ANOS COMBINED OMBINED FINANCIAL INANCIAL S STA T TEMENTS ATEMENTS SANT AN ANDER TANDER BANESP ANES A PA JUNE 30, 2007 UNE 30, 2007

Transcription

1 ANOS COMBINED FINANCIAL STATEMENTS SANTANDER BANESPA JUNE 30, 2007

2 Santander Banespa Management Report Dear Shareholders, Economic Scenario We present the Management Report and the Financial Statements of Santander Banespa Financial and Non-Financial Group for the first half of 2007, prepared in accordance with Brazilian accounting practices, established by Corporate Law, associated with the standards of the National Monetary Council (CMN), Central Bank of Brazil (Bacen), Brazilian Securities Commission (CVM), National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP), when applicable. Santander Banespa, controlled by Santander Central Hispano, has been operating in Brazil through Banco Santander Banespa S.A. and Santander Seguros S.A. and their respective subsidiaries, and their operations are conducted on an integrated basis in the financial market. Santander Banespa s Combined Financial Statements reflect more accurately the performance of the group s activities in the country, with aggregate evolution and data compared with the same period in 2006, in relation to the consolidated financial statements of Banco Santander Banespa S.A. Banco Santander Banespa s Consolidated Financial Statements reflect the financial position and the results for the first half of 2007 of Banco Santander Banespa S.A. and its subsidiaries, and as a result of the corporate restructuring described in Note 2 to the Financial Statements, and in accordance with prevailing legislation, include only the results for the first half of 2006 of Banco Santander Meridional S.A. (Merging Entity). These Financial Statements do not include the results for the first half of 2006 of the Merged Entities (Banco do Estado de São Paulo S.A. Banespa, Banco Santander Brasil S.A. and Banco Santander S.A.) and their subsidiaries. For a better understanding of the context, Santander Banespa s Combined Financial Statements should be read together with Banco Santander Banespa S.A. s Financial Statements. In 2007 the Brazilian economy maintained its growth pace. In the first four months of the year, the retail sales volume rose by approximately 9.2% (interannual variation). In its turn, industrial production rose by a more modest rate, although still significant, in the first five months of the year: 4.43% (interannual variation). We should point out the recovery of the agricultural sector, which had impacts on the pesticide and agricultural machinery sectors, as well as on the income of certain regions, notably the south of the country. During this period inflation remained at low levels. Only in June the IPCA presented a slight acceleration in the accumulated 12-month figure, rising from 3.18% to 3.69%, mainly due to a shock in food prices. Inflation maintains an upward trend, although we expect that the IPCA will remain below the 4.5% target (as in last year). As a result, the continuous reduction of interest rates tends to create a dynamics increasingly favorable to consumption, investment, credit and fund raising. The favorable economic scenario can also be seen in other indicators. In addition to the reduction of the basic interest rate, from 13.25% per year in December 2006 to 11.5% per year in July 2007 (the lowest rate since the implementation of the inflation target regime), the growth of income and employment levels, the readjustment of the minimum wage, and the appreciation of Brazilian assets (which indicate confidence in the country s future), contribute to maintain the favorable economic scenario. The country risk, which reached 280 points in May 2006, closed June 2007 at 160 points. The country s external accounts are also positive, as a result of the commodity price favorable scenario. Compared with the same half in 2006, exports rose by 19.9% and imports by 26.6%, resulting in a 5.7% increase in the trade surplus (US$ 20.7 billion). The appreciation of the real makes it easier to increase imports, which helps to contain inflation, lower the 1

3 Santander Banespa Management Report price of imported capital goods and ensure a more robust growth in real wages. The macroeconomic environment characterized by low volatility allowed the continued advance in total loans, which reached 32% of GDP in May 2007, having risen 20.2% compared with the same month in The volume of corporate loans posted a 21.3% variation in the same comparison, and was even surpassed by the performance of loans to individuals, which accumulated an impressive 25.8% increase in the same period. Payroll loans and real estate financing were the main highlights in the area of loans to individuals, having accumulated variations in their portfolios of 45.8% and 68.7%, respectively, in relation to the same month in Corporate Restructuring In August 2006, the Extraordinary Stockholders Meeting approved the legal merger of Banco Santander Brasil S.A. (BSB), Banco Santander S.A. (BSSA) and Banco do Estado de São Paulo S.A. Banespa (Banespa) into Banco Santander Banespa S.A. (formerly Banco Santander Meridional S.A.). The stockholders of BSB, BSSA and Banespa (Merged Entities) received shares issued by Banco Santander Banespa S.A. and the Merged Entities were wound up, with Banco Santander Banespa S.A. becoming the universal successor of the Merged Entities to all their assets, rights and obligations, and becoming the lead institution of the financial and non-financial group with Bacen. In December 2006, the legal merger process was concluded with the approval of the corporate acts by BACEN and its filing with the Division of Corporations of São Paulo State. In March 2007, the Brazilian Securities Commission (CVM) approved the going public process of Banco Santander Banespa S.A. Complementing the Bank s corporate restructuring process, the Extraordinary Stockholders Meeting held on November 30, 2006 approved the Agreement of Merger of Santander Banespa Companhia de Arrendamento Mercantil into Santander Brasil Arrendamento Mercantil S.A.", entered into on November 13, The purpose of the corporate restructuring implementation was to streamline the operations of the Entities and reduce administrative, operating, and financial costs. On March 30, 2007, the Extraordinary Stockholders Meetings of Santander Participações e Empreendimentos S.A. and Santander Securitizadora de Créditos Financeiros approved the Agreement of Merger of Santander Brasil Participações e Empreendimentos S.A. into Santander Companhia Securitizadora de Créditos Financeiros", entered into on March 29, On the same date, the change of its name from Santander Securitizadora de Créditos Financeiros to Santander Participações e Serviços S.A. was also approved. The corporate restructuring aimed to unify the brand, improve the business strategy focus on customers, users, business partners and the market, and streamline operations. From the legal viewpoint, it simplified the corporate structure, with reduction of administrative costs, especially those related to legal and regulatory obligations. From the accounting standpoint, it allowed the Group to improve its equity structure. Change of Corporate Name On April 30, 2007, the Extraordinary Stockholders Meeting approved the change of name from Banco Santander Banespa S.A. to Banco Santander S.A., process approved by Bacen and pending registration with the Division of Corporations of São Paulo State. First Half of 2007 Performance 1. Results Santander Banespa ended the first half of 2007 with a net income of R$ 1,002 million. The result for the first half showed a favorable evolution in business-related 2

4 Santander Banespa Management Report revenues. The business volume (deposits, managed funds and credit) rose by 28.6% in the last 12 months. Financial income/expenses (before expense on allowance for loan losses) increased 34.7% in the first half of 2007 compared with the same period in Income from lending and leasing operations grew 9.7% in the first half of 2007 compared with 2006, mainly as a result of the 27.9% increase in the credit portfolio in relation to June 2006, which was partially offset by the negative impacts of the reduction of interest rates (Selic) and the product mix. 2. Assets and Liabilities Total consolidated assets grew 37.0% in relation to June 30, 2006, reaching R$123,610 million. Of this amount, R$39,691 million are represented by the credit portfolio, R$26,671 million by securities and derivatives, mainly federal government securities, and R$27,301 million by interbank investments. Santander Banespa had R$722 million in securities classified as "held-to-maturity securities" and has the financial capacity and intention to hold them to maturity. Income from securities and derivatives rose by 4.4% in the first half of 2007 over the same period of Financial expenses, less expense on allowance for loan losses, decreased 16.2% in the first half of 2007, when compared with 2006, as a result of the reduction of interest rates and the dollar depreciation, which impacted operations in foreign currency. Income from services rendered grew 21.0% in the first half of 2007, with a 75.5% increase in fees from lending operations and 60.8% in credit card fees. The credit portfolio increased by 27.9% compared with 2006, reaching R$39,691 million, with a 29.8% increase in individual loans, 28.2% in corporate loans, and 20.2% in real estate and rural financing. Total funding, including managed funds, reached R$130,507 million, with a 36.8% increase over Deposits grew 13.3% in relation to June 2006, totaling R$34,284 million. Managed funds increased by 41.7% compared with June 2006, reaching R$52,118 million. Stockholders Equity Personnel expenses and other administrative expenses increased by 7.3% during the first half of 2007, when compared with 2006, reflecting the better expense control. The allowance for loan losses represented 4.1% of the total credit portfolio as of June 30, 2007, compared with 4.7% in June The expense on allowance for loan losses recorded during the first half of 2007 amounted to R$ 922 million, representing an increase of 16.1% in relation to 2006, against a 27.9% increase in the credit portfolio. Credits with AA to C ratings represented 94.3% of the total portfolio in June 2007, compared with 91.5% in June Stockholders equity reached, as of June 30, 2007, R$10,120 million, showing a 37.7% increase in relation to June The Basel Agreement ratio, which is calculated on a consolidated basis and takes into account the perpetual bonds and subordinated certificates of bank deposit, reached 16.3%, higher than the 11% minimum required by Bacen. On April 25, 2007, the Bank s Board of Directors and Executive Board approved the proposal to increase capital by R$1.5 billion, with the issuance of 9,612,358 thousand shares (5,142,958 thousand common shares and 4,469,400 thousand preferred shares). The returns on the average stockholders equity and on average assets, annualized, were 23.2% and 1.7% respectively, compared with 13.1% and 1.1% in the same period of On June 29, 2007, the Bank s Board of Directors and Executive Board approved the distribution of dividends, based on the Reserve for Dividend 3

5 Santander Banespa Management Report Equalization, totaling R$522 million (ON R$ PN R$4.1308, in reais per lot of 1,000 shares) and the payment of interest on capital, calculated in the first half of 2007, in the amount of R$263 million (ON R$ PN R$2.0822, in reais per lot of 1,000 shares and ON R$ PN R$1.7698, net of income tax, in reais per lot of 1,000 shares), which will be considered in the calculation of the mandatory minimum dividend for Business Highlights in the First Half of 2007 Santander Banespa closed the first half of 2007 posting positive results and consolidated its image as a strong and innovative Bank in maintaining the loyalty of its customers, demonstrated by the increase in the market share of loan products, specially vehicle financing, credit card and payroll loans, which increased 20 bps, 180 bps and 60 bps, respectively, in twelve months. The Bank also increased its market share in total unrestricted credit in the same period by 30 bps and 50 bps in investment funds. Santander Banespa s business strategy has the following objectives: 1. Increase the number of customers in the Individual segment. 2. Improve the program of relationship with São Paulo State civil servants. 3. Boost the Business (small and medium companies) and Companies businesses, consolidating these segments to leverage sustainable growth. Santander Banespa has a distribution network of 2,042 points of sale and 7,464 ATMs. Products For this new phase of expansion, Santander Banespa has taken an aggressive stance, notably with its Santander Free (a credit card launched in June 2007, free from annual charges for the main card holder and for five additional users, as long as the main card is used at least once a month), Santander Light (a credit card with a low interest rate and up to double the limit), Santander - Super Casa (a real estate financing with fixed installments over 20 years) and the Fundos Multi Retorno, which guarantee Santander Banespa a leading position in the management of retail multimarket funds, according to data released by the National Association of Investment Banks (Anbid). In the insurance business, lenders insurance obtained a 4.8% market share, which represents an increase of 40 bps in the last 12 months, according to data provided by FENASEG (National Federation of Private Insurance and Capitalization Companies). Rating Agencies Santander Banespa is rated by international rating agencies and the rating received reflects the operating performance and high quality of its management. 4. Globalize the Wholesale Bank, taking advantage of the Group s relationship models abroad. 5. Position the brand so as to reflect the attributes of the bank s innovation and growth strategy. Santander Banespa has a portfolio of 7.8 million customers in Brazil, is one of the leading financial institutions in São Paulo State, and has expanded its operations in Rio de Janeiro State, after the acquisition of the municipal government s payroll. People For Santander Banespa, its team of professionals is one of its most valuable assets and its competitive differential. As of June 30, 2007, the Bank had 23,196 4

6 Santander Banespa Management Report professionals, being fully committed to maintaining an efficient and dedicated team. For this purpose, the Bank has internal programs that offer opportunities for professional growth, specific programs for interns and Schools that promote continued education, specifically focused on the need to qualify professionals in the business. On June 23, 2007, Banco Santander s General Stockholders Meeting in Spain approved the distribution of 100 Santander shares to all the Group s employees, in celebration of its anniversary of 150 years, in recognition of the employees efforts, associating them to the organization s future. The distribution of shares to employees will be effective on August 6. Subsidiaries Some data from the companies balance sheets are provided below. The Consolidated Santander Banespa ended the first half of 2007 with total assets of R$117,936 million, stockholders equity of R$9,960 million, and net income of R$965 million. Santander Seguros S.A. had R$4,358 million in technical reserves for insurance and pension plan operations as of June 30, 2007 and stockholders equity of R$425 million. It reported a net income of R$97 million for the first half of Social Responsibility All over the world, the Santander Group s main focus is the investment in education, with emphasis on higher education and academic research, as it believes that this is the best way to guarantee social and economic progress. Investments in education are concentrated in bilateral agreements of the Universia Network, which includes 985 partnering universities, in the 11 Ibero-American countries where it is present. An integrating element of that Network is the Universia portal, which makes content and service available to the academic sector, free of charge. The Brazilian arm of the Network, Universia Brasil ( has experienced constant growth and consolidated its innovative position with higher education institutions and young students. Currently, Universia Brasil has partnership with 245 higher education institutions and has reached 1.9 million registered users and a monthly average of 900 thousand navigators (Source: Nilsen/NetRatings). Another successful initiative of Santander Banespa is the Partners in Action Program, which semiannually selects education projects benefiting children, teenagers, and college students, always in partnership with non-governmental organizations in the south and southest of Brazil. Santander Banespa also sponsors projects in the areas of culture, health, community development and sports, among others. Operating Risks and the Sarbanes-Oxley Act For Santander Banespa, the system for management and control of operating risks is a strategic and competitive factor. Thus, since 2001 it maintains a structure run by the Vice-presidency of Operating Risks, a specific and independent corporate area intended to manage and control operating risks and achieve internal control system efficiency. This Vice-presidency contributes and is responsible for preparing and releasing policies, through the implementation of procedures, training and methodologies that are part of this system, allowing employees to efficiently identify, evaluate, monitor, manage and control the operating risks identified in their daily routines and ensure compliance with, among other issues, the requirements contained in CMN Resolutions 2554/98 and 3380/06, SUSEP Circular 249/04 and the Sarbanes-Oxley Act - SOX. Management, in line with its Corporate Governance policy, recognizes, participates in and shares the responsibility for the continued improvement of this structure in order to ensure the fulfillment of the defined objectives and provide security and quality to 5

7 Santander Banespa Management Report customers, shareholders and parties related to Santander Banespa. This structure, with its methodologies and views, along with the main results obtained, is commented in our annual and social reports for 2005 and 2006, available on the site In the first half of this year we point out the creation of the Operating Committee for Operating Risks, which aims to ensure the implementation of the guidelines established by the Executive Committee for Operating Risks, as well as the awarding to Santander, on February 28, 2007, of the full certification of its internal control model, in compliance with section 404 of SOX Act, for the year ended December 31, 2006, in which no material or significant issues were identified. This certification complements Grupo Santander Central Hispano s certification, formalized in document 20-F filed with the SEC - Securities and Exchange Commission, on June 29, Other Information It is Santander Banespa s policy to restrict the services provided by its independent auditors, so as to preserve the auditor s independence and objectivity in accordance with Brazilian and international standards. In compliance with CVM Instruction 381/03, the Bank informs that in the first half of 2007 it did not contract non-audit services from Deloitte Touche Tohmatsu Auditores Independentes. Acknowledgements The Management of Santander Banespa thanks its customers and stockholders for their trust and its employees for their efforts and dedication that have made the results possible. São Paulo, July 25, Banco Santander Banespa S.A. Lead Institution of the Financial and Non-Financial Group 6

8 (Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT AUDITORS REPORT To the Management of the Entities of Santander Banespa (see Note 4 to the combined financial statements) São Paulo - SP 1. We have audited the accompanying combined balance sheets of Santander Banespa as of June 30, 2007 and 2006, and the related combined statements of income, changes in stockholders equity, and changes in financial position for the six-month periods then ended, all expressed in Brazilian reais and prepared under the responsibility of the Entities management. Our responsibility is to express an opinion on these financial statements. 2. Our audits were conducted in accordance with auditing standards in Brazil and comprised: (a) planning of the work, taking into consideration the significance of the balances, volume of transactions, and the accounting and internal control systems of the Entities, (b) checking, on a test basis, the evidence and records that support the amounts and accounting information disclosed, and (c) evaluating the significant accounting practices and estimates adopted by Management, as well as the presentation of the financial statements taken as a whole. 3. In our opinion, the combined financial statements referred to in paragraph 1 present fairly, in all material respects, the financial position of Santander Banespa as of June 30, 2007 and 2006, and the results of its operations, the changes in stockholders equity, and the changes in its financial position for the six-month periods then ended in conformity with Brazilian accounting practices. 4. The combined financial statements referred to in paragraph 1 include the individual financial statements of the Santander Banespa entities that operate under a common management in Brazil, as mentioned in notes 3 and 4 to the combined financial statements, and are presented for purposes of disclosing additional non-mandatory information on Santander Banespa. 5. The accompanying combined financial statements have been translated into English for the convenience of readers outside Brazil. São Paulo, July 25, 2007 DELOITTE TOUCHE TOHMATSU Auditores Independentes Francisco A.M. Sant Anna Engagement Partner 7

9 (Convenience Translation into English from the Original Previously Issued in Portuguese) SANTANDER BANESPA COMBINED FINANCIAL STATEMENTS BALANCE SHEETS AS OF JUNE 30, 2007 AND 2006 (In thousands of Brazilian reais - R$) Current Assets 88,876,704 57,067,783 Cash 921, ,357 Interbank investments (Note 6) 26,655,450 6,020,503 Money market investments 24,881,625 1,522,415 Interbank deposits 983, ,726 Foreign currency investments 790,754 4,095,362 Securities and derivatives (Note 7) 19,589,760 21,285,863 Own portfolio 12,442,890 10,917,947 Subject to resale commitments 232,085 4,671,515 Derivatives (Note 33) 2,170,022 1,328,391 Linked to Central Bank of Brazil 3,224,236 2,312,791 Linked to guarantees 1,502,589 2,036,193 Privatization certificates 17,938 19,026 Interbank accounts (Note 8) 5,446,690 4,718,770 Payments and receipts pending settlement 322, ,157 Restricted deposits: Central Bank of Brazil 5,035,091 4,289,476 National Housing System 84,510 8,828 Correspondents 4,357 18,309 Interbranch accounts Internal transfers of funds Lending operations (Note 9) 19,447,272 15,284,474 Public sector 140,934 49,258 Private sector 19,557,989 15,469,542 Allowance for loan losses (Note 9.d) (251,651) (234,326) Leasing operations (Note 9) 212, ,375 Private sector 216, ,368 Allowance for doubtful lease receivables (Note 9.d) (3,907) (7,993) Other receivables 16,281,649 8,623,847 Receivables for guarantees honored 359 2,197 Foreign exchange portfolio (Note 10) 12,818,810 5,598,719 Income receivable 160, ,395 Trading account (Note 11) 851, ,639 Receivables from insurance operations 192,471 49,120 Tax credits (Note 12) 580, ,682 Other (Note 13) 1,690,361 1,596,203 Allowance for losses on other receivables (Note 9.d) (13,206) (21,108) Other assets (Note 14) 322, ,913 Temporary investments - 73 Allowance for losses - (73) Other assets 198, ,031 Allowance for valuation (165,839) (170,019) Prepaid expenses 289, ,901 (Continues) 8

10 (Convenience Translation into English from the Original Previously Issued in Portuguese) SANTANDER BANESPA COMBINED FINANCIAL STATEMENTS BALANCE SHEETS AS OF JUNE 30, 2007 AND 2006 (In thousands of Brazilian reais - R$) Long-term Assets 33,187,556 31,667,947 Interbank investments (Note 6) 645, ,619 Interbank deposits 645, ,819 Allowance for losses (200) (200) Securities and derivatives (Note 7) 7,081,552 12,189,918 Own portfolio 3,638,388 3,387,839 Subject to resale commitments 161,316 7,356,342 Linked to Central Bank of Brazil 1,220, ,527 Linked to guarantees 1,492,023 1,095,234 Derivatives (Note 33) 520,085 - Privatization certificates 49,555 49,976 Interbank accounts (Note 8) 62,364 58,381 Restricted deposits: National Housing System 62,364 58,381 Lending operations (Note 9) 14,951,139 11,188,442 Public sector 118, ,070 Private sector 16,149,865 12,192,010 Allowance for loan losses (Note 9.d) (1,317,000) (1,131,638) Leasing operations (Note 9) 145, ,788 Private sector 150, ,753 Allowance for doubtful lease receivables (Note 9.d) (4,792) (2,965) Other receivables 9,698,192 7,542,489 Receivables for guarantees honored 296 4,170 Foreign exchange portfolio (Note 10) 2,431,220 1,131,520 Income receivable 11,783 22,869 Trading account (Note 11) 83 - Tax credits (Note 12) 3,081,958 3,523,052 Other (Note 13) 4,209,016 2,917,146 Allowance for losses on other receivables (Note 9.d) (36,164) (56,268) Other assets (Note 14) 603, ,310 Temporary investments 10,395 26,714 Allowance for losses (655) (655) Other assets 1,178 6,962 Allowance for valuation (1,178) (6,962) Prepaid expenses 593, ,251 Permanent assets 1,545,399 1,512,994 Investments 136, ,240 Investments in affiliates Domestic 18,041 14,260 Other investments 147, ,512 Allowance for losses (28,603) (32,532) Property and equipment in use (Note 15) 671, ,969 Real estate 324, ,953 Other 1,418,586 1,239,703 Accumulated depreciation (1,071,611) (968,687) Deferred charges (Note 16) 736, ,785 Organization and expansion costs 1,895,051 1,747,517 Accumulated amortization (1,158,365) (943,732) Total Assets 123,609,659 90,248,724 9

11 (Convenience Translation into English from the Original Previously Issued in Portuguese) SANTANDER BANESPA COMBINED FINANCIAL STATEMENTS BALANCE SHEETS AS OF JUNE 30, 2007 AND 2006 (In thousands of Brazilian reais - R$) Current Liabilities 85,402,011 56,506,969 Deposits (Note 17.a) 26,515,926 21,867,694 Demand deposits 4,404,352 3,680,604 Savings deposits 5,316,335 4,759,286 Interbank deposits 497, ,384 Time deposits 16,034,036 13,216,344 Other deposits 263, ,076 Money market funding (Note 17.b) 23,376,366 14,077,367 Own portfolio 1,438,507 12,962,364 Third parties 21,937,859 1,115,003 Funds from acceptance and issuance of securities (Note 17.c) 753, ,230 Securities issued abroad 549, ,284 Real estate credit notes 204,263 85,946 Interbank accounts (Note 8) 292, ,741 Receipts and payments pending settlement 291, ,663 Correspondents ,078 Interbranch accounts 909, ,905 Third-party funds in transit 905, ,175 Internal transfers of funds 4,006 9,730 Borrowings (Note 17.d) 6,770,704 3,441,698 Foreign borrowings 6,770,704 3,441,698 Domestic onlendings - official institutions (Note 17.d) 1,840,563 1,041,383 National Economic and Social Development Bank (BNDES) 1,183, ,496 Federal Savings and Loan Bank (CEF) 15,965 15,650 National Equipment Financing Authority (FINAME) 511, ,657 Other institutions 129, ,580 Derivatives (Note 33) 2,973,432 1,582,372 Derivatives 2,973,432 1,582,372 Other payables 21,969,055 12,795,579 Collected taxes and other 221, ,187 Foreign exchange portfolio (Note 10) 11,451,399 4,181,011 Social and statutory 833, ,250 Tax and social security (Note 18) 264, ,637 Trading account (Note 11) 460, ,458 Technical reserves for insurance, pension plan and capitalization operations (Note 19.a) 5,063,244 3,914,584 Subordinated debts (Note 20) 2,328 2,615 Other (Note 21) 3,671,630 2,676,837 (Continues) 10

12 (Convenience Translation into English from the Original Previously Issued in Portuguese) SANTANDER BANESPA COMBINED FINANCIAL STATEMENTS BALANCE SHEETS AS OF JUNE 30, 2007 AND 2006 (In thousands of Brazilian reais - R$) Long-term Liabilities 27,848,822 26,178,612 Deposits (Note 17.a) 7,768,127 8,403,877 Interbank deposits 2,789 22,181 Time deposits 7,765,338 8,381,696 Money market funding (Note 17.b) 2,372,093 1,736,251 Own portfolio 2,372,093 1,736,251 Funds from acceptance and issuance of securities (Note 17.c) 877,539 1,213,012 Securities issued abroad 877,539 1,187,075 Real estate credit notes - 25,937 Borrowings (Note 17.d) 676, ,708 Foreign borrowings 676, ,708 Domestic onlendings - official institutions (Note 17.d) 2,543,400 1,929,990 National Economic and Social Development Bank (BNDES) 1,478, ,116 Federal Savings and Loan Bank (CEF) 18,776 32,765 National Equipment Financing Authority (FINAME) 1,022, ,109 Other institutions 23,896 - Derivatives (Note 33) 955,304 - Derivatives 955,304 - Other payables 12,655,525 12,146,774 Foreign exchange portfolio (Note 10) 2,456,454 1,105,789 Tax and social security (Note 18) 3,561,213 2,698,350 Trading account (Note 11) 255, ,591 Subordinated debts (Note 20) 4,113,912 2,588,329 Other (Note 21) 2,268,617 5,595,715 Deferred income 44,278 43,476 Deferred income 44,278 43,476 Minority interest 194, ,064 Stockholders' equity 10,119,595 7,348,603 Capital (Note 23.a) 8,462,011 6,899,538 Capital reserves 35,580 29,357 Revaluation reserves Profit reserves 570, ,769 Adjustment to fair value - securities and derivatives 426,127 (180,743) Treasury shares (38) (28) Retained earnings 624, ,125 Total Liabilities and Stockholders' Equity 123,609,659 90,248,724 The accompanying notes are an integral part of these financial statements

13 (Convenience Translation into English from the Original Previously Issued in Portuguese) SANTANDER BANESPA COMBINED FINANCIAL STATEMENTS BALANCE SHEETS AS OF JUNE 30, 2007 AND 2006 (In thousands of Brazilian reais - R$) FINANCIAL INCOME 7,481,493 7,006,774 Lending operations 3,741,872 3,390,113 Leasing operations 28,398 46,836 Securities transactions 3,127,363 2,597,276 Income from insurance, pension plan and capitalization operations 283, ,823 Derivatives 116, ,930 Compulsory investments 184, ,796 FINANCIAL EXPENSES (4,142,316) (4,637,636) Funding operations (2,768,307) (3,433,738) Adjustment of interest on technical reserves for insurance, pension plan and capitalization operations (235,080) (220,065) Borrowings and onlendings (46,999) (216,280) Foreign exchange operations (169,910) 26,879 Allowance for loan losses (Note 9.d) (922,020) (794,432) GROSS PROFIT FROM FINANCIAL OPERATIONS 3,339,177 2,369,138 OTHER OPERATING INCOME (EXPENSES) (1,984,271) (1,812,476) Income from services rendered (Note 26) 1,632,860 1,349,912 Income from insurance, pension plan and capitalization operations (Note 19.b) 256, ,356 Personnel expenses (Note 27) (918,650) (944,338) Other administrative expenses (Note 28) (1,386,983) (1,203,604) Tax expenses (Note 29) (444,323) (366,193) Investments in affiliates 1,704 1,796 Other operating income (Note 30) 243, ,021 Other operating expenses (Note 31) (1,369,258) (1,128,426) INCOME FROM OPERATIONS 1,354, ,662 NONOPERATING (EXPENSES) INCOME (Note 32) (2,948) (21,238) INCOME BEFORE TAXES ON INCOME AND MINORITY INTEREST 1,351, ,424 INCOME AND SOCIAL CONTRIBUTION TAXES (Note 35) (173,798) 110,516 Provision for income tax (208,130) (148,694) Provision for social contribution tax (80,659) (51,222) Deferred tax credits 114, ,432 PROFIT SHARING (155,335) (162,193) INCOME BEFORE MINORITY INTEREST 1,022, ,747 MINORITY INTEREST (20,656) (11,103) NET INCOME 1,002, ,644 The accompanying notes are an integral part of these financial statements. 12

14 (Convenience Translation into English from the Original Previously Issued in Portuguese) SANTANDER BANESPA COMBINED FINANCIAL STATEMENTS BALANCE SHEETS AS OF JUNE 30, 2007 AND 2006 (In thousands of Brazilian reais - R$) Capital reserves Profit reserves Adjustment to fair value - Stock Reserve for securities Capital Tax Goodwill exchange Revaluation Legal Statutory dividend and Treasury Retained Capital increase incentives reserve memberships reserve reserve reserve equalization derivatives shares earnings Total BALANCES AS OF DECEMBER 31, ,483, ,436 20,977 5,178 2, ,890 57,887 - (215,790) (12) 367,011 7,536,937 Capital increase (Note 23.d) 415,957 (414,436) ,521 Corporate restructuring (40) - (1) (8) (60) (109) Adjustment to fair value - securities and derivatives , ,047 Updating of stock exchange memberships Tax incentives Revaluation reserve (8) Purchase of own shares (16) - (16) Supplementary dividends proposed/paid from retained earnings balance (Note 23.b) (400,664) (400,664) Net income , ,644 Legal reserve , (23,000) - Statutory reserve Dividends proposed/paid (Note 23.b) (241,775) (241,775) Interest on capital proposed/paid (Note 23.b) (56,043) (56,043) BALANCES AS OF JUNE 30, ,899,538-21,400 5,178 2, ,882 57,887 - (180,743) (28) 118,125 7,348,603 BALANCES AS OF DECEMBER 31, ,861, ,852 25,839 5,178 3, , , ,800 (38) 78,366 8,114,564 Capital increase (Note 23.d) 1,866 1,491, ,493,117 Corporate restructuring 7,611 (19,624) ,757 (8,859) Adjustment to fair value - securities and derivatives , ,803 Updating of stock exchange memberships , ,207 Revaluation reserve (366) Supplementary dividends proposed/paid from reserve for dividend equalization (Note 23.b) (511,389) (511,389) Reserve for dividend equalization , (142,860) - Net income ,002,169 1,002,169 Legal reserve , (46,976) - Proposed/paid Interest on capital (Note 23.b) (268,206) (268,206) BALANCES AS OF JUNE 30, ,870,532 1,591,479 25,873 5,178 4, , ,127 (38) 624,805 10,119,595 The accompanying notes are an integral part of these financial statements. 13

15 (Convenience Translation into English from the Original Previously Issued in Portuguese) SANTANDER BANESPA COMBINED FINANCIAL STATEMENTS BALANCE SHEETS AS OF JUNE 30, 2007 AND 2006 (In thousands of Brazilian reais - R$) SOURCES OF FUNDS 35,551,079 10,983,324 Adjusted net income 1,350, ,046 Net income 1,002, ,644 Adjustments to net income: Investments in affiliates and subsidiaries (1,704) (1,796) Depreciation and amortization (Note 28) 206, ,109 Goodwill amortization (Note 31) - 96,695 Provision for adjustment related to acquisition and development of software (Note 32) 155,548 - Reversal of allowance for losses on other assets (Note 32) (9,269) (2,435) Recognition (reversal) of allowance for losses on other investments (3,192) 816 Exchange variation on foreign branches - 13 Capital increase (Note 23.d) 1,493,117 1,521 Change in deferred income 2,756 5,951 Minority interest 28,764 4,406 Updating of stock exchange memberships 1, Investment grants Revaluation reserve Corporate restructuring (8,859) (109) Adjustment to fair value - securities and derivatives 296,803 35,047 Funds from third parties 32,387,058 10,157,401 Increase in liabilities 14,387,372 6,135,239 Deposits 2,538, ,581 Money market funding 273,751 - Funds from acceptance and issuance of securities 196, ,472 Borrowings and onlendings 1,870,860 - Interbank and interbranch accounts 319, ,992 Derivatives 1,917, ,565 Other payables 7,271,350 3,774,629 Decrease in assets 17,905,399 3,969,343 Interbank investments - 3,910,748 Securities and derivatives 17,873,055 - Leasing operations 32,344 58,595 Disposal of permanent assets 94,287 52,819 Assets not in use 58,018 34,193 Property in use 34,034 18,626 Investments 2,235 - USES OF FUNDS 35,812,255 11,869,399 Purchase of own shares - 16 Proposed dividends and interest on capital (Note 23.b) 779, ,482 Additions 146, ,828 Assets not in use 48,750 31,534 Property in use 87,442 63,149 Investments 10,729 9,145 Deferred charges 62,026 55,807 Increase in assets 34,823,713 6,368,320 Interbank investments 21,991,671 - Securities and derivatives - 911,773 Interbank and interbranch accounts 700, ,075 Lending operations 1,838,242 2,292,668 Other receivables 10,129,467 2,708,399 Other assets 164,267 78,405 Decrease in liabilities - 4,642,946 Money market funding - 4,186,511 Borrowings and onlendings - 456,435 DECREASE IN CASH (261,176) (886,075) REPRESENTED BY Cash: Beginning of period 1,182,576 1,592,432 End of period 921, ,357 DECREASE IN CASH (261,176) (886,075) The accompanying notes are an integral part of these financial statements. 14

16 1. OPERATIONS Santander Banespa operates in Brazil through Banco Santander Banespa S.A. and other entities, as stated in Note 4. Banco Santander Banespa S.A., controlled by Banco Santander Central Hispano S.A., with headquarters in Spain, is the lead institution of the financial and non-financial group with the Central Bank of Brazil (Bacen), established as a corporation, with main offices at Rua Amador Bueno, 474, Santo Amaro, São Paulo, SP, and operates as a multiple service bank, conducting operations such as commercial, foreign exchange, investment, credit and financing and mortgage loan portfolios and, through related entities, insurance, pension plan, capitalization, leasing, asset management, and securities and insurance brokerage operations. Transactions are conducted within the context of a group of financial institutions that operate on an integrated basis in the financial markets. 2. CORPORATE RESTRUCTURING a) Merger of Banco Santander Brasil S.A., Banco Santander S.A. and Banco do Estado de São Paulo S.A. - BANESPA into Banco Santander Banespa S.A. On August 31, 2006, the Extraordinary Stockholders' Meetings of Banco Santander Banespa S.A. (formerly Banco Santander Meridional S.A.), Banco Santander Brasil S.A. (BSB), Banco Santander S.A. (BSSA) and Banco do Estado de São Paulo S.A. - Banespa (Banespa) approved the proposed corporate restructuring under the terms of the Merger Agreement of Banco Santander Brasil S.A., Banco Santander S.A., and Banco do Estado de São Paulo SA. - Banespa into Banco Santander Meridional S.A. (Merger Agreement), declaring the Merger effective. As a consequence, the stockholders of BSB, BSSA and Banespa (Merged Entities) received shares of Banco Santander Banespa S.A. (Merging Entity) and the Merged Entities were wound up, with Banco Santander Banespa S.A. becoming the universal successor of the Merged Entities to all their assets, rights and obligations, and becoming the lead institution of the financial and non-financial group with Bacen. The Entities management established the share exchange ratios for the mergers, based on the valuations of the Entities net equity values. The implementation of the restructuring simplified the corporate structure of the Entities, improved the operational efficiency and reduced administrative costs. In December 2006, the legal merger process was concluded, with the approval of the corporate acts by Bacen and its filing with the Division of Corporations of the São Paulo State (Jucesp). In March 2007, the going public process of Banco Santander Banespa S.A. was approved by the Brazilian Securities Commission (CVM). b) Merger of Santander Banespa Companhia de Arrendamento Mercantil into Santander Brasil Arrendamento Mercantil S.A. The Extraordinary Stockholders' Meting held on November 30, 2006 approved the Merger Agreement of Santander Banespa Companhia de Arrendamento Mercantil into Santander Brasil Arrendamento Mercantil S.A. entered into on November 13, As a result of the merger, the stockholders of Santander Banespa Companhia de Arrendamento Mercantil (Merged Entity) received shares of Santander Brasil Arrendamento Mercantil S.A (Merging Entity) and the Merged Entity was wound up and Santander Brasil Arrendamento Mercantil S.A. became the successor to all its assets, rights and obligations. The purpose of the corporate restructuring was to streamline the Entities operations and reduce administrative, operating and financial costs. On November 15, 2006 a Significant Event Notice was published in the newspaper Gazeta Mercantil and the São Paulo State Official Gazette, presenting the details of the merger occurred on November 14,

17 c) Merger of Santander Brasil Participações e Empreendimentos S.A. into Santander Participações e Serviços S.A. (formerly Santander Companhia Securitizadora de Créditos Financeiros) On March 30, 2007, the Extraordinary Stockholders Meetings of Santander Brasil Participações e Empreendimentos S.A. and Santander Companhia Securitizadora de Créditos Financeiros approved the Agreement of Merger of Santander Brasil Participações e Empreendimentos S.A. into Santander Companhia Securitizadora de Créditos Financeiros" entered into on March 29, On the same date the change of the name Santander Securitizadora de Créditos Financeiros to Santander Participações e Serviços S.A. was also approved. As a consequence of the corporate restructuring, the capital of Santander Participações e Serviços S.A. (Merging Entity) was increased from R$269,000 in December 2006 to R$286,473 in March 2007, divided into 496,000 thousand registered common shares without par value. The purpose of the merger process implementation was to streamline the Entities operations and reduce administrative, operating and financial costs. d) Change of name of Banco Santander Banespa S.A. The Extraordinary Stockholders Meeting held on April 30, 2007 approved the change of the entity s name to Banco Santander S.A., process approved by Bacen and pending registration with Jucesp. 3. PRESENTATION OF COMBINED FINANCIAL STATEMENTS The financial statements of the entities included in the combined financial statements of Santander Banespa have been prepared in accordance with accounting practices established by Brazilian Corporate Law, standards established by the National Monetary Council (CMN), Bacen, the CVM, National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP), as applicable. In the preparation of the combined financial statements, not only the ownership control was considered, as established by Brazilian corporate law, but also the actual operating control characterized by common management in Brazil or operation in the Brazilian market under the same brand. In the preparation of the combined financial statements, investments in affiliates, significant balances arising from transactions among domestic branches, foreign branches and subsidiaries, and unrealized profits between these entities have been eliminated. Minority interest is recorded in a separate caption in stockholders equity and in the statements of income. The balances stated in the jointly-owned subsidiaries balance sheets and statements of income were consolidated in proportion to the interest in the subsidiary s capital. The information of the leasing company was reclassified, in order to reflect its financial position in the consolidated statements in conformity with the financial method of accounting for leasing transactions. The preparation of financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting periods. Since Management s judgment involves making estimates concerning the likelihood of future events, actual amounts could differ from those estimates. 16

18 4. ENTITIES INCLUDED IN THE COMBINED FINANCIAL STATEMENTS Adjusted Net Direct and indirect interest in stockholders Total income total Entities equity assets (loss) capital - % Indirect subsidiaries - Banco Santander Central Hispano, S.A. Financial sector Banco Santander Banespa S.A. 9,997, ,888, , % Insurance sector Santander Seguros S.A. 425,041 5,026,066 96, % Other sectors Santander Brasil Investimentos e Serviços S.A. 39,160 59,318 1, % Universia Brasil S.A. 1,620 2,546 (1,943) 99.99% Indirect subsidiaries and jointly-owned subsidiaries Financial sector Santander Brasil S.A Corretora de Títulos e Valores Mobiliários 104, ,208 11, % Banespa S.A. Corretora de Câmbio e Títulos (1) 80, ,609 27, % Santander Distribuidora de Títulos e Valores Mobiliários Ltda. 11,299 18,862 (115) % Santander Brasil Arrendamento Mercantil S.A. 504,935 3,984,773 34, % Santander Banespa Companhia de Arrendamento Mercantil Santander Asset Management Distribuidora de Títulos e Valores Mobiliários Ltda. (2) 79,132 95,040 10, % 17

19 Adjusted Net Direct and indirect interest in stockholders Total income total Entities equity assets (loss) capital - % Insurance sector Santander Capitalização S.A. 83, ,928 24, % Santander S.A. - Serviços Técnicos, Administrativos e de Corretagem de Seguros (3) 67, ,616 19, % Santander Banespa Seguros S.A. 77, ,225 28, % Other sectors Santander Banespa Administradora de Consórcios Ltda. (4) 3,567 3, % Norchem Participações e Consultoria S.A. 45, ,912 4, % Santander Participações e Serviços S.A. (5) 144, ,631 4, % Agropecuária Tapirapé S.A. 5,999 6, % (1) In process of change of name to Santander S.A. Corretora de Câmbio e Títulos. (2) Formerly Santander Banespa Asset Management Distribuidora de Títulos e Valores Ltda. (3) Formerly Banespa S.A. Serviços Técnicos, Administrativos e de Corretagem de Seguros. (4) In process of change of name to Santander Administradora de Consórcios Ltda. (5) Formerly Santander Companhia Securitizadora de Créditos Financeiros (see Note 2). 5. SIGNIFICANT ACCOUNTING PRACTICES a) Results of operations Determined on the accrual basis of accounting and includes income, charges and monetary or exchange variations earned or incurred through the balance sheet date, determined on a daily pro rata basis. For insurance companies, insurance premiums recorded upon issuance of the related policies/invoices are recognized as premiums written. The respective revenue is deferred on a daily pro rata basis over the insurance policy/invoice period, through the recording of an unearned premium reserve, calculated based on the net retention of premiums written. Commissions and other acquisition costs are also deferred over the policy/invoice period. Income from pension plan contributions and capitalization certificates are recorded in income upon receipt. b) Current and long-term assets and liabilities Stated at their realizable or settlement amounts, respectively, and include income, charges and monetary or exchange variations earned or incurred through the balance sheet date, determined on a daily pro rata basis. When applicable, allowances for valuation are recorded to reflect market or realizable values. The allowance for loan losses is based on analyses of outstanding lending operations (past due and current), past experience, future expectations, and specific portfolio risks, as well as on the risk assessment policy of the Bank s management for recognition of allowances, including requirements under Bacen standards and instructions. Receivables and payables due within 12 months are recorded in current assets and liabilities, respectively, except for trading securities, which are totally classified in current assets, in conformity with Bacen Circular No. 3,068/01. 18

20 c) Securities Securities are presented in accordance with the following recognition and accounting valuation criteria: I - II - III - Trading securities. Available-for-sale securities. Held-to-maturity securities. Trading securities include securities acquired for the purpose of being actively and frequently traded and Held-to-maturity securities include those which the Bank intends to maintain in its portfolio to maturity. Available-for-sale securities include those which cannot be classified in categories I and III. Securities classified in categories I and II are stated at cost plus income earned through the balance sheet date, calculated on a daily pro rata basis, and adjusted to fair value, reflecting the increase or decrease arising from this adjustment in: (1) The related income or expense account, in income for the period, when related to securities classified as Trading securities, net of tax effects. (2) Separate caption in stockholders equity, when related to securities classified as Available-for-sale securities, net of tax effects. The adjustments to fair value on sale of these securities are transferred to income for the period. Securities classified as Held-to-maturity securities are stated at cost, plus income earned through the balance sheet date, calculated on a daily pro rata basis, and recorded in income for the period; provisions for losses are recognized whenever there are permanent losses on the realizable value of these securities. d) Derivatives Derivatives designated as hedge may be classified as: I - II - Market risk hedge. Cash flow hedge. Derivatives designated as hedge and the respective hedged items are adjusted to fair value, considering the following: (1) For those classified in category I, the increase or decrease is recorded in income or expense for the period, net of tax effects. (2) For those classified in category II, the increase or decrease is recorded in a separate caption in stockholders equity, net of tax effects. e) Prepaid expenses Funds used in advance payments, whose benefits or provision of services will occur in future years, are recorded as prepaid expenses, over the term of the respective agreements. f) Permanent assets Stated at cost and include: f.1) Investments Adjustments to investments in affiliates are determined under the equity method of accounting and recorded as investments in affiliates. Other investments are stated at cost, reduced to fair value, when applicable. 19