Risk Management Report Pillar 3 2Q18

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1 Risk Management Report Pillar 3 2Q18

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3 Risk Management Report 2Q18 3 Summary Banco do Brasil Introduction Objective Main Regulatory Indicators Risks and Capital Governance Risk and Capital Internal Governance Risk and Capital Management Structure Strategic Definitions Relevant Risks Risk Appetite and Tolerance Risk and Capital Management Policies Reports Risk Management Processes Prudential Conglomerate Balance Sheets Composition of the Prudential Conglomerate Composition of the Disclosed Balance Sheet Capital Referential Equity (PR) Details Minimum Required Reference Equity (MRRE) Capital Adequacy Ratio Assessment of Sufficiency and Adequacy of Reference Equity (PR) Leverage Ratio Shareholdings Entities Linked to Banco do Brasil (ELBBs) Supervision Risk Management Credit Risk Specific Credit Policy Mitigation Policy Management Strategies and Credit Risk Management Framework Measurement Systems Mitigating instruments Exposure to Credit Risk Exposure to counterparty credit risks Acquisition, Sale or Transfer of Financial Assets Securities (TVM) operations derived from securitization processes Market Risk Market Risk Policy Management Strategies and Market Risk Framework Hedge Policies Derivative Financial Instruments Negotiable Portfolios... 57

4 Risk Management Report 2Q Non-negotiable Portfolios Risk measuring systems and communication and information processes Liquidity Risk Liquidity Risk Policy Liquidity Risk Processes and Strategies Liquidity Coverage Ratio (LCR) Calculation Liquidity Risk measuring systems Operational Risk Policies Operational Risk Management Process Environmental Risk Environmental Responsibility Policy Environmental Risk Management Strategies Other Risks Strategy Risk Reputational Risk Complementary Pension Fund Entities and Private Health Insurance Plan Operators for Employees Risk (EFPPS Risk) Legal Risk Model Risk Specific Risk Policy Model Strategies for Model Risk Management Contagion Risk Contagion Risk Specific Policy Contagion Risk Management Strategies Compliance Risk Specific Policy of Internal Controls and Compliance Conformity Risk Management Model Compliance Program Stress Test Program... 73

5 Risk Management Report 2Q18 5 List of Tables Table 1 - Prudential Balance Sheet x Disclosed Balance Sheet Table 2 - Composition of the Prudential Conglomerate Table 3 - Composition of the Disclosed Balance Sheet Table 4 - Hybrid Capital and Debt Instruments Table 5 - Hybrid Capital and Debt Instruments authorized to compose RE Table 6 - Total Subordinated Debts Table 7 - Reference Equity (PR) Details Table 8 - Regulatory Adjustments Table 9 - Capital Minimun Requirements in relation to RWA Table 10 - Required Minimun Reference Equity Table 11 - Basel Ratio (Total Capital Ratio) and PR margin Table 12 - Commom model of information disclosure on Leverage Ratio Table 13 - Comparative summary between Disclosed Financial Statements and Leverage Ratio Table 14 - Shareholdings - Banking Book Table 15 - Collateral coverage Table 16 - Mitigated value of exposure, weighted by the respective risk factor Table 17 - Concentration of the ten and of the hundred largest customers in relation to the total of transactions with credit granting feature Table 18 - Credit risk average exposure Table 19 - PJ credit risk exposure by geographic regions Table 20 - PF credit risk exposure by geographic regions Table 21 - Credit risk exposure of the prudential conglomerate, by economic sector Table 22 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) - 2Q Table 23 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) - 1Q Table 24 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) - 4Q Table 25 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions - 2Q Table 26 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions - 1Q Table 27 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions - 4Q Table 28 - Amount of overdue transactions by geographical regions Table 29 - Amount of overdue transactions, segregated by economic sector - 2Q Table 30 - Amount of overdue transactions, segregated by economic sector - 1Q Table 31 - Amount of overdue transactions, segregated by economic sector - 3Q Table 32 - Write-off transactions by economic sector Table 33 - Total allowances for loan and lease losses in the quarter and variations Table 34 - Credit risk exposure by FPR Table 35 - Notional value of contracts to be liquidated in clearing houses, in which the clearing house acts as central counterparty Table 36 - Notional value of contracts subject to counterparty credit risk in which clearing houses do not act as central counterparty Table 37 - Positive gross value of contracts subject to counterparty credit risk Table 38 - The value of collaterals that cumulatively meet the requirements of paragraph VII, Art.9, of Bacen Circular n 3,678/ Table 39 - The value of collaterals that cumulatively meet the requirements of paragraph VII, Art.9, of Bacen Circular nº 3,678/ Table 40 - Loss operations assigned, with substantial transfer of risks and benefits Table 41 - Value of the portfolio granted with co-obligation, recorded in the off balance sheet Table 42 - Balance of exposures acquired WITH retention of risks and benefits by the transferor Table 43 - Balance of exposures acquired WITHOUT retention of risks and benefits by the transferor Table 44 - Value of the exposures derived from acquiring FIDC and CRI Table 45 - Derivative financial instruments in the country and abroad, by market risk factor, with and without a central counterpart - 2Q Table 46 - Derivative financial instruments in the country and abroad, by market risk factor, with and without a central counterpart - 1Q Table 47 - Derivative financial instruments in the country and abroad, by market risk factor, with and without a central counterpart - 4Q Table 48 - Derivative financial instruments in the country and abroad, by market risk factor, with and without a central counterpart - 3Q

6 Risk Management Report 2Q18 6 Table 49 - Derivative financial instruments in the country and abroad, by market risk factor, with and without a central counterpart - 2Q Table 50 - Negotiable Portfolio by relevant market risk factor, divided into positions purchased and positions sold Table 51 - Impact on the result or on the assessment of the institution value due to the shocks in interest rates, segmented by risk factor - Economic Value of Equity methodology Table 52 - LCR Implementation Schedule Table 53 - Information on the Liquidity Coverage Ratio (LCR) Table 54 - Operational losses monitoring by loss events category... 68

7 Risk Management Report 2Q18 7 List of Figures Figure 1 - Regulatory Capital Indicators Figure 2 - Corporate Governance Structure Figure 3 - Organizational Structure involved in the capital and risk management Figure 4 -Decision making and process Figure 5 - Liquidity in Local Currency Figure 6 - Liquidity in Foreign Currency Figure 7 - DRL Indicator List of Charts Chart 1 - Main Purposes of the Advisory committees to the Board of Directors Chart 2 - Main Purposes of the Committees involved with risks and capital management Chart 3 - Main Purposes of the Forums involved with risk and capital management Chart 4 - Banco do Brasil`s Prudential Conglomerate Relevant Risks Set Concept Chart 5 - Criteria and parameters for classification of the capital condition... 34

8 Risk Management Report 2Q18 8 Abbreviations Glossary ACP Audit Bacen CA CD CF CMN Coaud Coris Corem Coger Cegov CEGAPC CEGRC CSGRC Dicoi Dicre Difin Dirco Direo Diris Disin DRL ECBB ELBB EMLI FPR HIBP HICN1 HICP IB IBP Icaap ICN1 ICP Icred90 IDS IHCD Iprov MCC MCL MP PR PRMR Redex RL RSPL RWA RWAACS RWACAM RWACIRB RWACOM RWACPAD RWAJUR RWAMINT RWAMPAD RWAOPAD Vicri Core Capital Additional Internal Audit Central Bank of Brazil Board of Directors Board of Officers Fiscal Council National Monetary Council Audit Committee Risks and Capital Committee Remuneration and Elegibility Comitee Accounting Directorship Linked Entities Governance Executive Committee Asset, Liability, Liquidity and Capital Management Executive Committee Risk Management and Internal Controls Executive Committee Risk, Assets, Liabilities, Liquidity and Capital Management Superior Committee Internal Controls Directorship Credit Directorship Finance Directorship Controlling Directorship Strategy and Organization Directorship Risk Management Directorship Institutional Security Directorship Availability of Free Resources Indicator Banco do Brasil Corporative Strategy Banco do Brasil Linked (Related) Entities Liquidity Maximum Requirement Intraday Risk Weighting Factor IBP projected mismatching minimum time horizon ICNI projected mismatching minimum time horizon ICP projected mismatching minimum time horizon Capital Adequacy Ratio Prudential minimum Capital Ratio (Minimum IB defined by management) Internal Capital Adequacy Assessment Process Tier 1 Capital Ratio Core Capital Ratio Credit as of 90 days default ratio Subordinate Debt Instrument Capital and Debt Hybrid Instruments Provisioning Ratio (PCLD balance over the portfolio balance) Capital Contingency Measures Liquidity Contingency Measures Prudential Margin in reais equivalent to the difference between the IBP and the IBR Reference Equity Minimum Required Reference Equity to cover Pillar I risks External Network Liquidity Reserve Shareholder Equity Return Risk-Weighted Assets Risk Weighted Assets for the Shares Market Risk exposures Risk Weighted Assets for the Exchange Market Risk exposures Risk Weighted Assets for the Credit Risk ascertained by internal models based approach Risk Weighted Assets for the Commodities Market Risk exposures Risk Weighted Assets for the Credit Risk ascertained by standardized approach Risk Weighted Assets for the Interest Rate Market Risk exposures Risk Weighted Assets for the Market Risk ascertained by internal models Risk Weighted Assets for the Market Risk ascertained by standardized approach Risk Weighted Assets for the Operational Risk ascertained by standardized approach Risk Management and Internal Controls Vice-President

9 Banco do Brasil Risk Management Report 2Q18 9 Founded in 1808, Banco do Brasil (BB) is a mixed-capital company that is controlled by the Brazilian Government and has been listed in B3 1 (Brasil, Bolsa e Balcão) New Market, which is a segment that gathers the companies with the best corporative governance practices. Banco do Brasil was also certified as a State-Owned Enterprises Governance Program, aimed at public State-Owned Companies (SOE) or SOEs with ongoing of IPO, created with the objective of encouraging them to improve their corporate governance practices and structures. In November 2017, BB was certified as Level 1 Governance by the Secretariat of Coordination and Governance of State Enterprises (Secretaria de Coordenação e Governança das Empresas Estatais SEST) of the Ministry of Planning, Development and Management. The Governance Indicator (IG-SEST) aims to monitor the governance quality of the federal state-owned enterprises (SOE), in order to comply with the requirements of Law 13,303/2016 (SOE s Law) and its Regulatory Decree, as well as guidelines established in resolutions of the Inter-ministerial Commission on Corporate Governance and Administration of Corporate Shares of the Union (Comissão Interministerial de Governança Corporativa e de Administração de Participações Societárias da União CGPAR). As one of the main agents of the country's economic and social development, BB supports agribusiness, infrastructure, companies and foreign trade, acting in an innovative and sustainable manner, guided by ethics. Our Purpose: "To take care of what matters to people". Our Vision: To be the company that provides the best experience for people and promotes society's development in an innovative, efficient and sustainable way." Our Values: Ethics, Customer focus, Innovation, Efficiency, Reliability, Protagonism and Public spirit 1 Company formed from the merger of BMF & Bovespa with Cetip.

10 1. Introduction Risk Management Report 2Q18 10 Banking system sustainability is indissolubly linked to risk-management and capital policies and mechanisms. The methods of identifying, assessing, controlling, mitigating and monitoring risk safeguard financial institutions in adverse situations and provide support for the generation of positive results that are recurring in the long run. Banco do Brasil (BB) considers essential risk and capital management to the process of decision-making, providing optimization of risk-return ratio to the operations. Changes in the global financial environment, such as market integration through globalization, the emergence of new transactions and products, increasing technological sophistication and new regulations have made financial activities and their risks more and more complex. Brazil s participation in the Basel Committee on Banking Supervision stimulates the timely implementation of international prudential norms in the Brazilian regulatory framework. Additionally, the lessons learned from financial disasters reinforce the importance of risk and capital management in the banking industry. Those factors influence regulatory agencies and financial institutions to invest in risk management, seeking to strengthen their financial health. In line with that perspective, BB has invested in the continuous improvement of its risk and capital management process and practices, in line with international market benchmarks of regulation and supervision. BB remains continuously aligned with the best management practices, among which, the risk management architecture with multidimensional scope whose specificities are described in this report. 1.1 Objective The current report aims to disclose the information related to risk management, to the measurement of the amount of Risk Weighted Assets (RWA) and to the Reference Equity (PR), in accordance with Circular nº 3,678, published by the Central Bank of Brazil (Bacen) on , and it is aligned with the guidelines of Pillar III of Basel II. This report includes information about structures, processes and risk and capital management policies of Banco do Brasil (BB). The measurement of PR and RWA considers the consolidation scope of the Prudential Conglomerate 2. 2 Prudential Regulation Details on the chapter 3.

11 1.2 Main Regulatory Indicators Risk Management Report 2Q18 11 BB Prudential Conglomerate main risks and capital indicators are shown below considering the position of the previous three quarters: Figure 1 - Regulatory Capital Indicators

12 2 Risks and Capital Governance 2.1 Risk and Capital Internal Governance Banco do Brasil`s corporate governance structure has: Risk Management Report 2Q18 12 a) the Shareholder s General Meeting, the Board of Directors, assisted by the Audit Committee (Coaud), by the Remuneration and Eligibility Committee (Corem) and by the Capital and Risks Committee (Coris); b) the Executive Board, composed by the Board of Officers and by the Statutory Directors; c) the Fiscal Council (CF); and d) the Internal Audit (Audit). The figure below represents BB`s structure of corporate governance: Figure 2 - Corporate Governance Structure The decisions, in any level of the Company, are made in a collegiate way, except for the situations in which a minimum organizational structure does not allow it. Aiming to involve all officers with the definition of strategies and the appreciation of proposals for Banco do Brasil`s different businesses, the Management uses strategic level committee, which warrant speed, quality and safety to decision making. Decisions are reported to participating units through documents that objectively express the position taken by the Senior Management, guaranteeing application throughout the Bank. 2.2 Risk and Capital Management Structure The Board of Directors (CA), pursuant to the provisions of art. 56, paragraph 1, of CMN Resolution 4,557 / 2017, and to the competencies stated on its Internal Regulations, is responsible for the informations regarding the risk and capital management structure of Banco do Brasil, available in this report.

13 Risk Management Report 2Q18 13 The risk and capital governance model adopted by BB involves a superior committee and executive committee structure, with the participation of many units at the Bank, addressing the following issues: a) separation of duties: business versus risk; b) specific structure for risk management; c) defined management process; d) decisions in several hierarchical levels; e) clear rules and authority structure; and f) reference to best management practices. The figure below represents BB`s structure of risk and capital governance: Figure 3 - Organizational Structure involved in the capital and risk management The Committees involved with BB`s risk and capital management, as well as their main purposes are described in the following chart: Chart 1 - Main Purposes of the Advisory committees to the Board of Directors Advisory committees to the Board of Directors Audit Comitee (CoAud) Main Purposes evaluate the effectiveness of the internal control systems of Banco do Brasil; evaluate and monitor Banco do Brasil s exposures to risk, pursuant to Law 13,303/2016 evaluate the reports on the activities carried out by the integrity area, according to the Decree / 2016; evaluate the reports about the indications of illegality related to the Bank's activities, compliance and internal control systems, to be presented to the Board of Directors inform the Board of Directors and the Brazilian Central Bank, about the evidence of error or fraud represented by incompliance with the legal rules and regulations that put in risk the institution s continuity. Capital and Risks Comitee (Coris) advise the Board of Directors regarding management of risks and capital supervise the compliance by the Bank s Executive Board with the terms of the Risk Appetite Statement; supervise the compliance with policies related to management of risks and capital; evaluate the degree of compliance of the risks management structure s processes with the policies related to management of risks and capital.

14 Risk Management Report 2Q18 14 Chart 2 - Main Purposes of the Committees involved with risks and capital management Strategic Committees Risk, Assets, Liabilities, Liquidity and Capital Management Superior Committee - CSGRC Main Purposes approve strategies for risks management; approve global risk exposure limits, except global credit and market risk limits; approve contingency plans for risks; approve strategies for management of asset, liabilities and liquidity and capital management; approve guidelines for treasury operations, observing the global risk limits; speak out about the Declaration of Appetite and Risk Tolerance. Risk Management and Internal Controls Executive Committee - CEGRC Asset, Liability, Liquidity and Capital Management Executive Committee CEGAPC approve models, methodologies, techniques, indicators, metrics, criteria and parameters applied to risk management; approve specific exposure limits with countries (LEP); speak out about strategies for risk management. approve guidelines for the management of funding and liabilities, and models, methodologies, criteria and parameters applied to capital management; approve scenarios to be used in the capital management process; speak out about strategies for managing assets and liabilities and liquidity; speak out about strategies for capital management. Chart 3 - Main Purposes of the Forums involved with risk and capital management Capital Forum Forums Scenarios Forum PCLD Forum Liquidity Risk Forum Technical Forum for Evaluation, Monitoring and Validation of Models Applied to Risk Management (FTMGR) Internal Controls and Risk Management in ELBB and External Network Forum Main Purposes assist the Asset, Liability, Liquidity and Capital Management Executive Committee - CEGAPC with technical analyses on topics related to capital management, the Internal Capital Adequacy Assessment Process (Icaap) and the Capital Plan; to analyze the behavior of the capital requirement based on the consolidation regime established by the Central Bank of Brazil Bacen; analyze the stress tests applied to capital indicators. analyse the corporate scenarios and their integration with the strategy, the budget and relevant risks incurred by the Conglomerate; promote the unicity and synergy in the usage of macroeconomic scenarios, including in relation to stress tests; assist theasset, Liability, Liquidity and Capital Management Executive Committee - CEGAPCwith the deliberations that require an analysis of the assumptions and variables from the macroeconomic scenarios. identify incorrections in the operations risk classification; propose proactive actions that can prevent improper variations in the Allowance for Loan Losses (PCLD) and correct inconsistencies in the operations risk classification; identify the origin, evolution and tendency of PCLD and the usage of provisions (losses); pomote, whenever required, the assessment of the Liquidity situation and recommendation to either adopt or not the Liquidity Risk Prudential Measures (MPRL). analyze proposals for defining or changing models, methodologies, techniques, indicators, metrics, criteria and parameters applied to risk management; advise the deliberations of the Risk Management and Internal Controls Executive Committee (CEGRC) regarding the models, methodologies, techniques, indicators, metrics, criteria and parameters applied to risk management; To promote the integration and alignment of the actions developed by the member areas of the Forum, regarding the technical aspects and the impacts of the analyzed models. promote discussions on models and methodologies of internal controls, in Banco do Brasil Linked Entities (ELBB) and in the External Network; to promote discussions on identified significant risks and on internal controls Banco do Brasil Linked Entities (ELBB) and in the External Network; integrate the actions developed by the internal control and risk management areas related to ELBB and External Network. Considering the requirements associated with the risk management structure standardized in CMN Resolution 4,557, the CA indicated the Vice President of Internal Controls and Risk Management as the Chief Risk Officer (CRO) of the Conglomerate. Banco do Brasil`s capital management consists of a continuous process of planning, assessment, control and monitoring of the capital that is necessary to cover the company relevant risks and bear the capital requirements made by the regulator, or the ones that are internally defined by the Institution, by considering the strategic planning and budget, aiming to optimize its allocation and structure. The risk and capital management process is done based on the policies and strategies of the Bank's Senior Management and permeates several areas at different levels of

15 Risk Management Report 2Q18 15 governance of the Institution, comprising the Board of Directors and its advisory committees, Board of Directors (CD), Strategic Committees, Board of Directors and the Capital Forum. The capital management structure is composed of Strategic Committees (CSGRC and CEGAPC), Strategic Units (Controlling - Dirco, Finance - Difin, Accounting - Coger and Risk Management - Diris) and Capital Forum. The Board of Directors (CA) of BB indicated the Controlling Director as responsible for Capital Management with the Central Bank. The areas that were defined in the capital management structure are collective or individually responsible for: a) identification of relevant risks; b) assessment of the capital required to bear them; c) projection of risk and capital indicators; d) calculation of the Referential Equity (PR); e) elaboration of the capital plan and contingency plan and; f) evaluating capital sources and its restoration. g) elaboration of the recovery plan; h) Icaap (Internal Capital Adequacy Assessment Process); i) Stress Tests; j) Managerial Reports; and k) Capital Management Specific Policy. Banco do Brasil s capital management structure enables the monitoring and control of the capital kept by the Institution, the assessment of capital necessity to cover the risks the Institution is exposed to and the planning of goals and capital necessity, by considering the Institution`s strategic goals. That way, BB adopts a forward-looking position, by anticipating the capital necessity derived from the market conditions possible changes. The Internal Controls Directorship (Dicoi) is responsible for the evaluation and certification of controls, validation of risk management models, evaluation of the Bank's internal control system, identification, assessment and mitigation of Operational Risk of Bank processes, as well as Compliance Risk management. 2.3 Strategic Definitions Relevant Risks BB has a process of risks identification, that results in the risks inventory and in the definition of the corporate set of relevant risks. That process is quite important for the risks and capital management, as well as for the business management. BB`s risks inventory and the corporate set of relevant risks are annually revised, considering the risks incurred by the several business segments explored by the Bank or by its subsidiaries, which can affect Banco do Brasil`s Prudential Conglomerate Reference Equity (PR). The classification of the relevant risks is based on quantitative and qualitative criteria. The risks below are part of Banco do Brasil`s Prudential Conglomerate Relevant Risks Corporate Range:

16 Risk Management Report 2Q18 16 Chart 4 - Banco do Brasil`s Prudential Conglomerate Relevant Risks Set Concept Credit Risk Risk Credit Concentration Risk Counterparty Credit Risk Market Risk Banking Book Interest Rate Risk Liquidity Risk Operational Risk Legal Risk Environmental Risk Strategy Risk Reputational Risk Complementary Pension Fund Entities and Private Health Insurance Plan Operators for Employees Risk Model Risk Contagion Risk Compliance Risk Concepts Possibility of losses associated with the non-fulfillment by a borrower or a counterparty of their corresponding financial obligations according to negotiated terms, the devaluation of a loan agreement due to a drop in the borrower s risk rating, a decline in gains or earnings, benefits granted in renegotiation, and recovery costs. Possibility of credit losses arising from significant exposure to counterparty, a risk factor or groups of counterparties related by common characteristics. Possibility of a certain counterparty not fulfilling its obligations related to the settlement of transactions that involve trading financial assets, including those related to the settlement of financial derivatives. Possibility of financial or economic losses resulting from the fluctuation of market values of positions held by the financial institution. Possibility of losses related to the fluctuations of the operations interest rates that are not classified in the trading portfolio (trading book). Possibility of imbalances between tradable assets and liabilities - "mismatches" between payments and receipts - which can affect the institution s payment ability, taking into account the different currencies and settlement terms of its rights and obligations. Possibility of losses due to failures, deficiencies, or improper internal processes, people and systems or external events. That includes the possibility of losses arising from legal risk. Possibility of losses derived form the inadequacy of deficiency in contracts signed by the institution, as well as the penalties due to the infringement of legal mechanisms and the compensation for losses to third parties derived from the activities done by the institution. Possibility of losses arising from social and environmental impacts resulting from administrative and business practices of BB. Possibility of losses arising from adverse changes in the business environment, or use of inappropriate assumptions in decision making. Possibility losses associated with the negative perception about the Institution by its customers, counterparties, shareholders, investors, government agencies, community or supervisors, which can adversely affect the sustainability of the business. Possibility of negative impact derived from the mismatching between actuarial liabilities and assets in the entities sponsored by complementary pension fund and private health insurance plan operators for employees. Possibility of losses derived from the inadequate development or use of models, as a result of the inaccuracy or insufficiency of data or the incorrect formulation in its construction. Possibility of negative impact on the capital, liquidity or reputation of the Prudential Conglomerate due to adverse events in the relevant Banco do Brasil Linked Entities (ELBB), that are not part of the Prudential Conglomerate. Possibility of financial or reputational losses resulting from failure to comply with laws, regulations, internal standards, codes of conduct and guidelines established for the business and activities of the organization Risk Appetite and Tolerance Banco do Brasil`s risk appetite and tolerance indicators and their corresponding limits consider, in their definition, the exposure to the risks, the business strategies and the projections of capital necessity that subsidize the Capital Plan. The definition of the risk appetite considers the capability to take risks, the risks tolerance and the Institution s risk profile. The Risk Appetite and Tolerance Statement covers the capital adequacy indicators: Core Capital Ratio (ICP), Tier l Capital Ratio (ICNI) and the Capital Adequacy Ratio (IB), among others, which can be accessed by all strategic units.

17 2.3.3 Risk and Capital Management Policies Risk Management Report 2Q18 17 The policies that are specific for capital and risk management, approved by the Board of Directors, aim to lead the development of functions or behaviors, by means of strategic directives that guide the Risk and Capital Management actions. Those specific policies are applied to all the businesses that involve risks and capital in the Bank, are avaliable to be checked by all the Bank`s employees and their contents are revised, at least, yearly. The Capital Management Specific Policy guides Banco do Brasil`s capital management, by means of a continuous process of planning, assessment, control and monitoring of the capital to cover all the relevant risks. Banco do Brasil`s Risk and Capital Management Specific Policies are quoted as follows: a) Capital Management Specific Policy; b) Credit Specific Policy; c) Market Risks Specific Policy; d) Liquidity Risk Specific Policy; e) Derivative Financial Instruments Usage Specific Policy; f) Specific Strategy Risk Policy; g) Specific Reputation Risk Policy; h) Specific Risk Policy for Closed Entities of Complementary Pension Plans and Private Pension Plans for Employees (EFPPS); i) Specific Interest Rate Risk Policy of the Banking Portfolio; j) Model Risk Policy; k) Banco do Brasil`s Specific Policies associated to the Operational Risk Management: i. Operational Risk Specific Policy; ii. Anti Money-Laundering, Corruption and Terrorism Financing Specific Policy; iii. Business Continuity Management Specific Policy; iv. Relationship Between the Bank and Suppliers Specific Policy; v. Information Security Specific Policy; vi. Legal Risk Specific Policy; l) Socio-environmental Responsibility Specific Policy; m) Risk and Capital Management Information Disclosure Specific Policy; and n) Contagion Risk Specific Policy. 2.4 Reports Risk and capital management reports support the risk and capital decision-making process and are presented to: a) Risk Management and Internal Controls Executive Committee (CEGRC); b) Asset, Liability, Liquidity and Capital Management Executive Committee (CEGAPC);

18 Risk Management Report 2Q18 18 c) Risk, Assets, Liabilities, Liquidity and Capital Management Superior Committee (CSGRC); d) Board of Officers (CD); e) Audit Committee; f) Capital and Risks Committee; g) Board of Directors (CA). The reports are periodically elaborated and have managerial qualitative and quantitative information, such as the monitoring of risk exposure and the capital planning, the consumption of global and specific limits, mitigating actions, projection of indicators and the necessity or not to recompose capital, whenever necessary. Among the internal reports, the following ones are quoted: a) Risk Dashboard; and b) Capital Adequacy Managerial Report. The information destined to the external public is available in a public access location and can easily be found on the Bank`s website. Information about risks are published in the following documents: a) Management Discussion & Analysis; b) Risk Management Report - Pillar III; c) Reference Sheet; d) Explanatory Notes to Financial Statements; and e) Annual Report. 2.5 Risk Management Processes The risk management process involves a continuous information flow, by observing the following stages: Figure 4 -Decision making and process

19 Risk Management Report 2Q18 19 It is important to mention that BB has a corporate tool to control and assess the Risks of Products, Services and Self-Service Channels (Carps), which is managed by Strategy and Organization Directorship (Direo), of mandatory usage by strategic units and external network, except for the subsidiary companies when there is the creation or revitalization of: a) a product of service; b) a type of product or service; and c) self-service channels. The usage of the tool aims to: a) provide decision makers with information, by aggregating products, services and self-service channels with safety when they are launched in the Market, through the participation of the intervening areas; b) identify and assess the several types of risks defined by the Bank for the creation and revitalization of a product/service/self-service channel; c) search for control and compliance solutions that minimize risks; d) promote synergy among managers and intervening parties of products/services/self-service channels, in a way it provides operational efficiency. In the approval of new products, Carps corporate tool adopts the principle that a manager must assess risks and implemente controls, with the assistance of areas that are involved in the process, seeking a higher profitability and the reduction of losses.

20 3 Prudential Conglomerate Risk Management Report 2Q18 20 The CMN Resolution nº 4,192, published on March 01, 2013, in its 3 rd article, item ll, establishes that the calculation of Reference Equity (PR) must be performed in consolidated bases for institutions that belong to the Prudential Conglomerate. The CMN Resolution nº 4,280, published on October 31, 2013, governs the preparation, disclosure and submission requirements of Prudential Conglomerate s consolidated financial statements. This Resolution was amended by the CMN Resolution 4,517, on August 24, According to the mentioned Resolutions, financial institutions and other institutions authorized by Bacen shall prepare financial statements in a consolidated basis, including data relative to the following entities, either located in Brazil or abroad, over which the institution has direct or indirect control: a) financial institutions; b) other institutions authorized by Bacen; c) consortium administrators; d) payment institutions; e) companies that perform the acquisition of credit operations, including real estate, or credit rights, like factoring companies, securitization companies and exclusive purpose societies; f) other legal entities domiciled in Brazil that have, as an exclusive objective, an equity interest in the entities mentioned in items a through e. The CMN Resolution 4,280/13 also determines that investment funds in which the entities that compose the Prudential Conglomerate, under any form, take or retain substantial risks and benefits, shall be consolidated. According to the CMN Resolution 4,517/16, investments in joint ventures must be accounted by the equity method from January They were previously proportionally consolidated. 3.1 Balance Sheets The table below shows the composition of the Prudential Balance Sheet compared to the Consolidated Balance Sheet prepared in accordance with the Bank s accounting policies, as well as references to the figures presented in the "Attachment 1 - Composition of the Reference Equity".

21 Risk Management Report 2Q18 21 Table 1 - Prudential Balance Sheet x Disclosed Balance Sheet 2Q18 In thousands of Reais Reference in RE Prudential Conglomerate Disclosed Financial Statements ASSETS CURRENT ASSETS AND LONG-TERM-RECEIVABLES 1,413,305,238 1,418,525,621 Cash and Cash Equivalents 12,867,353 12,867,715 Short-term Interbank Investments 428,739, ,739,723 Open market investments 392,029, ,029,819 Interbank deposits 36,709,904 36,709,904 Securities and Derivative Financial Instruments 151,598, ,002,986 Own portfolio 104,540, ,508,234 Funding instruments issued by institution authorized by Banco Central do Brasil (r) 33, Other 104,506, Subject to repurchase agreements 42,272,218 35,708,956 Pledged in guarantee 3,041,770 3,041,770 Derivative financial instruments 1,744,026 1,744,026 Interbank accounts 78,067,249 78,067,249 Payments and receipts pending settlement 2,122,964 2,122,964 Restricted deposits 73,130,872 73,130,872 Deposits with Banco Central do Brasil 70,243,570 70,243,570 National Treasury - rural credits resources 18,453 18,453 National Housing Finance System 2,868,849 2,868,849 Interbank onlendings 646, ,132 Correspondent banks 2,167,281 2,167,281 Interdepartmental Accounts 153, ,411 Internal transfers of funds 153, ,411 Loan Operations 548,320, ,320,679 Public sector 55,896,210 55,896,210 Private sector 525,788, ,788,148 Loan operations linked to assignment 448, ,852 (Allowance for loan losses) (33,812,531) (33,812,531) Leasing Transactions 160, ,120 Private sector 172, ,898 (Allowance for leasing transactions losses) (11,778) (11,778) Other Receivables 192,455, ,126,307 Receivables from guarantees honored 518, ,383 Foreign exchange portfolio 22,850,168 22,850,168 Accrued Income 3,151,198 2,965,460 Securities trading 1247, ,392 Specific credits 381, ,266 Sundry 167,471, ,344,350 Tax credits 39,761, Resulting from tax losses and negative basis of social contribution on net income and excess of depreciation (g) 2,593, Resulting from temporary differences 37,167, Excess of 10% from Common Equity Tier 1 Capital (k1) 5,341, Excess of 15% from Common Equity Tier 1 Capital (m) 4,615, Tax credits resulting from temporary differences not deducted from RE (t) 3,887, Tax credits resulting from temporary differences for loan losses 23,322, Actuarial assets related to defined benefit pension funds (h1) 7,064, Other 120,645, (Allowance for other losses) (3,164,119) (3,180,712) Other Assets 942, ,432 Assets not for own use and materials in stock 483, ,648 (Allowance for losses) (141,633) (146,094) Prepaid expenses 599, ,878

22 Risk Management Report 2Q Q18 Prudential Disclosed Financial Reference in RE In thousands of Reais Conglomerate Statements PERMANENT ASSETS 35,068,895 31,727,253 Investments 21,278,817 18,087,601 Investments in subsidiaries and associates 21,065,480 17,874,240 Domestic 21,036,472 17,845,232 Goodwill (e1) 233, Investments 20,803, Investments in insurance companies 11,003, Excess of 10% from Common Equity Tier 1 Capital (j) 2,500, Excess of 15% from Common Equity Tier 1 Capital (l1) 4,615, Investments not deducted from RE (s) 3,887, Other Investments 9,799, Funding instruments issued by institution authorized for Banco Central do Brasil deducted from PR (l2) 2,643, Other 7,156, Abroad 29,008 29,008 Goodwill (e2) 3, Other 25, Other investments 232, ,511 (Accumulated impairment) (19,150) (19,150) Property and equipment 7,253,219 7,345,560 Land and buildings 8,196,705 8,201,197 Other property and equipment 9,624,512 9,796,126 (Accumulated depreciation) (10,567,998) (10,651,763) Property and equipment by leases (1) 255, Leased assets 344, (Accumulated depreciation) (89,203) -- Intangible 6,281,160 6,294,092 Intangible assets 14,173,394 14,203,355 Constituted from October 1, 2013 (f1) 9,585, Constituted before October 1, 2013 (f2) (n1) 4,587, (Accumulated amortization) (7,892,234) (7,909,263) Intangible assets amortization constituted from October 1, 2013 (f3) (3,720,969) -- Intangible assets amortization constituted before October 1, 2013 (f4) (n2) (4,171,265) -- TOTAL ASSETS 1,448,374,133 1,450,252,875 (1) Leasing transactions were considered based on the financial method, and the amounts were reclassified from the heading of leased assets to the heading of leasing transactions, after deduction of residual amounts received in advance.

23 Risk Management Report 2Q18 23 Reference in RE Prudential Conglomerate 2Q18 Disclosed Financial Statements In thousands of Reais LIABILITIES CURRENT LIABILITIES AND LONG-TERM LIABILITIES 1,347,978,403 1,347,180,397 Deposits 475,543, ,538,418 Demand deposits 66,785,146 66,780,241 Savings deposits 167,089, ,089,234 Interbank deposits 30,790,106 30,790,106 Time deposits 210,710, ,709,870 Other deposits 168, ,967 Securities Sold Under Repurchase Agreements 430,834, ,111,690 Own portfolio 47,863,200 41,140,889 Third-party portfolio 382,970, ,970,801 Funds from Acceptance and Issuance of Securities 131,101, ,282,481 Bonds backed by real estate, mortgage and other credits 105,912, ,912,894 Foreign securities 25,062,612 28,243,427 Certificates of structured operations 126, ,160 Interbank Accounts 2,354,202 2,354,202 Interdepartmental Accounts 3,143,081 3,143,081 Thrid-party funds in transit 3,142,945 3,142,945 Internal transfers of funds Borrowings 23,386,992 23,386,992 Domestic Onlending - Official Institutions 77,542,939 77,542,939 National Treasury 158, ,633 BNDES 24,320,845 24,320,845 Caixa Econômica Federal 28,102,921 28,102,921 Finame 17,507,627 17,507,627 Other institutions 7,452,913 7,452,913 Foreign Onlending Derivative Financial Instruments 1,387,583 1,387,583 Other Liabilities 202,684, ,432,533 Billing and collection of taxes and contributions 2,780,537 2,780,537 Foreign exchange portfolio 14,026,605 14,026,605 Shareholders and statutory distributions 1,559,263 2,071,395 Taxes and social security 11,411,291 11,911,463 Deferred tax liabilities associated to defined benefit pension funds assets (h2) 1247, Deferred tax liabilities deducted of the deferred tax assets value (k2) 1,361, Other 8,802, Securities trading 1,231,782 1,208,782 Financial and development funds 15,946,554 15,947,513 Special operations 2,216 2,216 Subordinated debts 51,993,147 51,993,147 In accordance with regulations preceding the CMN Resolution No.4,192/2013 as Tier II (FCO) 29,336, In accordance with regulations preceding the CMN Resolution No.4,192/2013 as Tier II (q) (v) 22,336, Other Subordinated debts 320, Equity and debt hybrid securities 4,138,148 4,138,148 In accordance with regulations preceding the CMN Resolution No.4,192/2013 as Additional Tier 1 Capital (o) (u) 3,277, Other,860, Debt instruments eligible as capital 28,678,127 28,678,127 Instruments eligible as Additional Tier 1 Capital (n) 20,724, Instruments eligible as Tier II 7,953, Instruments considered in RE after applying reducer (p) 3,777, Value of REdisregarded due to application of the reducer 4,175, Other liabilities 70,916,333 72,674,600 DEFERRED INCOME 434, ,648 Shareholder's Equity 99,961, ,637,831 Capital (a1) 67,000,000 67,000,000 Local residents 52,044,238 52,044,238 Domiciled abroad 14,955,762 14,955,762 Instrument Qualifying as Common Equity Tier 1 Capital (a2) 8,100,000 8,100,000 Capital Reserves (c1) 14,692 14,692 Revaluation Reserves (c2) 2,336 2,336 Profit Reserves (b1) 39,163,283 39,163,283 Accumulated Other Comprehensive Income (c3) (13,128,616) (13,128,616) Retained earnings/accumulated losses (Treasury Shares) (i) (1,843,213) (1,843,213) Noncontrolling Interests (d) 652,601 3,329,349 TOTAL LIABILITIES 1,448,374,133 1,450,252,875

24 3.2 Composition of the Prudential Conglomerate The following table shows the institutions that comprise the Prudential Balance Sheet: Risk Management Report 1Q18 24 Table 2 - Composition of the Prudential Conglomerate 2Q18 1Q18 4Q17 3Q17 2Q17 Total Total Total Total Activity Equity Equity Equity R$ Thousand Assets Assets Assets Assets Equity Total Assets Equity Financial Institutions Banco do Brasil S.A. - Agências no País e no Exterior (1) Banking 1,592,046, ,016,926 1,537,860,292 97,596,107 1,486,357,847 95,265,169 1,517,191,663 89,707,998 1,570,527,817 87,270,925 Banco do Brasil - AG (2) Banking 77,326, ,343 67,905, ,084 66,486, ,351 65,123, ,940 66,990, ,910 BB Leasing S.A. - Arrendamento Mercantil (2) Leasing 11,999,280 4,613,283 14,051,767 4,602,590 16,027,980 4,548,114 20,171,512 4,527,948 19,814,515 4,474,015 BB Securities Asia Pte. Ltd. (2) Broker 32,566 31,195 27,317 25,615 26,983 24,582 23,146 22,154 22,473 21,837 Banco do Brasil Securities LLC. (2) Broker 292, , , , , , , , , ,077 BB Securities Ltd. (2) Broker 523, , , , , , , , , ,513 BB USA Holding Company, Inc. (2) Holding Brasilian American Merchant Bank (2) Banking 1,692,786 1,644,416 1,594,360 1,551,066 1,614,969 1,572,586 1,528,322 1,488,652 1,880,531 1,505,833 Banco do Brasil Americas (2) Banking 2,517, ,139 2,058, ,595 1,933, ,284 1,772, ,192 1,796, ,046 Besc Distribuidora de Títulos e Valores Mobiliários S.A. (2) Asset Management 7,018 6,978 7,066 7,032 7,130 7,084 7,201 7,145 7,229 7,176 Banco Patagonia S.A. (2) Banking 15,505,080 1,590,603 16,212,625 2,078,106 17,492,254 2,052,804 15,695,931 1,926,342 18,729,549 1,941,962 BB Banco de Investimento S.A. (2) Investment Bank 7,926,513 3,150,807 8,008,825 3,421,628 8,014,967 3,074,109 7,652,194 3,496,265 7,408,979 3,014,376 BB Gestão de Recursos-Distribuidora de Títulos e Valores Asset (2) Mobiliários S.A. Management 1,427, , , , , , , , , ,633 Consortium Manager BB Administradora de Consórcios S.A. (2) Consortium 631, , , , , , , , , ,078 Payment Institutions BB Administradora de Cartões de Crédito S.A. (2) Service Rendering 104,397 29,675 90,680 25, ,309 19, ,464 33, ,962 28,905 Securitization Companies Ativos S.A. Securitizadora de Créditos Financeiros (2) Credits Acquisition 1,023, ,140 1,202, ,971 1,171, ,410 1,160, ,465 1,104, ,860 BB Asset Management Ireland Limited (2) Credits Acquisition 3,320 2,511 4,033 2,281 3,591 2,178 2,357 1,782 2,443 1,857 Other Institutions Fundo Fenix (3) Investment Fund ,296,843 1,289,213 1,287,756 1,287,507 1,300,658 1,295,880 1,298,056 1,294,113 Fundo Compesa (3) Investment Fund 107, , , , , , , , , ,337 BB Fund Class A (3) Investment Fund 8,731 8,684 10,235 10,178 10,224 10,181 10,584 10,545 9,316 9,284 BB Fund Class D (3) Investment Fund 104, ,865 92,295 91,837 92,061 91,759 88,738 88,659 91,472 91,347 BB DTVM Ações Saúde Bem Estar (3) Investment Fund 8,540 8,534 9,923 9,917 10,559 10, BB DTVM MM Multiestratégia LP (3) Investment Fund 10,078 10,072 10,486 10,465 10,235 10, (1) Leader Institution. (2) Subsidiaries. (3) The investment funds in which the entities that compose a prudential conglomerate, under any form, take or retain substantial risks and benefits must be included in the financial statements of the Prudential Conglomerate.

25 Risk Management Report 1Q Composition of the Disclosed Balance Sheet As follows, the institutions included in the scope of consolidation of the disclosed balance sheet, segregated by business segments: Table 3 - Composition of the Disclosed Balance Sheet Activity 2Q18 1Q18 4Q17 3Q17 2Q17 Total Total Total Total Equity Equity Equity Equity Total Assets Equity Assets Assets Assets Assets R$ Thousand Banking Segment Banco do Brasil S.A. - Agências no País e no Exterior (1) Banking 1,592,046, ,016,926 1,537,860,292 97,596,107 1,486,357,847 95,265,169 1,517,191,663 89,707,998 1,570,527,817 87,270,925 Banco do Brasil - AG (2) Banking 77,326, ,343 67,905, ,084 66,486, ,351 65,123, ,940 66,990, ,910 BB Leasing S.A. - Arrendamento Mercantil (2) Leasing 11,999,280 4,613,283 14,051,767 4,602,590 16,027,980 4,548,114 20,171,512 4,527,948 19,814,515 4,474,015 BB Securities Asia Pte. Ltd. (2) Broker 32,566 31,195 27,317 25,615 26,983 24,582 23,146 22,154 22,473 21,837 Banco do Brasil Securities LLC. (2) Broker 292, , , , , , , , , ,077 BB Securities Ltd. (2) Broker 523, , , , , , , , , ,513 BB USA Holding Company, Inc. (2) Holding Brasilian American Merchant Bank (2) Banking 1,692,786 1,644,416 1,594,360 1,551,066 1,614,969 1,572,586 1,528,322 1,488,652 1,880,531 1,505,833 Banco do Brasil Americas (2) Banking 2,517, ,139 2,058, ,595 1,933, ,284 1,772, ,192 1,796, ,046 Banco Patagonia S.A. (2) Banking 15,505,080 1,590,603 16,212,625 2,078,106 17,492,254 2,052,804 15,695,931 1,926,342 18,729,549 1,941,962 Investment Segment BB Banco de Investimento S.A. (2) Investment Bank 7,926,513 3,150,807 8,008,825 3,421,628 8,014,967 3,074,109 7,652,194 3,496,265 7,408,979 3,014,376 Fund Management Segment BB Gestão de Recursos-Distribuidora de Títulos e Valores Mobiliários S.A. Besc Distribuidora de Títulos e Valores Mobiliários S.A. (2) (2) Asset Management Asset Management 1,427, , , ,560 1,641, ,638 1,333, ,148 1,295, ,633 7,018 6,978 7,066 7,032 7,130 7,084 7,201 7,145 7,229 7,176 Insurance, Private Pension Fund and Capitalization Segment BB Seguridade Participações S.A. (2) Holding 9,492,890 7,957,658 8,507,341 8,495,208 9,519,051 7,597,003 8,604,484 8,588,350 8,956,094 7,382,697 BB Corretora de Seguros e Administradora de Bens S.A. (2) Broker 2,505,674 47,074 2,343, ,444 2,608,678 47,074 2,698, ,851 2,805,182 47,069 BB Seguros Participações S.A. (2) Holding 6,722,068 6,625,245 6,395,938 6,385,614 6,646,808 6,604,923 6,601,973 6,478,821 6,779,610 6,675,562 Payment Methods Segment BB Administradora de Cartões de Crédito S.A. (2) Service Rendering 104,397 29,675 90,680 25, ,309 19, ,464 33, ,962 28,905 BB Elo Cartões Participações S.A. (2) Holding 6,668,204 6,604,525 6,469,420 6,430,784 6,920,825 6,290,007 6,773,019 6,659,135 6,618,929 6,517,470 Other Segments Ativos S.A. Securitizadora de Créditos Financeiros (2) Credits Acquisition 1,023, ,140 1,202, ,971 1,171, ,410 1,160, ,465 1,104, ,860 Ativos S.A. Gestão de Cobrança e Recuperação de Credits (2) Crédito Acquisition 1,888 1,526 3, , , , BB Administradora de Consórcios S.A. (2) Consortium 631, , , , , , , , , ,078 BB Tur Viagens e Turismo Ltda. (2) (3) Tourism 44,628 31,350 47,591 32,358 42,174 (10,139) 39,175 (7,776) 39,515 (5,149) BB Asset Management Ireland Limited (2) Credits Acquisition 3,320 2,511 4,033 2,281 3,591 2,178 2,357 1,782 2,443 1,857 BB Tecnologia e Serviços (2) IT 478, , , , , , , , , ,380 (1) Leader Institution. (2) Subsidiaries. (3) The Financial Statements refers to May, 2018.