December 31, 2016 Consolidated Financial Statements

Transcription

1 December 31, 2016 Financial Statements

2 BANCO VOTORANTIM S.A. Management report To the Shareholders, In compliance with legal and statutory provisions, we are presenting the Management Report and the Individual and Financial Statements of Banco Votorantim S.A. () for the periods ended December 31, 2016 and 2015, accompanied by the respective notes to the statements and the independent auditors report. 1. Economic Environment and ing Sector The second six-month period started with high expectations, with most of the market agents confident that the new economic policy would put an end to Brazil's recession by the end of the year. However, the most recent economic indicators evidence the difficulties faced by the companies, which continue to experience a low demand for their products, and the difficulties faced by individuals, who are still deep in debt and worried about the rising unemployment rate. Consequently, the initial optimism had to be adjusted, and the GDP projection for 2017 was reduced to 0.5%. On the other hand, the persistence of the recession led to progress in certain structural reforms which are of great importance to Brazil, making it possible for Brazilian assets to perform better than the assets of other emerging countries. The Brazilian currency (real) remained practically stable in the second six-month period - closing the year at R$3.26 per US dollar, despite the possibility of a more accelerated interest rate increase in the United States. The gains on commodity prices, with the prospect of an acceleration in the pace of world economic growth, also helped to create a more favorable environment for local assets. It is worth emphasizing that Ibovespa gained 18.1% in the second half of the year. In view of the above, the scenario for the banking industry in Brazil remained challenging. In the corporate segment, delinquency increased from 2.6% at the end of Dec.15 to 3.5% in Dec.16, but decreased from 4.2% to 4.0% in the individual client segment. Despite the growth observed in the stock of credit of the financial system over the last two months of the year, there was a nominal decrease of 3.5% over the last twelve months. In the auto finance loan segment, a segment in which Banco Votorantim is one of the market leaders, credit also decreased in the year (-11.1%), but showed signs of a recovery in Dec.16. The recovery of economic activity tends to benefit from the monetary policy. The most substantial decrease in inflation, which closed the year in line with the official target and expectations, coupled with progress in the approval of fiscal adjustment measures, paved the way for interest rate cuts. After ending the year at 13.75%, the benchmark interest rate (SELIC) was reduced to 13.00% in January 17, and the Brazilian Central (BACEN) announced further cuts. If these further cuts in the benchmark interest rate (SELIC) occur and the consumers' uncertainties abate, the expectation is for credit to gain momentum and Brazil to resume growth in the medium- and long-term. However, in the short term, conditions must be created to enable the necessary reforms to restore Brazil's economic dynamics.

3 2. Main Information position Variation RESULTS (R$ Million) Net Interest Income (a) 5,135 5, % Allowance for loan losses - ALL (b) (3,061) (2,467) -19.4% Gross Income from Financial Operations (a - b) 2,074 2, % Income from services and banking fees , % Administrative and personnel expenses (2,332) (2,378) 2.0% Operating income (Loss) (244) Provision for income tax and social contribution 936 (257) - Net income (Loss) % MANAGEMENT INDICATORS (%) Return on Average Equity 2 (ROAE) p.p. Return on Average Assets 3 (ROAA) p.p. Basel Ratio p.p. Tier I p.p. BALANCE SHEET (R$ Million) Total assets 110, , % Loan portfolio 50,984 47, % Wholesale segment 17,377 14, % Consumer Finance segment 33,606 33, % Guarantees provided 9,468 7, % Funding sources 77,953 67, % Shareholders' equity 7,617 8, % Capital (Basel Ratio) 10,742 9, % LOAN PORTFOLIO QUALITY INDICATORS (%) 90-day NPL/ Loan portfolio p.p. ALL provisions / 90-day NPL p.p. ALL provisions / Loan portfolio p.p. OTHER INFORMATION AuM 4 (R$ Million) 47,418 53, % 1. Includes banking fees income; 2. Ratio between net income and average equity of the period. This ratio is annualized; 3. Ratio between net income and average assets of the period. This ratio is annualized. 4. Includes onshore funds (ANBIM A criteria) and private clients assets (fixed income, equities and offshore funds).

4 3. Business Performance Transactions of the are conducted in the context of a set of subsidiaries that operate in an integrated manner in the financial market, including in relation to risk management. These subsidiaries include BV Financeira, BV Leasing, Votorantim Asset Management (VAM) and Votorantim Corretora de Títulos e Valores Mobiliários. Having Votorantim Group and Banco as its shareholders, Banco Votorantim is one of the largest Brazilian privately-held banks in total assets and also in loan portfolio, and has a diversified wholesale bank businesses (CIB), consumer finance and wealth management business portfolio was a year marked by a rather challenging macroeconomic scenario, but, despite that, the continued to focus on the rolling out of its strategic plan, based on the increase of the profitability of businesses and operational efficiency, as well as a diversification of revenues. The main highlights of the year were: 1. Net income of R$ 426 million, equivalent to annualized return on shareholders equity of 5.2%. 2. Consistent revenue generation. Gross earnings from financial intermediation amounted to R$ 2,753 million in 2016, growth of 32.8% compared to It is worth emphasizing that total fee income/banking fees income grew 16.8% in 2016/ Maintenance of conservative approach to credit. The balance of the expanded credit portfolio closed Dec.16 at R$ 60.8 billion, decreasing 7.3% in the last 12 months especially due to a maintenance of the focus on the profitability and quality of assets. However, it should be mentioned that the extended loan portfolio grew by 2.5% in the second semester. 4. Delinquency under control. Despite the presence of a challenging macroeconomic scenario, delinquency above 90 days of the on loan portfolio ended Dec.16 at 5.5%, 0.2 p.p. lower than in Dec.15. The delinquency of the Consumer Finance portfolio decreased 0.2 p.p. compared to Dec.15, to 5.1%, resulting in an improvement in the quality of the portfolio of Vehicles, whose delinquency reduced 0.2 p.p. in the last 12 months, while the average market delinquency of this segment grew 0.4 p.p. in the same period. 5. Effective cost management. Administrative and personnel expenses increased by 2.0% in 2016/2015 comparison, compared to the IPCA of 6.3% in the last year. As a result of a strict control of costs, the Efficiency ratio for the last twelve months had an improvement of 38.8%. These results reflect the developments achieved in all the s businesses. In 2016, the Corporate Segment continued to focus on increasing the profitability of capital. By means of long-term, agile relationships, and efficient capital management (risk/return ratios), the Corporate provided integrated financial solutions and adequate to its clients needs. Aligned with such strategy, the expanded credit portfolio (including guarantees provided and private securities) of the segment ended Dec.16 with a balance of R$ 27.4 billion, compared to R$ 31.9 billion in Dec.15. Votorantim Corretora continued to focus on the BM&FBovespa trading desk services, macroeconomic and political research, as well as on Corporate Access. In Dec.16, the discontinued its Equity Research activities, without changing the quality of its services and of the team that serves companies and investors. Votorantim Wealth Management & Services (VWM&S), in turn, maintained the focus on being one of the best structurers and managers of high value added products. VWM&S occupied 9 th place in Anbima s ranking of managers, ending Dec.16 with R$ 53.8 billion in AuM (Asset under Management), a growth of 13.4 than in Dec.15.

5 In Consumer Finance, the maintained its focus on guaranteeing the quality and profitability of the new vintages, ending Dec.16 with a loan portfolio of R$ 33.5 billion (R$ 33.9 billion in Dec.15). Despite the challenging macroeconomic environment, the has been providing auto finance loan origination with quality and scale, a result of the continuous refinement of the credit policies, processes and models. The volume of auto finance loan origination totaled R$ 13.3 billion in 2016, with 82% relating to used light vehicles, a sector in which the has a history of leadership and recognized competence. In addition, the improved the policies, processes and models for the loan concession in the Consumer Finance Segment, adopting more conservative terms and down payment requirements. In the payroll loans business, the continued to prioritize the refinancing of payroll loans to retirees and pensioners, who have a better risk profile, besides acting selectively in private and public agreements. The payroll loans portfolio ended Dec.16 at R$ 3.6 billion, compared to R$ 4.7 billion in Dec.15. It is worth mentioning that Promotiva S.A. a subsidiary of the created to act as a promotor of sales of loan assets directly to the shareholder Banco do Brasil started its wide-scale operation in 2016 and generated around R$ 400 million per month in payroll loans. Aligned with the strategy of growing revenues in a diversified manner, the credit card portfolio was up 26.4% over Dec.15, and ended Dec.16 at R$ 1.6 billion, with more than 3.6 million cards issued. Also, the has expanded sales of insurance for credit insurance and auto, whose revenues from brokerage totaled R$ 256 million in 2016, a growth of 19.6% compared to Sales are handled through the subsidiary Votorantim Corretora de Seguros, and the result of this operation, as well as the Promotiva, is recognized under the equity method of accounting. In 2016, the maintained a conservative attitude towards loan concession, resulting in a lower demand for funding. In this context, the improved the profile of funding sources, expanding the share of more stable funding instruments, such as bills (financing bills, real estate credit bills and agribusiness credit bills) and assignments of receivables with recourse, which accounted for a half (R$ 34.3 billion) out of the total funding sources in Dec.16. In terms of liquidity, the ended Dec.16 with cash at a record level, more than sufficient to fully cover our funding with daily liquidity. And the Managerial LCR, which is the ratio between the balance of highly-liquid assets and the total cash outflows expected for the next thirty days - was 251% at the end of Dec.16, a figure which exceeds the minimum regulatory requirement (70%). Regarding capital, the Basel ratio ended Dec.16 at above the regulatory minimum of 10.5% - and the Tier I Capital at 11.2%, higher than in Dec.15 at 2.7 p.p. and composed entirely of Principal Capital. For further information on the consolidated economic and financial performance of the, see the 4Q16 Earnings Release on the Investor Relations website ( We emphasize that Banco Votorantim, in compliance with the provisions of Article 8 of Bacen Circular No. 3,068/01, declares that it has the necessary financial capacity and intention to hold to maturity the securities classified in the held to maturity category, in the amount of R$ 7.1 billion, representing 24.7% of the total securities.

6 4. Rating agencies Banco Votorantim is rated by international rating agencies and the ratings assigned reflect its operating performance, financial soundness and the quality of its management, in addition to other factors related to the financial sector and economic environment in which the company is operating. In Feb.16, Moody s rating agency downgraded Brazil s issuer rating and debt notes rating to Ba2 with negative perspective, impacting the s long-term local currency deposits rating from Ba1 to Ba2, and long-term foreign currency from Ba1 to Ba3. In May.16, the agency reviewed its national scale methodology, and the s rating was therefore changed from Aa2.br to Aa3.br. In Feb.16, the risk rating agency Standard & Poor s (S&P) lowered Brazil s sovereign rating from BB+ to BB. This review had an impact on the ratings of several financial institutions, including that of Banco Votorantim: the global scale long-term rating was reviewed as BB, while the national scale long-term rating was reviewed from braa- to bra+. RATINGS AGENCIES Local Currency IDR Internacional Foreign Currency IDR National Local Currency IDR Brazil Sovereign rating Moody's Long-Term Ba2 Ba3 Short-Term NP NP Aa3.br BR-1 Ba2 Standard & Poor's Long-Term Short-Term BB B bra+ bra-1 BB 5. Corporate Governance The current corporate governance model is continuously improved for more robustness and transparency and to ensure fast decision making, which is a characteristic quality of the. The s governance is shared by the Votorantim Group shareholders and Banco do Brasil, both enjoying parity of participation in the Board of Directors and its advisory committees (Finance & Products and Marketing), and in the following three statutory bodies: Fiscal Council, which is an independent body created to supervise the administrative management acts; Audit Committee, a body whose duties include evaluating the effectiveness of the internal control system and of the internal and independent audits, besides reviewing and issuing an opinion on the quality of the financial statements; and Compensation and Human Resources Committee, body that monitors matters related to the Management Compensation Policy and HR practices. Moreover, the s administrative management is conducted by the Board of Executive officers and its respective internal bodies: Executive Committee and other subordinated Operating Committees, always involving the s executive leaders. 6. Personnel Management The Human Resources and Organizational Culture (HR) area acts as a strategic partnership in the development of actions that support business growth, besides providing the breakdown of institutional guidelines for all the employees, promoting actions geared towards human capital management and the maintenance of values and organizational culture. Our pillars are: Environment, represented by a place with values aligned with the organization s purpose.

7 Bond, which reflects the employees ties to the organization. Excellence, support with the best tools, modern and innovative practices of Human Resources. At the end of Dec.16, the number of employees totaled 3,937, with 53% of men and 47% of women. Besides investing in the hiring of talented professionals as a basis for our staffing framework, the seeks to attract professionals with competitive differentials aligned with the organizational culture and values. During 2016, the increased its onsite training sessions and incentivized self-development, providing technical development and the development of topics related to the Organizational Culture. Our Culture, which defines the way we are and act, is based on four attributes: Clients, Leadership, Results and Governance. Managing performance and handling the management of our talents are both absolutely necessary to achieve s goals. The current Performance Management model supports the execution of the organizational strategy by means of the joint definition of targets and evaluation of corporate competencies by the leaders. This model values the feedback and feedforward practice to support the development of professionals, always encouraging the s employees to act as protagonists in the management of their careers. Expressing a genuine concern to monitor and maintain a pleasant working environment, the values cooperation between people and seeks to build relationships of trust based on ethics, transparency, and mutual respect. Compensation practices are based on a meritocratic model, recognizing and differentiating individual performance and its impact on the collective result. The model aims at aligning the interests of both shareholders and professionals, and stimulates the seeking of sustainable results. 7. Sustainability According to Banco Votorantim, Sustainability is the construction of the long-term relationship through actions targeting the economic wellbeing of society and the amplified management of risks and opportunities. These three pillars set the directions to be taken and are present in all the areas and businesses of the organization. Aligned with these concepts, the key focal points of activity of the Institution related to the topic are: Business Sustainability, Financial Education, Social Responsibility and Impact of Activities. Business Sustainability In the second half of 2016, a study on the climate footprint of two investment funds of Votorantim Asset Management was conducted. After this study was concluded, the emissions of the Fia Votorantim Sustentabilidade em Ações Investment Fund referring to 2015 were offset (1.104 thousand tco2e (tonnes of carbon dioxide equivalent)). The is a pioneer in the offsetting of greenhouse gases of investment funds. Financial Education Banco Votorantim is committed to promoting financial education in the relationship with its stakeholders. In the second half of 2016, the provided training for 753 employees from Consumer Finance Segment areas to pass on knowledge on this topic to the clients. The focus was the appropriate supply of products and financial guidance.

8 Two other actions aimed at the society were held: a financial education lecture at the Querô Project, a project based in Santos (state of São Paulo) which is supported by the, and mini financial education workshops at the race and walk sponsored by the in the city of Rio de Janeiro. Social Responsibility Banco Votorantim launched its online volunteering platform in May.16. Throughout the year, a total of 32 actions were organized by the, with the help of 121 volunteer employees, benefiting 8963 people. In Dec.16, the made the capital contributions to the projects that will be developed throughout A total of R$ 5.1 million was allocated to 23 projects under tax incentive laws. Impact of Activities The actions were aimed at the Management of the Waste generated by the 's buildings. The following actions were carried out: (i) visits to service providers; (ii) monitoring of the waste disposal process in administrative buildings; (iii) documentation control; (iv) creation of a solid waste work group; and (v) research on the solid waste disposal process at the branches. The objective is to improve the internal management of the waste generated by the, focusing on a reduction of waste and its proper disposal. Institutional At the end of 2014, the approved its Sustainability and Social Responsibility Policy, a document in its 4th version and aims at guiding the behavior of all companies of the Financial Economic Votorantim, considering their specific needs and the legal and regulatory aspects to which they are subject. During 2016, the action plan that covers actions required for the adaptation of the organizational and operational structure of the institution was put into practice, as well as the routines and the procedure to be executed in compliance with the guidelines of the policy, according to a schedule specified by the institution. In the second half of 2016, the was featured in the Exame Sustainability Guide. The was recognized in the "Relationship with Clients and Consumers" category, an award granted to companies that achieve excellence in terms of the quality of their Ombudsman's Office. 8. Acknowledgment The Management of Banco Votorantim is grateful to its clients and shareholders for their trust and to the employees for their continuous effort and dedication. São Paulo, February 9, Executive Board

9 Financial Statements on December 31, 2016 CONTENTS INDEPENDENT AUDITOR S REPORT ON THE FINANCIAL STATEMENTS 3 FINANCIAL STATEMENTS BALANCE SHEET.. 9 STATEMENT OF INCOME 10 STATEMENT OF CHANGES IN SHAREHOLDER S EQUITY STATEMENTE OF CASH FLOWS STATEMENT OF VALUE ADDED NOTES TO THE FINANCIAL STATEMENTS THE CONGLOMERATE AND ITS OPERATIONS PRESENTATION OF FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS INTERBANK FUNDS APPLIED SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS INTERBANK RELATIONS LOAN OPERATIONS FOREIGN EXCHANGE PORTFOLIO OTHER RECEIVABLES - SUNDRY OTHER ASSETS INVESTMENTS PROPERTY FOR USE INTANGIBLE ASSETS DEPOSITS AND MONEY MARKET REPURCHASE COMMITMENTS BORROWINGS AND ONLENDINGS ACCEPTANCES AND ENDORSEMENTS OTHER LIABILITIES OTHER OPERATING INCOME/EXPENSES NON-OPERATING INCOME SHAREHOLDERS EQUITY TAXES RELATED PARTIES EMPLOYEE BENEFITS CONTINGENT ASSETS AND LIABILITIES AND LEGAL, TAX AND SOCIAL SECURITY OBLIGATIONS RISK AND CAPITAL MANAGEMENT OTHER INFORMATION SUBSEQUENT EVENTS

10 KPMG Auditores Independentes Rua Arquiteto Olavo Redig de Campos, 105, 6º andar - Torre A São Paulo/SP - Brasil Caixa Postal CEP São Paulo/SP - Brasil Telefone +55 (11) , Fax +55 (11) Independent auditors' report on individual and consolidated financial statements To The Board of Directors and Shareholders of Banco Votorantim S.A. São Paulo - SP Opinion We have audited the individual and consolidated financial statements of Banco Votorantim S.A. ( ) referred to as and, respectively, which comprise the balance sheet as at December 31, 2016 and the respective statements of income, changes in shareholder s equity and cash flows, for the six month period and year then ended, and notes, comprising the summary of the significant accounting practices. In our opinion, the accompanying individual and consolidated financial statements present fairly, in all material respects, the individual and consolidated financial position of Banco Votorantim S.A. as of December 31, 2016, the individual and consolidated financial performance of its operations and its individual and consolidated cash flows for the six month and year then ended, in accordance with the accounting practices adopted in Brazil, applicable to institutions authorized to operate by the Central of Brasil - Bacen. Basis for opinion We conducted our audit in accordance with Brazilian and international standards on auditing. Our responsibilities, under those standards, are further described in the The Auditor s responsabilities for the audit of individual and consolidated financial statements. We are independent of the, in accordance with the ethical requirements established in the Accountant s Professional Ethics Code and the Professional Standards issued by the Federal Accounting Council (CFC), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those that, in our professional judgment, were of most significance in our audit of the current year. These matters were addressed in the context of our audit of the individual and consolidated financial statements as a whole, and in forming our opinion thereon, and, we do not express a separate opinion on these matters. KPMG Auditores Independentes, uma sociedade simples brasileira e firmamembro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ( KPMG International ), uma entidade suíça. KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 3

11 Allowance for loans losses As disclosed in notes 3g and 8, for purposes of measuring the allowance for loan losses, the classifies its loans (which comprise loans, leasing, advances on foreign exchange contracts and other receivables with credit characteristics) into nine risk levels, taking into account and assumptions such as late payments, economic and financial position, indebtedness level, economy sector, guarantee characteristics and other factors and assumptions of the current regulation, with rating "AA" being the minimum risk level and "H" the maximum risk level. The initially applies the loss percentages established in the regulation for each risk level for purposes of calculating the allowance and further increases the allowance, when necessary, its estimates based on internal evaluations. The classification of loans into risk levels requires the to make assumptions and judgments, based on its internal risk classification methodologies, and the allowance for loan losses represents the s best estimate of the portfolio losses. Due to the relevance of loans and the uncertainties and judgements related to the of the allowance for loan losses and the impact that any changes in assumptions may generate on the recorded amounts in the individual and consolidated financial statements, we considered this as a significant matter in our audit. How our audit addressed this matter We have evaluated the design, implementation and operating effectiveness of the relevant internal controls, manual and automated, implemented by the and related to the processes of approval, recording, classification and updating of risk levels of loans, leasing, advances on foreign exchange contracts and other receivables with credit characteristics and the main assumptions used for calculating the allowance for loan losses. On a sampling basis, we evaluated whether the met the minimum requirements established by the current regulations related to the determination of the allowance for loan losses and whether the disclosures in the individual and consolidated financial statements described in notes 3g and 8 are in accordance with the applicable accounting practices. Based on the evidence obtained from the procedures described above, we considered the level of provisioning adequate in the context of the individual and consolidated financial statements taken as a whole. Market value of financial instruments As disclosed in Notes 3e, 3f and 6, the has significant balances of derivative financial instruments and securities measured at market value. For financial instruments that are not actively traded and those which market prices and parameters are not available, the determination of market value is subject to a higher uncertainty level, to the extent the makes significant judgments to estimate such amounts. Therefore, we considered the market value measurement of these financial instruments as a significant matter in our audit. How our audit addressed this matter We have tested the design, implementation, and operating effectiveness of the relevant internal controls, manual and automated, implemented by the to mitigate the risk of material misstatement in the individual and consolidated financial statements arising from uncertainties in the market value measurement of financial instruments, which depend on the internal models. For a sample of financial instruments for which market value measurement parameters are not observable, with the technical support of our specialists with knowledge of financial instruments, we evaluated the adequacy of the models developed by the for determining market values and the reasonableness of data, the parameters and information included in the pricing models used, and recalculated the KPMG Auditores Independentes, uma sociedade simples brasileira e firmamembro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ( KPMG International ), uma entidade suíça. KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 4

12 corresponding market values of these operations. We also evaluated whether the disclosures in the individual and consolidated financial statements, in Notes 3e, 3f and 6, are in accordance with the applicable accounting practices. Based on the evidence obtained from the procedures described above, we considered the market value measurement of financial instruments adequate in the context of the individual and consolidated financial statements taken as a whole. Provisions and contingent liabilities - labor, civil and tax As disclosed in Notes 3n and 25, the recognizes provision for labor, civil and tax claims arising from the normal course of its operations. Estimates of the outcome and the financial effect are determined by the nature of the claims and by the 's judgment, based on the opinion of the legal advisors, on the elements of the process, complemented by the experience of similar claims. Due to the relevance, complexity and judgment involved in the evaluation, measurement, timing of recognition definition and disclosures related to Provisions and contingent Liabilities and Provisions, we consider this as a significant matter in our audit. How our audit addressed this matter We have evaluated the design, implementation and operating effectiveness of the relevant internal controls, manual and automated, implemented by the, related to the process identification, risk evaluation, measurement of provision, process management and closing steps. We have evaluated the adequacy of the measurement and recognition of the provision and disclosure of contingent liabilities. By sampling, we performed audit procedures related to the amounts of constitutions and reversals and regarding the adequacy of the provision. We have evaluated the assumptions of the procedural risk of causes for relevant matters and values of the by evaluating the criteria adopted in the measurement methodology for the amounts recognized and/or disclosed, as well as historical data and information and analyzed the changes in the assumptions in relation to previous periods, when applicable. We also have evaluated whether the disclosures made in the individual and consolidated financial statements, disclosed in Notes 3n and 25, are in accordance with the applicable accounting practices. Based on the evidence obtained from the procedures described above, we considered the level of provisioning adequate in the context of the individual and consolidated financial statements taken as a whole. Projection of future results for realization of deferred tax assets The individual and consolidated financial statements include assets related to deferred tax assets (Notes 3m, 22e and 22f), which realization depends on future profitability based on the business plan and budgets prepared by the and approved at its governance levels. To prepare the projections of future results for purposes, among others, of verifing the realization of assets, the adopts assumptions based on its corporate strategies and the macroeconomic scenario, such as interest rate, inflation rate, among others, considering the current and past performance and the expected growth in the market it acts. Due to the relevance of the balances related to these assets (deferred tax assets), as they are based on future profitability estimated and the impact that eventual changes in the assumptions would have on the amounts recorded in the individual and consolidated financial statements, we have considered this as a significant matter in our audit. KPMG Auditores Independentes, uma sociedade simples brasileira e firmamembro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ( KPMG International ), uma entidade suíça. KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 5

13 How our audit addressed this matter We have evaluated the design, implementation and effectiveness of the relevant internal controls implemented by the related to the process for determining and approving the assumptions used to prepare the projection of future results, which is the basis for evaluating the realization of assets. With the support of our corporate finance specialists, we evaluated the reasonableness of the assumptions used by the, recalculated the projections based on such assumptions, and if they were in compliance with current regulatory guidelines. With the support of our tax specialists, we evaluated the bases of calculation in which the current tax rates are applied and the study of the capacity to realize the deferred tax assets. We also have evaluated whether the disclosures in the individual and consolidated financial statements described in notes 3m, 22e and 22f are in accordance with the applicable accounting practices. Based on the evidence obtained from the procedures described above, we considered the measurement of the deferred tax assets adequate in the context of the individual and consolidated financial statements taken as a whole. Other matters Statements of value added The individual and consolidated statements of value added for the six month and year ended December 31, 2016, prepared under the responsability of s management, that is being presented as supplemental information in relation to the accounting practices adopted in Brazil applicable to institutions authorized to operate by the Central of Brazil Bacen, were subjected to the same auditing procedures described above. For the purposes of forming our opinion, we assess whether these statements are reconciled with the financial statements and accounting records, as applicable, and if their form and content are in accordance with the criteria set forth in Technical Pronouncement CPC 09 - Statement of Value Added. In our opinion, these statements of value added have been properly prepared, in all material respects, in accordance with the criteria set forth in this Technical Pronouncement and are consistent with the individual and consolidated financial statements taken as a whole. Other information that accompany the individual and consolidated financial statements and the auditor s report The s management is responsible for other information that comprises the Management s Report. Our opinion on the individual and consolidated financial statements does not cover the Management s Report and we do not express any form of assurance conclusion thereon. In connection with our audit of the individual and consolidated financial statements, our responsibility is to read the Management s Report, and, in doing so, consider whether the other information is, on all material respects, inconsistent with the individual and consolidated financial statements or with our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Management s Report, we are required to report this fact. We have nothing to report in this regard. Responsibilities of the management and those in charge with governance for the individual and consolidate financial statements Management is responsible for the preparation and fair presentation of individual and consolidated financial statements in accordance with the accounting practices adopted in Brazil applicable to insitutions authorized to operate by Central of Brazil Bacen and for such internal controls as management determines is necessary to enable the KPMG Auditores Independentes, uma sociedade simples brasileira e firmamembro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ( KPMG International ), uma entidade suíça. KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 6

14 preparation of these financial statements that are free from material misstatement, whether due to fraud or error. In preparing the individual and consolidated financial statements, management is responsible for assessing the and its subsidiaries ability to continue as going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the and its subsidiaries or to cease operations, or has no realistic alternative but to do so. Those charged with governance are those responsible for overseeing the s financial reporting process. Auditor s responsibilities for the audit of the individual and consolidated financial statements Our objectives are to obtain reasonable assurance about whether the individual and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Brazilian and international standards on auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these individual and consolidated financial statements. As part of an audit performed in accordance with the Brazilian and international standards on auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identified and assessed the risks of material misstatement of the individual and consolidated financial statements, whether due to fraud or error, designed and performed audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtained an understanding of internal control relevant to the audit to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the s internal control. Evaluated the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Concluded on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether material uncertainty exists related to events or conditions that may cast significant doubt on the s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the individual and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the to cease to continue as a going concern. KPMG Auditores Independentes, uma sociedade simples brasileira e firmamembro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ( KPMG International ), uma entidade suíça. KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 7

15 Evaluated the overall presentation, structure and content of the individual and consolidated financial statements, including the disclosures, and whether the individual and consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtained sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the individual and consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit and, consequently, for our audit opinion. We have communicated with those charged with governance regarding, among other matters, the planned scope, the audit timing and significant audit findings, including any significant deficiencies in internal control that we have identified during our audit. We also have provided those charged with governance with a statement that we have complied with the relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we have determined those matters that were of most significance in the audit of the individual and consolidated financial statements of the current period and are therefore the key audit matters. We have described these matters in our auditors report, unless law or regulation precludes public disclosure about the matter, or when, in extremely rare circumstances, we have determined that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefit of such communication. São Paulo, February 09, 2017 KPMG Auditores Independentes CRC 2SP014428/O-6 (Original report in Portuguese signed by) João Paulo Dal Poz Alouche Accountant CRC 1SP245785/O-2 KPMG Auditores Independentes, uma sociedade simples brasileira e firmamembro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ( KPMG International ), uma entidade suíça. KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 8

16 BALANCE SHEET In December 31, 2016 and December 31, 2015 (In thousands of Reais, unless otherwise stated) Note Nota CURRENT ASSETS 40,339,785 48,432,299 55,614,057 61,610,225 CURRENT LIABILITIES 69,810,393 75,809,492 64,680,704 70,841,194 Cash and cash equivalents 4 56, , , ,915 Deposits 15a 7,904,792 3,059,208 2,782,122 2,627,146 Demand deposits 89,688 87,200 87,991 81,331 Interbank funds applied 5a 23,607,320 27,215,721 17,066,698 16,892,435 Interbank deposits 5,829,814 1,199, , ,942 Money market repurchase commitments 14,702,886 14,851,895 14,702,886 14,851,895 Time Deposits 1,985,290 1,772,800 1,985,290 1,766,873 Interbank deposit investments 8,904,434 12,363,826 2,363,812 2,040,540 Money market repurchase commitments 15c 44,425,550 37,389,486 34,637,971 32,050,247 Securities and Derivative financial instruments 9,308,228 11,097,346 12,518,174 15,691,286 Own portfolio 30,516,941 27,375,338 22,656,894 26,291,499 Own portfolio 6a 1,024,105 4,318,172 9,628,904 10,078,538 Third-party portfolio 11,702,126 8,969,036 9,774,594 4,713,636 Subject to repurchase agreements 6a 6,259,197 4,727, ,730 3,486,611 Free portfolio 2,206,483 1,045,112 2,206,483 1,045,112 Given in guarantee 6a 966,395 1,117,832 1,089,548 1,157,610 Derivative financial instruments 6d 1,185,022 1,264,924 1,453,483 1,299,153 Acceptances and endorsements 17 10,244,503 15,482,515 10,244,503 15,483,086 (Provision for impairment of securities) 6a (126,491) (330,626) (126,491) (330,626) Funds from real estate bills, mortgage, credit and similar 8,981,104 7,659,358 8,981,104 7,659,358 Debenture funds Interbank relations 340,641 72, ,641 72,157 Securities issued overseas 1,263,399 7,823,157 1,263,399 7,823,157 Reserve requirements 7a 340,569 20, ,569 20,232 Compulsory deposits at the Central of Brazil 340,569 20, ,569 20,232 Interbranch accounts 99,685 83,208 99,685 83,208 Interbank onlendings - 51,668-51,668 Third-party funds in transit 99,685 83,208 99,685 83,208 Correspondents Borrowings 16a 1,671,462 4,090,964 1,671,462 4,090,964 Foreign borrowings 1,671,462 4,090,964 1,671,462 4,090,964 Loan operations 8a 3,553,628 4,921,015 19,302,622 21,187,840 Public sector 40, ,549 40, ,549 Private sector 4,178,032 5,340,821 14,720,741 15,611,411 Domestic onlendings - Official institutions 16b 697, , , ,211 Loan operations subject to assignment - - 6,723,321 7,345,265 National Treasury 80,768 71,884 80,768 71,884 (Allowance for loans losses) (664,791) (537,355) (2,181,827) (1,886,385) BNDES 302, , , ,564 FINAME 313, , , ,763 Leases 8a ,111 97,925 Private sector , ,767 (Allowance for leases losses) - - (3,473) (22,842) Derivative financial instruments 6d 1,721,867 11,782,243 1,721,867 1,805,525 Other receivables 3,303,024 4,829,922 5,861,620 7,237,536 Other liabilities 3,045,516 3,044,511 12,821,237 13,822,807 Foreign exchange portfolio 9a 516,244 2,192, ,244 2,192,550 Collection and levy of taxes and alike 3,356 3,720 19,209 17,975 Income receivable 14,876 64,864 27,426 18,372 Foreign exchange portfolio 10a 218,165 1,533, ,165 1,533,310 Securities clearing accounts 120, , , ,307 Social and statutory 161, , , ,798 Sundry 10 2,751,854 2,278,134 5,181,241 4,601,484 Tax and social security 18a 209, , , ,021 (Allowance for other receivables losses) 8a (100,909) (290,543) (119,278) (297,177) Securities clearing accounts 209, , , ,096 Subordinated debts 18b 1,851, ,404 1,851, ,404 Sundry 18d 392, ,155 9,734,661 10,478,203 Other assets , , , ,131 Non-operating assets and material inventories 180, , , ,344 NON-CURRENT LIABILITIES 23,954,275 24,579,882 29,891,408 31,763,457 (Accumulated impairment) (23,825) (22,473) (46,812) (45,457) Prepaid expenses 14,008 14,694 34,411 33,244 LONG-TERM LIABILITIES 23,916,725 24,531,635 29,853,858 31,715,210 NON-CURRENT ASSETS 61,850,773 59,573,739 47,383,945 48,611,090 Deposits 15a 1,798,679 1,585,496 1,795,515 1,578,732 Interbank deposits 1,288,477 1,160,324 1,288,477 1,153,560 LONG-TERM ASSETS 58,238,664 56,201,093 46,724,031 48,089,398 Time Deposits 510, , , ,172 Interbank funds applied 5a 13,108,196 11,063,305 49, ,207 Money market repurchase commitments 15c 2,055,472 2,260,159 1,035, ,675 Interbank deposit investments 13,108,196 11,063,305 49, ,207 Own portfolio 2,055,472 2,260,159 1,035, ,675 Free portfolio Acceptances and endorsements 17 11,557,911 9,839,719 11,557,911 9,839,719 Securities and Derivative financial instruments 35,647,755 33,891,197 18,646,868 17,282,722 Funds from real estate bills, mortgage, credit and similar 11,505,211 9,539,573 11,505,211 9,539,573 Own portfolio 6a 7,522,575 5,615,673 9,213,838 8,199,104 Securities issued overseas 52, ,146 52, ,146 Subject to repurchase agreements 6a 27,064,584 25,347,686 8,059,424 5,844,175 Given in guarantee 6a 694,655 1,677,450 1,007,665 1,989,055 Borrowings 16a 126, , , ,011 Derivative financial instruments 6d 1,231,802 1,250,388 1,231,802 1,250,388 Foreign borrowings 126, , , ,011 (Provision for impairment of securities) 6a (865,861) - (865,861) - Loan operations 8a 6,971,819 8,630,121 21,443,803 23,057,311 Domestic onlendings - Official institutions 16b 2,699,109 2,777,619 2,702,644 2,787,022 Public sector 486, , , ,746 National Treasury 1,971 5,804 1,971 5,804 Private sector 6,894,488 8,665,267 16,684,442 17,176,631 BNDES 1,294,597 1,164,276 1,294,597 1,164,276 Loan operations subject to assignment - - 5,442,750 6,677,220 Finame 1,402,541 1,607,539 1,406,076 1,616,942 (Allowance for loans losses) (409,640) (622,892) (1,170,360) (1,384,286) Derivative financial instruments 6d 985,842 1,108, ,842 1,108,857 Leases 8a ,219 68,652 Private sector ,757 72,545 Other liabilities 4,692,867 6,822,774 11,649,693 15,514,194 (Allowance for leases losses) - - (2,538) (3,893) Tax and social security 18a 174, , , ,104 Securities clearing accounts 97, , , ,726 Other receivables 2,510,734 2,615,415 6,314,720 7,012,047 Subordinated debts 18b 3,024,914 5,469,532 3,024,914 5,469,532 Credits for sureties and guarantees paid 174, , , ,497 Debt instruments eligible to capital 18c 1,168, ,642 1,168, ,642 Income receivable 1, , Sundry 18d 226, ,586 7,111,336 8,449,190 Securities clearing accounts 2, , Sundry 9 2,527,036 2,974,281 6,331,026 7,370,951 DEFERRED INCOME 37,550 48,247 37,550 48,247 (Allowance for other receivables losses) 8a (193,740) (557,514) (193,744) (557,552) SHAREHOLDERS EQUITY 8,425,890 7,616,664 8,425,890 7,616,664 Other assets , , ,459 Capital 7,826,980 7,483,754 7,826,980 7,483,754 Prepaid expenses 160 1, , ,459 Domestic 21a 7,826,980 7,483,754 7,826,980 7,483,754 FIXED ASSETS 3,612,109 3,372, , ,692 Capital reserves 21b 372, , , ,120 Investments 3,475,864 3,259, , ,449 Profit reserves 21c 373, , , ,434 Investments in subsidiaries 12a 3,466,371 3,249, , ,969 Domestic 3,410,265 3,164, , ,969 Equity valuation adjustments 21d (147,101) (631,644) (147,101) (631,644) Abroad 56,106 84, Other investments 12c 27,893 27, , ,712 Retained earnings (Accumulated impairment) 12c (18,400) (17,717) (52,547) (47,232) NON-CONTROLLING INTERESTS Property for use 13 50,514 42,066 97,887 97,125 Other property for use 164, , , ,989 (Accumulated depreciation) (114,271) (75,021) (206,570) (151,864) Intangible assets 14a 85,731 56, ,319 85,351 Intangible assets 138,512 96, , ,330 (Accumulated amortization) (35,355) (22,033) (78,153) (60,129) (Accumulated impairment) (17,426) (17,426) (17,612) (24,850) Deferred assets - 14,572-14,767 Organizational and expansion expenses - 30,678-36,851 (Accumulated amortization) - (16,106) - (22,084) TOTAL ASSETS 102,190, ,006, ,998, ,221,315 TOTAL LIABILITIES 102,190, ,006, ,998, ,221,315 See the accompanying notes to the financial statements. 9