Brazilian Exchanges Time for Growth to Show up Assuming Coverage

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1 Equity Research Brazilian Exchanges Time for Growth to Show up Assuming Coverage FOTO CAPA Lucas Lopes Marcelo Telles, CFA marcelo.telles@credit-suisse.com Alonso Garcia alonso.garcia@credit-suisse.com When All You Need for High Multiples Comes Together Compelling near- and long-term growth outlook coupled with high operating leverage. Strong cash flow generation. Limited risk of disruption due to virtual natural monopoly status. BVMF gathers all features to justify high multiples, which, however, are inexpensive compared to historical levels, at a lower-than-average premium to Ibovespa and at an unjustifiable ~17% discount to global peers. Adding Resilience to Growth Potential In our view, BVMF s multiples have been confined by earnings disappointments in the past few years, but we believe this time will be different (13.4% CAGR). Not only recent trends, namely higher Ibovespa, better volumes, and, more recently, weaker BRL, provide a solid foundation for a strong year ahead but also (i) cash equities penetration is close to its lowest levels ever, (ii) M&A with Cetip will likely contribute G&A synergies and additional growth sources, (iii) monetary easing should accentuate and ultimately fuel volumes, (iv) recently launched products are gaining steam (e.g., Tesouro Direto, IPCA futures), and (v) consensus expectations are now more realistic. Growth at a Reasonable Price BVMF s present valuation (15.4x 2017E P/E and 13.3x 2018E P/E) is only slightly above historical levels, in spite of its much superior competitive positioning nowadays and better-than-ever earnings resilience. Perhaps equally important, PEG ratio of 1.4x is one of the lowest in the exchange sector. Notwithstanding its compelling growth outlook, the stock also offers one of the best free cash flow yields among Brazilian companies and global exchanges (6.5% for 2017E and 7.7% for 2018E in USD terms). Assuming Coverage with Outperform on BVMF3 and CTIP3 We are assuming coverage of BVMF with an Outperform rating and a R$20 TP, yielding 22% upside potential. Our DCF-based TP (15.5% ke) accounts for BVMF s compelling organic outlook and value accretion from the business combination with Cetip. We are also assuming coverage of Cetip with an Outperform rating and a R$55 TP, based on BVMF s offer price. In our view, Cetip is not only a vehicle for exposure to BVMF s attractive investment thesis but also a great carry owing to the current 7.7% discount to the swap price and the CDI adjustment of the cash portion. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.22

2 Executive Summary Valuation and M&A with Cetip (slides 4-27): Growth potential and cash generation support higher multiples. BVMF s present valuation (15.4x 2017E P/E and 13.3x 2018E P/E, or 14.4x and 12.5x adjusting for the present value of the tax benefit from goodwill/intangibles amortization) is only slightly above historical levels, in spite of its much superior competitive positioning nowadays and better-than-ever earnings resilience. Besides, the company is trading at a subdued premium to the IBX index (17%, vs. five-year average of 42%). Perhaps equally important, BVMF s multiples are at a deep discount to international peers (17% discount to global exchanges for 2018), which we believe is to a large extent unjustifiable, due to its superior earnings growth potential (PEG ratio of 1.4x in USD terms is one of the lowest in the exchange sector). Notwithstanding its compelling growth outlook, the stock also offers one of the best free cash flow yields among Brazilian companies and global exchanges (6.5% for 2017E and 7.7% for 2018E in USD terms). We thus are assuming coverage of BVMF with an Outperform rating and a R$20 TP, yielding 22% upside potential. We are also assuming coverage of Cetip with an Outperform rating and a R$54TP, based on BVMF s offer price. In our view, not only is Cetip a vehicle for exposure to BVMF s compelling investment thesis, it is also a great carry owing to the current 7.7% discount to the swap price and the CDI adjustment of the cash portion. Bovespa segment (slides 28-40): Growth potential to be gradually tapped. Were BVMF in a developed market, its cash equities volumes would be prone to increase ~10% per year, as stock market capitalization is, in theory, supposed to increase by the cost of equity of its companies (~15%) less its aggregate dividend yield (~5% long term), which is already compelling for a business with high operating leverage. Fortunately (for growth), Brazil is far from being a developed country, especially when it comes to the stock market, despite its topnotch exchange. The country has one of the lowest stock market capitalization-to-gdp ratios in the world and, astoundingly, in its own history, which we believe will be addressed in the medium-to-long term. We also believe turnover velocity has room to improve, as, on a sector-by-sector basis, it looks low compared to that of many developed and even emerging markets. Although many advocate that turnover velocity is already somewhat high, its level is fully justified by the importance of commodity companies in the stock exchange, which naturally have higher turnovers due to their global nature and the volatility of their fundamentals. We are working with a 13% CAGR for ADTV, but we believe that bears much upside risk (e.g., we assume equity offerings significantly below 10-year average and no improvement in turnover velocity). BM&F segment (slides 41-46): Interest rate futures to retrieve the spotlight. Owing to high volatility and BRL depreciation, the BM&F segment experienced one of its best years in Most of the tailwinds, however, are gone, due to volatility normalization (e.g., Selic stable for most of the year), curbing volume growth, and BRL ~16% YTD appreciation, weighing on RPC. Looking at the glass half full, tough comps are no longer an issue for the next few quarters. Going forward, we expect ADV of interest rates to enjoy good momentum, boosted by imminent changes in the policy rate (changes in the Selic rate and in ADV are closely correlated) and uncertainties in regards to the magnitude and timing of the rate cuts. We expect FX futures volumes, which, after soaring in 2015, have been declining materially, to resume growing in the near future, albeit at a modest pace. This segment also bears interesting optionalities, with turnover of IPCA futures, for instance, gradually gaining steam. This, in our view, is a very promising product, especially in light of the low cannibalization within BVMF s current portfolio. On a related note, we are also enthusiastic about the Tesouro Direto platform, which, unlike IPCA futures, is already contributing significantly to the top-line, through custody revenues. Cetip (slides 47-60): Headwinds from credit growth meet tailwinds from lower volatility. Used to growing at double-digit rates, we expect Cetip s top-line to increase only 9% in 2017 and 2018, placing us % below consensus. The deceleration is explained mainly by the balance of OTC derivatives, which, basically comprised by FX-related securities, have been declining significantly in the past two quarters, heading for normalization following pronounced volatility in 2H15-1H16. Although the balance of fixed income instruments should be fueled by credit originations in the next fuel years, we expect a timid recovery ahead, in light of the pronounced leverage of Brazilian corporates and households. Furthermore, the short-tomedium term benefit from the change in pricing policy of CDBs should lose steam next year and the company should be negatively impacted by Central Bank s ruling that precludes the employment of leasing debentures as a source of funding by banks. On the other hand, we believe the financing unit will leave its underdog status behind, as not only should vehicle sales improve next year, albeit moderately, but the share of financing may also resume growth. We also expect Cetip to start bearing fruits from its mortgage platform in the near term, although we are cautious about its potential (base case of R$12mn in Ebitda). Source: Company data, Credit Suisse 2

3 Table of Contents Valuation: When All You Need for High Multiples Comes Together 4 Assuming Coverage of BVMF3 and CTIP3 with Outperform Rating 5 Adding Resilience to Growth Potential 6 Street Used to Be Let Down 7 Inexpensive Valuation Compared to Historical Average 8 Global Comps Are the Only Comps 9 Growth Is the Name of the Game 10 Attractive from Growth and Value Perspectives 11 Earnings Becoming More and More Resilient 12 Competition No Longer Keeps Investors Awake at Night; Re-rating Warranted 13 Tax Dispute of Up to R$9.5bn Is Major Tail Risk 14 Valuation Matrix of Exchanges 15 BM&FBovespa: Corporate Summary 16 Cetip: Corporate Summary 17 The New Exchange: A Look at the Merger of BM&FBovespa and Cetip 18 Giving Birth to an Exchange Powerhouse 19 Limited Overlap to Result in Smooth Approval Process 20 Seeking Diversification Organically and Inorganically 21 Synergies at High End of Global Transactions 22 History Indicates Inspiring, Though Gradual, Synergy Gains 23 Tax Gains Amount to R$8.9/CTIP3 24 Bottom Line: Cetip Acquisition Results in Value Accretion of R$2.4bn 25 Is There Really No Free Lunch? 26 BM&FBovespa: Pro Forma Income Statement 27 Bovespa: Is It Finally Time for Cash Equities? 28 Secular Growth Potential May Finally Be Unveiled 29 HFT Masking Part of Volume Deterioration 30 Buffett Indicator Suggests Low Penetration 31 Primary Market Coming Back to Life 32 Equity Offerings Can Move the Needle 33 Turnover Velocity Running Above That of International Peers 34 BVMF s Monopoly Partially Explains High Turnover Velocity 35 Turnover Velocity Is Good, but Not There Yet 36 Delving Deeper into Turnover Velocity 37 Pension Money Is Being Missed 38 Securities Lending: Room for Improvement, but Not for Disruption 39 Single-Stock Options: Will Potential Ever Be Tapped? 40 BM&F and Depository: Monetary Policy Uncertainty and New Products to Lead Growth 41 Interest Rate Futures to Drive Top-Line Growth 42 Welcoming Monetary Policy Uncertainty 43 BRL Appreciation Hitting RPC 44 IPCA Futures Taking Off 45 Depository: Tesouro Direto Growing Exponentially 46 Cetip s Securities: Headwinds from Credit Growth Meet Tailwinds from Lower Volatility 47 Will Credit Growth Offset Lower Volatility? 48 Non-earmarked Loan Originations About to Bounce Back 49 CDBs Rebound to Fuel Fixed-Income Instruments 50 A Look at Banks Balance Sheets 51 Pricing Policy Responding to Regulatory Changes 52 Steady Growth of Debentures Will Be Challenged 53 Mortgage Instruments Sideways, Revenues Plummeting 54 Remarkable Volatility Driving OTC Revenues Higher 55 Cetip s Financing: Leaving Underdog Status Behind 56 Financing Unit in Its Most Challenging Years 57 Will Vehicle Financing Finally Rebound? 58 Mortgage Platform on the Verge of Bearing Fruits 59 Mortgage Platform to Contribute ~R$12mn in Ebitda 60 3

4 Equity Research Valuation When All You Need for High Multiples Comes Together DIVISÓRIA

5 Assuming Coverage of BVMF3 and CTIP3 with Outperform Rating We are assuming coverage of BVMF3 with an Outperform rating and a R$20 target price, yielding 22% upside potential. We derive our target price from a pro-forma DCF model, which embeds 10.5% EPS CAGR, factoring in the acquisition of Cetip. We assume cost of equity of 15.5%, based on a risk-free rate of 10.0% and beta of 1.10x. We view BM&FBovespa (BVMF) trading at a significant discount to global peers, which we believe is unjustified in light of its superior earnings growth potential and stronger competitive positioning. Not only recent trends, namely higher Ibovespa, better volumes, and, more recently, weaker BRL, provide a solid foundation for strong earnings growth ahead but also (i) cash equities penetration is close to its lowest levels ever, (ii) M&A with Cetip will likely contribute G&A synergies and additional promising growth sources, (iii) monetary easing should accentuate and ultimately fuel volumes, (iv) alternative business lines are gaining steam (e.g., Tesouro Direto, IPCA futures), and (v) consensus expectations regarding macro and earnings are now more realistic. The main risks to our Outperform rating consist of (i) weaker-than-expected economic activity, which impacts volumes of all segments of the Newco, and (ii) the tax dispute regarding goodwill amortization from the merger of BM&F and Bovespa, currently at administrative level (Carf). We are assuming coverage of CTIP3 with an Outperform rating and a R$54 target price, yielding 24.0% upside potential. We derive our target price from the swap price offered by BVMF, as we believe that the deal will be approved by the antitrust authority (Cade) with only minor remedies. We expect that the deal will be completed in February 2017, which could be postponed to May 2017 if Cade applies the measure that extends the deadline by 90 days. To calculate the target price, we multiply the current share swap by BVMF s target price and assume CDI adjustment of the cash portion for the next 12 months (when the deal is completed, investors can continue to earn the basic interest rate from cash proceeds). Noteworthy, return to Cetip s shareholders may be capped if BVMF s average closing price in the 30 trading sessions before the date the last regulatory approval is granted is above ~R$18.6, as the exchange ratio will be adjusted to limit the price paid by BVMF (cap mechanism). On a stand-alone basis, we would arrive at a R$47 TP for Cetip, yielding 7.9% upside potential, suggesting that the market is pricing in an overly exaggerated chance that the transaction will not materialize, which, though, remains the main risk to our recommendation. Brazilian Exchanges: Coverage Overview Multiples Multiples at target price Current price Target price Upside potential 2017E P/E 2018E P/E 2017E TP/E 2018E TP/E BVMF3 R$16.4 R$ % 15.4x 13.3x 18.7x 16.2x CTIP3 R$43.6 R$ % 18.0x 16.3x 22.4x 20.2x Source: Company data, Credit Suisse 5

6 Adding Resilience to Growth Potential Growth outlook supports high multiples: BVMF and Cetip alone were two companies with compelling top-line growth potential and high operating leverage. On a stand-alone basis, we anticipate 15.0% 2022E-2017E Ebitda CAGR for BVMF and 9.4% for Cetip. Together, not only is the business more shielded from competition, limiting earnings risk, but synergies are also likely to boost earnings further. We expect the new company to deliver 13.4% 2022E-2017E Ebitda CAGR and 12.4% net profit CAGR, which, coupled with strong cash generation and its monopoly status that limits risk, justify high valuation levels. Ebitda of BM&FBovespa R$ million 11.1% 1,442 1,602 Growth 3.9% 12.8% 1, % 2, % 2,528 2,881 3,270 3, % 13.5% 12.9% CSe vs. Consensus 8.8% 7.3% Ebitda of Newco R$ million Growth 15.9% 14.5% 4,256 4,780 5, % 1,665 3, % 12.3% 11.9% 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E ,296 Ebitda of Cetip R$ million Growth 9.7% % % % 9.5% 986 1,080 1, % 1,288 1,413 1, % 9.8% 9.6% , % 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E Source: The BLOOMBERG PROFESSIONAL service, Company data, Credit Suisse -3.0% 2017E 2018E 2019E 2020E 2021E 2022E 6

7 Street Used to Be Let Down Waiting for growth since 2010: BVMF s Ebitda prints for the past six years have been significantly below expectations set one, two, and three years before the earlier the forecast, the more overestimated it was. From 2010 to 2015, Ebitda, on average, came in 7% below expectations set one year before it was disclosed, 22% below, two years before, and as much as 29%, three years before. Investors thus have reasons to not give benefit of the doubt to earnings growth, as long-term sell-side forecasts turned out to be overly optimistic in the vast majority of time. We believe BVMF s track record of downward earnings revisions, mainly due to deteriorating macro fundamentals and weaker-than-expected ADTV, may partially explain discount to global peers. New kids on the block: We, however, believe this time will be different, as consensus estimates seems to be more on the conservative side, anticipating only 11% growth for the following year, compared to 24% forecasted for 2011 one year before, 20% for 2012, and 18% for 2013, for instance. Moreover, the past few months have been providing solid foundation for a good year ahead, namely higher Ibovespa, stronger volumes, and, more recently, weaker BRL. Whether or not this will be another report to overestimate earnings growth, time will tell but we will demonstrate over the next few pages why we are convinced that earnings risk is now skewed to the upside. Ebitda beat (miss) to consensus Actual Ebitda vs. consensus estimates one, two, and three years before One year before Two years before Three years before 6% 9% 1% n.a. n.a. n.a. -4% -7% -10% -11% -18% -20% Source: The BLOOMBERG PROFESSIONAL service, Credit Suisse -20% -26% -24% -27% % -27% -29% -32% -32%

8 Inexpensive Valuation Compared to Historical Average New company, new multiples: We see BVMF trading at 15.4x 2017E P/E and 13.3x 2018E P/E on a pro forma basis, assuming Cetip is fully incorporated in 1Q17. These multiples compare to a five-year average of 14.9x 12-month forward earnings for BVMF and Cetip combined, adjusted for stake in CME and full distribution of interest on equity and calculated until preliminary discussions about a merger were officially announced (November 3, 2016), when multiples became heavily influenced by market expectations of gains from the transaction and the control premium BVMF would pay to Cetip s shareholders. In order to calculate BVMF s multiple, we do not consider tax gains from goodwill and intangibles amortization in its denominator (recurring earnings), so we believe it would be fair to deduct the present value from the tax gains from the numerator (market cap), which amounts to R$1.01/BVMF3 and, as a result, would bring multiples to 14.4x 2017E P/E and 12.5x 2018E P/E. Re-rating of Brazilian companies taken into account: In the five years prior to the transaction s announcement, BVMF and Cetip, combined, traded at a 42% premium to the IBX index, on average. Today, BVMF s 15.4x 2017E multiple is only 17% above IBX s 13.2x, close to one standard deviation below historical average. In our view, this suggests that BVMF did not follow the re-rating of the Brazilian stock market led by discount rate narrowing and, accordingly, indicates room for P/E expansion. Owing to less concerns about competition and the increasing resilience of its earnings, we believe that BVMF s multiple should be above its historical average and at a higher premium to IBX index, justifying the 16.2x 12-month forward P/E at our target price. BVMF + CTIP: Combined P/E until Transaction Announcement 12-month forward consensus P/E 20x BVMF + CTIP: Combined P/E Premium to IBX Index 12-month forward consensus P/E 90% 18x 12m fwd P/E +1 st dev 80% 70% 60% +1 st dev 16x 14x 12x Average -1 st dev CSe 50% 40% 30% 20% 10% 12m fwd P/E -1 st dev Average CSe 0% 10x Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Source: The BLOOMBERG PROFESSIONAL service, Credit Suisse -10% Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 8

9 Global Comps Are the Only Comps BVMF vs. the world: As an undisputed regional leader, BVMF, in our view, must be compared to the most important exchanges in the world; after all, it will become the sixth-largest exchange following Cetip s integration. The company, on a pro forma basis, is trading at a 13% discount to the median 2017E P/E ratio of global exchanges, despite substantial short-term earnings dilution owing to Cetip s integration, and at a 18% discount to 2018E P/E. Compared to the weighed average P/E, the discount stands at 32% for 2017E and 33% for 2018E. Although discount may be partially explained by Brazil s high cost of equity, we believe it is overly exaggerated, especially in light of BVMF s superior earnings growth potential. 2017E P/E Ratio (in USD terms) MCX HKEx CBOE Holdings Hellenic Exchanges CME Group DFM Global exchanges (weighed average) JPX Big 4 ASX SGX Bursa Malaysia ICE Global exchanges (median) LSE BMV NZX BME BVMF NASDAQ INC Deutsche Boerse TMX Group GPW JSE Moscow Exchange 35.9x 31.0x 27.2x 25.6x 23.4x 23.4x 23.4x 22.1x 21.6x 21.1x 20.9x 18.5x 18.4x 18.3x 16.5x 16.3x 16.2x 16.0x 15.9x 15.6x 14.0x 12.9x 12.9x 12.4x 43.9x Market Cap of Ten Largest Exchanges R$ billion 38.3 CME Group ICE HKEx Deutsche NASDAQ Boerse INC 2018E P/E Ratio (in USD terms) HKEx MCX CBOE Holdings CME Group JPX Global exchanges (weighed average) ASX Big 4 Hellenic Exchanges Bursa Malaysia SGX DFM BME Global exchanges (median) LSE ICE BMV NASDAQ INC NZX BVMF Deutsche Boerse TMX Group JSE GPW Moscow Exchange BVMF (proforma) JPX ASX CBOE Holdings SGX 32.7x 31.0x 28.0x 24.0x 21.5x 21.4x 21.3x 20.2x 20.1x 19.8x 19.0x 18.0x 17.9x 17.2x 16.5x 16.4x 15.2x 14.9x 14.6x 14.4x 14.1x 13.4x 12.7x 12.5x 12.2x Source: The BLOOMBERG PROFESSIONAL service, Credit Suisse 9

10 Growth Is the Name of the Game Growing like almost no one else: In 2018, we expect BVMF to deliver Ebitda growth of 11.5% in USD terms, (or 15.9% in nominal terms), the fourth-highest in the group of exchanges and 5.1 p.p. above the global average. We also believe its long-term growth potential is ahead of the pack, due to very low penetration of some of its products (e.g., cash equities), growth initiatives that may bear fruits over the next few years (e.g., IPCA futures and the Tesouro Direto), and gradual materialization of synergies from the Cetip acquisition. Compelling PEG ratios: BVMF s 2017E PEG ratio (2017E P/E vs. 2018/2017 earnings growth) is 1.4x in USD terms and 1.0x in nominal terms, one of the lowest in our sample of global exchanges. This, in our view, reinforces the relative attractiveness of its valuation. Moreover, the PEG ratio is in line with its level immediately before the potential merger began to influence share prices. Although the rule of thumb suggests that a PEG ratio above 1.0x indicates rich valuation levels, we believe that exchanges sound profitability, robust cash flow generation, and relatively lower earnings risk justify higher PEG ratios. BVMF: PEG ratio 12-month forward P/E / 24-month/12-month forward net profit growth 1.3x 1.1x 0.9x 0.7x +1 st dev Average PEG ratio -1 st dev 0.5x Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Global Exchanges: Earnings Growth 2018E/2017E Ebitda growth; in USD terms Global Exchanges: PEG Ratio 2017E P/E / 2018E/2017E Ebitda growth; in USD terms MCX DFM Hellenic Exchanges BVMF SGX CBOE Holdings LSE Deutsche Boerse HKEx BMV Big 4 Global exchanges (weighed average) ICE Bursa Malaysia Global exchanges (median) CME Group JPX NASDAQ INC NZX TMX Group ASX GPW Moscow Exchange JSE 11.5% 10.4% 10.1% 9.4% 9.3% 9.2% 8.1% 8.1% 7.4% 7.0% 6.7% 6.4% 6.2% 5.0% 4.5% 4.5% 4.0% 3.0% 1.8% 1.8% 1.0% 28.1% 42.4% 58.4% JSE ASX GPW Moscow Exchange JPX CME Group TMX Group HKEx NASDAQ INC Global exchanges (weighed average) NZX Big 4 CBOE Holdings Global exchanges (median) Bursa Malaysia ICE BMV LSE SGX Deutsche Boerse BVMF Hellenic Exchanges MCX DFM 4.3x 4.1x 3.6x 3.5x 3.5x 3.3x 3.3x 3.1x 3.1x 3.0x 3.0x 2.7x 2.0x 1.9x 1.8x 1.7x 1.4x 1.0x 0.5x 0.4x 7.1x 7.1x 7.0x 12.1x Source: The BLOOMBERG PROFESSIONAL service, Credit Suisse 10

11 Attractive from Growth and Value Perspectives Cash is king: Owing to high Ebitda margins, exchanges usually have strong operating cash flow generation, in spite of their capital-intensive nature. BVMF is no different, especially now that not only the company but also Cetip are at the end of the capex cycles, fueling cash flow in the next few years. Although part of cash flow generation will be allocated to the company s deleveraging (target of 1.0x gross debt-to-ebitda in 2019), we believe the company will be able to sustain high payout ratios (80% in 2017 and 2018, and 95% from 2019 onwards). A stock for growth and value investors: BVMF s free cash flow yield of 6.5% for 2017E and 7.7% for 2018E is attractive (or 6.8% and 8.3% in nominal terms), significantly above the average yield of global exchanges and Brazilian companies. BVMF therefore offers a rare combination of a very inspiring growth outlook and high free cash flow yield (and medium-to-long term dividend yield), making it easier for investors to pay for growth in advance. Capex R$ million A 2012A 2013A 2014A 2015A 2016E 2017E 2018E Global Exchanges: 2018 Free Cash Flow Yield Operating cash flow / market cap; in USD terms Brazilian GICS Sectors: 2018 Free Cash Flow Yield Operating cash flow / market cap; in USD terms Bursa Malaysia Moscow Exchange BMV NZX JPX BVMF TMX Group ICE Deutsche Boerse Global exchanges (median) NASDAQ INC SGX Big 4 BME Global exchanges (weighed average) LSE ASX CME Group CBOE Holdings HKEx 11.2% 9.2% 8.0% 7.7% 7.7% 7.6% 6.8% 6.8% 6.7% 6.7% 5.7% 5.5% 5.5% 5.4% 4.7% 4.7% 4.3% 3.6% 2.8% 16.7% Utilities BVMF Materials Telecommunication Services Energy Information Technology Total Consumer Staples Consumer Discretionary Health Care Real Estate Industrials 0.7% 2.9% 5.7% 5.2% 7.1% 7.0% 6.9% 6.6% 6.5% 6.5% 8.3% 10.0% Source: The BLOOMBERG PROFESSIONAL service, Company data, Credit Suisse 11

12 Increase in stock market capitalization Increase in stock market capitalization Increase in stock market capitalization 27 November 2016 Earnings Becoming More and More Resilient A gradually more resilient company: Following the acquisition of Cetip and increasing relevance of the BM&F segment, BVMF is becoming less sensitive to cash equities volumes and, as a consequence, to market conditions. Moreover, owing to FX exposure of listed and OTC derivatives, part of BVMF s revenue stream embeds countercyclical nature, not to mention the resilience of Cetip s custody revenues. We also expect the take-off of recently launched products to drive earnings growth in the next few years, such as the Tesouro Direto and mortgage platforms. Weak 2017 would not impair investment thesis: Our earnings growth assumption depends to a good extent on our ADTV estimates, which, in turn, are a function of stock market capitalization and turnover velocity. However, if stock market performs poorly next year and, accordingly, our ADTV assumptions turn out to be overestimated, we would still find enough upside to justify an Outperform rating. For instance, if the aggregate market cap declines 12% next year (vs. our estimate of an increase of 12%) and we revise our long-term turnover velocity to subdued 68% (vs. our estimate of 78%), our ADTV estimates would be 23% lower and our target price would consist of R$18.0, implying still decent upside potential of 9.6%. In addition to that, if economy deteriorates further and weighs on stock market performance, it may also lead to BRL depreciation and increasing demand for hedging, potentially boosting the BM&F and Cetip s securities unit segments and partially offsetting lower-than-expected cash equities revenues. Sensitivity to increase in stock market capitalization and turnover velocity Cash equities ADTV R$ million Turnover velocity Target price R$ Turnover velocity Upside potential to target price % Turnover velocity 68% 73% 78% 83% 88% 68% 73% 78% 83% 88% 68% 73% 78% 83% 88% -11.9% 6,641 7,129 7,617 8,105 8, % % 9.6% 15.6% 15.6% 15.6% 15.6% -0.5% 7,052 7,571 8,089 8,608 9, % % 15.6% 15.6% 15.6% 21.7% 21.7% 12.0% 7,486 8,036 8,587 9,137 9, % % 15.6% 21.7% 21.7% 21.7% 27.8% 25.7% 7,943 8,527 9,111 9,695 10, % % 21.7% 21.7% 27.8% 27.8% 27.8% 40.5% 8,423 9,042 9,662 10,281 10, % % 27.8% 27.8% 33.9% 33.9% 33.9% Source: Company data, Credit Suisse 12

13 Competition No Longer Keeps Investors Awake at Night; Re-rating Warranted Not only entry barriers but also diversification are higher than ever: Although we do believe that noise about competition may come back if the ADTV improves materially, we think it is less of a concern nowadays. First, the Cetip acquisition (i) strengthens BVMF s leadership in the exchange sector, raising its efficiency and reinforcing its ability to offer the most competitive prices; (ii) curbs the development of a totally separate central counterparty, as Cetip is currently developing a CCP for OTC derivatives, which now will likely be integrated into BVMF s clearing house; and (iii) eliminates a potential partner for foreign exchanges in case they decide to invest in the country. More importantly, cash equities trading revenues are gradually less important to the company, amounting to just ~5% of its pro forma top-line. We believe competition in post-trading activities, where the bulk of cash equities economics lies, is very unlikely, owing to the scale needed to develop infrastructure, assess risk of market participants, and calculate collateral, yielding several inefficiencies. The higher the competitive threat, the lower the multiple: In the past, economic outlook and competition rumors were correlated, as, when the former was bright, the latter gained steam due to increasing attractiveness of the local market, which weighed on BVMF s multiples. In 2011, following Brazil s eye-opening ADTV and GDP growth, Direct Edge and Bats announced their intention to launch cash equities exchanges in Brazil, triggering concerns about competition and ultimately a de-rating of BVMF. In early 2012, competition remained a hot topic, with CVM fostering discussions about the impact of competition in order to inform new entrants of regulatory requirements. Building a natural monopoly: Competition talks, though, gradually cooled down, as Bats, which was considering launching a vertically-integrated exchange and therefore posed a bigger threat to BVMF, gave up in 2012 and, later on, acquired Direct Edge. Today, ATS is the only player that is vocal about opening a trading platform in Brazil, but its initiative seems to be in the early stages. (CVM rejected its registration request in April 2016.) The Brazilian exchange industry, in our view, resembles a natural monopoly, due to BVMF s horizontally and vertically integrated nature, strengthened by the integration of its clearing houses, and the demanding regulatory framework (e.g., identification of final beneficiaries). The benefits of competition among market participants are dubious; more so is the potential value accretion for new entrants. BVMF s Historical P/E Ratio (12-month forward P/E; average P/Es for selected periods highlighted) 22x 20x 18x 16x 14x 12x H x 12.6x 2H11-1H12 2H x x 10x Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Source: The BLOOMBERG PROFESSIONAL service, Company data, Credit Suisse 13

14 Tax Dispute of Up to R$9.5bn Is Major Tail Risk Long-lived overhang: In 2010 the Brazilian Revenue Service (RFB) challenged BVMF s tax benefit related to the goodwill amortization stemming from the merger of BM&F and Bovespa. The first violation notice encompassed the taxes allegedly not collected in 2008 and 2009 only, although the company continued to amortize goodwill and deduct it from the tax base and will continue to do so until next year. The company appealed to the Administrative Board of Tax Appeals (Carf), whose lower chamber ruled in favor of the RFB (in a 3 vs. 3 opinion, with a tie-breaker vote in favor of the RFB). BVMF then appealed to Carf s upper chamber, whose final decision is still pending, as its members requested to review the record in October s and November s sessions, postponing the judgment (two preliminary opinions have been casted in favor of the RFB). Note that in April 2015 the RFB issued a violation notice in regards to 2010 and 2011, which is currently being assessed by Carf s lower chamber Take a seat; a lot more is yet to come: If the company loses at Carf, the discussion will likely move to court, and a final decision could take another 10 to 15 years. Our understanding is that the company will not make provisions even in that scenario, but we note that it may need to pay for bank/insurance guarantees if the court so requires. Although we believe BVMF s defense is strong (RFB's challenges in regards to the market cap date used in goodwill calculations and the timing of the appraisal report seem feeble), the potential tax liability will become a lot bigger before it is settled, as we believe more violation notices will be issued for 2012 to Assuming (i) the company is fined for the entire period for which it amortized goodwill, (ii) a 75% fine (125% for 2008 and 2009 only) is imposed, and (iii) the amounts are adjusted for inflation and accrued with non-compounded interest, the present value of the potential tax liability would amount to as much as R$9.5bn (28% of pro forma market cap). Present Value of Potential Tax Liability Related to Goodwill Amortization (R$ million) 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E Goodwill amortization ,348 1,467 1,586 1,634 1,631 1,618 1,592 1,565 Tax rate 34% 34% 34% 34% 34% 34% 34% 34% 34% 34% Tax shield (R$) Assumed fine 125% 125% 75% 75% 75% 75% 75% 75% 75% 75% Implicit fine Total payable IGP-M / Ke 9.8% -1.7% 11.3% 5.1% 7.8% 5.5% 3.7% 10.5% 7.5% 15.0% Non-compounded interest Present value 377 1,040 1,128 1,111 1,152 1,117 1,071 1, Present value 9,543 Source: Company data, Credit Suisse 14

15 Valuation Matrix of Exchanges Company Ticker CS Rating Market cap (USD million) Local currency Closing Price (local currency) Target Price (local currency) Upside / Downside P/E ratio Free cash flow yield Dividend yield Earnings growth PEG ratio EBITDA Margin 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2018E / 2018E / 2017E 2016E 2018E / 2018E / 2017E 2016E 2016E 2017E 2018E BM&FBovespa (pro-forma) BVMF3.SA 9,935 BRL n.a. 16.4x 14.1x n.a. 6.7% 8.2% n.a. 4.8% 5.7% 15.2% 17.2% 1.1x 0.9x 66.6% 72.7% 74.9% BM&FBovespa BVMF3.SA O 8,717 BRL % 15.5x 14.4x 13.1x 3.7% 5.4% 6.4% 2.4% 5.5% 6.1% 17.7% 26.7% 0.8x 0.5x 57.2% 69.9% 72.2% Cetip CTIP3.SA O 3,344 BRL % 19.1x 16.8x 15.3x 6.9% 7.7% 8.6% 3.3% 4.6% 5.7% 9.5% 9.3% 1.8x 1.8x 70.8% 70.9% 71.0% Global exchanges (median) 21.4x 18.4x 17.2x 5.5% 6.1% 6.7% 3.5% 3.7% 4.2% 6.4% 6.5% 3.0x 1.8x 54.7% 56.5% 57.8% Diversified exchanges 20.9x 17.5x 17.1x 5.8% 6.1% 6.8% 4.0% 4.3% 4.4% 6.4% 6.5% 3.1x 2.2x 57.4% 57.5% 58.3% Top 4 (CME, HKEX, ICE, DB1/LSE) 23.1x 22.1x 20.2x 4.8% 5.1% 5.5% 2.7% 3.0% 3.2% 8.1% 6.7% 3.1x 3.6x 70.3% 69.7% 70.6% Global exchanges (weighed average) 25.3x 23.4x 21.4x 4.7% 5.0% 5.4% 2.8% 3.0% 3.1% 7.4% 6.5% 3.3x 3.1x 65.3% 65.6% 66.6% Diversified exchanges 26.1x 24.1x 22.1x 4.6% 4.8% 5.2% 3.1% 3.3% 3.3% 6.9% 5.7% 3.4x 4.2x 67.2% 66.9% 67.6% Top 4 (CME, HKEX, ICE, DB1/LSE) 27.0x 24.6x 22.4x 4.2% 4.5% 4.9% 2.7% 2.9% 3.0% 7.8% 7.1% 3.1x 4.1x 66.7% 66.8% 67.7% American exchanges 19.1x 17.5x 15.8x 4.8% 6.0% 6.7% 2.0% 2.1% 2.0% 6.6% 5.3% 3.3x 3.1x CME Group CME N 38,292 USD % 26.2x 25.6x 24.0x 4.3% 4.1% 4.3% 4.7% 4.9% 4.7% 6.2% 3.8% 4.1x 6.8x 71.5% 71.2% 71.8% Intercontinental Exchange ICE.N O 32,578 USD % 20.0x 18.5x 16.4x 5.2% 6.1% 6.8% 1.2% 1.3% 1.4% 7.0% 4.8% 2.7x 3.8x 70.2% 70.0% 71.7% NASDAQ INC NDAQ O 10,852 USD % 18.1x 15.9x 14.9x 4.4% 5.9% 6.7% 0.9% 0.9% 0.9% 4.5% 8.8% 3.5x 1.8x 64.4% 69.0% 70.5% CBOE Holdings CBOE N 5,562 USD % 29.8x 31.0x 28.0x 3.2% 3.2% 3.6% 1.4% 1.5% 1.7% 10.1% 3.9% 3.1x 7.9x 54.5% 52.9% 55.3% TMX Group X.TO NR 2,672 CAD % 14.9x 14.0x 13.4x 7.1% 7.3% 7.6% 2.5% 2.8% 2.4% 4.0% 5.8% 3.6x 2.4x 50.2% 52.2% 52.3% Bolsa Mexicana de Valores BOLSAA.MX O 801 MXN % 18.1x 16.5x 15.2x 7.8% 8.6% 9.2% 3.9% 4.4% 4.8% 8.1% 9.7% 2.0x 1.7x 49.6% 51.0% 51.7% Euorpean exchanges 16.3x 15.9x 15.3x 7.5% 6.1% 6.1% 4.4% 4.3% 4.9% 5.6% 5.4% 1.8x 1.1x Deutsche Boerse DB1Gn.F N 14,823 EUR % 17.3x 15.6x 14.1x 5.6% 6.1% 6.8% 3.2% 3.4% 3.7% 9.3% 8.6% 1.7x 1.8x 50.2% 51.6% 53.1% London Stock Exchange LSE.L O 12,344 GBp % 22.6x 18.3x 16.5x 4.6% 4.1% 4.7% 1.3% 1.7% 2.4% 9.4% 13.2% 1.9x 1.4x 52.3% 56.3% 57.6% Moscow Exchange MOEX.MM N 4,018 RUB % 10.8x 12.4x 12.2x 12.4% 11.0% 11.2% 5.6% 5.2% 5.3% 1.8% -5.1% 7.0x -2.4x 75.7% 71.6% 70.4% Bolsas y Mercados Espanoles BME.MC U 2,558 EUR % 15.3x 16.2x 17.9x 9.5% 6.1% 5.5% 6.7% 5.9% 5.3% -8.9% -6.1% -1.8x -2.7x 66.8% 66.8% 64.7% Warsaw Stock Exchange GPW.WA NR 377 PLN % 13.8x 12.9x 12.5x n.a n.a n.a 5.9% 5.8% 6.0% 1.8% 2.2% 7.1x 5.9x 54.9% 55.6% 55.5% Hellenic Exchanges EXCr.AT NR 337 EUR % 40.9x 27.2x 20.1x n.a. n.a. n.a. 2.4% 3.3% 4.4% 28.1% 35.1% 1.0x 0.8x 38.7% 47.1% 51.8% Asian & Pacific exchanges 22.5x 21.6x 21.3x 5.8% 6.2% 6.7% 3.9% 4.0% 4.2% 6.7% 6.8% 3.3x 3.1x Hong Kong Exchanges & Clearing 0388.HK NC 32,360 HKD % 41.0x 35.9x 32.7x 2.1% 2.6% 2.8% 2.2% 2.5% 2.7% 9.2% 10.4% 3.5x 3.4x 70.4% 69.4% 69.6% Japan Exchange Group 8697 U 8,404 JPY % 21.2x 23.4x 21.5x 8.0% 7.4% 7.7% 2.9% 2.6% 2.8% 5.0% -1.8% 4.3x -13.2x 65.2% 63.4% 63.5% Australian Securities Exchange ASX.AX N 6,899 AUD % 21.7x 21.6x 21.3x 4.3% 4.6% 4.7% 4.1% 4.2% 4.2% 3.0% 2.4% 7.1x 8.9x 77.1% 76.4% 76.1% Singapore Exchange Ltd. SGXL.SI N 5,345 SGD % 21.9x 21.1x 19.0x 5.5% 5.0% 5.7% 3.9% 4.0% 4.5% 10.4% 6.8% 1.8x 3.1x 57.2% 56.8% 57.9% Bursa Malaysia Berhad BMYS.KL NC 1,021 MYR % 22.5x 20.9x 19.8x 11.5% 13.8% 16.7% 4.2% 4.4% 4.2% 6.7% 6.7% 3.0x 3.1x 57.5% 58.2% 58.6% Multi Commodity Exchange of India Ltd. MCEI.NS NR 924 INR % 57.8x 43.9x 31.0x n.a. n.a. n.a. 0.5% 1.0% 1.4% 58.4% 68.5% 0.5x 0.6x 32.6% 43.5% 50.4% New Zealand Exchange NZX.NZ O 193 NZD % 27.1x 16.3x 14.6x 6.0% 7.8% 8.0% 5.9% 6.1% 6.1% 4.5% 17.4% 3.3x 0.9x 29.4% 37.8% 38.3% African & Middle East exchanges 21.8x 18.1x 15.4x n.a n.a n.a 4.3% 5.3% 5.2% 21.7% 20.9% 6.3x 1.3x Johannesburg Stock Exchange JSEJ.J NR 992 ZAR % 14.3x 12.9x 12.7x n.a. n.a. n.a. 4.4% 5.0% 5.2% 1.0% 6.3% 12.1x 2.0x 47.8% 48.5% 47.1% Dubai Financial Market DFM.DU NC 2,549 AED % 29.3x 23.4x 18.0x n.a. n.a. n.a. 4.3% 5.6% 5.1% 42.4% 35.5% 0.4x 0.7x 50.4% 63.5% 74.1% Brazil diversified financials Cielo CIEL3.SA O 19,829 BRL % 15.8x 13.9x 11.8x 6.0% 8.0% 8.9% 1.3% 1.3% 1.5% 18.3% 16.3% 0.8x 1.0x 53.5% 52.7% 53.5% BB Seguridade BBSE3.SA N 16,300 BRL % 13.6x 12.3x 11.0x 8.7% 9.5% 10.7% 5.9% 6.5% 7.3% 12.2% 11.4% 1.0x 1.2x n.a. n.a. n.a. Porto Seguro PSSA3.SA N 2,662 BRL % 10.0x 9.7x 9.4x 0.4% 0.6% 1.5% 3.8% 3.5% 5.2% 3.1% 3.2% 3.1x 3.1x n.a. n.a. n.a. SulAmerica SULA11.SA U 1,832 BRL % 9.2x 8.7x 8.2x 1.0% 0.9% 2.2% 2.0% 2.7% 2.8% 6.3% 6.3% 1.4x 1.5x n.a. n.a. n.a. Par Corretora PARC3.SA N 643 BRL % 14.2x 12.6x 11.2x 9.9% 11.4% 12.9% 7.1% 7.9% 8.8% 12.4% 12.4% 1.0x 1.1x 51.9% 52.5% 53.5% Source: The BLOOMBERG PROFESSIONAL service, Credit Suisse 15

16 BM&FBovespa: Corporate Summary FINANCIAL METRICS (R$ mn) 2014A 2015A 2016E 2017E 2018E 2019E OPERATING METRICS 2014A 2015A 2016E 2017E 2018E 2019E Gross Revenues 2,250 2,459 2,533 2,823 3,219 3,637 BMF ADV (in mn contracts) Net revenues 2,034 2,217 2,281 2,542 2,898 3,275 ADTV Growth Rate -7.3% 10.7% 7.0% 10.7% 8.5% 8.5% Total Expenses (809) (851) (1,139) (910) (955) (1,000) Bovespa ADTV (R$ mn) 7,292 6,793 7,264 8,587 9,778 11,011 EBIT 1,225 1,366 1,142 1,632 1,943 2,275 ADTV Growth Rate -1.7% -6.9% 6.9% 18.2% 13.9% 12.6% EBIT margin 60% 62% 50% 64% 67% 69% BMF Rate per Contract (R$) Net Financial Revenue Bov Trading Clearing Fees (bps) Income Tax (661) (604) (303) (330) (418) (550) Avg Eq. Turnover velocity (%) 76% 76% 81% 78% 78% 78% Net income 977 1,445 1,002 2,024 2,223 2,511 Adjusted Net Income (CS) 1,370 1,571 1,893 2,043 2,234 2,515 Adjusted Net Income (BVMF) 1,478 1,819 2,355 2,628 2,287 2,568 LEVERAGE 2014A 2015A 2016E 2017E 2018E 2019E Net margin 67% 71% 83% 80% 77% 77% Net debt/ Adj. EBITDA 1.6x 1.9x 7.2x 5.9x 5.4x 4.9x # shares ('000) 1,851 1,795 1,785 1,787 1,787 1,787 Net debt / Total cap. 7% 9% 30% 34% 37% 40% EPS (R$) Net debt / Equity 12% 15% 47% 53% 57% 60% EBITDA 1,344 1,477 1,241 1,749 2,075 2,422 Capex / Depreciation EBITDA margin 66% 67% 54% 69% 72% 74% EBITDA/Net Financ. Rvnues NOPAT ,077 1,282 1,502 FCFE 1,191 1,873 1,854 2,210 2,483 2,660 Dividends (751) (409) (705) (1,216) (1,724) (2,232) RETURN / YIELD 2014A 2015A 2016E 2017E 2018E 2019E Total assets 25,538 26,309 27,871 29,391 30,585 31,466 Adj. ROE 17.3% 18.9% 21.3% 22.0% 23.0% 25.5% Cash 3,856 5,250 11,467 12,825 13,852 14,561 FCF Yield 4.0% 6.2% 6.2% 7.4% 8.3% 8.9% Other assets 4,910 5,869 1,140 1,301 1,469 1,640 Div. Yield -2.5% -1.4% -2.3% -4.0% -5.7% -7.4% Intangible 16,773 15,190 15,264 15,264 15,264 15,264 Payout 80.3% 56.4% 70.0% 80.0% 80.0% 95.0% Net debt (2,189) (2,796) (8,889) (10,241) (11,267) (11,977) Book value 18,980 18,342 18,944 19,348 19,793 19,919 Market cap. 30,047 30,047 30,047 30,047 30,047 30,047 VALUATION 2014A 2015A 2016E 2017E 2018E 2019E EV 27,858 27,251 21,158 19,806 18,779 18,070 EV / Adj. EBITDA 20.7x 18.5x 17.1x 11.3x 9.0x 7.5x Depreciation P/E 21.9x 19.1x 15.9x 14.7x 13.5x 11.9x Capex Adj. P/E 22.2x 18.8x 15.5x 14.4x 13.1x 11.7x Source: Company data, Credit Suisse 16

17 Cetip: Corporate Summary FINANCIAL METRICS (R$ mn) 2014A 2015A 2016E 2017E 2018E 2019E OPERATING METRICS 2014A 2015A 2016E 2017E 2018E 2019E Gross Revenues 1,222 1,363 1,535 1,656 1,811 1,967 Registration - fixed income (R$ bn) 8, , , , , ,442.9 Net revenues 1,013 1,125 1,277 1,392 1,522 1,653 Registration - derivatives (R$ bn) 6,208 9,845 8,421 7,155 7,854 8,621 Total Expenses (400) (448) (492) (525) (563) (606) Avg. Number of Transactions (thousands) 151, , , , , ,172 EBIT ,047 Utilization - Avg. Number of Clients 12,214 12,509 12,237 12,234 12,478 12,728 EBIT margin 61% 60% 61% 62% 63% 63% Vehicles financed ('000) 6,393 5,312 4,514 4,555 4,827 5,047 Net Financial Revenue (59) (111) % GRV contracts penetration 49.7% 12.9% 0.0% 0.0% 0.0% 0.0% Taxes (130) (70) (308) (259) (288) (314) Net income LEVERAGE 2014A 2015A 2016E 2017E 2018E 2019E Adjusted Net Income Net debt/ Adj. EBITDA 0.1x 0.2x (0.2)x (0.3)x (0.4)x (0.4)x Net margin 45% 47% 47% 48% 49% 48% Net debt / Total assets 2% 4% -6% -12% -15% -18% # shares ('000) Net debt / Equity 4% 8% -11% -17% -20% -24% EPS (R$) Capex / Depreciation (1.9)x (2.2)x (1.7)x (1.8)x (1.6)x (1.5)x EBITDA ,078 1,173 EBITDA/Net Financ. Revenues (11.9)x (6.9)x 9.8x 32.3x 29.7x 39.1x EBITDA margin 69% 68% 70% 70% 71% 71% NOPAT FCFE RETURN / YIELD 2014A 2015A 2016E 2017E 2018E 2019E Dividends ROE 26% 31% 31% 33% 35% 37% Total assets 2,999 3,497 3,947 2,943 2,823 2,901 FCFE Yield 5.1% 4.5% 7.7% 5.9% 6.6% 7.2% Cash 719 1,174 1, FCFF Yield 1.6% 1.6% 1.4% 1.7% 5.8% 1.6% Long-Term Assets 2,122 2,115 2,122 2,117 2,107 2,089 Div. Yield 3.3% 3.8% 3.5% 4.9% 6.0% 6.5% Net debt (218) (341) (429) (511) Payout 75% -12% -35% -29% -29% -29% Book value 1,746 1,696 1,920 2,034 2,101 2,154 Market cap. 11,153 11,153 11,153 11,153 11,153 11,153 VALUATION 2014A 2015A 2016E 2017E 2018E 2019E EV 11,223 11,282 10,935 10,812 10,725 10,642 EV / Adj. EBITDA 16.1x 14.6x 12.3x 11.0x 9.9x 9.1x Depreciation (31) (41) (67) (61) (68) (74) P/E 24.8x 21.3x 19.1x 16.8x 15.3x 14.2x Capex Adj. P/E 24.5x 21.0x 18.8x 16.6x 15.1x 14.0x Registration Custody Transactions Utilization Others SNG Vehicles GRV Contracts Information services Earnings growth 18% 17% 14% 13% 11% 8% Source: Company data, Credit Suisse 17

18 Equity Research The New Exchange A Look at the Merger of BM&FBovespa and Cetip DIVISÓRIA

19 Giving Birth to an Exchange Powerhouse BVMF and Cetip to join forces in 1Q17: Following global trends of consolidation of exchanges and the creation of regional hubs, BVMF recently announced the acquisition of Cetip. The undisputed leader in Brazil s cash equities and listed derivatives markets will now also reign in the OTC derivatives and fixed income segments, not to mention the vehicle financing platform. The transaction, which we expect to be concluded in 1Q17, will give birth to the fifth-largest exchange in the world, on a market cap basis. Strategically, this transaction improves the competitive landscape for the company, reinforces its leadership position in LatAm, and leaves room for efficiency gains through G&A synergies. Timeline of the Acquisition 13-Nov-2015: BM&FBovespa sends a non-binding offer to Cetip s board of directors for R$39.0/share (50% cash). November 19-Feb-2016: BM&FBovespa sends a binding offer to Cetip s board of directors for R$40.2/share, comprised of a cash portion of R$30.75/share (subject to interest rate (CDI) adjustment) and a share swap ratio of :1. The CDI adjustment would start on the date of the shareholder meeting of Cetip that approves the transaction. February Mar-2016: Cetip s board of directors refuses BM&FBovespa s binding offer but authorizes management to sign a confidentiality agreement and its advisors to initiate discussions for the transaction. March 8-Apr-2016: Board of directors of both companies approve the financial terms of the deal, comprised of a cash portion of R$30.75/share (subject to interest rate (CDI) adjustment) and a share swap ratio of :1. The CDI adjustment, under the final agreement, starts on this date. April June 28-Jun-2016: BM&FBovespa reports the business combination to Brazil's antitrust authority (Cade) and requests approval. Approval by Brazilian Securities Commission (CVM) Approval by Central Bank of Brazil Q17: Following regulatory approvals, financial settlement should take no more than 40 days. November December February April May 3-Nov-2015: BM&FBovespa announces it is engaged in preliminary discussions with Cetip for a proposed combination of both companies. 4-Dec-2015: Cetip s board of directors announces that the nonbinding offer does not represent Cetip s fair value. 29-Feb-2016: BM&FBovespa's management sends a letter to its shareholders, explaining the benefits to clients and regulators of the inclusion of OTC derivatives in its business. 7-Apr-2016: BM&FBovespa sells its 4% stake in CME to fund the acquisition. 20-May-2016: Shareholders of both companies approve the transaction. 1Q17: Cade has 240 days following the antitrust filing to analyze the transaction, which period is extendible for 90 days. Source: Company data, Credit Suisse 19

20 Limited Overlap to Result in Smooth Approval Process Nearly a horizontal merger: We expect that the Brazilian Antitrust Authority (Cade) will approve the deal with only minor remedies (e.g., price caps for a given period, access of potential competitors to post-trading platforms at reasonable fees). Although the deal will result in a company that has a virtual monopoly in the local exchange market, we note that BVMF already dominates equities and listed derivatives segments and Cetip, OTC derivatives and fixed-income segments, so the transaction resembles a horizontal merger. Except for some limited overlaps in OTC derivatives and some fixed-income securities, the combination of both exchanges will not materially change the market concentration. Market Share of BM&FBovespa and Cetip, by Segment R$4.89 billion Certificates of deposit (CDB) Financial bills (LF) Real-estate credit bills (LCI) Agribusiness credit bills (LCA) 6.4% 16.6% 71.1% 100% 83.4% 28.9% 100% 100% 83% 94% R$577mn R$560mn R$228mn R$205mn Certificates of interbank deposit (CDI) Structured operations Corporate bonds Shares of funds 11.1% 17% 6% 100% 100% 100% 88.9% Listed Derivatives Cash Equities OTC Fixed Income R$554mn R$9.4mn R$905mn R$1,910mn Note: Data as of September 2016 Source: Company data, Credit Suisse 20

21 Seeking Diversification Organically and Inorganically The Newco at a glance: Over the past few years, defensive (either resilient or somewhat countercyclical) businesses have gained importance in BVMF s revenue mix, contributing ~55% to the top line this year, compared to ~48% in Not only did revenues from listed derivatives increase at a much healthier pace than cash equities (6.3% vs. -1.4% E CAGR), but alternative sources of revenue also performed well, driven by solid increases in securities lending revenues from 2010 to 2013 and in depository revenues in the past two years. Following their recent acquisition, the share of defensive businesses are expected to increase to ~61% of BVMF s top line, as ~71% of Cetip s revenues can be considered resilient. Breakdown of BM&FBovespa s Revenues BM&F 5.4% CAGR Bovespa Other E 2017E 2018E Other Vendors Depository Listing Securities lending Bovespa BM&F Breakdown of Newco s Revenues % CAGR E 2017E 2018E Breakdown of Cetip s Revenues Financing unit 14.0% CAGR Securities unit Market data Sircof SNG Others Utilization Transaction Custody Registration E 2017E 2018E Breakdown of Newco s Revenues as of % 2.6% 2.7% 2.4% 0.7% 12.0% 5.7% 25.4% 24.5% 4.0% 5.2% 2.2% 3.9% 4.2% 1.8% Registration Transaction Others Sircof BM&F Securities lending Depository Other Custody Utilization SNG Market data Bovespa Listing Vendors Source: Company data, Credit Suisse 21

22 Synergies at High End of Global Transactions Businesses with potential economies of scale call for consolidation: Management expects cost synergies of R$100mn/year by the third year after the conclusion of the transaction, implying ~8% of the core opex of the combined company. Synergies will be driven by redundant personnel and infrastructure, in our view. Compelling synergy expectations: Although the guidance may seem modest at first glance, we note that this soft guidance implies a ~30% reduction in the core opex of Cetip s securities unit. (We are not considering the financing unit (former GRV), as it is not an exchange business and has little room for synergies.) Despite not being a typical consolidation merger, as BVMF and Cetip are leaders of different segments, the synergy guidance is in line with synergies achieved by global transactions in the past ten years. The regional overlap, on the other hand, is an advantage of BVMF compared to many other transactions in the sector. Comps for Selected Exchange M&As US$ million Cost Synergies of Selected Exchange M&As % of target costs Announced LTM P/E Cost % target synergies costs Revenue synergies % target revenues ASX/SFE Mar x 21 30% - - NYSE/Euronext Jun x % 100 7% TMX/Montreal CME/CBOT DB1/NYSE ENX 35% 43% 48% CME/CBOT Oct x % 75 12% NDAQ-ICE/NYSE ENX 33% DB1/ISE Apr x 15 17% 35 20% NYSE/Euronext 30% NDAQ/OMX Sep x % 50 8% LSEG/Borsa Ita. Jun x 64 29% 40 11% TMX/Montreal Dec x 25 48% 10 0% DB1/NYSE ENX Feb x % 219 9% NDAQ-ICE/NYSE ENX Apr x % 185 7% ASX/SFE ICE/NYSE ENX LSEG/Borsa Ita. NDAQ/OMX 30% 29% 29% 23% ICE/NYSE ENX Dec x % - - DB1/ISE 17% Source: Company data, Credit Suisse 22

23 History Indicates Inspiring, Though Gradual, Synergy Gains A look at the BM&F + Bovespa merger: BM&F and Bovespa were expecting synergies of 25% of the combined opex base resulting from the merger of both companies, which was increased to 26% 27% afterwards, implying ~50% of the core opex of each of the companies alone (BM&F and Bovespa had very similar cost structures). The company was anticipating a three-year phase-in period, with synergies being fully attained in Most of the synergies stemmed from process optimization (~65%), while the remainder resulted from a decrease in headcount (~35%). The BVMF merger is therefore at the high end of global transactions synergies, which could be explained by its domestic nature, whereas most of the recent exchange M&As were cross-border. Synergies currently amount to 53% of target costs: Assuming that, if not for the merger, the core opex of BM&F and Bovespa would increase in line with inflation, the synergies from the merger of both companies currently consist of 27% of the combined opex base and 53% of target costs (assuming BM&F as the target). Hence, the company met its synergies guidance over time, although it took many more years than originally expected. The synergies guidance for the Cetip acquisition (30% of target costs) is more conservative than that expected and delivered following the merger that originated BVMF, which is justified by the smaller overlap in their activities (Cetip is not a pure exchange). Synergies from BM&F and Bovespa Merger R$ million Synergies from BM&F and Bovespa Merger % of cost structure Adjusted opex Synergy gains % % of target cost 32% 38% 43% 53% 54% 27% 27% E In 2010, revenues increased 26%, likely explaining, to some extent, opex growth above inflation and failure to meet synergies guidance according to our simplistic methodology, although opex was also impacted by higher marketing expenses and a sharp increase in personnel. However, from 2009 to 2015, revenues increased at a 6.5% CAGR, below inflation of 6.8% in this period. In our view, this (i) indicates that top-line growth would not have resulted in opex growth in real terms if not for the merger and (ii) reinforces the significance of our analysis especially in light of the marked importance of fixed costs to exchanges. Source: Company data, Credit Suisse 19% 21% 22% 19% 18% 16% 16% 10% 9% 8% % of combined opex base E 23

24 Tax Gains Amount to R$8.9/CTIP3 Goodwill and intangible assets amortization of R$10bn: We believe the Cetip acquisition will result in R$6bn in intangible assets (amortizable in 15 years) and R$4bn in goodwill (amortizable in 5 years). The goodwill will likely consist of a deferred liability and, accordingly, will not be amortized in the P&L, analogously to the goodwill from the merger of BM&F and Bovespa. This time, however, we do not expect pushbacks from the Brazilian Revenue Service (RFB), due to recent improvements in the regulatory framework (law 12973/2014), which provides that a legal entity that absorbs assets of another, in which it holds an equity interest acquired with goodwill, may exclude for purposes of ascertaining the taxable income for subsequent periods the balance of such goodwill existing on record on the date of acquisition of the equity interest, at the rate of 1/60 (one sixtieth), at most, for each month of the ascertainment period. Increasing firepower to distribute IOC: Thanks to the stock issuance and subsequent increase in capital reserves, the transaction will increase BVMF s potential to distribute interest on capital (IOC), which, in turn, will result in lower effective tax rates going forward. We believe that the increase in capital reserves will boost net income by R$115mn/year. To sum up, we estimate that the present value of tax synergies from the Cetip acquisition (goodwill/intangibles amortization and higher IOC distribution) amounts to R$2.4bn, or R$8.9/CTIP3 and R$1.1/BVMF3 (pro forma). Net Present Value of Tax Synergies R$ million ,351 R$8.9/CTIP3 R$1.1/BVMF3 (pro forma) 770 Intangibles amortization Goodwill amortization Higher IOC distribution Tax synergies Assuming 80% of goodwill is deductible for tax purposes Source: Company data, Credit Suisse 24

25 Bottom Line: Cetip Acquisition Results in Value Accretion of R$2.4bn Many sources of value creation: We believe the offer price for Cetip (currently R$47.0/share) is very compelling for BVMF. On the back of (i) the pronounced re-rating of Brazilian equities since the deal was announced and the (ii) company's solid operating performance, we estimate that Cetip would be worth at least R$42.4/share if not for the acquisition offer. Moreover, there are important gains from (iii) opex synergies, (iv) tax benefits (goodwill/intangibles amortization, and higher IOC distribution), and (v) a decline in the cost of equity of the Newco, thanks to the looming sector consolidation (we assume a 0.05x decline in BVMF s beta in this exercise) that justify the premium paid for Cetip. Offer price leaves plenty of room for accretion: Taking into account the aforementioned factors, Cetip s fair value to BVMF amounts to R$57.2/CTIP3, 22% above the current offer price. In other words, the value accretion consists of R$2.4bn, amounting to 8.0% of BVMF s current market cap. Notably, even if BVMF fails to reap synergies from the acquisition, which we find very unlikely, the deal would already be accretive, indicating that it poses almost no execution risks. Cetip s Value to BVMF R$/CTIP Cetip s share price before merger discussions (October 30, 2015) Re-rating warranted by sovereign risk narrowing Cetip s current standalone share price Tax gains from the transaction Decline in cost of equity/beta due to sector consolidation Cetip s fair value to BVMF excluding synergies Opex synergies Cetip s fair value to BVMF Source: Company data, Credit Suisse 25

26 Is There Really No Free Lunch? Cetip s shares embed 7.7% discount to offer price: Cetip s current share price embeds a 7.7% discount to the offer price agreed with BVMF, which stands at R$47.0 at present. In other words, if the transaction is concluded today, Cetip s shareholders would be entitled to a 7.7% risk-free gain. Although we expect the acquisition to be fully approved only in 1Q17, we note that the cash portion is adjusted at the interbank deposit rate (CDI), and BVMF shares, in theory, would increase in line with their cost of equity. Hence, the upside to the current share price does not heavily depend on the timing of regulatory approvals. Very attractive risk-reward: Since, in our view, Cetip would be trading at R$42.4 if not for its acquisition, as shown on the previous slide, and BVMF has agreed to pay a R$250mn fee if the deal is not concluded (R$0.94/CTIP3), its current share price implies a ~90% chance that the deal will not materialize, which is naturally overly exaggerated. Hence, we initiate coverage on Cetip with an Outperform rating. Cetip s Discount to Swap Price Cetip s Price Depending on the Outcome of the Proposed Transaction 14% 12% 0.6% downside if deal does not go through 7.7% upside if deal goes through % 8% % 4% 2% 0% Stand-alone price Current price Offer price Source: Company data, Credit Suisse 26

27 BM&FBovespa: Pro Forma Income Statement 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E New BM&F Bovespa Net revenues 2,217 2,281 3,934 4,420 4,928 5,480 6,086 6,741 7,444 8,188 9,000 BM&F Bovespa 2,217 2,281 2,542 2,898 3,275 3,672 4,107 4,578 5,087 5,629 6,230 Cetip - - 1,392 1,522 1,653 1,809 1,979 2,163 2,357 2,559 2,770 Operating expenses (851) (1,076) (1,377) (1,440) (1,501) (1,597) (1,698) (1,802) (1,913) (2,032) (2,159) BM&F Bovespa cash expenses (641) (875) (685) (726) (767) (811) (857) (905) (956) (1,011) (1,068) Cetip cash expenses: - - (405) (442) (480) (521) (566) (615) (668) (725) (787) Securities division - - (287) (307) (330) (358) (389) (423) (460) (500) (543) Opex reduction (%) 0.0% 0.0% 10.0% 20.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% (+) Opex synergies Depreciation & stock option (210) (200) (316) (333) (353) (373) (392) (409) (427) (446) (466) Restructuring charges - (63) (29) (17) (6) Operating profit 1,366 1,142 2,528 2,963 3,421 3,883 4,388 4,939 5,531 6,157 6,841 Accretion / dilution 0.0% 0.0% 1.1% 2.1% 3.0% 2.8% 2.7% 2.6% 2.6% 2.5% 2.4% EBITDA 1,576 1,343 2,844 3,296 3,774 4,256 4,780 5,348 5,958 6,603 7,307 EBITDA margin 71.1% 58.9% 72.3% 74.6% 76.6% 77.7% 78.5% 79.3% 80.0% 80.6% 81.2% Accretion / dilution 0.0% 0.0% 1.0% 1.9% 2.7% 2.6% 2.5% 2.4% 2.4% 2.3% 2.3% Financial results (198) (119) (69) (55) (88) (19) (-) Interest on cash (100% DI) - - (594) (536) (727) (918) (872) (826) (826) (826) (826) (-) Cost of new debt (105% DI) - - (356) (318) (159) Profit before tax 1,875 1,877 2,330 2,844 3,352 3,828 4,300 4,920 5,558 6,235 6,976 Income taxes (604) (303) (161) (321) (481) (638) (794) (1,000) (1,211) (1,434) (1,679) (-) Opex synergies - - (10) (21) (34) (37) (40) (43) (47) (51) (55) (+) Interest on cash disbursed (+) Cost of new debt (+) Additional IoC Minority interest (1) Discontinued operations 175 (573) Net profit 1,445 1,002 2,169 2,522 2,871 3,189 3,506 3,921 4,348 4,801 5,297 Avg. shares outstanding 1,795 1,795 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 EPS Accretion / dilution n.a. n.a. -6.1% -0.6% 0.1% 0.9% 3.5% 5.4% 6.3% 6.9% 7.3% Recurring net profit 1,571 1,893 2,188 2,533 2,874 3,189 3,506 3,921 4,348 4,801 5,297 Avg. shares outstanding 1,795 1,795 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 EPS Accretion / dilution n.a. n.a. -6.2% -0.7% 0.1% 0.9% 3.5% 5.4% 6.3% 6.9% 7.3% Source: Company data, Credit Suisse 27

28 Equity Research Bovespa Is It Finally Time for Cash Equities? DIVISÓRIA

29 Secular Growth Potential May Finally Be Unveiled A first-class exchange in a last-class stock market: Were BVMF in a developed market, its cash equities volumes would be prone to increase ~10% per year, as stock market capitalization is, in theory, supposed to increase by the cost of equity of its companies (~15%) less its aggregate dividend yield (~5% long term), which is already compelling for a business with high operating leverage. Fortunately (for growth), Brazil is far from being a developed country, especially when it comes to the stock market, despite its top-notch exchange. The country has one of the lowest stock market capitalization-to-gdp ratios in the world and, astoundingly, in its own history, which we believe will be addressed in the medium-to-long term. We also believe turnover velocity has room to improve, as, on a sector-by-sector basis, it looks low compared to that of many developed and even emerging markets. Although many advocate that turnover velocity is already somewhat high, its level is fully justified by the importance of commodity companies in the stock exchange. We are working with a 13% CAGR for ADTV, but we believe that bears much upside risk (e.g., we assume equity offerings below 10-year average, no improvement in turnover velocity, and do not factor in increase in pension plans exposure to equities). Bovespa: Stock Market Capitalization R$ billion; average % 2% 0% -1% Bovespa: Turnover Velocity Annual volumes / market cap % 2% 22% % E 2017E 2018E 68% 74% y/y change 76% 76% 76% 81% 78% 78% Bovespa: ADTV Estimates R$ billion; average 6.5 0% % % -2% % -7% 18% 8.6 Bovespa: Margin (trading + post-trading) Bps % Bovespa: Revenues R$ billion E 2017E 2018E y/y change % 7% -1% -5% y/y change % 7% 17% % E 2017E 2018E E 2017E 2018E Source: Company data, Company data, Credit Suisse E 2017E 2018E 29

30 HFT Masking Part of Volume Deterioration HFT corresponds to 17% 19% of ADTV: Since 2010, high-frequency trading (HFT) volumes soared from ~0% to ~18% of ADTV. Although BVMF has not directly disclosed this information since 2013, we believe co-location volumes are a good proxy. In our view, it is interesting to assess volume trends excluding HFT because this segment (i) has lower margins (RPC is ~50% of that of traditional volumes), and (ii) do not compete with non-hft volumes, as high-frequency investors have distinctive mandates. Hence, non-hft ADTV consists of higher quality volumes. Worse than it looks: Excluding HFT volumes, 5-year CAGR of LTM ADTV stands at -1.7%, compared to +2.3% for overall LTM ADTV. This reinforces that cash equities volumes are significantly depressed and, more importantly, that there is significant room for improvement. Importance of HFT and Co-Location % of ADTV HFT 0.05 Co-location 0.00 Sep-10 Jul-11 May-12 Mar-13 Feb-14 Dec-14 Oct-15 Aug-16 Bovespa s ADTV Annual ADTV, R$ billion ADTV (LTM) Bovespa s ADTV Monthly ADTV, R$ billion ADTV (monthly) Source: Company data, Credit Suisse ADTV ex HFT (LTM) 5.0 Jan-10 May-11 Sep-12 Jan-14 May-15 Sep ADTV ex HFT 4 (monthly) Jan-10 May-11 Sep-12 Jan-14 May-15 Sep-16 30

31 Buffett Indicator Suggests Low Penetration Brazilian GDP not fairly represented in BM&FBovespa: Stock market capitalization to GDP, also known as the Buffett indicator, is a straightforward metric often employed to assess valuation levels of a country. When the ratio is above 100%, the market is considered overvalued, while it is deemed undervalued at levels closer to 50%. Brazil, however, would always look cheap according to this approach, as its GDP is not fairly represented in its stock market. Subdued penetration of the local stock market: Despite the YTD rally of local indexes, Brazil's LTM average market cap stands only at 34% of GDP, compared to the global median of 72%. If we were to consider the latest market cap printout (instead of the LTM daily average), penetration would still be a very low 43%, significantly below that of developed markets and many emerging market peers, such as South Africa, Chile, India, and China. It indicates that there is a significant percentage of Brazilian companies that are privately held and, to a lesser extent, that the government may assume roles that may be the responsibility of the private-sector elsewhere. Moreover, Brazil s current Buffett indicator is significantly below its historical average of 55%, as a result of the de-listing of several companies and, potentially, of the increasing importance of the government in economic activity. Market Cap to GDP LTM daily average market cap, GDP as of 2015 South Africa Japan UK Canada Australia Chile France US India China Germany Peru Mexico Russia Brazil Colombia Turkey Argentina 11% 53% 50% 39% 37% 34% 33% 27% 107% 107% 105% 101% 90% 80% 76% 73% 71% 135% Brazil s Market Cap to GDP Market cap of companies listed on BM&FBovespa 95% 85% 75% 65% 55% 45% 35% 41% Mkt Cap/GDP Average + 1 st dev - 1 st dev 70% 55% 43% 25% Jan-06 Jul-07 Jan-09 Jul-10 Feb-12 Aug-13 Feb-15 Aug-16 Source: The BLOOMBERG PROFESSIONAL service, IMF, Central Bank of Brazil, Company data, Credit Suisse 31

32 0.5x 0.6x 0.7x 1.1x 1.0x 1.2x 1.1x 1.2x 1.0x 1.6x 1.6x 1.7x 2.0x 1.9x 2.2x 2.1x 1.9x 2.3x 2.4x 2.4x 2.7x 2.9x 27 November 2016 Primary Market Coming Back to Life All-time high corporate leverage must be addressed: Brazilian corporates have been increasing their leverage substantially since 2009, fostered by (i) wide credit availability, especially at public-sector and development banks, amid an environment of low interest rates and a boost in global liquidity; and (ii) weak revenues and margin environment. As of June 2016, Brazilian companies had an aggregate net debt-to-ltm-ebitda ratio of 2.7x (ex Petrobras). Owing to BRL appreciation, leverage improved slightly compared to December 2015, when the net debt-to-ebitda ratio reached its all-time high of 2.9x. Leverage, however, remains ahead of that in any point in time before 2015 (including the previous two peaks in 1995 and 2002) and well above the 15-year average of 1.6x (ex Petrobras). Putting ECM to work: On the back of the pronounced leverage of Brazilian companies and the gradually higher confidence of the investor community, we expect a pickup in primary equity offerings in the next few years, after several years of muted activity. Equity offerings are important not only to bring new companies to the stock market, but also to increase free float, and thus liquidity, of companies that are already listed. In our models, we assume R$50bn in equity offerings in 2017, increasing in line with inflation going forward. We believe our short-term estimates embed significant upside risk, given the pent-up demand accumulated in the past few years amid market downturns, low macroeconomic visibility, and pronounced volatility, which has kept the IPO window practically closed for years. Net Debt-to-Ebitda Ratio Net debt / LTM trailing Ebitda (ex Petrobras) Total Capital Raised in Equity Capital Markets R$ million, inflation-adjusted through September 2016 (ex Petrobras) Q M16 Source: Economatica, Company data, Credit Suisse 32

33 Equity Offerings Can Move the Needle Gauging impact from IPOs and follow-ons: All else equal, BVMF s cash equities volumes would increase ~10% per year, as market cap is, in theory, supposed to increase by the cost of equity of its companies (~15%) less its aggregate dividend yield (~5% long term). In our base case of R$50bn in equity offerings per year (inflationadjusted thereafter), offerings boost long-term ADTV by 13.5%, despite the somewhat modest contribution in the short-to-medium term. Market cap in the hands of a few: In this exercise, and in our models, we actually consider that the market cap of equity offerings will be in line with the 10-year average financial volume of new issuances (i.e., free float). Hence, assuming that the average free float of Brazilian companies is 50%, we are incorporating issuances 50% below historical average. The modest free float shows that not only IPOs and primary followons are important; secondary follow-ons can also fuel cash equities volumes. Free Float of Ten Largest Brazilian Companies by Market Cap % of outstanding shares Median 10.5% Source: Company data, Credit Suisse 28.2% 26.3% 33.8% 45.6% 43.3% 41.1% 53.2% 52.6% 60.6% 59.9% Equity Offerings' Contribution to Stock Market Capitalization R$ billion 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Organic market cap 2,748 3,067 3,399 3,766 4,172 4,623 5,122 5,675 6,288 Ke 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Dividend yield 2.7% 3.4% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% Base case (% organic market cap) 1.8% 3.5% 5.2% 6.7% 8.2% 9.6% 11.0% 12.3% 13.5% Issuances Inflation 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Additional market cap issuances issuances issuances issuances issuances issuances issuances issuances issuances 77 Bull case (% organic market cap) 3.6% 7.1% 10.4% 13.5% 16.4% 19.3% 22.0% 24.5% 27.0% Issuances Inflation 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Additional market cap ,125 1,392 1, issuances issuances issuances issuances issuances issuances issuances issuances issuances

34 Turnover Velocity Running Above That of International Peers Turnover velocity comparable to developed markets: If market cap to GDP suggests low penetration of the stock market and therefore may be a long-term driver of ADTV growth, BVMF s turnover velocity is already high compared to that of international peers. At 75% 80% in the past few months, turnover velocity is higher than that of important exchanges of developed markets, such as Deutsche Bourse, ASX, and LSE. Selic down, volumes up: A decline in interest rates bodes well for ADTV, as it not only may fuel market cap through a lower opportunity cost (Ke), but it can also increase appetite for riskier investments, resulting in higher turnover velocity ratios. From 2007 to 2014, there was a negative correlation between turnover velocity and the Selic basic interest rate (-74%), which has weakened since 2015, most likely due to political and economic uncertainty. Hence, the ~275bps monetary easing expected for next year may fuel turnover velocity. Turnover Velocity and Selic LTM turnover velocity 80% 75% 70% 65% 60% 55% Turnover velocity 50% 45% Selic inverted (RHS), 3-month lag % 15 Jan-07 Aug-08 Mar-10 Oct-11 May-13 Dec-14 Jul-16 Source: World Federation of Exchanges, Central Bank of Brazil, Company data, Credit Suisse Turnover Velocity of Selected Exchanges 9M16 monthly average turnover velocity, top 20 exchanges with data availability, by volume Shenzhen Stock Exchange Shanghai Stock Exchange Borsa Istanbul Korea Exchange Japan Exchange Group BME Spanish Exchanges Stock Exchange of Thailand BM&FBOVESPA Saudi Stock Exchange (Tadawul) Deutsche Boerse Australian Securities Exchange TMX Group Taiwan Stock Exchange Corp. LSE Group SIX Swiss Exchange Nasdaq Nordic Exchanges Euronext National Stock Exchange of India Hong Kong Exchanges and Clearing Johannesburg Stock Exchange 133% 119% 104% 80% 79% 79% 77% 65% 64% 61% 61% 60% 55% 53% 47% 43% 39% 185% 170% 396% 34

35 BVMF s Monopoly Partially Explains High Turnover Velocity A fresh look at turnover velocity: Although we acknowledge that volumes of an exchange are influenced by the products they offer, the robustness of its platforms, and initiatives to bring investors to it, we believe they are driven mainly by (i) the number and size of the companies listed in the exchange, (ii) investors appetite for them, and (iii) the competitive landscape. Hence, in order to assess the stage of development of cash equities volumes of certain countries, we believe it is more informative to consider the turnover velocity of the listed companies of each country in the aggregate, instead of the turnover velocity of the exchanges. In theory, BVMF s virtual monopoly could lead to turnover velocity above that of developed markets peers. For the sake of conservativeness, though, we assume turnover velocity of 78% from 2017 onwards in our models. Competition at international level: Competition among exchanges is gradually becoming international. Owing to the importance of ADRs to Brazilian blue chip companies volumes, we thus advocate that, in order to assess turnover velocity s potential, international volumes (i.e., outside BM&FBovespa) should be taken into account, which also holds true for other regions. BVMF s LTM turnover velocity stands at 71% (companies cash equities only), while the aggregate turnover velocity of Brazilian companies amounts to 112%. Hence, 36% of volumes come from ADRs, a level we believe will be sustained going forward. We note, however, that the importance of cash equities volumes outside the main trading platform of the country is still low compared to that of LatAm and European peers, indicating that BVMF s relatively high turnover velocity is sustainable. Turnover Velocity, by Companies Country of Domicile LTM turnover velocity Germany China France Turkey Canada US UK SouthAfrica Brazil Australia Japan India Argentina Russia Mexico Peru Chile Colombia 139% 131% 129% 123% 71% 40% 112% 100% 82% 63% 61% 60% 47% 36% 29% 18% Source: The BLOOMBERG PROFESSIONAL service, Credit Suisse 242% 226% 201% 181% Domestic Foreign Share of Foreign Stock Exchanges in Total Volume % Argentina Peru UK France Germany Chile Russia Mexico SouthAfrica Colombia Brazil Canada Australia India China Turkey Japan US 8.4% 5.6% 1.5% 1.3% 0.6% 20.3% 46.2% 42.3% 40.0% 35.9% 35.7% 60.8% 58.3% 83.8% 83.0% 78.2% 72.9% 72.6% 35

36 Turnover Velocity Is Good, but Not There Yet Turnover velocity boosted by commodity sectors: The energy and materials sectors, which are comprised of Petrobras and Vale, respectively, have turnover velocities above 200%, driving overall volumes up. In our view, these sectors have structurally higher turnover ratios, compared to domestic-related ones, owing to their global nature and exposure to commodities high volatility. Hence, the sector mix contributes to BVMF s ADTV and, in light of the importance of commodities to the Brazilian economy, may warrant relatively a high turnover velocity, all else being equal. Sectors being missed: The aggregate turnover velocity of our stock market sample, comprised by the main developed, emerging market, and LatAm countries, is 146%, driven by the materials, IT, and discretionary consumer sectors. Notably, the latter two sectors are not fairly represented in the Brazilian stock market. As more sectors become representative, bringing market cap to GDP up, we should also expect their turnover velocity to improve; healthcare is perhaps one of the best examples. We note, however, that the Brazilian sectors whose turnover velocity is close to international standards (e.g., financials and telecommunication services) have a significant part of volumes negotiated through ADRs, indicating that, to some extent, improvement in turnover velocity may be driven also by foreign volumes. Turnover Velocity by Sector in Brazil LTM turnover velocity Aggregate Turnover Velocity in Our Stock Market Sample LTM turnover velocity Materials 139% 110% 249% Materials 216% Energy 107% 120% 227% Information Technology 186% Total 71% 40% 112% Consumer Discretionary 173% Industrials 80% 27% 107% Industrials 171% Financials 66% 34% 101% Real Estate 168% Real Estate 99% 99% Total 146% Consumer Discretionary 93% 94% Health Care 143% Telecommunication Services 40% 39% 79% Energy 129% Health Care Utilities Consumer Staples Information Technology 74% 75% 53% 15% 68% 42% 24% 65% 61% 62% Utilities 121% Consumer Staples 103% Domestic International Financials Telecommunication Services 99% 78% Source: The BLOOMBERG PROFESSIONAL service, Credit Suisse 36

37 China Germany France Canada Healthcare US SouthAfrica Turkey UK Japan Australia Brazil India Mexico Argentina Chile 162% 135% 127% 115% 103% 98% 84% 75% 65% 52% 26% 219% 214% 184% 12% Germany Turkey France UK Russia Brazil Canada Japan US India SouthAfrica Australia China Peru Argentina Mexico Colombia Chile Banks 134% 119% 104% 101% 95% 92% 86% 75% 63% 43% 42% 38% 35% 22% 285% 270% 18% 409% China Canada Germany Brazil France SouthAfrica Turkey Australia US Chile UK Japan Mexico India Russia Peru Colombia Argentina Materials 249% 210% 206% 184% 175% 156% 133% 132% 102% 95% 60% 46% 44% 22% 354% 344% 296% 9% 27 November 2016 Delving Deeper into Turnover Velocity Turnover velocity, by country of domicile (LTM turnover velocity) Top 10 median 208% Commodity-related sectors naturally have higher turnover velocities, owing to the volatility of its fundamentals and its global nature, which widens the universe of potential investors, in our view. The median turnover velocity of the top ten countries, according to this metric, is substantially high, at 208%. Vale thus has an important role in Brazil s turnover velocity, which stands at 249% in the case of the Materials sector. Top 10 median 112% With more than 55% of the banking system in the hands of listed companies, the turnover velocity of Brazilian banks is high, at 104%, suggesting that sectors that are fairly represented in the stock market may have turnover velocities in line with those of developed markets. Top 10 median 131% In contrast with banks, the Brazilian stock market lacks listed healthcare companies, leading to one of the lowest turnover velocities in our sample. This reinforces our view that equity offerings that increase the representativeness of GDP in the stock market help not only market capitalization but also turnover velocity. We conclude that, although already relatively high, BVMF s turnover velocity still has room to improve in the next few years. 37

38 13.0% 20.3% 21.0% 20.8% 16.8% 16.4% 14.0% 13.9% 13.2% 11.5% 8.5% 7.9% 10.0% 9.8% June % 13.3% 10.4% 11.9% 16.4% 16.1% 16.0% 14.7% 15.9% 18.5% 17.7% 16.0% 24.7% 28.0% 30.7% 32.8% 33.3% 32.5% 30.1% 28.6% 29.0% 36.7% December November 2016 Pension Money Is Being Missed Equities losing ground to fixed income: In the past two years, pension plans exposure to equities plummeted, amounting to only 17.7% of their assets under management, as of June 2016, substantially below the 10-year average of 29.5%. Notably, despite the Ibovespa index being 19% higher in 1H16, pension plans exposure to equities increased only 1.4% in this period (from R$126.9bn in December 2015 to R$128.7bn in June 2016), suggesting some profit taking. Pension funds portfolio managers can make a difference: In an environment of lower interest rates and increasing macro visibility, we believe pension fund portfolio managers will gradually turn more of their attention to equities, either by owning stocks directly or through third-party funds. If pension funds allocation to equities bounces back to December 2013 levels (29.0%), for instance, their exposure would increase by R$211bn. Assuming this rebalancing materializes throughout next year, it would result in an additional ADTV of R$0.8bn (~10% of our ADTV estimate for next year), which is thus an important upside risk to our volume estimates. Pension Plans Allocation to Equities % of AuM Defined benefit Defined contribution Variable contribution Funds Stocks 35.2% 10.6% 13.9% 23.2% 5.4% 8.4% H16 Equities Others Source: Brazilian Association of Closed-End Pension Management Companies (Abrapp), Credit Suisse 38

39 Securities Lending: Room for Improvement, but Not for Disruption On the road: Every European and many American asset managers are not allowed to lend stocks through a central counterparty due to regulatory constraints (demand for collateral directly from the borrower). BVMF is working with foreign regulators (e.g., SEC and ESMA) to enhance the regulatory framework and ultimately remove impediments. Also, the company is constantly on roadshows to encourage foreign asset managers that can lend stocks with CCP (e.g., US hedge funds) to lend securities they own. Lending screen remains on the drawing board: Securities lending remains an over-the-counter business in Brazil, as BVMF does not offer a lending screen with bid and ask prices (neither in real time, nor with a delay). In our view, the lending screen project, which has been in BVMF s pipeline for years, will move forward only after the clearing house's integration is concluded (i.e., 2017). However, it is still unclear whether the screen will gain acceptance, as market participants are used to borrowing and lending over the counter. Far from being an underpenetrated segment: Although we acknowledge that BVMF s initiative can indeed help securities lending volumes, empirical evidence suggests that room for improvement is somewhat limited and is related mainly to small and some medium-sized companies. If we compare Brazilian banks to their most significant global peers, for instance, we note that their short interest ratios (days to cover ratios) are among the highest, indicating that stock loans are usually not an issue for Brazilian large caps. Securities Lending Volumes R$ billion 74% 97% % 59 86% % 272 Growth % % 80% % Volume 7% 1,007 28% % * -9% 4% Short Interest Ratio of World s Largest 20 Banks (with Data Availability) Short interest / cash equities ADTV TD CN Equity WBC AU Equity ITUB4 BZ Equity ANZ AU Equity SANB11 BZ Equity RY CN Equity BBDC4 BZ Equity CBA AU Equity BMO CN Equity CM CN Equity NAB AU Equity BNS CN Equity BBT US Equity USB US Equity BBAS3 BZ Equity PNC US Equity JPM US Equity C US Equity BAC US Equity WFC US Equity Source: The BLOOMBERG PROFESSIONAL service, Company data, Credit Suisse (*) 2016 consists of 9M16 annualized 39

40 Single-Stock Options: Will Potential Ever Be Tapped? Does it have to be all about commodities? While volumes of Petrobras and Vale options (puts and calls) are quite decent, this is not the case for the remainder of the Brazilian stock market, which relies to a good extent on over-the-counter options (flexible options). Furthermore, representativeness of option volumes have been declining in the past few years, amounting only to 3.2% of cash equities ADTV, compared to 5.1% in We believe this segment bears growth potential, as options of important companies (e.g., banks) still do not have significant liquidity, but we do not identify meaningful signs of improvement and, therefore, do not incorporate a relevant increase in penetration of single-stock options in our model. Options Volumes to ADTV of Stocks % Options Volumes to ADTV of Stocks of Brazil's Ten Largest Companies % 5.1% PETR4 BZ Equity 26.4% VALE5 BZ Equity 24.6% 4.5% BBAS3 BZ Equity 3.1% 4.1% ITSA4 BZ Equity ITUB4 BZ Equity 2.5% 2.4% BBDC4 BZ Equity 2.0% 3.2% 3.3% 3.2% ABEV3 BZ Equity 1.8% CIEL3 BZ Equity 0.7% 2.6% VIVT4 BZ Equity 0.3% SANB11 BZ Equity 0.0% Source: The BLOOMBERG PROFESSIONAL service, Company data, Credit Suisse 40

41 Equity Research BM&F and Depository Monetary Policy Uncertainty and New Products to Lead Growth DIVISÓRIA

42 Interest Rate Futures to Drive Top-Line Growth Time for interest rate futures to retrieve the spotlight: Owing to high volatility and BRL depreciation, the BM&F segment experienced one of its best years in Most of the tailwinds, however, are gone, due to volatility normalization (e.g., Selic stable for most of the year), curbing volume growth, and BRL ~16% YTD appreciation, weighing on RPC. Looking at the glass half full, tough comps are no longer an issue for the next few quarters. Going forward, we expect ADV of interest rates to enjoy good momentum, boosted by imminent changes in the policy rate (changes in the Selic rate and in ADV are closely correlated) and uncertainties in regards to the magnitude and timing of the rate cuts. We expect FX futures volumes, which, after soaring in 2015, have been declining materially, to resume growing in the near future, albeit at a modest pace. This segment also bears interesting optionalities, with turnover of IPCA futures, for instance, gradually gaining steam. This, in our view, is a very promising product, especially in light of the low cannibalization within BVMF s current portfolio. On a related note, we are also enthusiastic about the Tesouro Direto platform, which, unlike IPCA futures, is already contributing significantly to the top-line, through depository revenues. BM&F Segment: Average Daily Volume (ADV) Growth Million contracts; year-on-year change 2.7 2% 2.9 7% 2.8-4% 2.6-7% 11% 2.9 BM&F Segment: Revenue per Contract (RPC) R$ per contract; year-on-year change 3.1 7% % E 2017E 2018E 1.1-3% 8% 9% % 13% % -4% 9% 1.3 4% BM&F Segment: Revenues R$ million; year-on-year change 760 5% % % -5% 24% 1,075 1,043 1,099-3% 5% 1,234 12% E 2017E 2018E E 2017E 2018E Source: Company data, Credit Suisse 42

43 Welcoming Monetary Policy Uncertainty Interest rates to remain BM&F s flagship: Owing to Brazil s history of high and volatile interest rates, interest rate futures are typically the most important product in the BM&F segment, accounting for 40% 60% of revenues from listed derivatives. In 2015 and 2016, interest rate contracts shared the spotlight with FX futures, on the back of the pronounced BRL depreciation until early March, followed by a sharp appreciation in the subsequent months. The most relevant interest rate product consists of DI rates (one-day interbank deposit futures), which (i) is a tool for managing interest rate risk, (ii) enables the exchange of an asset/liability referenced on the DI rate for a fixed rate, and (iii) allows for leveraging with lower margins, compared with over-the-counter derivatives. Eventful monetary policy meetings ahead: Expectations of changes in the Selic basic interest rate bode well for revenues from interest rate contracts, as volumes typically increase when the basic interest rate is expected to change. With the yield curve pricing in a ~25bps cut this year and ~275bps next year, interest rate revenues are expected to perform well in the short-to-medium term. Although the yield curve embeds stability in the Selic rate from 2018 onwards, we note that the market generally does not anticipate volatility in the medium-to-long term and is therefore a worse predictor of interest rate changes over longer horizons. Selic Moves and Growth in BRL Interest Rate Volumes Changes in Selic rate are sum of upward and downward moves (absolute terms) Listed Derivatives Revenues R$ million % % 275 1% % Change in Selic Interest rate volumes (RHS) -1% 275 Others Commodities Equities Interest Rate BRL Mini Contracts Interest Rate USD FX ,067 1, , , % E 2017E E 2017E 2018E Source: The BLOOMBERG PROFESSIONAL service, Company data, Credit Suisse (*) 2016 consists of 9M16 annualized 43

44 BRL Appreciation Hitting RPC Currency appreciation to impair BM&F's top-line growth: As of 3Q16, 52% of the BM&F segment's LTM revenues were denominated in foreign currency, through FX rates (40% of LTM revenues) and interest rates in USD (12% of LTM revenues). Not only does BRL appreciation negatively impact RPC directly, but currency stabilization is also closely correlated with volume growth of interest rates in USD contracts, whereas the ADV of FX rates derivatives has been relatively stable in the past few years. Following several months of impressive volatility, we expect the BRL to accommodate at relatively lower levels (CSe of R$3.30 for 2016YE and R$3.60/US$ for 2017YE), which should curb top-line growth in the BM&F segment. Revenues from FX Rates and Interest Rates in USD Futures Year-on-year change 100% 80% 60% 40% Interest rates in USD RPC of FX Rates and Interest Rates in USD Futures Base 100 as of December BRL/USD FX rates 100 Interest rates in USD 70 Dec-09 Mar-12 Jun-14 Sep-16 20% 0% -20% -40% -60% BRL depreciation FX rates ADV of FX Rates and Interest Rates in USD Futures Year-on-year change 80% 60% 40% 20% 0% -20% -40% FX rates Interest rates in USD BRL depreciation E Source: Company data, Credit Suisse (*) 2016 consists of 9M16 annualized 44

45 IPCA Futures Taking Off IPCA coupon gaining momentum: With the support of market makers, BVMF has been fueling DI vs. IPCA spread futures (also known as the IPCA coupon), which remunerates the difference between the compounded interbank rate (DI) and the change in IPCA inflation. With an open interest of only 4K contracts in March, this product has been rapidly gaining steam, reaching almost 100K contracts in July. Hedging alternative to NTN-B holders: The IPCA coupon is analogous to Brazil's inflation-protected treasury bill (NTN-B), as it is also a source of protection against inflation fluctuations. Since 2010, inflation-linked bonds have been gaining share of the total public debt (from 24% in January 2010 to 29% in September 2016), suggesting that inflation protection is becoming more coveted among investors. More importantly, the increasing balance of NTN-Bs also indicates growing demand for hedging against this exposure, which, owing to the subdued liquidity of government bonds in the secondary market, may be more easily attained by IPCA futures. Can it move the needle? Despite recent ups and downs in its open interest (led by expiration of short-term contracts), we believe this product bears enormous growth potential. Currently, it represents only 0.04% of the outstanding volume of NTN-Bs and 0.55% of DI open interest. If it reaches 20.0% of the open interest of DI futures, which would be equivalent to 1.4% of the balance of NTN-Bs, it would increase BVMF s revenues by 3.4%. We believe the IPCA coupon is more of a substitute product for government bonds than for DI contracts, so its growth would result in limited cannibalization and could boost BM&F s overall top line. For now, we consider its growth an optionality and do not factor it in our model. Evolution of IPCA Coupon Open Interest 000 contracts Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct Source: Tesouro Nacional, Company data, Credit Suisse Q16 U16 V16 X16 Z16 F17 K17 Q18 K19 Q20 K21 Q22 K23 Q24 Q26 Q30 Total Inflation-Protected Treasury Bill (NTN-B) Gaining Share of Public Debt % of public debt 36% 34% 32% 30% 28% 26% 24% 24% 29% 22% Jan-10 Oct-10 Aug-11 Jun-12 Apr-13 Feb-14 Dec-14 Oct-15 Jul-16 45

46 Depository: Tesouro Direto Growing Exponentially Tesouro Direto platform skyrocketing: BVMF is responsible for the custody of government bonds owned by individuals sold through the Tesouro Direto online platform. As of 3Q16, Tesouro Direto contributed 39% to depository revenues and 3.0% to BVMF s total revenues. Its balance currently amounts to R$36.6bn (+67% y/y), relying on the engagement of 347K investors (+74% y/y). Sky is the limit: If Tesouro Direto s sound performance is sustained (e.g., 50% CAGR, followed by 30% CAGR, and 20% CAGR), it may fuel top-line growth by up to 2.5pps per year and ultimately comprise 14% of BVMF s revenues. In this scenario, the Tesouro Direto balance would surge from R$37bn as of 3Q16 to R$470bn in 2025, compared to saving deposits current balance of R$644bn. Although we consider this scenario as a bull case, we note that the interest accrual of many long-term bonds, coupled with the recent exponential growth in the number of investors, may make it feasible. Tesouro Direto: Bull-Case Scenario Contribution to BVMF s top-line (ex depository fees) 3.5% 4.7% 6.4% 7.6% 8.9% 10.5% 11.5% 12.5% 13.6% 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 50% y/y growth 30% y/y growth 20% y/y growth Tesouro Direto growth Tesouro Direto Balance R$ billion and year-on-year change Tesouro Direto Investors Number of active investors ( 000 individuals) 70% 72% Year-on-year change 61% % 67% 81% % 42% 34% 33% 29% 28% % % Q16 Year-on-year change 57% % 31% 32% % % 22 12% % 8% Q16 Source: Tesouro Nacional, Company data, Credit Suisse 46

47 Equity Research DIVISÓRIA Cetip s Securities Unit Headwinds from Credit Growth Meet Tailwinds from Lower Volatility

48 Will Credit Growth Offset Lower Volatility? Top-line deceleration ahead: Used to growing at double-digit rates, we expect Cetip securities unit s top-line to increase only 8% in 2017 and The deceleration is explained mainly by the balance of OTC derivatives, which, basically comprised by FX-related securities, have been declining significantly in the past two quarters, heading for normalization following pronounced volatility in 2H15-1H16 (tough comps remain an issue for 1H17). On the positive side, the balance of fixed income instruments should be fueled by credit originations, which are expected to return to positive territory next year, following a slight contraction in 2015 and a sharp one in We, though, expect a timid recovery ahead, in light of the pronounced leverage of Brazilian corporates and households. Furthermore, the short-to-medium term benefit from the change in pricing policy of CDBs should lose steam next year and the company should be negatively impacted by Central Bank s ruling that precludes the employment leasing debentures as a source of funding by banks. Securities Unit s Revenue Breakdown R$ million Cetip s Ebitda R$ million 47% Year-on-year change 74% Ebitda Ebitda margin Others Utilization Transaction Custody Registration % 18% Source: Company data, Credit Suisse 14% % 19% , % 8% 1, , E 2017E 2018E 73% 71% 71% 71% 71% 70% 70% 1, E 2017E 2018E 48

49 Non-earmarked Loan Originations About to Bounce Back Credit originations to return to positive territory: We expect a moderate recovery in loan volumes of the Brazilian banking system in the next few years (-0.4% in 2017 and +4.0% in 2018), on the back of the much needed deleveraging of Brazilian companies and households and the still pronounced level of credit amortizations, and in spite of the expected economy recovery. However, our more cautious loan growth estimates are still consistent with a pick-up in loan originations next year, following a slight contraction in 2015 and a sharp one in Perhaps equally importantly, non-earmarked loans should be the main driver of credit growth going forward, gaining share at the expense of earmarked loans, which currently comprise 50% of the total volume of loans. This scenario bodes well for funding instruments, which are key to foster non-earmarked lending. Growth in Credit Originations, by Type of Lending Year-on-year change 45% 30% 15% 0% -15% Total Earmarked Nonearmarked -30% Feb-13 Sep-13 Apr-14 Nov-14 Jun-15 Jan-16 Aug-16 Estimated Growth in Loan Volumes Year-on-year change (%) Estimated Growth in Loan Originations Year-on-year change (%) E 2019E E 2018E Source: Central Bank of Brazil, Credit Suisse 49

50 CDBs Rebound to Fuel Fixed-Income Instruments Financial bills have been offsetting decline in banking deposits: On the back of the gradually worse credit environment, the balance of fixed-income instruments in Cetip s custody has been increasing at very modest rates (1.0% CAGR, or 4.4%, excluding interbank deposits). Over the past few years, the stock of Certificates of Deposit (CDBs) has declined materially, from R$676mn in 1Q11 to R$540mn in 3Q16, which is a result not only of a cooling in banks drive to offer this instrument but also of competition with BVMF s ibalcão. On the other hand, financial bills have gained ground on banks balance sheets, surging from R$54mn in 1Q11 to R$394mn in 3Q16. Equity instruments have also increased substantially, amounting to R$166mn in 3Q16, from an insignificant volume at the beginning of the decade. Bank Funding Instruments in Cetip s Custody R$ billion -3.3% 4.6% 8.5% 9.1% 18.4% 11.8% Year-on-year change 4.5% 7.3% 6.0% 2.2% 0.9% -1.5% -6.3% -5.4% -4.8% -1.6% 2.1% 2.2% -4.0% -2.3% -7.6% 1,578 1,647 1,596 1,625 1,554 1,543 1,510 1,548 1,529 1,613 1,620 1,640 1,627 1,563 1,556 1,596 1,589 1,590 1,656 1,673 Others 1,516 1, Regulatory capital , instruments Financial bills CDB 9.2% 4.9% DI 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Source: Company data, Credit Suisse 50

51 4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15 2Q16 8% 10% 9% 9% 9% 10% 11% 8% 7% 17% 17% 17% 17% 16% 15% 15% 13% 14% 13% 12% 13% 14% 14% 13% 12% 21% 23% 22% 25% 28% 26% 22% 31% 27% 24% 25% 20% 18% 15% 14% 15% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 4% 4% 3% 3% 24% 20% 23% 21% 23% 27% 29% 23% 27% 26% 25% 29% 28% 30% 29% 32% 3% 2% 2% 2% 2% 4% 4% 5% 6% 6% 6% 2% 2% 2% 2% 1% 23% 24% 21% 20% 16% 14% 15% 17% 18% 22% 23% 23% 24% 25% 26% 24% 27 November 2016 A Look at Banks Balance Sheets Earmarked lending impacting banks funding mix: On-lending, financial bills, and open market instruments have gradually become more substantial on banks balance sheets, at the expense of retail deposits. On-lending has been soaring since 2007, which is partially explained by the gradually higher importance of subsidized credit in the Brazilian economy, funded chiefly by BNDES and originated by retail banks. The balance of on-lending (R$1.3trn as of 2Q16) is also comprised by borrowings, which consist to a large extent by foreign exchange transactions related to export pre-financing and import financing. Time to turn to traditional funding instruments: In our view, banks will have to turn to retail deposits again in the near future, as non-earmarked lending is likely to resume growth, whereas earmarked lending will likely decline, owing to the government s fiscal austerity. Hence, the weight of traditional funding instruments will likely rise at the expense of BNDES on-lending, whose relevance already declined by 2 percentage points in 1H16. Moreover, due to a recent normative rule of the central bank, financial institutions will have to replace leasing debentures, an open-market instrument, by other funding alternatives, which should boost mainly volumes of time deposits. Breakdown of Bank Funding % of total funding Brazilian Banking System s Liabilities R$ billion Demand deposits On-lending Savings deposits Financial bills Time deposits Open market instruments Court deposits Interbank deposits 91.7 Interbank deposits Court deposits Time deposits Saving deposits Demand deposits Open market instruments 1,679.6 Financial bills On-lending 1,285.7 Total funding instruments 5,326.4 Other liabilities 2,417.5 Total liabilities 7,743.8 Source: Central Bank of Brazil, Credit Suisse 51

52 Pricing Policy Responding to Regulatory Changes Change in CDB pricing policy contributing to top-line growth: In July 2014, the central bank reduced the threshold for a CDB to be registered, from R$50K to R$5K (resolution 3709). In response, Cetip reduced the registration fee for CDBs and introduced a custody fee, with the view of not heightening materially banks burden. We believe this pricing change has been positive to the company, as revenues from bank funding instruments have been outpacing materially the growth of its volumes, in spite of the frontloaded impact of lower registration revenues and the only gradual boost in custody revenues. Revenue growth to depend on volumes again: In 9M16, revenues from bank funding instruments (registration and custody) were 31.6% up y/y, whereas their average balance (whether subject to custody fees or not) was just 5.4% up y/y, reinforcing the short-term contribution from the change in pricing policy. However, we believe that this impact will practically cease next year, as the balance of fixed-income instruments subject to custody fees already amounts to 87% of the total volume, compared to 45% in 4Q14. In the past two quarters, the growth differential has already narrowed substantially. Bank Funding Instruments: Growth in Volume and in Revenues (Registration + Custody) Year-on-year change 70% Bank Funding Instruments: Volume in Custody and Volume Subject to Custody Fees R$ billion 1,200 60% 50% Registration + custody revenues 1,000 Balance in Cetip's custody 40% % % 10% 0% Balance -10% 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q Balance subject to custody fees 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2Q15 1Q16 Source: Company data, Credit Suisse 52

53 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q November 2016 Steady Growth of Debentures Will Be Challenged Leasing debentures cease to be a source of funding: Increase in debentures issued by banks leasing subsidiaries, which have been an alternative source of funding, also explains the decline in the balance of time deposits and the increase in the balance of debentures. In September 2016, however, the Brazilian Monetary Council (CMN) prohibited repurchase commitments involving securities of affiliate institutions. In practice, this puts an end to the loopholes that allowed banks to use bonds issued through leasing subsidiaries as funding for credit operations. By May 2017, banks will have to reduce their stock of bond-backed repos by 50%, whereas previous issuances may be renewed only until December of next year and for a maximum term of 12 months. Regulatory change hits top line by R$30mn/year: We believe that banks will gradually migrate the balance of leasing debentures to CDBs, which will likely have a slightly negative impact on Cetip, since custody fees for debentures are higher. While debentures fees averaged 0.13bps per month in the past 24 months, fees of bank funding instruments (registration + custody) stood at 0.10bps per month (excluding DI contracts), as per our estimates. Assuming that 60% of the balance of debentures consists of leasing bonds, and that 75% of it will migrate to CDBs and 25% will be foregone due to low funding needs, the impact would amount to R$30mn per year (R$17mn post VAT and income taxes, or 2.8% of 2016E net profit). Owing to the recent change in pricing policy, the gradual migration from debentures to CDBs should fuel registration revenues in the near term, smoothing out the negative impact. Balance of Debentures R$ billion 18% 18% 23% 23% 26% Year-on-year change 21% 16% 15% 15% 10% 10% 11% Monthly Revenues from Bonds and Bank Funding Instruments (Registration + Custody) % of volumes (bps) Bonds Bank funding instruments (ex DI) Bank funding instruments Source: Company data, Credit Suisse 53

54 November 2016 Mortgage Instruments Sideways; Revenues Plummeting Lackluster growth yields up-front impact: The balance of mortgage securities has remained flattish since 2015, owing to banks lack of appetite to lend. Since Cetip only charges registration fees on mortgage securities (i.e., no custody fees), the impact on the P&L is much more pronounced, as the driver consists of originations (flow) instead of volumes (stock). Front-loaded impact works both ways: With withdrawals from savings accounts at record-high levels, we believe Real Estate Credit Bills (LCI) and Certificates of Real Estate Receivables (CRI) will play a more important role for funding in the near term. As the credit environment improves, we believe registration revenues for mortgage securities should be among the main beneficiaries due to the front-loaded nature of the impact. Mortgage Instruments: Balance in Cetip s Custody Year-on-year change LH: Real Estate Bill CRI: Certificate of Real Estate Receivables CCI: Real Estate Credit Note LCI: Real Estate Credit Bill Mortgage Instruments: Growth in Balance and in Revenues Year-on-year change 120% 100% 80% Balance 60% 40% 20% 0% -20% Registration revenues 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 Source: Company data, Credit Suisse -40% 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 54

55 , , , , ,736 1,749 1,944 2,117 2, November 2016 Remarkable Volatility Driving OTC Revenues Higher FX volatility helps derivatives volumes: Basically comprised of FX-related securities, the balance of derivatives increased materially in 2H15-1H16, fueled mainly by options. Owing to lower BRL volatility since 2Q16, volumes have been declining significantly in the past two quarters, with the balance of options down 6.2% y/y, of swaps down 8.8% y/y, and of forwards down as much as 47% y/y. Going forward, the main question, in our view, is whether the volumes of flexible option will be sustained at the present high levels, as they are almost 4x above the historical average (R$549bn, vs. 5-year average of R$152bn). We assume a mild contraction in our models. OTC: Balance in Cetip s Custody R$ billion Others Flexible options Forward COE BOX Swaps OTC: Growth in Balance and in Revenues (Registration + Custody) Year-on-year change 90% 75% Balance Registration + custody revenues 60% 45% 30% 15% 0% -15% 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 Source: Company data, Credit Suisse -30% 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 55

56 Equity Research Cetip s Financing Unit Leaving Underdog Status Behind DIVISÓRIA