Risk and Capital Management Report 4Q2015

Transcription

1 Risk and Capital Management Report 4Q2015.

2 Table of Contents A. Introduction...3 B. Balance Sheet Consolidation and Comparison Scope...4 C. Internal Governance Governance Structure of Committees Organizational Structure Policies, Standards, Procedures and Manuals Structured Flow of Information...11 D. Capital management Capital Adequacy (Regulatory view) Basel III Available Capital (Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital) RiskWeighted Assets RiskWeighted Assets for Credit Risk (RWA CPAD ) RiskWeighted Assets for Market Risk (RWA MPAD ) Riskweighted assets for Operational risk (RWA OPAD ) Capital Adequacy Analysis (Regulatory View) Internal Capital Adequacy Assessment Process ICAAP Leverage Ratio...18 E. Risk management Credit Risk Definition Basic Principles Risk management structure and involved areas Board of Risks structure Involved areas Credit Lending Structure and Involved Areas Board of Internal Controls and Operational Risks structure Involved Areas Credit Risk Management Total and Average Exposure in the Quarter Exposure by Country and Brazil Geographical Region Exposure by Economic Sector Credit Concentration Unelapsed period of operations Operations overdue...25 (1) Includes operations overdue of the transferred portfolio. Additionally, as the exposures of these tables were calculated gross of provisions from mar/15, the numbers from dez/14 were reprocessed in the same scope for comparison Allowance for loan losses Credit Risk Mitigation Counterparty Credit Risk Counterparty Credit Risk Management Credit Derivatives Acquisition, sale and transfer of financial assets Exposures granted Exposures Acquired Securitization Market Risk

3 2.1 Definitions Basic Principles Areas Involved Market Risk Management Segregation of Portfolios Risk Measures and Limits for Management and Control Risk Measurement Methodology Trading portfolio Banking portfolio Measurement Systems and Communication Process Reporting Limits Exceeded or Noncompliant Transactions Derivative portfolio Profile Sensitivity Analyses Liquidity Risk Definition Basic Principles Management and control governance and commissions Areas Involved Liquidity Risk Management Risk Measures and Limits for Management and Control Measurement Systems and Communication Process Notifying Limits Exceeded and Contingency Plan Operational Risk Definition Basic Principles Areas Involved Measurement System and Communication Process Operating Losses by Category of risk Business Continuity Management Equity Risk Other risks Reputation risk Strategy risk Environmental and Social Risk Underwriting risk Risks Appetite...48 F. Attachments Composition of Total Capital (TC) Appendix Main Characteristics of the Capital Instruments Appendix Common Model of Disclosure of information on the Leverage Ratio Appendix G. Glossary

4 A. Introduction This document presents information referring to risk management, to the determination of the sum of riskweighted assets (RWA) and to the adequacy of the capital of the Votorantim Prudential Bank, in accordance with the demands of the Brazilian Central Bank ( BACEN ), through Circular No. 3,678 and Circular No. 3,716, and in accordance with Pillar 3 rules of the Basel II Accord. In accordance with CMN Resolutions 3,380, 3,464, 3,721, 4,090 and 3,988, the Bank has institutional structures and policies for the management of operational risk, market risk, credit risk, liquidity risk and capital management approved by the Board of Directors and the basic principles observed in the management and control were established in compliance with the current regulations and market practices, as detailed in the specific chapters on each one of these topics to be presented in this report. The Bank also declares that it has a formal policy for disclosure of information about risk and capital management approved by the Board of Directors, as provided for in Art 12 of CMN Resolution No. 4,193. In addition, according to BACEN Circular No. 3,678, the information contained in this report is responsibility of the Director appointed under the terms of art 14 of Resolution No. 4,193. Banco Votorantim has a portfolio of products and services, classified internally in Wholesale and Consumer Finance. The Wholesale segment is geared towards companies with annual revenues above R$ 200 million, and seeks a position as an important partner of clients through an efficiency, longterm relationship, focusing on integrated financial solutions offering structured products. In Consumer Finance, the Bank is one of the market leaders in consumer finance, focusing on the auto business and positions in other supplementary business lines such as credit cards, insurance brokerage and payroll loans. The following is a summary of the main capital adequacy indicators in the Regulatory View for base date December The Bank ended Dec15 with a Total Capital of approximately R$ 10,7 billion, presenting an decrease of R$ 124 million (1.1%) over the previous quarter, mainly due to increased deductions of equity adjustments and reduction of Shareholders' Equity. The total sum of RiskWeighted Assets (RWA) ended Dec 15 at approximately R$ 70,5 billion, a decrease of R$ 6,1 billion relative to previous quarter (7.9%), impacted mainly by the decreased in Credit Risk (RWA CPAD ). Capital Adequacy (Regulatory view) R$ million. Prudential Dec15 Total Capital (TC) (a) Tier I Capital (b) Common Equity Tier I (CET1) (c) Total RiskWeighted Assets (RWA) (d) Credit Risk (RWA CPAD ) Market Risk (RWA MPAD ) Operational Risk (RWA OPAD ) Capital Requirement (e) Margin Capital (a e) RBAN (f) 393 Margin Capital with RBAN (a e f) The Capital Ratio ended Dec15 at 15.2%, with a capital margin of R$ 2,6 billion, calculated by the difference between the Capital and the Capital Requirement. There was an increase of 83 bps over the prior quarter. And the Leverage Ratio, which entered into force in Oct15, ended Dec15 in 5.5%. Ratios Prudential Dec15 Basel Ratio (a / d) 15,2% Tier I Capital Ratio (b / d) 9,5% Common Equity Tier 1 Ratio (c / d) 9,5% LR Leverage Ratio 2 5,5% Detailed information is described throughout this report and spreadsheets to support tables, Annex 1 and Annex 2 available in the Investor Relations site at: 2 More information is available in Section D 3. 3

5 B. Balance Sheet Consolidation and Comparison Scope Risk and capital management is performed for the consolidated prudential according to recommendations published by the Brazilian Central Bank (BACEN). In this context, the table below lists the companies included in the Balance Sheet (published in " Statements" report available on the investor relations website) and the Regulatory balance (Prudential Conglomerate Document 4060 BACEN), which is used to calculate the Capital Ratio. R$ million. Company Business Segment Total Assets Dec15 Shareholders' Equity Balance Sheet Regulatory Balance Sheet Banco Votorantim S/A. Multiple Bank BV Financeira S.A. Crédito, Financiamento e Investimento. Credit society, financing and investment BV Leasing Arrendamento Mercantil S/A. Leasing company Votorantim Corretora de Títulos e Valores Mobiliários LTDA. Securities Brokerage Votorantim Asset Management Distribuidora de Títulos e Valores Mobiliários LTDA. Distributor Company Securities Votorantim Bank Limited. Foreign Institution Banco Votorantim Securities Inc. Foreign Institution Votorantim Securities (UK) Limited. Foreign Institution FIP BVIA Investment Fund and Participation We present below a comparison between the Balance Sheet and the Regulatory Balance Sheet, whose main objective is to highlight the equity elements that constitute the determination of Capital, according to rules established by CMN Resolution No. 4,192. Chapter F discloses the breakdown of capital through a standardized model made available by BACEN Circular No. 3,678. 4

6 Assets Comparison between Balance Sheet and Regulatory Balance Sheet Dec15. Assets Balance Sheet Prudential, R$ million. Ref. to Regulatory Balance Sheet 1 Comments Annex 1 1. Current Assets and LongTerm Assets Cash and cash equivalents Interbank funds applied Securities and Derivative financial instruments Interbank accounts/relations 1.5. Interbranch accounts Loan operations Leases (21) (21) 1.8. Other receivables Credits for guarantees and collaterals honored Foreign exchange portfolio Income receivable Securities clearing accounts Other receivables Other Other Deferred Tax Assets on the negative base and tax loss d Deferred Tax Assets that rely on future profitability (except allowance for credit losses) Deferred Tax Assets for allowance for credit losses Other receivables allowance for credit losses 1.9. Other assets 2. Fixed Assets 2.1. Investments Interest in subsidiaries Other investments 2.2. Fixed assets for use 2.3. Leases 2.4. Intangible assets Intangible assets before oct/ Intangible assets after oct/ Deferred assets (857) (857) Total Assets Refers to the Prudential (Document 4060 of the Brazilian Central Bank). l h g f 5

7 Liability Comparison between Balance Sheet and Regulatory Balance Sheet Dec15. Liabilities Balance Sheet Prudential, R$ million. Ref. to Regulatory Balance Sheet 1 Comments Annex 1 1. Current Liabilities and NonCurrent Liabilities Deposits Money market repurchase commitments Acceptances and endorsements Interbank accounts/relations 1.5. Interbranch accounts Borrowings Domestic onlendings Official institutions Derivative financial instruments Other liabilities Collection and levy of taxes and alike Foreign exchange portfolio Social and statutory Other liabilities Tax and social security Tax and social security Deferred tax liabilities e Other liabilities Securities clearing accounts Other liabilities Subordinated debts Debt instruments eligible for capital before Resolution k Other Subordinated debts Debt instruments eligible for capital j Other liabilities Other Creditors for anticipation of the residual value guaranteed (VRG) Deferred Income Shareholders' Equity Interest of NonControlling Shareholders 2 i 3.2. Elegible Instruments to Common Equity Tier a 3.3. Profit reserves b, i 3.4. Capital reserves (260) (260) c Total Liabilities Refers to the Prudential (Document 4060 of the Brazilian Central Bank). 2 The amount of this account is R$ 350,66, however, it is reported as zero due to rounding in R$ million. 6

8 C. Internal Governance The Bank s governance structure is composed of collegial forums, formally organized and with delegation of levels of authority. Each governance body has its role, scope and composition defined in a dedicated norm, which specifies the management and the risk monitoring and tracking responsibilities. 1. Governance Structure of Committees The Bank has decisionmaking committees and technical commissions so as to ensure adequate capital management and the selfassessment of its risks. Special emphasis is placed on the ALM, Risks and Capital Committee (CARC) as the primary risk and capital management forum, on the Control and Operational Risk Committee and, at a higher level, the Executive Committee (ComEx), which also performs the tracking of its general performance. Finally, the bank also has a Board of Directors (CA 1 ), a Fiscal Council (CF 2 ) and an Audit Committee (COAUD 3 ). The figure below describes the structure of the Committees and Commissions of internal governance related to risk and capital management. Executive Committee ALM, Risk and Capital Committee Control Market Risk Credit Risk Liquidity Tax ALM Sectoral of Risk Management and Control 1 Information Security Money Laundering Prevention Fraud Prevention Register governance Credit Business CIB Product Sustainability Committee Commission Business Retail Business BVEP 1. Sectoral of Risk Management and Control consists of 14 forums. The internal governance structure ensures that all stakeholders contribute effectively to the internal risk management and mitigation and capital adequacy assessment process. As detailed below, all the bodies play an important role in the Bank s risk and capital management. 1 Conselho de Administração 2 Conselho Fiscal 3 Comitê de Auditoria 7

9 Executive Committee ComEx: Attributions: definition of the strategy and monitoring the institution s general performance, market context and of all the topics addressed in the committees and commissions, with the duty of deliberating matters that require the participation of senior management or of arbitrating in case of a standoff in the committees. Periodicity: weekly. Reporting: Board of Directors ALM, Risk and Capital Committee (CARC) Attributions: prepare a risk appetite proposal (to be ratified by the Board of Directors) and monitor relevant financial and nonfinancial risk indicators; analyze and ratify the proposals of the commissions (Market Risk, Credit, Liquidity, Tax and Business); assess and approve operations that may have an impact on consumption or capital base; monitor the capital planning for three years; monitor liquidity and cash reserves and forward proposals to the Executive Committee and to the Board of Directors regarding actions for risk management and control, as well as capital management. Periodicity: fortnightly. Reporting: Executive Committee. Market Risk Commission: Attributions: assesses exposures to market risks and follows up on the exposure limits of the main market risks of the trading portfolio. Periodicity: monthly. Reporting: CARC. Credit Risk Commission: Attributions: track and monitor the loan portfolio and the limits of exposure of the credit risk portfolio, both for Wholesale and for Consumer Finance; evaluation of stress testing results; tracking of the level of formation of provision for loans to deal with delinquency; evaluation of the credit risk measurement methodologies, evaluation of the contingency plans related to credit risk management, and issuance of opinions for the ALM, Risks and Capital Committee and/or for ComEx, on new strategies and rules for operations and management of the loan portfolio; monitor the effectiveness of credit collection and credit recovery actions as well as guarantees; discuss strategies for the promotion of timely debt payment. Periodicity: monthly. Reporting: CARC. Liquidity Commission: Attributions: evaluation of exposures to liquidity risks and of the cash strategy scenarios; follows up on and reviews minimum capital limits, and monitors and updates the funding contingency plan. Periodicity: monthtly. Reporting: CARC. ALM Commission Attributions: assess and propose initiatives to protect and maximize the structural balance sheet under the economic and financial point of view, accounting and tax, guiding and triggering the responsible areas for technical studies. This includes identifying and treating risks that may adversely affect the balance sheet conditions. Periodicity: fortnightly. Reporting: CARC. Tax Commission Attributions: assessment of tax risks that may impact the balance sheets of the companies from the Conglomerate and statement for approval of the Technical Studies for realization of Tax Credits for financial businesses Resolution No. 3,059. Periodicity: monthly. Reporting: CARC. Credit Committee Attributions: approving limits and/or lending operations referred by the commercial departments, evaluation of negotiations or agreements for settlement of problematic loans, and the lowering of credit restrictions (temporary or permanent) to individuals, groups and sectors of the economy. Periodicity: weekly. 8

10 Reporting: Executive Committee. Product Committee: Attributions: evaluation of opportunities for new products; evaluation of the impact on assessment systems, operations, processes and controls; tracking of the implementation of new products; tracking of the implementation of improvements and of the maintenance of existing products; validation of compliance of new products and of structured transactions. Periodicity: weekly. Reporting: Executive Committee. Sustainability Committee: Attributions: guiding the press office actions, internal communication, advertising and marketing, public relations and investor relations, carry out the governance related to sustainability and social responsibility projects, defining and developing strategies, policies, standards, investments that are related to sustainability and social investment and identifying and analyzing adherence to voluntary commitments that address the issue of sustainability; assess and mitigate situations that might bring image risk to the institution. Periodicity: quarterly. Reporting: Executive Committee. Control and Operational Risk Committee Attributions: consolidation of the work of the Sectorial Commissions of Risks and Controls of each Board of Officers/Area; analysis and validation of actions for the correction of weak points and improvement of the risk management system; tracking of operational risks and of the internal control system; monitoring of money laundering prevention and fraud prevention actions; and tracking of information security issues and business continuity plans. Periodicity: monthly. Reporting: Executive Committee. Sectorial Risk and Control Management Commissions Attributions: discuss, analyze and deliberate relevant points of risks, internal controls, compliance and internal auditing of each Board of Executive Officers/Area; perform the tracking of corrective actions and define the method of implementation of the relevant points raised; prioritize projects according to the risks and weak points identified. Periodicity: bimonthly. Reporting: Control and Operational Risk Committee. Information Security and Business Continuity Commission Attributions: deliberate Information Security and Business Continuity strategy besides risk assessment versus corporate action plan, keeping track of the implementation of established plans; monitor Information Security and Business Continuity incidents and indicators; design and keep track of crisis management processes and procedures; quantify and mitigate risks relating to information leakage and business discontinuity. Periodicity: quarterly. Reporting: Control and Operational Risk Committee. Money Laundering Prevention Commission (PLD) Attributions: defining standards for the performance of the different areas from the Conglomerate in relation to the PLD and to the fight of terrorist financing; reviewing the policies and procedures related to the subject, including the legal aspects related to the current legislation; establishing procedures for receiving and treating everything related to the subject. Periodicity: fortnightly. Reporting: Control and Operational Risk Committee. Fraud Prevention Commission Attributions: monitoring frauds volume, modus operandi and source; following the effectiveness of the preventive controls and detecting frauds; evaluation and proposing actions for fraud prevention through creating or modifying prevention rules, routines, operational processes and standards; proposing improvements on recovery values defrauded processes. Periodicity: monthly. Reporting: Control and Operational Risk Committee. 9

11 Register of Governance Attributions: Manage the customer relationship transact with the institution (with the exception of suppliers), and set modus operandi, rules, forms, areas involved and scope of work for hire, maintenance and monitoring of these (where applicable), and may determine the actions it deems necessary for every situation Periodicity: bimonthly. Reporting: Committee Controls and Operational Risk. Business CIB, Retail and BVEP Committee Attributions: evaluation of the return on operations proposed by the business areas and preparation of opportunities for additional operations to increase revenue and maximize the return on the allocated capital. Periodicity: weekly. Reporting: Executive Committee. 2. Organizational Structure For the execution of risk and capital management activities, the Bank relies on dedicated areas that are responsible for the consolidated controls of risks and capital. The main processes relating to risk and capital management are under the responsibility of the Board of Executive Officers of Risks, Executive Board of Internal Controls and Operational Risks to the Executive Board of Finance and Investor Relations. See below the structure of these management boards: Board of Directors Board of Executive Officers of Risks Executive Board of Internal Controls and Operational Risks Executive Board of Finance and Investor Relations The attributions of these specialized riskmanagement structures are detailed in the following chapters as part of the presentation of the Bank's approach to each type of risk management and control. 3. Policies, Standards, Procedures and Manuals The risk and capital management process uses a set of documents which establish the main guidelines which must be followed in risk management activities. The level of detail of these standards is structured depending on the purpose of each document and is organized according to the hierarchy shown below: Corporate Policies: fundamental principles and guidelines established by the highest hierarchical level, which must be followed by the entire organization and govern all the other regulations, procedures and product and service manuals; Rules: rules established to define the activities and the manner in which procedures are organized, detailing the aspects addressed by corporate policies; Procedures: operational rules established to describe the activities and their completion stages, detailing aspects addressed by the standards; e Product, Service, System and Calculation Modeling Manuals: set of documents that compile the main features on structuring of products, services, systems and calculation methodologies used. 10

12 These regulations are published for the internal consultation at the Corporate Portal (Intranet), a and are reviewed and updated in specific intervals for each type of document, or whenever there are significant changes in business aims and strategies, or in the risk management approach and methodology. 4. Structured Flow of Information The institution adopts the practice of communicating information about risks and capital through reporting with specific periodicity to the parties involved in the process and senior management, which reinforces the timely monitoring of information that subsidizes corporate decisions. Risk Managers and Business Units Commission Risk and Capital Report Board of Directors Committee The Bank adopts an integrated approach for managing risks and capital, aiming at organizing the decisionmaking process and defining tools for maintaining acceptable risk levels which are compatible with the volume of capital available, in line with the business strategy adopted. The consolidation of risks covers material exposures inherent to the Bank's business lines. The exposures are mainly grouped into the following risk categories: market, liquidity, credit and operational. This consolidation is done through a structured process that includes mapping, counting and aggregating values at risk. The levels of risk exposure and capital availability are monitored through a limit framework, incorporated into the Bank's activities by means of an organized management and control process which assigns functional responsibilities to the areas involved. Senior Management s involvement consists of monitoring and taking the actions required to manage risks. D. Capital management Following the regulations of BACEN and in accordance with the recommendations of the Basel Committee on Banking Supervision, the Bank adopts the prudential guidelines of capital management aiming at the efficient and sustainable management of its resources and contributing to promote the stability of the National System. In accordance with CMN Resolution No. 3,988 and BACEN Circular No. 3,547, the Bank has an institutional structure and policies for capital management, approved by the Board of Directors, in accordance with the Internal Capital Adequacy Assessment Process (ICAAP), covering the following items: Identification and appraisal of the relevant risks; Documented policies and strategies; Capital Plan for three years, including Capital targets and projections, main funding sources and Capital contingency plan; Stress tests and their impacts on Capital; Management reports to the Senior Management (Executive Board and Board of Directors); Evaluation of Capital Adequacy in the Regulatory and Economic View; and Annual Report of Internal Capital Adequacy Assessment Process (ICAAP). 11

13 1. Capital Adequacy (Regulatory view) At the institution, capital is managed in order to ensure adequacy within regulatory limits and to establish a strong capital base enabling the Bank to develop business and transactions in accordance with its strategic plan. Our annual capital plan includes growth projections for the loan portfolio and other transactions and assets, in order to assess adequacy of its capital to deal with the associated risks and ensure compliance with regulatory operational limits. Management reports tracking the capital allocated to risks and the capital ratios (Basel, Tier I and Common Equity Tier I) are disclosed on a monthly basis after the determination of the Capital and Capital Requirement to the areas involved. 1.1 Basel III The new capital requirement rules of Basel III took effect in Brazil in October 2013, and establish the new definitions and the new minimum capital requirements. They also define which companies should compose the Prudential Balance Sheet to be used to calculate the capital base and the capital requirement. The schedule below, defined by BACEN, presents the necessary adequacy for implementation, in Brazil, of the requirements defined in Basel III: Schedule for Basel III implementation Common Equity Tier I 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Tier I Capital 5.5% 5.5% 6% 6% 6% 6% 6% Total Capital 11% 11% 11% 9.875% 9.25% 8.625% 8% Additional Capital Lower Limit 0.625% 1.25% 1.875% 2.5% Upper Limit 1.25% 2.5% 3.75% 5% Common Equity Tier I with Additional Capital (Lower Limit) 4.5% 4.5% 4.5% 5.125% 5.75% 6.375% 7% Common Equity Tier I with Additional Capital (Upper Limit) 4.5% 4.5% 4.5% 5.75% 7% 8.25% 9.5% Tier I Capital with Additional Capital (Lower Limit) 5.5% 5.5% 6% 6.625% 7.25% 7.875% 8.5% Tier I Capital with Additional Capital (Upper Limit) 5.5% 5.5% 6% 7.25% 8.5% 9.75% 11% Total Capital with Additional Capital (Lower Limit) 11% 11% 11% 10.5% 10.5% 10.5% 10.5% Total Capital with Additional Capital (Upper Limit) 11% 11% 11% % 11.75% % 13% Regulatory Adjustments 20% 40% 60% 80% 100% 100% In the following sections we present the breakdown of Capital and RiskWeighted Assets (RWA), from the perspective of the Prudential Balance Sheet 4, and the capital indicators. 1.2 Available Capital (Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital) The Available Capital, classified as Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital, is the equity used as a basis for verification of compliance with the operational limits of financial institutions. The Total Capital is obtained by adding Tier 2 Capital and Tier 1 Capital. The latter is obtained by adding Common Equity Tier 1 Capital and Additional Tier 1 Capital, as defined in CMN Resolution No. 4,192 and No. 4,193. The Common Equity Tier 1 Capital is composed of the shareholders equity and specific regulatory adjustments. The Bank ended Dec15 with Total Capital of approximately R$ 10,7 billion, presenting an decrease of R$ 124 million (1.1%) over the capital of Sept15, whereas that 62.8% of the value of this capital is composed of Tier 1 Capital. Tier 1 Capital (which as it has no Additional Tier 1 Capital, represents the same value as the Common Equity Tier 1 Capital) ended Dec15 at R$ 6,7 billion, an decrease of R$ 142 million (2,1%) over the prior quarter. 4 The Prudential Balance Sheet (CADOC 4060) is in force for base date June 15. Until December 14 the Balance Sheet, designated CADOC (Document 4040 of BACEN) was used to determine the Capital and the portions of the RiskWeighted Assets (RWA). 12

14 We present below the detailing of the breakdown of the Bank s capital requirement: Capital Composition Prudential R$ million. Dec15 Sep15 Dec14 Quarterly Annual Shareholders' Equity ,1% 0,8% Common Equity Tier I Capital Regulatory Adjustments (931) (949) (394) 2,0% 135,9% Common Equity Tier I ,1% 6,6% Authorized Instruments to compose Additional Tier I Capital N/A N/A Additional Tier I Capital Regulatory Adjustments N/A N/A Additional Tier I N/A N/A Tier I (Common Equity Tier I + Additional Tier I) ,1% 6,6% Authorized Instruments to compose Tier II Capital ,5% 1,5% Tier II ,5% Total Capital (Tier I+Tier II) ,1% 4,7% Additional information about the instruments that constitute the capital is available in chapter F (Appendix 1 and Appendix 2) of this report. 1.3 RiskWeighted Assets RWA, as defined by CMN Resolution No. 4,193, is composed of the sum of riskweighted assets referring to the credit, market and operational risks: Credit risk Market risk RWA = RWA CPAD + RWA CAM + RWA JUR + RWA COM + RWA ACS + Operational Risk RWA OPAD Whereas: RWA CPAD: meaning the portion of riskweighted assets (RWA) relating to credit risk exposures subject to the calculation of capital requirement using a standardized approach (Bacen Circular No. 3,644); RWA CAM: portion of riskweighted assets (RWA) relating to exposures in gold, in foreign currency and in assets subject to exchange rate variation (Bacen Circular No. 3,641); RWA JUR: portion of riskweighted assets (RWA) relating to exposures subject to the variation of interest rates classified in the trading portfolio (Bacen Circulars No. 3,634, 3,635, 3,636 and 3,637); RWA COM : portion of riskweighted assets (RWA) relating to exposures subject to the variation of commodity prices (Bacen Circular No. 3,639); RWA ACS : portion of riskweighted assets (RWA) relating to exposures subject to the variation of the price of shares classified in the trading portfolio (Bacen Circular No. 3,638); RWA OPAD : portion of riskweighted assets (RWA) relating to the calculation of capital required for operational risk using a standardized approach (Bacen Circular No. 3,640). The Capital Requirement is obtained from the portions of RiskWeighted Assets, and is calculated as follows: Capital Requirements = Factor F x RWA Where Factor F is equal to: Until 31/12/ /01/ /01/ /12/ /01/ % 9.875% 9.25% 8.625% 8% 13

15 The evolution of the RWA composition is presented in consolidated form in the table below: Composition of RiskWeighted Assets (RWA) Prudential R$ million. Dec15 Sep15 Dec14 Quarterly Annual Total RiskWeighted Assets (RWA) ,5% 6,4% Credit Risk (RWA CPAD ) ,6% 7,4% Market Risk (RWA MPAD ) ,7% 12,7% Operational Risk (RWA OPAD ) ,0% 14,1% We present below in detail the composition of RWA by Credit, Market and Operational Risks RiskWeighted Assets for Credit Risk (RWA CPAD ) The institution uses the Standardized Approach, defined by BACEN Circular No. 3,644, to calculate the portion of riskweighted assets (RWA) relating to credit risk exposures subject to calculation of capital requirement (RWA CPAD ). The amount determined for RWA CPAD is reported monthly to Senior Management, together with the Basel Ratio chart. Composition of RWA CPAD Prudential R$ million. Dec15 Sep15 Dec14 Quarterly Annual Credit Risk (RWA CPAD ) ,6% 7,4% Risk Weight of 2% ,7% 27,4% Risk Weight of 20% ,0% 313,3% Risk Weight of 50% ,8% 28,8% Risk Weight of 75% ,9% 9,3% Risk Weight of 85% ,3% 1,1% Risk Weight of 100% ,2% 9,5% Risk Weight of 150% N/A N/A Risk Weight of 250% ,8% 38,5% Risk Weight of 300% ,8% 44,5% Risk Weight of 909,09% ,3% 14,8% Risk Weight of 100% 1 (378) N/A 100,0% Risk Weight of 300% 1 (1.046) N/A 100,0% Without Risk weight ,6% 65,8% (1) Refers to the RWA of the assets deducted from the determination of Common Equity Tier 1 Capital, according to the current resolution RiskWeighted Assets for Market Risk (RWA MPAD ) The Bank uses the standardized approach to calculate the portion of riskweighted assets (RWA), relating to the calculation of capital requirement for market risk (RWA MPAD ). As defined by CMN Resolution No. 4,193, the RWA MPAD portion consists of the sum total of the following components: RWA CAM, RWA JURS, RWA COM and RWA ACS. 14

16 The table below presents the values of the riskweighted assets for market risk (RWA MPAD ): Composition of RWA MPAD Prudential R$ million. Dec15 Sep15 Dec14 Quarterly Annual Market Risk (RWAMPAD) ,7% 12,7% RWA CAM ,0% 40,5% RWA JURS ,9% 29,1% RWA JUR [1] ,1% 24,3% RWA JUR [2] ,0% 56,4% RWA JUR [3] ,5% 14,7% RWA JUR [4] N/A N/A RWA COM 10 N/A 100,0% RWA ACS ,8% 76,7% Market Risk Capital Requirement Prudential R$ million. Dec15 Sep15 Dec14 Quarterly Annual Market Risk (Capital Requirement) ,7% 12,7% PCAM ,0% 40,5% PJUR ,9% 29,1% PJUR[1] ,1% 24,3% PJUR[2] ,0% 56,4% PJUR[3] ,5% 14,7% PJUR[4] N/A N/A PCOM 1 N/A 100,0% PACS ,8% 76,7% The table below presents the value of operations subject to variation of interest rates of operations classified in the banking book (RBAN): Interest Rate Risk in the Banking Book 1 Prudential R$ million. Dec15 Sep15 Dec14 Quarterly Annual RBAN ,4% 69,9% 1 Operation not classified in the trading portfolio. As defined by CMN Resolution No. 4,193: RWA CAM : Operations subject to exposures in gold, foreign currency and assets subject to exchange rate variation; RWA JURS : Operations subject to the variation of interest rates: RWA JUR [1] : of Realdenominated prefixed interest rates; RWA JUR [2] : Foreign exchange variation coupon rates RWA JUR [3] : Changes in price index coupons rates RWA JUR [4] : of coupon interest rates. RWA COM : Operations subject to the variation of commodity prices; RWA ACS : Transactions subject to share price variation; R BAN : Operations subject to the variation of interest rates of operations classified in the banking book. 15

17 1.3.3 Riskweighted assets for Operational risk (RWA OPAD ) The Bank uses the Alternative Standardized Approach (ASA) defined by BACEN Circular No. 3,640 to calculate the portion of riskweighted assets (RWA), relating to the calculation of capital requirement for operational risk (RWA OPAD ). The table below presents the opening of the riskweighted assets for operational risk: Composition of RWA OPAD Prudential R$ million. Dec15 Sep15 Dec14 Quarterly Annual Operational Risk (RWA OPAD ) ,0% 14,1% 1 Portion of Operational Risk for financial entities. R$ million. Operational Risk Capital Requirement Prudential Dec15 Sep15 Dec14 Quarterly Annual Operational Risk (Capital Requirement) ,0% 14,1% 1 Portion of Operational Risk for financial entities Capital Adequacy Analysis (Regulatory View) The capital adequacy analysis in the regulatory view is aimed at assessing compliance with the Basel Ratio determined in accordance with the current regulation, defined by the Brazilian Central Bank. This evaluation verifies whether the institution has sufficient available capital to cover the capital requirement for the risks of Pillar I, besides the additional requirement for coverage of the interest rate risk of the banking book (RBAN) according to Bacen Circular No. 3,365. Capital Adequacy (Regulatory view) Prudential R$ million. Dec15 Sep15 Dec14 Quarterly Annual Total Capital (TC) (a) ,1% 4,7% Tier I Capital (b) ,1% 6,6% Common Equity Tier I (CET1) (c) ,1% 6,6% Total RiskWeighted Assets (RWA) (d) ,5% 6,4% Credit Risk (RWA CPAD ) ,6% 7,4% Market Risk (RWA MPAD ) ,7% 12,7% Operational Risk (RWA OPAD ) ,0% 14,1% Capital Requirement (e) ,5% 6,4% Margin Capital (a e) ,2% 0,1% RBAN (f) ,4% 69,9% Margin Capital with RBAN (a e f) ,0% 6,0% The Institution ended Dec15 with a Basel Ratio at 15.2%, with excess capital, calculated by the difference between the Capital and the Capital Requirement, of approximately R$ 2.6 billion (including RBAN). The Tier I Capital ratio reached 9.5%, which represents an increase of 43 bps over the prior quarter and of 350 bps above the regulatory limit (6%). 16

18 Ratios Prudential Dec15 Sep15 Dec14 Quarterly Annual Basel Ratio (a / d) 15,2% 14,4% 15,0% 83 bps 27 bps Tier I Capital Ratio (b / d) 9,5% 9,0% 9,5% 43 bps Common Equity Tier 1 Ratio (c / d) 9,5% 9,0% 9,5% 43 bps See below the evolution of the Basel Ratio and Tier I Capital Ratio from the regulatory perspective between Dec14 and Dec 15: Capital Adequacy (Regulatory view) Dec14 Mar15 Jun15 Sep15 Dec15 Total Capital (PR) Capital Requirement Margin Capital 9,5% 9,0% Tier I Capital 9,6% 9,0% 9,5% 6,0% Dec14 Mar15 Jun15 Sep15 Dec15 Tier I Capital * Regulatory limit 15,0% 13,8% Capital Ratio 14,9% 14,4% 15,2% 11% dez/14 mar/15 jun/15 set/15 dez/15 Capital Ratio Tier I Capital Regulatory limit (*) For the period analyzed Tier I Capital Ratio equal to the Common Equity Tier 1 Capital Ratio 17

19 2. Internal Capital Adequacy Assessment Process ICAAP In accordance with Resolution No. 3,988 and Circular No. 3,547, the institution performs the Internal Capital Adequacy Assessment Process (ICAAP) and produces its respective report made available to BACEN yearly, covering the capital plan, stress test, capital contingency plan and management and evaluation of the need for capital in the presence of material risks to which the institution is exposed, among other topics. According to the ICAAP report for the base date December 31, 2014, the Bank regards its capitalization levels as adequate, since both the current regulatory capital, and the capital projections aligned with strategies for the next three years, are within regulatory and internal limits. 3. Leverage Ratio Starting in October 2015, entered into force Circular No. 3,748, which is about the methodology for the calculation of the Leverage Ratio (LR). This Circular is in line with the Basel III recommendations, disclosed in order to improve the financial institutions abilities to absorb shocks from the financial system itself or other sectors of the economy, favoring the maintenance of the financial stability. The Leverage Ratio (LR), according to the circular, is defined as the ratio of Tier I Capital (numerator) and an exposure measure (denominator). Whereas: Tier I Capital: it s the sum of the Common Equity Tier I and Additional Capital, as defined in Resolution No. 4,192; Exposure Measure: is determined through the use of the financial statements net of provisions, advances received, unearned income and without the deduction of any mitigating. On dec15, the Leverage Ratio ended in 5.5%. More detailed information is available in Annex 3. LR Composition R$ million. Prudential Dec15 Leverage Ratio 5,5% Tier I Capital Exposure Measure E. Risk management Risk management of the institution is performed for risks considered relevant to Senior Management (Material Risks), which are dealt with and monitored by specific processes means. The identification of material risks is performed recurrently, based on specific internal methodology and with the participation of the risk area in committees related to business management, such as the Executive Committee and Product Committee. 1. Credit Risk The aim of credit risk management is to provide support for the Senior Management in the decisionmaking process by defining strategies and policies and establishing operational limits, risk mitigation tools and procedures to maintain credit risk exposure within levels deemed acceptable by the Bank s management. 18

20 1.1 Definition Credit Risk is defined as the likelihood of losses occurring due to the borrower, issuer or counterparty not complying with their respective financial obligations in accordance with agreed terms. 1.2 Basic Principles In accordance with CMN Resolution No. 3,721, the Bank has an institutional structure and policies for credit risk management approved by the Board of Directors and the basic principles observed in management and control were established in compliance with current regulations and market practices, as follows: Manuals and documents containing the organizational structure, relevant products, corporate policies, standards and procedures including flowcharts and rules related to the governance, business and credit support processes; Technological environment encompassing the credit cycle ranging from risk admission, tracking and monitoring, to restructuring when applicable; Validation process covering risks involved in systems, accuracy of models used for calculations and quality of processed data, as well as the coverage of the documentation; Committee structure and powers for approving credit; Criteria and procedures for selecting clients and preventing money laundering; Credit analysis, lending and management standards; Procedures for analysis, approval and release of new products involving credit risk; Classification of portfolio risk levels, considering the clients ratings, the collateral involved, the maturity dates and operational arrears; Monitoring sector and conglomerate concentration, as well as monitoring internal and regulatory limits defined by policies and rules; Managing counterparty credit risk and limits for derivatives; Evaluating risk in transactions for sales or transfer of assets; Formalized procedures covering credit recovery flows; Setting limits for carrying out transactions subject to credit risk, both individually and at the aggregate level a group of companies with common economic interest and for borrowers or counterparties with similar characteristics; Control of guarantees and instruments for mitigating credit risk; Monitoring of the loan asset portfolio using indicators with the aim of minimizing the risk of losses; Performance of stress tests, measuring the combined effect of adverse movements in macroeconomic indicators, estimating financial impacts affecting delinquency, provisions and consequently, available and required capital; Periodic reporting to Senior Management addressing the performance indicators of risk management based on the policies and strategies adopted; and Documented procedures for policy exceptions. In addition, credit risk management activities are carried out by specific control units, strengthening their performance with independence in relation to their trading units, providing to the senior administration a global view of the risk exposures from the Banco Votorantim. 1.3 Risk management structure and involved areas Credit risk management activities include a number of strategic, tactical and operational activities permeating the entire 'business chain', from product development, setting limits, portfolio management, management information, collection and credit recovery, as well as monitoring the effectiveness of processes and controls used. 19

21 1.3.1 Board of Risks structure Involved areas Risk management attributions are performed by formally set up units with technically qualified staff, under separate management, with clearly defined responsibilities. Wholesale and Retail Credit Risk Management Wholesale Credit Risk Management: its mission is to direct and continuous monitor the credit risk from the Wholesale Bank, aiming to mitigate the associated risks. It has two different structures: Credit Policies, that manages aim is to elaborate analyses and technical studies that may result in policies identifying, measuring and mitigating the credit risk from the Wholesale Bank. Additionally, another aim is to ensure the adherence of the wholesale credit risk policies to regulatory devices, as well as answering the internal and external regulatory requirements, concerning the wholesale credit risk and its accomplishment. Monitoring the Credit Risk, this supervision duty is to monitor the recurrent wholesale banking portfolio, detecting warning signs that identify, with priority, advance and in a timely manner, the credit deterioration in individual and aggregate levels Retail Credit Risk Management and Modeling: responsible for developing statistics models, such as Credit Score, Expected Loss, Behavior Score, Collection Score, and classification of private companies and public agencies, in line with the requirements of the new Basel Accord. MIS Wholesale and Retail Credit Infrastructure: responsible for the credit systems management, interface with external bureaux, consolidation of reports of measurement and control of Wholesale and Retail portfolio exposures in an aggregate level (portfolio vision). Credit collection and Strategy: manages the Retail Credit Recovery, Wholesale Credit Recovery and Planning and Recovery teams, whose main attributions are detailed below: commercial unit's renegotiations, arranging friendly credit collections and ongoing monitoring, along with the legal department, and bringing judicial proceedings, acting as liaison and coordinator between the units involved, and analyzing and submitting renegotiating proposals to the proper court. Credit recovery Retail: Responsible for the mass and litigious administrative credit collection (products: payroll loans, cards, personal credit and consumer credit) guard and sales of resumed guarantees and conceptualization, specification and monitoring recovery projects. Recovery Planning: responsible for report and collection indicator generation and monitoring, and establishing related policies and calculating the allowance for loan losses. Environmental and Social Risk: responsible for assessing the social and environmental aspects with which the client is involved, such as: Waste Management, Compliance with Legislation, Working Conditions and Use of Natural Resources, establishing their level of environmental and social risk and issuing a social and environmental opinion to subsidize the Lending area in the credit decision process. Integrated Risk and Capital: responsible for the (procedural and methodological) coordination of the Internal Capital Adequacy Assessment Process (ICAAP), risk appetite, stress test and ALM, Risks and Capital Committee (CARC) and for the determination and analysis of the regulatory and economic capital of credit risk, as well as for the capital ratios (Basel, Tier I and Common Equity Tier I). Derivative Risk Control: performs the daily monitoring of the portfolio of derivatives held with clients. Credit recoverywholesale: responsible for management and control of loans in arrears, supporting the Credit Lending Structure and Involved Areas Credit CIB (Corporate & Investment Banking) Responsible for the credit analysis and approval process of the CIB segment. It s a member of the CIB credit committee and of the decisionmaking committees of the area, monitoring the business strategy based on market scenarios and internal credit policies and instructs the commercial managers in relation to best credit practices, aiming at a sustainable growth and alignment with the organization's strategic objectives. 20

22 Retail Credit Responsible for the individual analysis, when required by policies, of requests for credit produced through the corporate commercial structures of the Retail segment, ensuring that they are dealt with in compliance with the norms and procedures and with the respective approval levels of each operation. It is also responsible for control over the risk exposure of the portfolio Board of Internal Controls and Operational Risks structure Involved Areas Validation of models Responsible for the independent assessment of the risks associated with the development process model, monitoring the action plans prepared to mitigate risks identified in the validation of models and monitoring the model performance. 1.4 Credit Risk Management The institution performs credit risk management through the adoption of governance, instruments and tools that allow the identification, assessment and measurement, tracking and reporting of the risk incurred in its activities in the main stages of credit risk, which are lending, credit monitoring and credit recovery. Credit Lending The lending process of the wholesale segment is based on detailed assessments of proponent clients, either in the admission of prospective clients or in the renewal of credit limits for existing clients. In the credit analysis process, the institution relies on integrated systems that manage the entire analysis flow, from the proposition of limits, through to the updating of detailed knowledge of the client (Know Your Client KYC, verification of documentation and inquiries to credit bureaus and market information), submission to the credit approval levels and implementation of the decisions of the corresponding committees. Proposals evaluations are segmented into specific organizational structures as the customer service level (Industry Team and Regional Team) and consider aspects related to the company s management, socioeconomic information, competitive environment, market aspects and economic sector, among others. After the evaluation a credit presentation is elaborated which compiles the main aspects of risks and its mitigation, that must be analyzed by the Credit Committee. In the Retail segment, credit proposals are processed by an automated, parameterized system supported by a scoring model, which favor greater efficiency and reliability in lending decisions, which are intended for individuals that demonstrate payment ability and reputability. For cases where the scoring model does not automatically decide, the credit desk carries out a more detailed check of all the aspects involved in the contract, with the intention of approving or rejecting the credit proposal. Credit Monitoring In Wholesale, after the approval of the credit limit and/or loan for the client, these are tracked by means of recurrent monitoring of the portfolio, identifying warning signs that demonstrate, with propriety, in advance and in a timely manner, the deterioration of credit at individual and aggregate levels. In Retail segment, the institution performs the monitoring of the credit risk through performance indicators and management reports of the credit portfolio. Credit Recovery The credit recovery area works together with the monitoring area from the first day of delinquency observed in loans. Several strategies are used to maximize credit collection opportunities. See below the credit risk exposures according to definitions established by Circular No. 3,644, segregated by products, country and geographical regions, and economic sector: Total and Average Exposure in the Quarter 21