrank. Your mix to wholesale explains a lot I guess, the revenue growing less than the top line. But the question I had was on the difference between EBITDA, which went from 640 to 730, growing kind of 15%, 20%, something like that versus were there any shrinking point. And my question is basically if this is the interest line and if it is a substantial compression on prepayment of receivables that’s booked under interest, that drove this big difference between the move on the two lines for taxes or something or depreciation.

Okay, thank you Domingos. On the NII the main forces there are real estate mortgages. The real-estate side we are producing, we have amounts of over 2 billion ROIs on that side. We have also payrolls growing nicely. We have personal loans also growing nicely. It has to do with mix, okay, what the answer is to you, and to some extent, to a lower extent car financing. But I would say that the first two are, and that means mix, it means spread, and it means volume, so that would answer you that. On the Getnet side, you do have this kind of volatility due to expenses. It’s both fees and expenses throughout quarters. I wouldn’t really extract a conclusion, because you have a specific things on one quarter and specific things on the other. Getnet will give light when they become leased; they are close to be leased. But that is basically, you have the funding side, you said that. The anticipation I remember to you, the anticipation is funded by the bank but it is pacified and done by your NIM, so that is something that happens and we do it through our credit assignment with obligation with the merchants. So that’s moved the NII, it moves below the NII and what we have extracted is basically fees and expenses with that volatility in between quarters. I think we have time for a last question. Is there a last question or not? No.

Thank you. The Q&A session is over and I hand over to Mr. Gustavo Sechin for his closing remarks.

So thank you. I just wanted to say a big thank you to everyone for joining us in our 2Q conference call. And I also would like to reinforce then personally myself and our IR team are fully available whenever necessary. Thank you again and very good day! Bye!

Banco Santander Brasil conference call has come to an end. We thank you for your participation. Have a nice day!