Banco Santander (Brasil) S.A. GAMMA SCORE

Banco Santander (Brasil) S.A. GAMMA SCORE

Date: March 10, 2011 Analysts: Eduardo G. Chehab Sao Paulo - Brazil Tel: 55-11-3039-9742 Email: eduardo_chehab@ Oleg Shvyrkov Moscow - Russia Tel: +7-095-783-4045 Email: oleg_shvyrkov @

For important information on GAMMA Scores please see the last page of this report.

Shareholder While

Heading

Subhead

Banco Santander (Brasil) S.A. Brazil

Overall Company Score* STRONG

7 NYSE: (ADRs Level III)

BSBR

Maximum is 10

Component Scores:*

Shareholder influence Shareholder rights Transparency, audit, and risk management Board effectiveness, strategic process and incentives

BOVESPA:

6+ 7 S&P credit rating:

7+ 12M P/Unit as of 12/2010: 7 Market Cap (ADRs):

SANB11, SANB3. SANB4

BBB-/Stable/A-3 11.6

USD 40 billion

Standard & Poor's has assigned a GAMMA score of 7 to Banco Santander (Brasil) S.A.

Strengths: The controlling shareholder is, in our opinion, a highly regarded global financial organisation motivated to support the development of Santander (Brasil). Three independent directors sit on the board who provide checks and balances to the major shareholder's influence. Unit owners have voting rights. A dividend policy is in place. Santander (Brasil) does not depend on its parent to fund its activities. Significant efforts have been made to improve transparency and other elements of corporate governance. The web site presents a fair volume of information in Portuguese and English. IFRS financial statements are available and disclosed on a timely basis. The management team is composed of highly experienced professionals, most of whom are locally hired. We deem the enterprise risk management system adequate. The senior executive officer compensation policy is adequate in our view, and also tied to medium term results.

Weaknesses: One third of board members are Santander (Brasil) executives, which in our view may constrain the purpose of the board to impartially supervise the executives' performance. The existing corporate governance structure and current board composition have been in place less than one year. The free float is below the statutory minimum. Minority shareholders have limited voting powers in our view given the strong influence of the major shareholder. Few board committees in place, forcing the board to rely on information provided by management.

S h a r e h o ld in g s t r u c t u r e ( b y o r d in a r y s h a r e s )

S a n t a n d e r ( S p a in )

F r e e f lo a t

1 7 .8 %

8 2 .2 %

Santander Spain, through three holding companies, also holds 80.7% of the preferred shares, while 19.3% are free float. In terms of total capital, the free float currently represents 18.5%.

Executive Summary

Standard & Poor's Governance Services has assigned its governance, accountability, management metrics and analysis (GAMMA) score of `7' to Banco Santander (Brasil) S.A.

The Santander group first gained a presence in Brazil in 1957 through an operating agreement with a small bank, Banco Intercontinental do Brasil S.A. At that time various regulations limited the activities of international banks in Brazil. In 1985, Santander was authorised to open a bank wholly owned by its parent company, albeit with restricted activity. Then, in the 1990s, the Brazilian government scrapped the majority of restrictions on international banks' operations in the domestic market. Santander's development really started to gain momentum in Brazil in 1997, when management decided to grow through the acquisition of medium- and large-sized banks such as Banco Geral do Com?rcio, Noroeste, Meridional/Bozzano Simonsen and Banespa. The most recent relevant acquisition was in 2008, when Banco ABN AMRO Real, which was of comparable size to Santander (Brasil), was acquired.

Santander (Brasil) is a full service financial institution, operating in all segments of the traditional banking and insurance activities. In October 2009, with the equity markets more conducive, Santander (Brasil) launched its IPO simultaneously on the Bovespa (Level 2) and the NYSE, raising USD7.3 bln, net of placement expenses, resources that will primarily be utilised to fund its growth programme up to 2013.

Santander (Brasil)'s key consolidated figures under IFRS are: - 2010 revenues of USD28 bln; net profit of USD4.4 bln; and a ROE of 16.9%. - At end-2010, total assets amounted to USD225 bln; its net worth USD26 bln; and its Basel capital adequacy ratio 22.1% (versus the minimum 11% required by Brazil's central bank), reflecting the significant capital increase through the IPO.

The P&L figures were almost double the 2007 numbers, for the most part due to the merger of Banco Real.

Santander (Brasil) currently employs 54,000 staff, has 2,201 branches, 1,495 mini-branches housed within companies and 18,312 ATMs, concentrated in the southeastern region, where approximately 73% of its branches are located. In terms of total assets, as of December 2009 (last data available), Santander had a 9.3% market share and ranked 3rd among the private banks in Brazil, after Ita? Unibanco (16.2% market share) and Bradesco (12.3%). The largest bank in Brazil, state-owned Banco do Brasil, held a 19.2% market share at that date.

Santander (Brasil) is currently rated BBB-/Stable/A-3 by S&P's Credit Rating Services, and broadly in line with Brazil?s sovereign credit rating (please note S&P Credit Rating Services operates entirely separately from S&P Equity Research).

Santander group activities are concentrated in ten countries: Spain, Portugal, Germany, the UK, Brazil, Poland, Mexico, Chile, Argentina and the US, together forming one of the largest financial institutions in the world, with total assets of EUR1.2 tln at end-2010, net profit of EUR8.2 bln, shareholders' equity of EUR75 bln, an ROE of 11.8% and a capital adequacy ratio of 13.1%, and employed around 179,000 staff. The parent company is rated AA by S&P's Credit Rating Services.

Strengths

Santander Group is a highly regarded global financial organisation, motivated to support the development of Santander (Brasil) through its managerial know-how and also through capital injections made in the past to fund its growth. Additionally, Santander (Brasil) was able to launch the largest IPO in Brazil to date, with the bulk of the proceeds earmarked to fund organic growth. We would stress that Santander (Brasil) is not dependent on its parent for funding for its activities.

Three independent directors sit on the Santander (Brasil) board, providing checks and balances on the parent company's influence, while the management team is composed of, in our view, highly regarded and experienced professionals.

As minority shareholders own units, they automatically have proportional voting rights. Both ordinary and preferred shareholders have 100% tag along rights. There is also a dividend policy in place.

The disclosure level within the Santander (Brasil) web site is satisfactory in our opinion, with most of the documents provided in both Portuguese and English. Financial statements have been available both under Brazilian GAAP and IFRS since 2008. Disclosure timing has been good in our view.

Santander (Brasil) has had a sound enterprise risk management system in place for several years, adhering to the requirements of Santander Spain, Brazil's central bank, CVM (Brazil's Securities and Exchange Commission), the SEC and SarbanesOxley.

We believe the compensation policy for senior executive officers is adequate, with a share scheme providing medium-term incentives.

Weaknesses

Three senior Santander (Brasil) executives also sit on the board, in our opinion constraining impartial supervision and evaluation of the executives' performance.

The corporate governance structure was only introduced very recently. The ability of the independent directors, who were appointed by the Santander group, to balance the influence of the parent company has not been tested. There are only two board-level committees, both of which have a fairly short history.

The free float is still below the threshold required by Bovespa's Level 2 regulations, but has been managed to reach the required 25% over the coming years.

Minority shareholders have limited voting powers at shareholders' meetings due to the strong influence of the parent company. The three independent directors were nominated by Santander (Spain).

Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score

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Full report

Shareholder Influence - Component Score: 6+

Key Analytical Issues

?Santander (Spain) has significant influence over its Brazilian subsidiary. Following the IPO, the Santander group still holds 82.2% of the voting shares in its Brazilian subsidiary (and 80.7% of preferred shares). Most of the policies followed by Santander (Brasil) are determined by its parent company, such as overall strategy, credit policies, dividend distribution, risk control, management structure, technology and internal audit procedures, besides using the same brand name and logo. Santander (Spain) is also a listed company, with its shares widely held, and professional management. Its largest individual shareholder owns roughly 3% of the ordinary shares.

We found no immediate material conflicts of interest between Santander (Spain) and its Brazilian subsidiary. The local management team has significant autonomy in terms of management of the Brazilian operations, in our opinion. However, the growth policy is restricted to the domestic market as the parent company already has subsidiaries elsewhere in Latin America. At this stage, we do not believe the parent company would sign off on a geographic expansion plan that included the internationalisation of the Brazilian subsidiary.

?Of the nine members of the board, three are independent but three are Santander (Brasil) executives. According to the Santander (Brasil) bylaws, the board can comprise up to 12 members, of whom at least 20% must be independent directors as defined by the BM&F Bovespa (Level 2) regulation. Of the current members, three represent Santander (Spain), three are executives (the CEO and the two senior vice-presidents) and three are independents, elected at the AGM but appointed by the majority shareholder. In our opinion, while the presence of three competent independent members with diversified professional backgrounds, improves the checks and balances system on the board, the presence of the three Santander (Brasil) executives constrains one of the main purposes of the board, which is to supervise the management team's performance. A recent exchange of positions saw Mr. F?bio Barbosa leave his role as CEO to become chairman, while Mr. Marcial Portela, the former chairman, became CEO.

?The management team is composed exclusively of professionals. Senior management is mainly composed of executives from the merged Banco Real, Santander (Spain) and Santander (Brazil). The current team comprises 60 executives, including the CEO, two senior vice-presidents and nine vice-presidents, each with a two-year mandate and the right to be re-elected. Some senior executives report directly to Santander (Spain).

Parent company has supported growth at Santander (Brasil). Despite the strong growth in the past 15 years, primarily through the acquisition of six medium- and large-sized financial institutions, the Santander (Brasil) capital structure remains satisfactory in our opinion, as these acquisitions were supported financially by the parent company. For instance, Banco Real was acquired in 2008 by Santander (Spain) from the ABN AMRO group, and the parent company subsequently transferred ownership to Santander (Brasil) through a c.USD24 bln capital increase, demonstrating the parent company's strong commitment to its Brazilian subsidiary.

Related-party transactions are in line with market conditions. To fund foreign-currency loans, Santander (Brasil) has outstanding credit lines with its parent and affiliated companies around the world. Indeed, borrowings and deposits with group companies currently represent just over 2% of its total funding. Additionally, there are contracts with certain affiliates for services provided to the Santander (Brasil) IT platform, including software development, hosting and information processing. Such related-party transactions are conducted at arm's length, in line with Santander's internal policy, based on terms that correspond to those that would apply to transactions with third parties, as stated in the Santander (Brasil) audited financial statements. No loans or advances are granted to any member of the board or executive team, as per Brazilian banking legislation.

IPO: in October 2009, Santander (Brasil) launched the largest IPO in Brazil to date, raising BRL13 bln, equivalent to USD7.3 bln at that date. Roughly 561 mln units were issued at BRL23.50 (USD13.40) each, both in Brazil and the US. Each unit comprised 55 ordinary shares and 50 preferred shares. Prior to this IPO, Santander had some ordinary and preferred shares in the market, equivalent to 2.1% of the total shares, but with no liquidity, shares that were originated from the banks it acquired and merged in previous years. The existence of these shareholders stemmed from the fact that some did not participate in earlier public offerings, and no other solution could be found. The Santander (Spain) participation in Santander (Brasil), totalling 82.2% of voting shares and 80.7% of preferred shares, is maintained through three holding companies: Grupo Empresarial Santander, S.L., Sterrebeeck B.V. and Santander Insurance Holding, S.L.

Related-party transactions: According to Brazilian legislation, a financial institution is not allowed to extend loans to: a) officers and members of the advisory, administrative, fiscal or similar councils, or their respective spouses and family members up to the second degree; b) individuals or corporations owning more than 10% of its capital; or c) corporations in which the financial institution, any officers or board members, or their relatives up to the second degree, own more than 10%.

Shareholder Rights - Component Score: 7

Key Analytical Issues

?Unit owners have voting rights. The Santander (Brasil) shareholding structure is split 53:47 ordinary (voting) and preferred shares. Santander (Brasil) was listed on the Bovespa (Level 2) and the New York Stock Exchange (ADR Level III) in October 2009, when 561 mln units were issued. Minority unitholders automatically have voting rights proportionate

Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score

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Key Analytical Issues

to their ownership, which we view as a positive. They are also entitled to appoint a proxy to attend shareholders' meetings and vote on their behalf.

Preferred shareholders have 100% tag-along rights. The preferred shares included in the units receive dividends equivalent to 110% of those on the ordinary shares, 100% tag-along rights (against the 80% legal minimum), and priority in repayment over shareholders in event of the bank's liquidation. However, as Santander (Spain) holds preferred and ordinary shares in broadly equal proportion to the ratio within the units, shareholders' voting rights are not affected by the ownership of preferred shares.

Pre-emptive rights for holders of ADRs are not comprehensive. Holders of units in Brazil have pre-emptive rights to subscribe to shares in any capital increase in proportion to their holding, as is generally the case elsewhere. However, holders of ADRs would not be able to exercise their rights under an issue if Santander (Brasil) failed to file a registration statement under the US Securities Act of 1933. In the 20-F, Santander (Brasil) notes that it may decide, at its discretion, not to file such registration statements.

?Free float currently below the Bovespa threshold of 25% of total shares. Under Bovespa (Level 2) listing rules, the minimum free float threshold is 25% of total shares, although there is a three-year window to meet this requirement. Santander (Brasil) management has informed us that the requirement will be met by October 2012, although it is possible to apply for a two-year extension upon presentation of a plan. The increase in the free float can be achieved through the issuance of new units or a sale of units held by Santander (Spain), either of which would dilute the latter's ownership. We believe a higher free float could give minorities greater influence at shareholders' meetings.

?Appointment of independent board members by minorities. A preferred shareholder or a group of preferred shareholders with a stake of at least 10% of total shares and/or ordinary shareholders with at least 15% of voting shares but not a blockholder, can nominate a board member at the AGM. However, the three independent members currently sitting on the board were elected at the April 2010 AGM by Santander (Spain). Board appointments by minorities would be easier if cumulative voting procedures were adopted. However, this is not common practice in Brazil, although the law would allow it where a minimum of 10% of shareholders with voting rights require this, and as an option has not been exercised so far.

?Dividend policy in place. Although Santander (Brasil)'s bylaws require that dividends account for 25% of adjusted net profit (less legal and contingency reserves), in line with Brazilian corporate law, its current dividend policy recommends the distribution of 50% of adjusted net profit (including interest on own capital). However, payouts have actually been higher in recent years, equivalent to almost 100% of adjusted net profit. Dividends related to FY 10 amounted to almost USD2 bln (BRL3,540 mln), and in 2009 USD800 mln (BRL1,575 mln). However, future recommended payouts may well be lower, depending on, among others, cash flow, financial condition, capital position, investment plans, prospects, legal requirements, economic environment and any other factors Santander may consider relevant at the time.

?Organisation of shareholders' meetings. In general, the board of directors is the responsible for convening ordinary and extraordinary shareholders' meetings. However, there are some special situations in which shareholders can do this. A shareholder or group of shareholders with at least 5% of the ordinary/preferred shares can call a shareholders' meeting where the board of directors has not done so. With more than 10% of voting shares, they can require the adoption of cumulative votes. In 2010, the AGM was held just three days before the cut-off date set by corporate law and the CVM. Holders representing more than 91% of voting shares attended. The meeting materials were made public 30 days before the AGM, in line with current Brazilian legislation (recently raised from 15 days). Shareholders can attend in person or by proxy. Eight shareholders' meetings were held in 2009, all of them before the IPO; in 2010 there were three.

The custodian and share registrar. The units underlying the ADSs are held by Santander (Brasil), acting as custodian, and agent for the depositary, JP Morgan Chase Bank, N.A. Santander (Brasil) also acts as registrar. BM&F Bovespa is custodian of the units traded in Brazil. Units: Santander (Brasil)'s capital of USD36 bln is broadly equally split between ordinary and preferred shares. Shareholders hold units that are depositary certificates, each representing 55 ordinary shares and 50 preferred shares. Of the free float shares, 54% are traded on the NYSE through ADRs, and the balance on Bovespa. Santander's units were included in the Bovespa index as of September 2010, which comprises all highly traded companies on the Brazilian stock exchange.

Santander (Brasil) is listed on Bovespa (Level 2), the main characteristics of which are: - At least five members on the board, at least 20% of whom are independent. - A free float of at least 25% of total shares. - Ordinary shares carry voting rights, 100% tag along, while preferred shares have an 80% tag-along, (i.e. the contractually guaranteed right of a minority shareholder to sell his/her stake if the majority shareholder does so), - Preferred shares carry voting rights only under special situations, such as a merger or spin-off, agreements with the controlling shareholder or affiliates that must be ratified by a shareholders' meeting, valuation of assets to be used as payment or capital increase, hiring of a specialised company to calculate the economic value of the bank in the event of the cancellation of a listed condition, among others. - Preferred shareholders also have the right to appoint one member of the bank's fiscal council and his/her respective alternate, where a fiscal council has been formed.

Dividend policy: Under Brazilian corporate law, dividends are generally required to be paid within 6o days of the date on which the dividend is declared unless a shareholders' resolution establishes another payment date (which must occur prior to the end of the fiscal year in which the dividend was declared).

Interest on own capital ? since 1996, Brazilian companies have been permitted to pay dividends calculated as interest on own capital and treat such payments as an expense for tax purposes.

Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score

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Shareholders' meetings: Shareholders are notified individually and through publications in the State of S?o Paulo Official Gazette and a widely circulated newspaper (Valor Econ?mico) over three days, and through the Santander (Brasil), CVM and SEC web sites 30 days before the meeting date. The materials for the most recent meeting were posted on the company's web site and sent to the stock exchanges, CVM and SEC 30 days before the meeting date, as per current Brazilian legislation (CVM Instruction 481). Resolutions are taken by shareholders representing the absolute majority of ordinary shares. Each ordinary share corresponds to one vote.

In 2010, the AGM was held at the Santander (Brasil) head office, as per local corporate law, on April 27, three days before the cut-off date set by the legislation. The 2011 AGM is also scheduled for April 27. At these annual meetings, shareholders approve the previous year's financial statements, both according to the Brazilian GAAP and to IFRS; the independent auditor and audit committee reports; dividends related to the previous fiscal year; the budget for compensation to be paid to executives and board members.

Transparency, Audit and Risk Management - Component Score: 7+

Scope, timing and accessibility of public disclosure

Key Analytical Issues

?Ownership information is complete and updated, including all shareholders with participations above 5%. With no minority shareholder currently meeting this threshold, the shareholding chart shows only the three Santander group holding companies. The web site includes a table showing all subsidiaries and the respective ownership structures. ?Solid financial and operating disclosure. The annual financial statements, annual report, 20-F and quarterly statements are comprehensive, with several footnotes detailing subjects related to management, markets, and operating and financial performance. Santander (Brasil) also presents annual and quarterly financial statements according to IFRS and Brazilian accounting principals, which we view as a strength in terms of disclosure. ?Satisfactory timing of disclosure. Santander (Brasil) has published all its financial reports before the deadline since it became a listed company. The 2010 financial statement according to Brazilian GAAP was released on February 4, 2011, IFRS statements will be published on March 31. The 20-F form is due to be published in June, in line with SEC requirements. Information regarding extraordinary events has been detailed and timely, in our view.

Investor Relations department formed mid-2009. Comprising 12 staff to help investors and analysts, the IR department is also responsible for preparing press releases, ordinary and extraordinary communications and organising several public presentations about the bank's performance during the course of the year. Most are fluent in English. All publishing of financial statements, and some extraordinary events, are followed by a public conference call. The team had a calendar of eight public presentations to analysts and investors in six cities in Brazil for 2010.

?Satisfactory web site disclosure. The Santander (Brasil) corporate governance structure, shareholding structure, statutory filings, financial statements, social responsibility policy, press releases and presentations are released in both Portuguese and English. Public reports have consistently been filed before the cut-off date. The web site includes a corporate governance section on which Santander (Brasil) discloses its policies, details of its administration structure, comprehensive professional histories for all board members and executive officers, the composition of committees, minutes, bylaws, code of ethics, calendar of corporate events for the year and presentations, among others. Financial statements available date from 2004. However, we believe a chart setting out the governance structure of Santander (Brasil) better detailing the committees subordinated to the board and management would facilitate the understanding of this structure.

Social and environmental concern. Santander (Brasil) is currently implementing the environmental and social risk management system that had been in place at Banco Real for several years. Under this system, corporate borrowers are screened for environmental and social concerns, such as contaminated land, deforestation, labour violations and other major environmental and social issues for which there are potential penalties. A specialised team of biologists and geologists monitors customers' environmental practices, and a team of financial analysts studies the likelihood of damage that unfavourable environmental conditions could cause to its customers' financial position and collateral, among others. Monitoring focuses on preserving capital and reputation in the market. Santander (Brasil) intends to expand these screening practices, including training in credit and commercial areas. The bank also directs a portion of its resources annually to social programmes to help develop and enrich the communities in which it operates, but there is no detailed information about these contributions in the web site.

The audit process

Key Analytical Issues

?Audit committee in place since 2004: The central bank requires financial institutions above a certain size, as detailed below, to have an audit committee. Up to March 2007, the Santander (Brasil) audit committee composition was the usual for non-listed companies, having some executives as members. The current audit committee comprises four independent members, each with a 1-year mandate, elected by the board of directors. The head of this committee is a professional with significant experience in auditing corporates (Arthur Andersen and KPMG) and banks (Santander and BBVA). Of the three other members, two are former central bank executives and the third is one of the board's independent directors with strong

Standard & Poor's Banco Santander (Brasil) S.A. GAMMA Score

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