Risk Management Report Pillar 3-4Q14

Transcription

1 Risk Management Report Pillar 3-4Q14

2 RISK MANAGEMENT REPORT PILLAR 3 BANCO DO BRASIL S.A. 4th Quarter of

3 Summary 1. INTRODUCTION GOVERNANCE Types of Risks Corporate Risk Governance Risk Management Process Reports REGULATION Basel II Pillar I Minimum Capital Requirements Pillar II Risk and Capital Supervisory Process Pillar III Transparency Basel III Basel II in Banco do Brasil Market Risk Credit Risk Operational Risk FINANCIAL CONGLOMERATE Balance Sheet Composition of the Financial Conglomerate Composition of the Economic and Financial Consolidated RISK MANAGEMENT Credit Risk Management Objectives Credit Policy Management Strategies Management Processes Communication and Information Processes Communication process for internal clients Communication process for external clients Measurement Systems Concentration Regulatory Requirements Mitigation Policy Processes for Monitoring the Effectiveness of Mitigators Exposure to Credit Risk Acquisition, Sale or Transfer of Financial Assets Securities (TVM) operations derived from securitization processes Exposure to counterparty credit risks Mitigating instruments Market and Liquidity Risks Management Objectives Management Policies and Strategies Hedge Policies Risk measuring systems and communication and information processes Market Risk Management Structure

4 5.2.6 Market Risk Management Process Negotiable Portfolios Non-negotiable Portfolios Liquidity Risk Management Structure Liquidity Risk Management Process Operational Risk Management Objectives Operational Risk Policy Management Processes and Strategies Communication and Notification Processes Measurement Systems Operational Risk Mitigation Control of Operational Risk Banco do Brasil Related Entities Other Risks Risk strategy, reputation, environmental and actuarial Shareholdings CAPITAL Capital Management Referential Equity (RE) Details Regulatory Adjustments deducted from CET1: Minimum Reference Equity Required (MRER) Capital Adequacy Ratio Assessment of Sufficiency and Adequacy of Referential Equity (PR)

5 List of Tables Table 1 - Timetable for Basel III Implementation in Brazil Table 2 - Financial Balance Sheet x Consolidated Balance Sheet Table 3 - Composition of the Financial Conglomerate Table 4 - Composition of the Economic and Financial Consolidated: Table 5 - Concentration of the ten and of the hundred largest customers in relation to the total of transactions with credit granting feature Table 6 - Credit risk average exposure Table 7 - PJ credit risk exposure by geographic regions Table 8 - PF credit risk exposure by geographic regions Table 9 - Credit risk exposure of the financial conglomerate, by economic sector Table 10 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) 4Q Table 11 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) 3Q Table 12 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) 2Q Table 13 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions 4Q Table 14 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions 3Q Table 15 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions 2Q Table 16 - Amount of overdue transactions by geographical regions Table 17 - Amount of overdue transactions, segregated by economic sector 4Q Table 18 - Amount of overdue transactions, segregated by economic sector 3Q Table 19 - Amount of overdue transactions, segregated by economic sector 2Q Table 20 Write-off transactions by economic sector Table 21 - Total allowances for loan and lease losses in the quarter and variations Table 22 - Credit risk exposure by FPR Table 23 - Loss operations assigned, with substantial transfer of risks and benefits Table 24 - Value of the portfolio granted with co-obligation, recorded in the off balance sheet Table 25 - Value of the exposures derived from acquiring FIDC and CRI Table 26 - Notional value of contracts to be liquidated in clearing house liquidation systems, in which clearing houses acts as central counterparty Table 27 - Notional value of contracts subject to counterparty credit risk in which clearing houses do not act as central counterparty, Segmented in uncollateralized agreements and collateralized agreements Table 28 - Positive gross value of the respective contracts, including derivatives, loans to settle, assets loans and repurchase agreements, disregarded the positive values related to compensation agreements defined in Resolution nº 3.263/ Table 29 - The value of collaterals that cumulatively meet the requirements of paragraph VII, Art.9, of Bacen Circular 3,678/ Table 30 - The value of collaterals that cumulatively meet the requirements of paragraph VII, Art.9, of Bacen Circular 3,678/13: Table 31 - Collateral coverage Table 32 - Mitigated value of exposure, weighted by the respective weighting factor Table 33 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 4Q Table 34 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 3Q Table 35 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 2Q Table 36 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 1Q Table 37 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 4Q Table 38 - Negotiable Portfolio by relevant market risk factor, divided into positions purchased and positions sold

6 Table 39 - Impact on income or in assessing the value of the institution due to shocks in interest rates segmented by foreign currencies Table 40 - Phases of the operational risk management process Table 41 - Operational losses monitoring by loss events category Table 42 - Shareholdings Banking Book Table 43 - RE Historical Series Financial Conglomerate Table 44 - Regulatory Adjustments Table 45 - RE Historical Series Financial Conglomerate Table 46 - Minimum Reference Equity Required of the Financial Conglomerate Table 47 - The Total Capital Ratio and RE margin - Financial Conglomerate Table 48 - Criteria and parameters for classification of the capital condition List of Figures Figure 1 - Governance Structure Figure 2 - Risk Management Structure and Process Figure 3 - Basel II Pillars Figure 4 - Capital allocation Models Figure 5 - Pillar III Structure Figure 6 - Creditrisk management Figure 7 - Credit risk management structure Figure 8 - Market risk management structure Figure 9 - Management Process Figure 10 - Liquidity Risk Management

7 1. Introduction The purpose of this report is to inform the public about Banco do Brasil's structures, processes and risk management policies. Banking system sustainability is indissolubly linked with risk-management policies and mechanisms. The methods of identifying, assessing, controlling, mitigating and monitoring risk safeguard financial institutions in adverse situations and provide support for positive, recurring earnings over time. BB considers essential risk and capital management to the process of decision-making, providing greater stability, better capital allocation and optimization of risk-return ratio. As relevant as the increase in business volume should be the consistency of the company's risk governance and efficiency of management processes. The institutions that will overcome this challenge will be those that manage to transcend mere compliance with regulatory requirements and consider the risk, in an agile and precise way, in each decision-making. Brazil s participation in the Basel Committee on Banking Supervision encourages broader, timelier adoption of international prudential standards. These new frontiers of the regulatory environment require Brazilian financial institutions to become more agile and adaptable. Changes to the global financial environment, such as market integration through globalization, the emergence of new transactions and products, increasing technological sophistication, and new regulations, have made financial activities and processes - and their risks - ever more complex. Additionally, the lessons learned from financial disasters in the 90 s and most recently at 2008, have helped to show the essential need for risk management in the banking industry. These factors have influenced regulatory agencies and financial institutions to invest in risk management, seeking to strengthen the financial health of banks and to prevent detrimental effects on the financial system. In concert with this outlook, BB has invested in the continual improvement of its riskmanagement process and practices, in line with international market benchmarks and the New Basel Accord, known as Basel II, and by the fine-tuning provided by Basel III. Banco do Brasil remains continuously aligned with best management practices, among them, the risk management architecture with multidimensional scope whose specificities are described in this report. 6

8 2. Governance 2.1 Types of Risks The main risks to which BB is exposed in its business are: Market Risk: possibility of losses from fluctuations of the market value of positions held by the institution. It includes the risks of transactions subject to fluctuations of exchange rates, interest rates, share prices, and commodity prices. Liquidity Risk: possibility of imbalances between tradable assets and liabilities payable - "mismatches" between payments and receipts - which can affect the institution s payment ability, taking into account the different currencies and settlement terms of its rights and obligations. Credit Risk: possibility of losses associated with non-fulfillment by a borrower or a counterparty of their respective financial obligations according to negotiated terms, the devaluation of a loan agreement due to a drop in the borrower s risk rating, a decline in gains or earnings, benefits granted in renegotiation, and recovery costs. Among other things, credit risk is defined as including: Counterparty Credit Risk: Possibility of a given counterparty not fulfilling its obligations related to settlement of transactions that involve trading financial assets, including those related to the settlement of financial derivatives; Country Risk: Possibility of losses associated with non-fulfillment of financial obligations according to negotiated terms by a borrower or counterparty located outside of the country, resulting from actions taken by the government of the country where the borrower or counterparty is located; Transfer risk, Possibility of difficulties occurred during currency conversion of funds received; Commitment Risk: Possibility of having to make disbursements to honor guarantees, bonds, co-obligations, credit commitments, or other transactions of a similar nature; Intervener Risk: Possibility of losses associated with non-fulfillment of financial obligations under the terms agreed by the mediator of loans; Concentration Risk: Possibility of credit losses arising from significant exposure to counterparty, a risk factor or groups of counterparties related by common characteristics. Operational Risk: possibility of losses due to failures, deficiencies, or improper internal processes, people and systems or external events. This includes the possibility of losses arising from legal risk. 7

9 Legal Risk: possibility of losses associated with improper or deficient contracts signed by the institution, as well as sanctions resulting from noncompliance with legal provisions and compensation for damages to third parties resulting from activities engaged in by the institution.. Strategic Risk: possibility of loss arising from adverse changes in the business environment, or use of inappropriate assumptions in decision making. Compromises: Systemic Risk: possibility of losses due to the financial difficulties of one or more institutions that cause substantial damage to others, or a disruption of normal operations of the national financial system. Situational Risk: arises from the possibility of losses caused by changes to political, cultural, social, economic, regulatory or financial conditions in Brazil and other countries. Corporate Risk: possibility of loss arising from the use of inappropriate assumptions in making strategic decisions or failure of the organization in a timely and proactively adjust its corporate strategy in relation to the current and future situation, national and international. Reputation Risk: possibility of negative perception about the institution on the part of customers, counterparties, shareholders, investors, government agencies, community or supervisors that can adversely affect the sustainability of the business. Compromises: Business and Relationships: Possibility of reputational damage associated with the strategies, products, services, business transactions and external relationships. Controls and compliance: Possibility of reputational damage associated with the ineffectiveness of the controls and the legal and regulatory non-compliance. Social and Environmental Risk: possibility of losses arising directly or indirectly from: Adverse environmental and social impacts resulting from administrative and business practices of BB, or stakeholders; and Adverse impacts to the Bank s operations resulting from conjectural aspects related to social and environmental unsustainability of the modes of production and the existing consumption patterns. Compromises: Administrative practices - possibility of losses arising from environmental impacts generated by the administrative activities of the institution; Financial Support - possibility of losses arising from environmental impacts related to the characteristics of the products and services or activities supported financially by the institution, as well as identified in assets posted as collateral or in lieu of payment. 8

10 Equity - possibility of losses arising from environmental impacts generated by investments or shares in companies with absence or inefficiency of policies and environmental management and / or high level exposure. Environmental Scenario - possibility of losses arising from changes brought about in the political, cultural, economic or financial conditions related to environmental issues. Actuarial Risk: Possibility of discrepancy between the actuarial assumptions used in the calculation of contributions, benefits and technical provisions and the data effectively carried out. 2.2 Corporate Risk Governance The risk-governance model adopted by BB involves a superior committee and executive committee structure, with the participation of many units at the bank, addressing the following issues: a) separation of duties: business versus risk; b) specific structure for risk management; c) defined management process; d) decisions at several hierarchical levels; e) clear rules and authority structure; and f) reference to best management practices. In December/14, the Executive Board approved the reconfiguration of strategic governance bodies. The new setting for the committees related to risk management shall be: Credit Risk Executive Committee (CRC); Market and Liquidity Executive Committee (CRML); Internal Controls and Operational Risk Executive Committee (CRO); Global Risk Superior Committee (CSRG). 9

11 Figure 1, below, represents the governance structure of the Bank s risk management Figure 1 - Governance Structure All decisions related to risk management are made jointly and in accordance with BB s guidelines and rules. Banco do Brasil s risk governance is centralized in the Global Risk Superior Committee (CSRG), composed by members of the Executive Board of Directors, consisting of a steering committee, whose main purpose is to establish strategies for risk management, appropriate overall risk-exposure limits to capital allocation in light of risks. Seeking to give flexibility the management process, several executive committees were set up to address Credit Risk (CRC), Market and Liquidity Risk (CRML), and Operational Risk (CRO); they make decisions and/or instruct the CSRG, and have delegated decisionmaking power. The Risk Management Board (DIRIS) is responsible for managing credit, market and liquidity and the Operational Risk Unit (URO) is responsible for managing operational risks. These structures reports to the Office of the Vice President for Internal Controls and Risk Management, providing synergy among processes and specialization and contributing to better capital allocation. 10

12 Figure 2 demonstrates the decision-making flow of topics related to risk management: Figure 2 - Risk Management Structure and Process Decisions are reported to intervening units through documents that objectively express the position taken by executive management, guaranteeing application throughout the bank. The Bank established concepts and management activities for strategy, reputational and environmental risks in compliance with the requeriments of CMN Resolution 3.988/11 and Circular Bacen 3.547/11. Additionally, BB assigned responsibility for managing these risks to the Risk Management Unit, in conjunction with the Strategy and Organization Unit, in the case of strategy and reputation risks, and in conjunction with the Sustainable Development Unit, in the case of environmental risk. The Board of Directors (CA), in conjunction with the Global Risk Superior Committee (CSRG) and Internal Controls and Operational Risk Executive Committee (CRO) has been defined as the governance structure for resolving matters related to these risks. The interest rate risk of the banking book follows the established governance for market risk and the concentration risk and the counterparty credit risk follow the established governance for credit risk. 2.3 Risk Management Process The risk-management process involves a continuous flow of information, abiding by the following phases: 11

13 a) planning: data gathering and analysis phase and preparation of proposals; b) decision: Proposals are assessed and deliberate collegiate way, in appropriate levels and communicated to areas concerned; c) execution: the intervening units implement the decisions made; and d) monitoring: checking on the implementation of the resolutions and report to Executive Committees and CSRG. 2.4 Reports Risk-management reports support decision-making processes about risk in the Executive Committees, the Global Risk Superior Committee (CSRG), the Executive Board of Directors (CD), and the Board of Directors (CA). The reports produced periodically have managerial information (qualitative and quantitative) and subsidize the dissemination of information to the market, as the Management Report and the Performance Analysis Report. 12

14 3. Regulation 3.1 Basel II In June 2004, the Committee published a document, commonly known as Basel II, with the following objectives: a) promote financial stability; b) strengthen the capital structure of institutions; c) favor the adoption of best risk-management practices; and d) encourage greater transparency and market discipline. Basel II proposes a more comprehensive approach in terms of strengthening banking supervision and stimulating greater transparency in disclosing information to the market, based on three major premises: a) Pillar I - capital requirement for the coverage of credit, market and operational risks; b) Pillar II - risks and capital supervision; and c) Pillar III - information transparency and market discipline. Figure 3 represents the pillars of Basel II. Figure 3 - Basel II Pillars Pillar I defines the treatment to be given to determine capital requirements in light of risks incurred in the activities engaged in by financial institutions. In relation to the 1988 Accord, Basel II introduces a capital requirement for operational risk and refines the discussion of credit risk, as shown in Figure 4. 13

15 Figure 4 - Capital allocation Models Basel II encourages the adoption of proprietary models to measure risks (credit, market, and operational), with differing degrees of complexity, subject to regulatory approval, which seeks to bring closer capital allocation and risk profile of the business. Pillar II reaffirms and strengthens the role of internal and external oversight of risks and capital of the institutions. Pillar III stimulates market discipline through transparency of information on risk management practices Pillar I Minimum Capital Requirements Under Pillar I, there are various alternatives to measure capital requirements depending on its size, complexity, and technical capacity of the financial institution, in order to measure risk, even considering the use of internal models (Advanced). The main changes compared to Basel I are: a) the sophistication of credit risk measurement methods; and b) The addition of capital requirement for operational risk coverage. Even though the internal models to calculate capital allocation require a greater degree of complexity, sophistication and investment, they enable a greater degree of accuracy in the evaluation of the capital required to support the risks incurred. 14

16 3.1.2 Pillar II Risk and Capital Supervisory Process The Basel Committee established four essential principles of risk and capital supervisory review which highlight the need for banks to evaluate capital adequacy in relation to risks assumed and for supervisors to review their strategies and procedures in light of these assessments. The principles of Pillar II are: 1) First Principle: banks must have a process to assess their capital adequacy in relation to their risk profile and have a strategy to maintain adequate levels of capital to cover risks; 2) Second Principle: supervisors should evaluate the banks strategies, the estimates of capital, and the ability of banks to monitor and to guarantee their compliance with minimum capital requirements; 3) Third Principle: supervisors expect, and may require, banks to operate above the minimum capital requirements; and 4) Fourth Principle: supervisors may intervene in advance and require banks to take prompt actions if their capital level falls below the minimum level. According to Pillar II, executive management is responsible for both the risk-exposure strategy and compatible levels of capital. The main features that reflect a rigorous process to assess capital adequacy should involve: a) supervision of the bank s senior management; b) solid assessment of capital needs to tolerate business risks; c) comprehensive assessment of risks; d) monitoring and reporting; and e) Review of internal controls. Pillar II emphasizes need of the bank to have an adequate volume of capital to tolerate all risks involved in the business. Besides the capital, the regulator also uses to address the risk issue, internal controls and risk management processes that should be sufficient and adequate Pillar III Transparency By encouraging information disclosure, Basel II seeks to increase market players power of evaluation and action. The purpose for creating this third pillar is to complement minimum capital requirements (Pillar I) and the supervisory review process (Pillar II). This means that with the development of rules that encourage and require more open information about banks risk profiles and capitalization levels, market players should feel encouraged to exercise discipline in this market. Pillar III covers the reference for the disclosure of qualitative information of internal ratings systems structure and process to manage and recognize the risk mitigation. 15

17 To guarantee compliance with transparency, Basel II requires supervisors to have a greater number of persuasive instruments, ranging from dialogue with the bank s management to financial fines, depending on the disclosure deficiency in question. This represents the set of information-disclosure requirements which will allow market players to evaluate the essential information in the institution s structure, capital measurements, risk exposure, risk-management processes, and capital adequacy. Pillar III is based on four categories/divisions: a) scope of application - represents the relationship between recommendations and the bank s structure; b) capital - demonstrates the bank s ability to absorb eventual losses; c) risk exposure - evidence forms and the risk assessment itself; and d) capital adequacy - enables the judgment of capital adequacy in light of risks incurred. Figure 5 represents the structure of Pillar III. 3.2 Basel III Figure 5 - Pillar III Structure On 1 st March 2013, the Central Bank of Brazil (Bacen) published the Basel III rules related to the definition of capital and capital requirements. Stand out, among the measures included in the Brazilian regulatory: a) definition of new methodology for calculating regulatory capital, which increases the capacity to absorb losses and continues to be divided into Tiers I and II, being Tier I composed of the Core Capital and Aditional Tier I Capital; 16

18 b) definition of new methodology for calculating the capital requirement maintenance, adopting minimum requirements for Referential Equity, Tier I and Core Capital, and the introduction of the Additional Core Capital; c) greater transparency regarding the composition of capital; and d) expansion of the risks scope captured by the capital structure. The proposals related to the Leverage Ratio, to be applied as a complementary measure to the minimum capital requirements, are under discussion in the Basel Committee and will be implemented at a future time. The regulations published by the Central Bank of Brazil are aligned with the procedures of the regulators from developed countries, and can be consulted on the website of that body. It has established a schedule of gradual implementation of the capital requirement that extends from October 2013 to January 2019 for which the transition is made gradually and institutions can adapt over time. The timetable for implementing the Basel III recommendations in Brazil is shown in Table 1. Table 1 - Timetable for Basel III Implementation in Brazil Indicator out/13 jan/14 jan/15 jan/16 jan/17 jan/18 jan/19 A) Main Capital Requirement 4,50% 4,50% 4,50% 4,50% 4,50% 4,50% 4,50% B) Additional Main Capital (superior limit) ,25% 2,50% 3,75% 5,00% C) Requirements A + B 4,50% 4,50% 4,50% 5,75% 7,00% 8,25% 9,50% D) Minimum Capital Level I 5,50% 5,50% 6,00% 6,00% 6,00% 6,00% 6,00% E) Requirements D + B 5,50% 5,50% 6,00% 7,25% 8,50% 9,75% 11,00% F) Minimum PR 11,00% 11,00% 11,00% 9,88% 9,25% 8,63% 8,00% G) Requirements F + B 11,00% 11,00% 11,00% 11,13% 11,75% 12,38% 13,00% Complementarily, in 10/31/2013 Central Bank of Brazil issued new resolutions and circulars aimed at adjusting the Basel III regulation in Brazil. These standards enhance and detail specific points of existing regulations. 3.3 Basel II in Banco do Brasil In order to continue the evolutionary process in risk management and business practices, the Bank has decided to strategically adopt internal models for market risk, credit and operational, aiming to be able to use the advanced approaches. Implementation of Basel II at BB is under conduction of the multidisciplinary technical teams, which is in charge of coordination and preparation for meeting the requirements of Basel II Market Risk Within the framework of Banco do Brasil, its wholly-owned subsidiaries and Subsidiaries of the financial conglomerate, is adopted a market risk management structure that aims to identify, assess, monitor and control the exposures of their own positions. BB has global and specific limits structure and Stress Testing Program of Capital Requirement for Market Risk, both in line with the BACEN Circular 3.478/09. 17

19 3.3.2 Credit Risk Regarding credit risk, BB uses proprietary methodologies to rate client s risks. Developed according to best market practices and concepts introduced by the Basel Accord, these models (credit score and behavior score) consider both aspects, as registration and historical use of banking products and customer credit with the Bank and the market. The Central Bank of Brazil Circular 3.648/13, of , established minimum requirements for the use of internal ratings based on Basel II approach for credit risk. At the Bank, implementation of the approach is driven by strategic project with the responsibility to build databases, develop models of risk parameters and validation processes, ensuring integration with the management and documentation. The Bank is carrying out the construction of models of risk parameters (probability of default, exposure at the time of default, loss given default and effective maturity) and review of risk mitigators provided in the New Capital Accord. In order to support the process of managing credit risk, BB has also made significant investments in solutions for information technology (TI), and the new tools have already been installed Operational Risk The operational risk management in the Banco do Brasil is based on best market practices and in compliance with regulatory norms (Central Bank and supervisory entities in countries where BB has dependencies installed). The operational risk management is divided into five stages: identification, evaluation, control, mitigation and monitoring. To ensure greater focus on the operational risk management, in March 2014, it was created the Operational Risk Unit, with a view to improve the operational risk management and to provide the necessary condition with focus in reduce operational losses, dissemination of the risk management culture and improvement of instruments and tools used in mitigation. This semester, the Bank improved the identification of operational risks using process mapping, detailed analysis of operational loss events, information ombudsman, among other sources. In this context, it is available methodology that allows the manager to identify operational risks associated with processes under his responsibility, including the identification of the occurrence of faults/inadequacies, assessing the possibility of loss, identification of risk factors, identification of operational risks and their classification. Furthermore, there is the implementation of integrated management processes, risks and controls tool, aiming at integration between the areas of risks and controls with process managers. This tool will allow, in a single environment, process mapping, documentation, identification and analysis of operational risks and the monitoring of mitigation actions. All these measures are intended mainly to reduce and prevent major events that generate operating loss, moreover, strengthen the structure of operational risk of the Bank. 18

20 4. Financial Conglomerate The risk management in Banco do Brasil's financial conglomerate covers comprehensively the risks underlying the activities of Banco do Brasil. Management activities are carried out by specific and specialized structures, as goals, policies, strategies, processes and systems described in each of these risks. The Bank adopts mechanisms to ensure the capital adequacy to cover other risks incurred. In line with Pillar II of Basel II, and in accordance with CMN Resolution 3.988/11 and Central Bank Circular 3.547/11, Banco do Brasil initiated process seeking to implement methodologies of management and evaluation of capital requirements for other relevant risks incurred in its activities. 4.1 Balance Sheet Following there is the composition of the Financial Balance Sheet compared to the Balance Sheet disclosed in the Consolidated Financial Statements, as well as the reference values in the "Attachment 1 - Composition of the Reference Equity". 19

21 Table 2 - Financial Balance Sheet x Consolidated Balance Sheet In thousands of Reais R eference in R E F inancial Eco no mic and F inancial A SSET S Current assets and long-term receivables 1,256,645,363 1,415,218,317 Cash and Cash Equivalents 13,357,194 13,786,585 Short-term Interbank Investments 302,435, ,236,604 Open market investments 263,325, ,489,673 Interbank deposits 39,110,735 39,746,931 Securities and Derivative Financial Instruments 106,189, ,643,457 Own portfolio 78,164, ,584,888 Funding instruments issued by institution authorized by Banco Central do Brasil (s) 14, Other 78,149, Subject to repurchase agreements 13,405,711 20,412,683 Pledged in guarantee 13,126,519 14,484,735 Derivative financial instruments 1,493,161 2,201,466 (Allowance for securities losses) -- (40,315) Interbank accounts 67,211,353 67,249,016 Payments and receipts pending settlement 10,428 10,428 Restricted deposits 65,657,228 65,684,830 Banco Central do Brasil deposits 63,224,237 63,251,839 National Treasury - rural credits resources 129, ,510 National Housing Finance System 2,303,481 2,303,481 Interbank onlendings 275, ,590 Correspondent banks 1,267,921 1,268,168 Interdepartmental Accounts 592, ,631 Internal transfers of funds 592, ,631 Loan Operations 594,920, ,499,161 Public sector 34,758,272 60,275,880 Private sector 584,296, ,006,685 Loan operations linked to assignment 321, ,251 (Allowance for loan pperations) (24,454,860) (26,104,655) Lease Transactions 292,415 1,024,096 Private sector 619,346 1,070,830 (Unearned income on leasinf transactions) (297,250) -- (Allowance for leasing transactions losses) (29,681) (46,734) Other Receivables 171,135, ,107,352 Receivables from guarantees honored 235, ,570 Foreign exchange portfolio 17,508,464 18,367,899 Receivables 3,315,157 3,865,087 Securities trading 1,144,825 1,292,656 Specific credits 1,549,300 1,550,087 Insurance, pension plans and capitalization -- 5,010,185 Sundry 149,209, ,785,578 Tax credits 24,631, Resulting from tax losses and negative basis of social contribution on net income (g) 1,466, Resulting from temporary differences 23,165, Tax credit compensated with deferred tax liabilities 1,102, Excess of 15% from Core Capital (k) 1,411, Tax credits resulting from temporary differences not deducted from RE (u) 5,409, Tax credits resulting from temporary differences for loan losses 15,241, Actuarial assets related to defined benefit pension funds (h 1 ) 6,233, Other 118,345, (Allowance for other losses) (1,827,299) (2,303,710) Other Assets 509,946 4,078,415 Assets not for own use and stock materials 293, ,273 (Allowance for impairment) (126,732) (147,365) Prepaid expenses 343,318 3,607,507 P ERM ANENT ASSETS 31,839,807 22,267,195 Investments 13,085,315 3,419,631 Investments in subsidiaries and associated companies 12,959,438 1,767,548 Domestic 12,753,503 1,181,056 Goodwill (e 1 ) 808, Investments 11,944, Investments in insurance companies and entities similar to financial institutions 6,615, Excess of 15% from Core Capital (j) 1,369, Investments not deducted from RE (t) 5,246, Other Investments 5,329, Funding instruments issued by institution authorized for Banco Central do Brasil (m) 3,714, Other 1,615, Abroad 205, ,492 Goodwill (e 2 ) 52, Other 153, Other investments 179,885 1,745,575 (Accumulated impairment) (54,008) (93,492) P roperty, plant and equipment 7,043,253 7,556,737 Land and buildings 6,134,503 6,370,075 Revaluation of land and buildings 144, Other property, plant and equipment 8,733,177 9,864,596 (Accumulated depreciation) (7,969,143) (8,677,934) Leased assets ( 1 ) 850, Leased assets 973, (Accumulated depreciation) (122,361) -- Intangible 10,828,768 11,249,232 Intangible assets 17,698,842 18,432,244 Goodwill (e 3 ) 4,961, Other Intangible assets 12,737, Constituded from October 1, 2013 (f 1 ) 5,976, Constituded before October 1, 2013 (f 2 ) (n 1 ) 6,761, (Accumulated amortization) (6,870,074) (7,183,012) Goodwill Amortization (e 4 ) (2,245,658) -- Other Amortization (4,624,416) -- Intangible assets amortization constituded from October 1, 2013 (f 3 ) (645,021) -- Intangible assets amortization constituded before October 1, 2013 (f 4 ) (n 2 ) (3,979,395) -- D eferred 31,642 41,595 Organization and expansion costs (l 1 ) 1,648,531 1,673,307 (Accumulated amortization) (l 2 ) (1,616,889) (1,631,712) TOTAL ASSETS 1,288,485,170 1,437,485,512 (1) Leasing transactions were considered based onthe financial method, and the amounts were reclassified from theheading of leased assets to theheading of leasing transactions, after deduction of residual amounts received in advance. 4Q14 20

22 In thousands of Reais R eference in R E F inancial Eco no mic and F inancial LIA B ILIT IES Current liabilities and long-term liabilities 1,209,284,336 1,356,432,351 D epo sits 468,247, ,361,769 Demand deposits 74,227,034 74,210,189 Savings deposits 148,698, ,698,890 Interbank deposits 30,353,883 30,968,746 Time deposits 214,968, ,483,944 Securities sold under repurchase agreements 296,430, ,045,575 Own portfolio 55,038,376 64,365,574 Third-party portfolio 241,392, ,674,469 Free movement portfolio -- 5,532 Funds from Acceptance and Issuance of Securities 146,622, ,034,537 Funds from real state, mortgage, credit and similar bonds 119,028, ,162,741 Funds from debentures Foreign securities 27,592,315 31,853,213 Certificates of structured operations 2,385 18,524 Interbank accounts 31,463 31,463 Receipts and payments pending settlement Correspondent banks 31,447 31,447 Interdepartmental Accounts 5,272,762 5,290,841 Thrid-party funds in transit 5,272,699 5,288,673 Internal transfers of funds 63 2,168 B o rro wings 21,180,443 23,996,437 Domestic loans - other institutions -- 1,753,887 Foreign borrowing 21,180,443 22,242,550 Domestic Onlending - Official Institutions 89,156,867 91,050,021 National Treasury 284, ,898 BNDES 43,250,643 44,281,798 Caixa Econômica Federal 12,359,686 12,359,686 Finame 32,398,036 33,204,750 Other institutions 863, ,889 Foreign Onlending Foreign Onlending Derivative Financial Instruments 2,650,184 3,443,159 Derivative Financial Instruments 2,650,184 3,443,159 Other Liabilities 179,690, ,178,072 Billing and collection of taxes and contributions 346, ,888 Foreign exchange portfolio 21,134,767 21,706,926 Shareholders and statutory distributions 1,043,494 2,356,593 Taxes and social security 18,555,226 22,783,791 Provision for deferred tax liabilities ansing from positive adjustments of benefit pension funds (h 2 ) 273, Provision for deferred tax liabilities compensated with tax credits 1,102, ,179, Securities trading 892, ,443 Technical provisions for insurance, pension plans and capitalization ,220,012 Financial and development funds 10,840,398 10,840,398 Special operations 2,153 2,153 Subordinated debts 49,413,216 52,315,841 In accordance with the CMN Resolution No.4,192/2013 as Tier II 20,467, In accordance with regulations preceding the CMN Resolution No.4,192/2013 as Tier II (r) (w) 23,048, Other Subordinated debts 5,897, Equity and debt hybrid securities 4,865,740 4,865,740 In accordance with regulations preceding the CMN Resolution No.4,192/2013 as Capital Management (p) (v) 3,850, Other 1,015, Debt instruments eligible as capital 21,250,525 21,467,670 Instruments eligible as capital M anagement (o ) 16,132, Instruments eligible as Tier II (q) 3,959, Instruments wainting authorization from Banco Central do Brasil to compose the RE 1,157, Other liabilities 51,346,084 59,350,617 D EF ER R ED IN C OM E 425, ,967 Shareholder's Equity 78,775,464 80,613,194 Capital (a 1 ) 54,000,000 54,000,000 Local residents 42,957,421 42,957,421 Domiciled abroad 11,042,579 11,042,579 Instrument Qualifying as CET1 (a 2 ) 8,100,000 8,100,000 Capital Reserves (c 1 ) 10,773 10,773 Revaluation Reserves (c 2 ) 2,805 2,805 P rofit Reserves (b ) 27,025,981 26,625,511 Accumulated Other Comprehensive Income (c 3 ) (9,597,840) (9,597,840) (T reasury Shares) (i) (1,621,507) (1,621,507) Noncontrolling Interests (d) 855,252 3,093,452 TOTAL LIABILITIES 1,288,485,170 1,437,485,512 4Q14 21

23 4.2 Composition of the Financial Conglomerate Institutions included in the scope of consolidation of the financial balance sheet, segregated by business segments: Table 3 - Composition of the Financial Conglomerate R$ mil B anking Segment Activity 4.3 Composition of the Economic and Financial Consolidated 4Q/14 Total Assests Following is shown the institutions included in the scope of consolidation of the disclosed balance sheet, segregated by business segments Equity Banco do Brasil - AG (1) Banking 54,610, ,056 BB Leasing Company Ltd. (1) Leasing 121, ,831 BB Leasing S.A. - Arrendamento M ercantil (1) Leasing 49,818,326 3,893,195 BB Securities Asia Pte. Ltd. (1) Broker 16,295 15,303 BB Securities LLC. (1) Broker 151, ,968 BB Securities Ltd. (1) Broker 544, ,921 BB USA Holding Company, Inc. (1) Holding Brasilian American M erchant Bank (1) Banking 10,684,139 1,221,751 BB Americas (1) Banking 682, ,537 Besc Distribuidora de Títulos e Valores M obiliários S.A. (1) Asset M anagement 7,390 7,173 Banco Patagonia S.A. (1) Banking 13,109,935 2,084,223 Investment Segment BB Banco de Investimento S.A. (1) Investment Bank 5,889,257 2,825,136 Segment o f F und M anagement BB Gestão de Recursos-Distribuidora de Títulos e Valores M obiliários S.A. (1) Asset M anagement 985, ,638 (1) Subsidiaries. 22

24 Table 4 - Composition of the Economic and Financial Consolidated 4Q/14 R$ mil Activity Total Assests Equity B anking Segment Banco do Brasil - AG (1) Banking 54,610, ,056 BB Leasing Company Ltd. (1) Leasing 121, ,831 BB Leasing S.A. - Arrendamento M ercantil (1) Leasing 49,818,326 3,893,195 BB Securities Asia Pte. Ltd. (1) Broker 16,295 15,303 BB Securities LLC. (1) Broker 151, ,968 BB Securities Ltd. (1) Broker 544, ,921 BB USA Holding Company, Inc. (1) Holding Brasilian American M erchant Bank (1) Banking 10,684,139 1,221,751 BB Americas (1) Bank 682, ,537 Besc Distribuidora de Títulos e Valores M obiliários S.A. (1) Asset M anagement 7,390 7,173 Banco Patagonia S.A. (1) Bank 13,109,935 2,084,223 Banco Votorantim S.A. (2) Bank 99,106,714 7,673,206 Investment Segment BB Banco de Investimento S.A. (1) Investment Bank 5,889,257 2,825,136 Kepler Weber S.A. (2) Industry 849, ,215 Companhia Brasileira de Securitização - Cibrasec (3) (4) Credits Acquisition 125,307 75,073 Neoenergia S.A. (2) Energy 10,134,635 9,673,798 Segment o f F und M anagement BB Gestão de Recursos-Distribuidora de Títulos e Valores M obiliários S.A. (1) Asset M anagement 985, ,638 Segment o f Insurance. P rivate P ensio n F und and C apitalizatio n BB Seguridade Participações S.A. (1) Holding 7,103,444 6,631,538 BB Cor Participações S.A. (1) Holding 734,292 46,903 BB Corretora de Seguros e Administradora de Bens S.A. (1) Broker 2,423,854 35,006 BB Seguros Participações S.A. (1) Holding 6,311,794 5,320,738 BB M apfre SH1 Participações S.A. (2) Holding 12,196,157 2,305,512 Brasildental (2) Service Rendering 2,759 2,313 Companhia de Seguros Aliança do Brasil (2) Insurance Company 10,769,444 1,549,852 M apfre Vida S.A. (2) Pension plan 1,246, ,275 Brasilprev Seguros e Previdência S.A. (2) Pension/Insurance 114,543,978 1,973,297 Brasilcap Capitalização S.A. (2) Capitalization 13,000, ,995 M apfre BB SH2 Participações S.A. (2) Holding 13,285,762 2,896,087 Aliança do Brasil Seguros S.A. (2) Insurance Company 1,339, ,379 Brasilveículos Companhia de Seguros (2) Insurance Company 3,207, ,045 M apfre Seguros Gerais S.A. (2) Insurance Company 10,860,856 2,083,671 BB M apfre Assistência S.A. (2) Service Rendering 8,398 2,199 Votorantim Corretora de Seguros S.A. (2) Broker 273, ,868 Seguradora Brasileira de Crédito à Exportação - SBCE (3) Insurance Company 73,785 22,173 IRB - Brasil Resseguros S.A. (2) Reinsurer 12,957,692 2,982,373 Segment o f P ayment M etho ds BB Administradora de Cartões de Crédito S.A. (1) Service Rendering 129,166 19,030 BB Elo Cartões Participações S.A. (1) Holding 630, ,915 Elo Participações S.A. (2) Holding 1,256,957 1,168,666 Companhia Brasileira de Soluções e Serviços CBSS - Alelo (2) Service Rendering 3,993,680 1,022,499 Elo Serviços S.A. (2) Service Rendering 79,505 44,777 Cielo S.A. (2) Service Rendering 18,088,327 4,433,784 Tecnologia Bancária S.A. - Tecban (3) Service Rendering 969, ,747 Other Segments Ativos S.A. Securitizadora de Créditos Financeiros (1) Credits Acquisition 1,185, ,867 Ativos S.A. Gestão de Cobrança e Recuperação de Crédito (1) Credits Acquisition 5 5 BB Administradora de Consórcios S.A. (1) Consortium 330, ,162 BB Tur Viagens e Turismo Ltda. (1) (4) Tourism 61,657 14,535 BB Tecnologia e Serviços S.A. (1) IT 391, ,974 (1) Subsidiaries. (2) Joint venture, proportionately included in consolidation. (3) Associated companies, proportionately included in consolidation as Bacen s Regulation. (4) The Financial Statements refers to November/

25 5. Risk Management 5.1 Credit Risk Management Objectives Exposures subject to credit risk form a big part of Banco do Brasil s assets. Therefore, the risk management of these exposures is fundamental for the bank to achieve its objectives. Banco do Brasil s credit risk is managed according to best market practices and follows the banking supervision and regulatory rules. It seeks to identify, assess, control, and mitigate the risk exposures, monitor the management process, contribute to maintain the bank s health and solvency, and ensure the interests of the shareholders. Credit risk management in the financial conglomerate involves credit policy, risk appetite and tolerance, strategies, processes, procedures and credit risk management systems, as the figure below: Figure 6 Credit risk management Note: CA = Board of Directors; CSRG = Global Risk Superior Committee; CRC = Credit Risk Executive Committee; DICRE = Credit Board; DIRAO = Asset Restructuring Board; DIRIS = Risk Management Board, URO = Operational Risk Unit. 24

26 Board of Directors (CA) The Board of Directors (CA) Banco do Brasil S.A. defines general business of the Bank and its subsidiaries. The Board has, in the manner provided by law and the Statute, strategic, guidance, elective and monitoring assignments, not covering operating and executive functions. The composition and management term of the Council is defined by the Bank's bylaws. The Board of Directors shall decide on policies, corporate strategy, investment plan, master plan and the Bank s general budget. Global Risk Superior Committee CSRG Purposes: to set credit risk management strategy; to determine global limits to credit risk exposure; to approve the risk factors that will make up the documents and reports to be submitted to regulatory agencies and other institutions; to approve methodologies, criteria and parameters for calculation of provisions for contingent claims; Credit Risk Executive Committee CRC Purposes: To approve: the implementation of actions that enable the loan portfolio management; the loans portfolio risk mitigatory actions and instruments; contingency plans regarding credit and social and environmental risk management; specific limits to regarding credit and social and environmental risk esposures; models, methodologies, criteria and parameters for: credit and social and environmental risk management; the process of collecting and recovering debts; to assess the internal validations results and specify, whenever necessary, corrective measures for models of credit and social and environmental risk management; To analyse and propose to CSRG the: credit and social and enviromental risk management strategy; global limits to credit and social and environmental risk exposures; To monitor the: measures implemented to mitigate the risk in the loan portfolio management; development of Allowance for Loan and Lease Losses (ALLL), submitting it to the attention of CSRG; recommendations and guidelines resolved by Committee. In accordance with CMN Decision 3.721/09, the Board of Directors (CA) approved the credit risk management structure of Banco do Brasil, composed by Global Risk Superior Committee (CSRG), Credit Risk Executive Committee (CRC), Credit Board (DICRE), 25

27 Operational Asset Restructuring Board (DIRAO), Risk Management Board (DIRIS) and Operational Risk Unit (URO). This credit risk management structure is compatible with the nature of transactions, the complexity of products and services, and in proportion to the size of the credit-risk exposure incurred by Banco do Brasil. In view of Diris is the unit at the bank in charge of overall risk management and does not have any ties to the management of third-party resources administration or to performing transactions subject to credit risk, the CA stated the Director of Risk Management as the person in charge of BB s credit risk management before the Bacen Credit Policy Banco do Brasil s credit policy contains strategic guidelines to direct credit-risk management actions in the financial conglomerate. It is approved by the Board of Directors and reviewed every year. It applies to all businesses that involve credit risk and is available to all employees. It is expected that the Subsidiaries, Affiliates and Investments companies define their paths from these guidelines, taking into account the specific needs and legal and regulatory issues to which they are subject. The credit policy is divided into four blocks: General Aspects, Assuming Credit Risk, Collections and Credit Recovery, and Credit Risk Management. Each block contains a comprehensive set of statements which encompass all stages of credit-risk management at Banco do Brasil. Some topics addressed in Banco do Brasil s credit policy are listed below: - concept of credit risk; - conditions for assuming risk; - separation of duties; - guidelines for collections and credit recovery; - joint decisions; - Capital planning - risk appetite; - allowance and capital levels; and - risk limits; - stress tests. - client rating; Management Strategies Aligned to the objectives of credit risk management, the Board of Directors (CA) establishes the credit policy and the risk appetite of Banco do Brasil and approves management strategies, which are defined by the Global Risk Superior Committee (CSRG) and operationalized by the Credit Risk Executive Committee (CRC). The CSRG also sets global limits and approves the capital allocation. The permanent voting members in CSRG are the President, the Vice-President of Financial Management and Investor Relations, the Vice President of Wholesale, International Business and Private Bank, the Vice President of Retail, Distribution and Operations, the Vice President of Internal Controls and Risk Management and the Vice 26

28 President of Human Resources Management and Sustainable Development. The other vice presidents are non-permanent voting members. The CRC was created to give more agility to decisions about credit risk management. It is a structure subordinated to CSRG, which has delegated decision-making authority to deliberate on certain issues, equipping the CSRG on other issues. The CRC is composed of the directors of the areas involved with the management of credit risk, being coordinated by the Director of the Risk Management Board. Credit-risk management strategies guide actions at the operational level, comprising: a) approving credit risk management models; b) setting goals for timely payment, recovery, maximum loss, and quality of the loan portfolio; c) setting risk and concentration limits; and d) keeping appropriate levels of allowances and capital Management Processes According to Banco do Brasil s credit risk management structure, the Credit (DICRE), Operational Asset Restructuring (DIRAO) and Risk Management (DIRIS) units are responsible for implementing strategic decisions approved by the CA, CSRG and CRC, keeping exposure at the risk levels set by the executive management. DICRE focuses on clients and operations, whose main products are: registration, marketing studies and information on economic sectors, methodologies (risk, risk components, and credit limits), risk analysis (clients, operations, projects, economic sectors, countries, and projects), validation and monitoring of risk methodology and credit-risk components, study of investment and leasing transactions, economic/financial evaluation and diagnosis of businesses/corporate groups, monitoring the credit portfolio, and producing inputs for pricing credit risk. The DIRAO operates in collecting, and recovering problem credits, whose main products are: models to rate clients under collections and recovery, collection and recovery strategies, recovery quality indicators, management of collections and recovery channels, rescheduling debt, restructuring transactions, setting negotiating floors and methodologies for dealing with problem credits or defaults. The DIRIS focuses on managing the credit risk of aggregate positions, whose main products are: policies, risk limits, credit risk models, information on credit risk, indicators of credit portfolio quality, capital allocation as a function of risk, management of the credit portfolio s risk, controlling of credit risk exposure and stress testing. 27

29 Figure 7 summarizes the responsibilities of the units: Figure 7 - Credit risk management structure The processes and procedures of the credit risk management structure are validated and performed by two internal units at different points in time, a fact that ensures the adequate separation of duties and the independence of work. The Internal Control Board (DICOI) is responsible for validating the financial conglomerate s risk determination and measurement models and the bank s internal control system. Internal Audit (AUDIT) periodically evaluates credit risk management processes to verify whether they are consistent with the strategic guidelines, credit policy, and regulatory and internal rules Communication and Information Processes Disclosure of credit risk information is a continual and ongoing process whose premises considered when selecting and disclosing information include: best practices, banking laws, user needs, the bank s interests, confidentiality, and the relevance of the information. The communication and information on credit risk management is provided to internal and external clients, according to the following processes: 28

30 Communication process for internal clients The operational units of the credit risk management structure communicate permanently to upper management about risk exposure in order to monitor management actions and decision-making by the Senior Management. The communication process involves several reports on credit risk management, which are produced periodically and are the result of analyzes conducted by professionals from the units. They demonstrate the credit risk of all exposure or in certain portfolios, such as: a) Presentation of the Bank s credit portfolio X National Financial System; b) Comparative BB credit portfolio x main competitors; c) Credit Risk Panel; and d) Stress test for credit risk Communication process for external clients The operational units of the credit risk management structure produce information for external users and send it to the Investor Relations Unit (URI) that, as a practice of transparency, discloses this information to the market, as a transparent governance practice, allowing investors and interested parties to monitor risk-management actions and the evolution of credit risk, and to prove the Bank s capital adequacy to cover all risks assumed. Information for external users is provided on a publicly accessible location, easily found on the bank s website. The following documents are published in the following documents: a) Management Discussion and Analyses; b) Explanatory Notes to Financial Statements; and c) Annual Report Measurement Systems Credit risk is measured in many ways: by default, arrears, portfolio quality, and allowance for doubtful accounts, concentration, expected losses, and regulatory requirements, among others. The quantity and nature of our operations, the diversity and complexity of our products and services, and the volume exposed to credit risk require systematic measurement of credit risk at Banco do Brasil. The bank has enough databases and corporate system infrastructure to ensure comprehensive measurement of credit risk. Some of these risk measures are highlighted Concentration The bank has developed and implemented a system to measure and monitor credit risk concentration in businesses. The model is based on the Herfindahl Index. It evaluates 29

31 concentration based on borrower s credit risk, and it considers the interrelationship among the various economic sectors that comprise the businesses credit portfolio Regulatory Requirements The Bank measures the Regulatory Capital requirement for credit risk through Regulatory Simplified Standardized Approach, whose procedures for calculating the potion of riskweighted assets (RWA) regarding exposure to credit risk (RWACPAD) were released by the BACEN through Circular 3.644/13. These procedures were implemented in a proprietary system that determines the capital requirements quickly and securely, allowing timely verification of the bank s solvency under the regulator s rules. The Bank uses Regulatory Capital information to assess the efficiency of capital allocation and planning Mitigation Policy Banco do Brasil adopts a conservative attitude toward credit risk. In conducting any business subject to credit risk, the bank s general rule is to tie it to a mechanism that provides partial or complete hedging of risk incurred. In managing credit risk on the aggregate level, to keep exposure within the risk levels established by the High Staff, the Bank has the prerogative to transfer or to share credit risk. The use of credit risk mitigating instruments is stated in the Credit Policy, present in strategic decisions, and formalized in credit rules, reaching all levels of the organization and covering all stages of credit risk management. Credit rules provide clear, comprehensive guidelines for the operational units. Among other aspects, the rules address ratings, requirements, choices, assessments, formalization, control, and reinforcement of guarantees, ensuring the adequacy and sufficiency of the mitigator throughout the transaction s cycle Processes for Monitoring the Effectiveness of Mitigators Monitoring the effectiveness of mitigators is part of the bank s credit risk management processes. We quote, as an example, monitoring exposures subject to credit risk, the risk ratings of loans, capital management, and collections and recovery of credits. The processes of monitoring credit risk exposure and rating loans risks produce important information for verifying the effectiveness of mitigating instruments. The low default ratio in certain segments of the credit portfolio and the lowest level of allowances in certain transactions may mean that the existence of guarantees tied to exposure reducing credit risk and capital requirements for its coverage. 30

32 5.1.9 Exposure to Credit Risk The table below shows the concentration levels of the ten largest customers in relation to total transactions with credit granting feature. Table 5 - Concentration of the ten and of the hundred largest customers in relation to the total of transactions with credit granting feature 1st to 10th 1st ao 100th 4Q14 10,2% 24,2% 3Q14 10,4% 24,3% 2Q14 9,6% 23,2% 1Q14 10,6% 23,8% 4Q13 10,7% 23,8% 2Q13 10,7% 23,2% The following table shows credit risk average exposure of individual portfolios (PF) and businesses (PJ). Table 6 - Credit risk average exposure R$ million 4Q14 3Q14 2Q14 Exposure Balance * Average Balance Balance * Average Balance Balance * Average Balance Individuals Agrobusiness 119,414 39, ,526 37, ,408 37,138 Mortgage 28,645 9,548 25,863 8,621 23,678 7,893 Payroll Loan 58,843 19,614 56,659 18,886 55,559 20,522 Auto Loans 10,608 3,536 10,597 3,532 11,013 7,527 Credit Cards 67,311 22,437 65,504 21,835 64,050 21,350 Others 48,603 16,201 49,791 16,597 51,085 17,027 Total Individuals 333, , , , , ,456 Companies Agrobusiness 48,038 16,013 48,128 16,043 48,228 16,363 Investiments 90,552 30,184 87,180 29,060 83,367 23,934 Import/Export. 16,505 5,502 15,531 5,177 15,694 5,231 Working Capital 229,541 76, ,518 75, ,432 73,808 Others 165,889 55, ,230 53, ,010 51,049 Total Companies 550, , , , , ,385 Total 883, , , , , ,841 * Includes BB internal portfolio and loans to concede 31

33 The next table presents the credit risk exposure of the businesses portfolio (PJ), segregated by geographic regions in Brazil. Table 7 - PJ credit risk exposure by geographic regions R$ million 4Q14 Region Agrobusiness Investiments Import/Export. Working Capital Others Midw est 1,559 22, ,960 7,050 Northeast 368 4, ,965 10,202 North 142 3, ,877 2,464 Southeast 38,349 40,707 13, ,074 96,339 South 7,600 13,376 2,413 30,873 12,992 Foreign - 5, ,792 36,843 Total 48,018 90,572 16, , ,889 3Q14 Region Agrobusiness Investiments Import/Export. Working Capital Others Midw est 1,503 22, ,496 6,473 Northeast 341 4, ,309 9,648 North 120 3, ,752 2,245 Southeast 38,519 38,802 12, ,750 93,781 South 7,630 13,016 2,357 30,829 12,697 Foreign - 4, ,383 34,386 Total 48,113 87,194 15, , ,230 2Q14 Region Agrobusiness Investiments Import/Export. Working Capital Others Midw est 1,436 20, ,813 6,285 Northeast 359 4, ,318 9,255 North 184 3, ,514 2,199 Southeast 38,115 37,603 12, ,266 91,921 South 8,103 12,847 2,320 31,845 13,339 Foreign - 4,334-12,676 31,007 Total 48,197 83,402 15, , ,006 32

34 The table below presents the credit risk exposure of the individuals portfolio (PF), segregated by geographic regions in Brazil. Table 8 - PF credit risk exposure by geographic regions R$ million 4Q14 Region Agrobusiness Mortgage Payroll Loan Auto Loans Credit Cards Others Midw est 28,457 4,865 5,999 1,600 9,871 5,526 Northeast 7,990 4,338 14,377 2,472 11,813 8,542 North 5, , ,502 2,663 Southeast 37,143 13,194 28,730 3,539 30,017 22,610 South 39,962 5,271 5,211 2,097 12,107 8,335 Foreign Total 119,434 28,645 58,843 10,588 67,311 48,603 3Q14 Region Agrobusiness Mortgage Payroll Loan Auto Loans Credit Cards Others Midw est 26,696 4,293 5,676 1,604 9,591 5,615 Northeast 7,351 3,712 13,735 2,452 11,392 8,867 North 5, , ,360 2,794 Southeast 35,256 12,097 28,038 3,534 29,353 23,267 South 37,971 4,875 4,933 2,094 11,807 8,517 Foreign Total 112,573 25,863 56,659 10,550 65,504 49,791 2Q14 Region Agrobusiness Mortgage Payroll Loan Auto Loans Credit Cards Others Midw est 26,792 3,841 5,515 1,657 9,387 5,744 Northeast 7,042 3,235 13,416 2,518 11,065 8,936 North 4, , ,283 2,902 Southeast 34,340 11,233 27,643 3,714 28,777 23,138 South 38,437 4,535 4,804 2,192 11,539 8,486 Foreign ,795 Total 111,547 23,678 55,559 10,960 64,050 51,000 33

35 The next table shows the behavior of the total credit risk exposure, segregated by economic sector Table 9 - Credit risk exposure of the financial conglomerate, by economic sector R$ million 4Q14 3Q14 2Q14 1Q14 4Q13 Government 36,936,54 35,263,89 32,692,00 30,399,91 29,423,61 Foodstuffs of Animal Origin 16,280,05 15,559,52 15,640,14 15,314,02 14,527,41 Foodstuffs of Vegetable Origin 40,731,45 40,749,17 39,864,16 37,272,85 36,569,08 Bulding Specif ic Activities 19,080,51 18,450,92 19,165,45 17,540,88 17,549,94 Automotive 34,216,31 34,373,04 34,840,16 31,626,47 31,705,45 Beverages 2,128,32 2,066,47 3,041,44 2,797,29 2,629,08 Wholesale Trade and Industries 10,606,46 10,033,44 9,996,34 9,453,87 8,351,47 Retail Trade 25,369,77 24,571,89 24,756,76 23,388,62 21,889,79 Heavy Construction 10,686,77 9,708,66 9,517,22 8,415,82 8,682,69 Leather and Shoes 4,234,95 4,161,39 4,031,32 3,944,59 3,476,63 Other Activities 729,08 2,338,85 2,251,59 29,908,49 2,598,07 Electrical and Electronic Goods 14,498,82 14,066,44 13,946,45 13,897,73 13,432,10 Eletricity 38,773,83 36,766,60 34,531,07 30,481,91 30,338,67 Housing 29,066,12 27,577,52 26,057,78 24,889,08 20,955,99 Banks and Financial Services 31,967,43 30,763,38 29,461,63 29,440,73 30,819,68 Agricultural Consumables 13,309,99 12,291,59 12,163,41 11,870,82 10,504,70 Timber and Furniture 9,069,02 8,679,12 8,757,31 8,640,61 7,961,62 Metalw orking and Steel 46,925,59 45,377,34 44,823,00 43,214,02 43,047,56 Pulp and Paper 12,412,03 12,193,04 12,206,80 11,567,52 10,942,68 Oil and Gas 46,605,42 47,166,14 46,603,06 38,396,34 44,864,09 Chemicals 14,257,24 14,075,50 14,554,52 12,978,44 11,569,25 Services 33,062,15 33,492,63 33,109,17 31,607,32 30,766,41 Telecommunication 11,055,89 11,044,02 11,191,33 11,272,05 12,653,06 Textile and Garments 16,548,47 16,212,47 16,231,57 15,578,55 14,523,76 Transport 31,973,79 30,604,01 29,296,94 27,991,62 27,826,01 Individuals 333,423,87 320,939,63 316,212,29 301,425,89 322,685,66 Total (1) 883, , , , ,294 (1)* Includes BB internal portfolio and loans to concede 34

36 The table below shows the behavior of the total credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ). Table 10 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) 4Q14 R$ million 4Q14 Agrobusiness Investiments Import/Export Working Capital Others Government 0,01 9,592,27 0,21 26,899,56 444,49 Foodstuffs of Animal Origin 6,047,92 1,324,01 1,414,16 5,454,02 2,039,94 Foodstuffs of Vegetable Origin 14,507,84 6,273,99 3,667,74 10,216,38 6,065,50 Bulding Specif ic Activities 170,15 3,654,16 362,27 7,627,52 7,266,42 Automotive 359,08 5,700,35 3,264,72 14,297,11 10,595,05 Beverages 127,16 404,99 234,72 706,37 655,08 Wholesale Trade and Industries 1,257,88 1,166,41 183,15 5,520,01 2,479,02 Retail Trade 1,544,95 2,091,82 50,87 12,892,63 8,789,51 Heavy Construction 1,07 1,189,77 18,98 4,171,91 5,305,04 Leather and Shoes - 331,74 378,58 2,255,20 1,269,43 Other Activities 51,73 2,50 1,14 10,87 662,85 Electrical and Electronic Goods 2,69 1,189,29 444,49 6,524,45 6,337,91 Eletricity 3,921,51 7,762,64 23,93 14,620,68 12,445,06 Housing 21,17 877,69 0,26 7,296,73 20,870,27 Banks and Financial Services 623,86 910,88 8,77 2,261,72 28,162,20 Agricultural Consumables 2,239,62 1,532,69 1,071,89 4,097,69 4,368,09 Timber and Furniture 904,27 1,343,98 222,61 4,448,49 2,149,67 Metalw orking and Steel 3,448,61 3,259,57 3,653,42 24,924,98 11,639,00 Pulp and Paper 2,547,76 1,164,18 358,78 5,469,67 2,871,64 Oil and Gas 9,120,58 4,160,00 288,26 20,565,61 12,470,96 Chemicals 85,42 1,641,77 197,44 7,221,71 5,110,90 Services 140,98 6,019,06 202,08 17,473,17 9,226,87 Telecommunication - 162,00 78,93 5,340,31 5,474,65 Textile and Garments 617,95 1,468,42 198,35 8,943,70 5,320,05 Transport 577,32 13,757,20 179,71 6,786,15 10,673,41 Total (1) 48,319,52 76,981,38 16,505,46 226,026,62 182,693,02 (1)* Includes BB internal portfolio and loans to concede 35

37 Table 11 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) 3Q14 3Q14 Agrobusiness Investiments Import/Export Working Capital Others R$ million Government 0,01 9,389,43 0,11 25,457,49 416,85 Foodstuffs of Animal Origin 5,877,11 1,319,81 1,260,80 5,230,37 1,871,43 Foodstuffs of Vegetable Origin 14,687,10 6,167,25 3,705,45 10,015,85 6,173,52 Bulding Specif ic Activities 168,85 3,523,19 313,86 7,511,90 6,933,11 Automotive 357,09 5,488,42 3,583,00 14,364,98 10,579,55 Beverages 197,76 398,43 230,63 702,71 536,93 Wholesale Trade and Industries 1,283,11 1,057,45 127,65 5,418,51 2,146,71 Retail Trade 1,580,07 1,983,94 24,44 12,268,63 8,714,82 Heavy Construction 1,33 1,188,84 18,74 3,743,98 4,755,77 Leather and Shoes - 318,65 361,73 2,234,08 1,246,92 Other Activities 603,17 369,75 0,95 1,622,82 30,505,50 Electrical and Electronic Goods 2,62 1,006,05 376,92 6,553,13 6,127,72 Eletricity 3,619,08 7,758,87 19,37 12,964,77 12,404,51 Housing 10,14 844,06 0,26 7,386,64 19,336,42 Banks and Financial Services Agricultural Consumables 2,245,58 1,409,37 938,05 4,021,73 3,676,86 Timber and Furniture 728,78 1,280,81 193,41 4,420,43 2,055,70 Metalw orking and Steel 3,508,22 3,163,33 3,070,66 25,938,83 9,696,29 Pulp and Paper 2,560,10 1,159,83 303,34 5,488,16 2,681,60 Oil and Gas 9,488,78 4,090,30 191,87 20,862,64 12,532,55 Chemicals 139,10 1,593,42 180,24 7,301,75 4,860,99 Services 119,93 6,070,11 200,11 17,588,72 9,513,76 Telecommunication - 151,58 81,92 5,579,96 5,230,56 Textile and Garments 625,49 1,446,34 182,10 8,911,03 5,047,51 Transport 331,42 13,020,35 165,44 7,224,42 9,862,39 Total (1) 48,134,84 74,199,60 15,531,05 222,813,54 176,907,97 (1)* Includes BB internal portfolio and loans to concede Table 12 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector and businesses portfolio (PJ) 2Q14 2Q14 Agrobusiness Investiments Import/Export Working Capital Others R$ million Government 0,01 8,840,24 0,15 23,347,65 503,95 Foodstuffs of Animal Origin 6,336,98 1,271,12 1,144,84 5,076,92 1,810,29 Foodstuffs of Vegetable Origin 14,085,94 6,177,05 4,220,58 9,850,24 5,530,35 Bulding Specif ic Activities 168,15 3,442,10 344,66 7,891,19 7,319,36 Automotive 368,60 5,310,23 3,109,87 15,750,89 10,300,58 Beverages 203,65 474,60 229,80 839,89 1,293,50 Wholesale Trade and Industries 1,288,53 998,08 127,69 5,516,86 2,065,18 Retail Trade 1,612,38 1,895,68 55,22 12,650,61 8,542,88 Heavy Construction 1,20 1,194,13 15,17 4,038,28 4,268,44 Leather and Shoes 0,31 298,26 324,56 2,242,65 1,165,54 Other Activities 549,91 385,11-1,596,67 29,181,52 Electrical and Electronic Goods 7,72 1,045,31 307,84 6,723,31 5,862,27 Eletricity 3,922,27 7,304,28 15,80 10,443,42 12,845,30 Housing 8,88 814,55 0,26 7,546,37 17,687, Agricultural Consumables 2,432,17 1,280,23 837,59 4,146,54 3,466,88 Timber and Furniture 716,38 1,225,83 199,38 4,509,14 2,106,59 Metalw orking and Steel 3,500,20 3,044,26 3,083,97 25,914,42 9,280,15 Pulp and Paper 2,529,29 1,176,50 580,30 5,275,57 2,645,14 Oil and Gas 9,292,08 4,034,60 251,62 20,275,85 12,748,92 Chemicals 146,96 1,599,32 198,58 7,536,44 5,073,21 Services 110,85 6,045,87 196,02 17,859,52 8,896,91 Telecommunication - 146,63 113,02 5,493,44 5,438,24 Textile and Garments 621,82 1,406,87 190,79 9,169,53 4,842,56 Transport 320,50 12,390,53 145,80 7,729,91 8,710,19 Total (1) 48,224,77 71,801,38 15,693,51 221,425,29 171,585,67 (1)* Includes BB internal portfolio and loans to concede 36

38 The next table presents the credit risk exposure of individual portfolios (PF) and businesses (PJ), segregated by maturity of the transactions Table 13 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions 4Q14 R$ million 4Q14 Exposure until 6 months 6 months to 1 year 1 to 5 years Above 5 years Agrobusiness 15,520,80 26,159,14 26,948,57 50,785,83 Mortgage 16,463,01 859,50 170,10 49,818,00 Payroll Loan 435,45 1,114,77 31,803,04 25,489,87 Auto Loans 19,17 3,68 269,91 28,352,01 Credit Cards 202,18 645,46 9,505,98 254,28 Others 10,688,20 11,152,69 18,883,16 7,879,09 Total Individuals 43,328,81 39,935,23 87,580,75 162,579,07 Agrobusiness 11,553,34 7,359,14 18,503,24 10,622,54 Investiments 54,753,92 17,678,95 105,157,03 51,951,01 Import/Export. 9,810,72 4,470,32 2,206,50 17,92 Working Capital 5,304,26 2,986,98 26,913,60 55,347,05 Others 42,294,43 11,824,28 85,042,77 26,728,00 Total Companies 123,716,68 44,319,66 237,823,14 144,666,53 Total 167,045,48 84,254,90 325,403,90 307,245,60 Table 14 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions 3Q14 R$ million 3Q14 Exposure until 6 months 6 months to 1 year 1 to 5 years Above 5 years Agrobusiness 20,192,17 15,436,41 30,100,77 46,813,30 Mortgage 17,262,42 714,59 25,15 47,501,40 Payroll Loan 531,18 1,319,28 39,103,61 20,409,76 Auto Loans 82,56 3,47 265,75 25,510,98 Credit Cards 315,54 1,257,11 21,730,12 245,65 Others 12,326,41 11,136,18 18,837,72 7,492,14 Total Individuals 50,710,28 29,867,04 110,063,12 147,973,22 Agrobusiness 11,043,88 9,864,64 16,798,20 11,277,55 Investiments 56,118,22 17,486,17 101,218,17 47,990,98 Import/Export. 7,617,85 5,495,23 2,417,98 - Working Capital 4,276,47 2,793,58 14,567,46 52,563,60 Others 39,170,05 16,093,37 78,717,91 24,401,47 Total Companies 118,226,47 51,732,99 213,719,72 136,233,59 Total 168,936,75 81,600,04 323,782,84 284,206,82 37

39 Table 15 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions 2Q14 R$ million 2Q14 Exposure until 6 months 6 months to 1 year 1 to 5 years Above 5 years Agrobusiness 24,820,05 13,260,65 29,418,40 43,914,11 Mortgage 17,002,45 680,43 24,50 46,342,99 Payroll Loan 542,88 1,273,78 39,242,79 20,506,03 Auto Loans 84,33 6,20 261,68 23,325,48 Credit Cards 356,01 1,042,61 20,963,81 219,67 Others 10,483,57 13,571,26 19,720,07 7,305,60 Total Individuals 53,289,30 29,834,93 109,631,25 141,613,89 Agrobusiness 10,300,47 8,966,18 18,855,90 10,105,71 Investiments 56,502,94 15,794,25 105,420,96 43,707,14 Import/Export. 8,322,90 4,519,15 2,851,46 - Working Capital 4,988,59 2,043,67 14,038,66 50,730,81 Others 37,902,54 15,381,86 76,321,81 24,399,92 Total Companies 118,017,45 46,705,10 217,488,79 128,943,58 Total 171,306,75 76,540,03 327,120,04 270,557,47 The table below shows the amount of overdue transactions, gross of allowances and excluded the write-offs, segregated by geographical regions in Brazil 38

40 Table 16 - Amount of overdue transactions by geographical regions. R$ millions 4Q14 Region 15 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days Above 360 days Midw est 804,45 220,51 604,11 797,53 68,95 Northeast 915,88 307,95 743, ,54 120,37 North 348,43 100,10 282,96 390,31 35,54 Southeast 2.531,43 993, , ,19 338,66 South 1.205,06 365, , ,71 140,88 Foreign 10,29 0,00-0,00 26,86 TOTAL R$ millions 3Q14 Region 15 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days Above 360 days Midw est 928,53 236,59 606,30 708,02 53,31 Northeast 994,73 361,02 725,45 993,32 81,98 North 383,45 120,39 278,78 376,23 29,79 Southeast 2.669, , , ,27 332,68 South 1.107,81 499, , ,07 170,43 Foreign 0,07 0,02 34,11 0,53 25,89 TOTAL 6.084, , , ,45 694,08 2Q14 Region 15 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days Above 360 days Midw est 757,21 242,55 607,95 610,31 47,93 Northeast 908,68 307,10 773,03 895,77 90,63 North 373,24 125,69 297,06 337,61 38,12 Southeast 2.697, , , ,43 311,29 South 1.071,82 390,49 802, ,32 137,81 Foreign 12,21 2,88 170,55 11,15 22,59 TOTAL 5.821, , , ,59 648,36 39

41 Below are presented the amount of overdue transactions, gross of allowances and excluded the write-offs of the financial group, segregated by economic sector. Table 17 - Amount of overdue transactions, segregated by economic sector 4Q14 R$ million 4Q14 Macro-sector 15 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days Above 360 days Government 7,70-0,60 0,10 1,10 Foodstuffs of Animal Origin 166,60 29,70 49,70 79,10 19,00 Foodstuffs of Vegetable Origin 175,30 135,70 182,50 267,00 23,00 Bulding Specif ic Activities 171,10 72,80 185,30 259,40 24,50 Automotive 196,00 94,30 259,10 389,90 11,70 Beverages 4,40 5,80 5,00 19,00 1,00 Wholesale Trade and Industries 88,80 41,70 85,00 136,90 24,00 Retail Trade 327,30 111,30 314,10 485,70 20,00 Heavy Construction 89,20 23,00 56,20 92,60 6,60 Leather and Shoes 42,10 13,20 40,20 74,70 2,80 Other Activities 0,10 0,20 0,50 0,50 - Electrical and Electronic Goods 119,80 42,10 146,00 233,40 9,40 Eletricity 2,70 0,60 48,00 7,70 - Housing 178,10 50,90 171,90 236,20 5,50 Banks and Financial Services 4,50 1,40 2,80 4,60 0,10 Agricultural Consumables 41,60 17,70 71,20 77,60 22,00 Timber and Furniture 112,10 42,40 114,00 215,60 16,30 Metalw orking and Steel 253,30 79,30 242,30 407,40 31,10 Pulp and Paper 55,70 21,20 52,90 93,00 8,70 Oil and Gas 92,00 33,40 128,40 156,10 8,80 Chemicals 92,60 33,50 116,40 157,40 7,40 Services 389,20 136,90 364,90 676,10 28,30 Telecommunication 16,50 11,70 28,60 50,70 6,40 Textile and Garments 180,60 70,40 216,50 353,80 13,90 Transport 207,40 58,40 156,30 251,30 12,40 Total 3,014,70 1,127,60 3,038,40 4,725,80 304,00 40

42 Table 18 - Amount of overdue transactions, segregated by economic sector 3Q14 R$ million 3Q14 Macro-sector 15 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days Above 360 days Government 0,81 0,08 0,02 0,69 0,57 Foodstuffs of Animal Origin 30,96 19,60 59,32 55,53 16,85 Foodstuffs of Vegetable Origin 277,62 74,65 225,04 279,83 38,28 Bulding Specif ic Activities 177,59 85,25 187,07 247,18 22,63 Automotive 218,87 109,83 275,96 326,92 14,90 Beverages 4,74 2,29 20,40 5,37 0,04 Wholesale Trade and Industries 71,75 37,31 97,23 110,95 27,15 Retail Trade 279,50 126,36 307,68 415,73 20,68 Heavy Construction 60,48 49,33 48,52 153,48 6,00 Leather and Shoes 32,89 19,94 48,24 83,03 4,02 Other Activities 2,51 1,35 5,16 2,01 0,22 Electrical and Electronic Goods 131,53 114,85 145,15 219,97 15,46 Eletricity 48,36 0,87 5,37 5,36 0,03 Housing 170,33 88,19 327,24 165,58 9,40 Agricultural Consumables 35,11 46,34 59,62 87,39 10,01 Timber and Furniture 102,20 51,42 139,80 203,36 23,81 Metalw orking and Steel 258,94 61,15 308,35 293,27 14,49 Pulp and Paper 40,22 26,27 57,57 68,32 7,81 Oil and Gas 103,06 69,31 121,49 150,32 5,98 Chemicals 109,52 42,19 106,82 151,22 12,58 Services 364,33 176,91 458,27 576,90 27,87 Telecommunication 19,41 13,67 33,23 41,02 1,78 Textile and Garments 167,77 96,63 218,72 338,90 17,64 Transport 174,45 67,52 219,02 214,75 12,45 Total 2,882,97 1,381,29 3,475,29 4,197,08 310,65 Table 19 - Amount of overdue transactions, segregated by economic sector 2Q14 R$ million 2Q14 Macro-sector 15 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days Above 360 days Government 12,56 1,24 1,22 1,05 0,00 Foodstuffs of Animal Origin 159,81 123,25 108,70 67,36 14,77 Foodstuffs of Vegetable Origin 620,28 487,68 451,44 166,80 16,25 Bulding Specif ic Activities 612,04 455,24 375,66 223,88 14,66 Automotive 796,17 595,51 490,45 297,32 12,05 Beverages 37,62 23,28 11,81 9,50 0,57 Wholesale Trade and Industries 308,36 240,70 182,24 117,64 23,69 Retail Trade 921,06 706,73 600,61 335,80 18,06 Heavy Construction 375,54 331,01 311,92 225,12 3,62 Leather and Shoes 160,75 122,98 95,93 52,41 3,08 Other Activities 11,11 7,74 6,46 4,62 0,31 Electrical and Electronic Goods 470,64 381,85 325,06 185,53 12,38 Eletricity 10,33 8,14 7,40 2,70 0,38 Housing 653,66 398,85 281,91 161,15 10,05 Agricultural Consumables 226,04 194,57 178,17 135,66 4,02 Timber and Furniture 442,97 338,56 289,50 158,29 15,23 Metalw orking and Steel 789,66 559,74 469,25 237,24 18,85 Pulp and Paper 179,70 142,91 126,38 81,74 5,33 Oil and Gas 512,95 436,41 394,58 143,83 6,21 Chemicals 343,86 267,09 226,30 131,04 11,11 Services 1,371,64 1,007,02 851,75 472,29 30,39 Telecommunication 85,49 68,48 56,71 32,79 0,63 Textile and Garments 744,23 601,40 523,16 299,49 18,99 Transport 573,89 419,51 348,96 202,74 7,28 Total 10,420,38 7,919,87 6,715,57 3,745,98 247,89 41

43 The following table shows the flow of write-off transactions, segmented by economic sector Table 20 Write-off transactions by economic sector. R$ Millions 4Q14 3Q14 2Q14 Economic Sector (Write-off) Government 0,22 0,02 0,01 Foodstuffs of Animal Origin 22,31 30,29 77,28 Foodstuffs of Vegetable Origin 175,78 87,03 157,40 Bulding Specif ic Activities 101,88 101,67 118,69 Automotive 146,68 131,95 134,76 Beverages 4,47 6,88 7,68 Wholesale Trade and Industries 53,43 44,70 61,07 Retail Trade 139,71 134,01 139,91 Other Activities 5,50 23,16 1,48 Heavy Constructions 91,21 128,22 51,70 Leather and Shoes 47,33 21,82 26,72 Electrical and Electronic Goods 97,13 83,28 112,26 Eletricity 1,57 0,72 0,98 Housing 69,73 101,86 90,70 Agricultural Consumables 39,19 43,48 22,76 Timber and Furniture 104,85 58,55 73,31 Metalw orking and Steel 114,04 133,87 154,58 Pulp and Paper 31,12 49,25 45,33 Oil and Gas 80,42 62,88 49,47 Chemicals 74,13 57,28 46,63 Services 234,16 217,95 197,53 Telecomunication 13,41 12,24 13,80 Textile and Garments 143,87 152,40 122,66 Transport 89,52 89,57 66,61 Total 1881, , ,32 Others Individual 1467, , ,01 Total 3349, , ,33 42

44 The table below shows the amount of allowances for loan and lease losses, segmented by economic sector and its quarterly change Table 21 - Total allowances for loan and lease losses in the quarter and variations R$ million Macro-sector over 2Q14 4Q14 3Q14 2T14 Government 1,70 6,03 4,34 4,09 Foodstuffs of Animal Origin 11,71 292,95 281,24 247,56 Foodstuffs of Vegetable Origin 82,94 1,491,79 1,408,85 1,206,84 Bulding Specif ic Activities 56,74 630,61 573,87 491,61 Automotive 74,49 770,62 696,13 628,27 Beverages 8,34 37,25 28,90 32,59 Wholesale Trade and Industries 55,88 351,32 295,44 267,96 Retail Trade 123,78 902,76 778,98 679,22 Heavy Construction 66,06 400,97 334,90 432,08 Leather and Shoes (4,64) 138,21 142,85 128,51 Other Activities 0,94 1,61 0,67 0,93 Electrical and Electronic Goods 15,16 503,41 488,25 453,19 Eletricity 29,38 157,90 128,52 123,23 Housing 34,44 643,06 608,62 447,44 Banks and Financial Services - 3,97 239,29 243,26 238,22 Agricultural Consumables 55,83 260,93 205,09 235,23 Timber and Furniture (10,50) 394,17 404,67 329,93 Metalw orking and Steel 159,36 941,17 781,81 704,45 Pulp and Paper 29,37 201,38 172,01 168,15 Oil and Gas 43,78 421,54 377,76 306,86 Chemicals 0,69 321,96 321,27 436,65 Services 74,15 1,235,95 1,161,81 1,045,94 Telecommunication 16,09 100,07 83,99 62,26 Textile and Garments 37,74 689,10 651,36 627,03 Transport 59,03 644,50 585,47 517,35 TOTAL 946,98 11,778,52 10,566,42 9,815,60 Below are presented the behavior of credit risk exposure, observed settings of Circular BACEN 3.644/13, segmented by Risk-Weighting Factor (FPR), along with the average exposure of the quarters. 43

45 Table 22 - Credit risk exposure by FPR R$ thousand Exposure by Risk Factor 4Q14 3Q14 2Q14 1Q14 4Q13 0% 291, , , , ,021 20% 682, , ,081 1,395,065 1,597,602 35% 24,127,350 21,906,012 19,838,582 17,135,911 14,446,624 50% 11,405,370 10,749,561 6,953,595 4,679,237 5,660,017 75% 265,719, ,537, ,979, ,661, ,097,426 85% 200,625, ,385, ,576, ,442, ,282, % 143,611, ,372, ,886, ,292, ,293, % (2) ,486,931 35,904,682 33,387, % (2) - - 6,043,228 5,655,366 5,822,886 Total (1) 624,090, ,090, ,919, ,715, ,155,366 Average Exposure in the Quarter (1) 636,882, ,049, ,841, ,097, ,382,641 (1) Includes loans, leasing, commitments after applying the conversion factor, credits to release and guarantees rendered (2) Risk weighted factor extinct for loans to individuals since Aug/14, according to BACEN Circular 3,714/ Acquisition, Sale or Transfer of Financial Assets It is BB s policy to assign credits from non-performing retail loans, recorded in losses and for which the bank has full risk, after all collection procedures defined in the collections and credit-recovery process have been exhausted, and the selected transactions have reached the savings point, that is, the cost-benefit ratio does not justify keeping the transactions under collections at a commercial bank. Credit assignment is also used punctually to dispose of specific credits, when such an operation is considered a viable alternative for its recovery, even if partial. Below we show the flow of operations ceded with substantial transfer of risks and benefits. Table 23 - Loss operations assigned, with substantial transfer of risks and benefits R$ Thousands 4Q14 3Q14 2Q14 1Q14 4Q13 Operation Quantity (in thousands) 1, , Value 3,484, ,925,119 4,404,571 Observation: The data refers to credit assigments ceded to Átivos S.A. Write-off Portfolio Values BB has no exposure in the following categories: a) exposures assigned with no substantial transfer or retention of risks and benefits; b) exposures assigned with substantial retention of risks and benefits; and c) exposures assigned in the quarter with substantial retention of risks and benefits, which were written off as losses. Below are presented the value of the portfolio granted with co-obligation, recorded in the off balance sheet, not in the Assets 44

46 Table 24 - Value of the portfolio granted with co-obligation, recorded in the off balance sheet R$ thousands 4Q14 3Q14 2Q14 1Q14 4Q13 Risk Retention in Loan operations - Operations w ritten off 6,032 6,430 6,433 6,763 8, Securities (TVM) operations derived from securitization processes The securities acquired by BB are classified in the following categories: a) category I - securities for trading - securities acquired with the intent of actively and frequently trading them must be registered here; b) category II - securities available for sale - securities that do not fall under categories I or III must be registered here; and c) category III - securities held to maturity securities, except non-redeemable shares, which the institution has the intent and financial capacity to keep in its portfolio until maturity must be registered here. Following are the exposures due to TVM operations derived from securitization processes: a) types of securities: i. Receivables Investment Funds (FIDC) = resource pool that allots most of its net assets to be applied in receivables. These are the rights and securities representing rights arising from operations carried out in the financial, commercial, industrial and real-estate, mortgage, financial leasing, and serviceprovision sectors, as well as other financial assets and investment modes admitted under the terms of CVM Instructions Nos. 356/2001 and 444/2006; and ii. Real Estate Receivables Certificates (CRI) = these are fixed-income securities backed by real estate credits counter installments flows of payments to purchase real estate properties or rent - issued by securitization companies. b) type of credit backing the issue: i. FIDC = vehicles financing, company cash flow receivables, debentures, promissory notes, bank credit certificates, bank credit bill certificates, real estate credit certificates, real estate letters of credit, export and other credit rights credit bills; and ii. CRI = real estate loans. c) type of security: i. FIDC and CRI = senior quota. Table 25 - Value of the exposures derived from acquiring FIDC and CRI R$ thousand 4Q14 3Q14 2Q14 1Q14 4Q13 FIDC ,632, ,628, ,520, ,526,161 CRI - category II , , , , ,555 CRI - category III , , , , ,129 TOTAL ,283, ,277, ,244, Note: Information includes BB branches in Brazil and abroad (BB-Multiple Bank) Exposure to counterparty credit risks Banco do Brasil admits assuming counterparty credit risks with clients who have been previously analyzed by the risk calculation methodology, with a credit limit applicable to 45

47 their profile established, subject to the existence of a sufficient operational margin to cover such operations. In this way, the counterparty credit risk exposures fall in line with other exposures in l the customer s loans on the credit limit assigned to it. In the event of a default, these types of operations affect the client s credit risk according to the estimated value of the counterparty credit risk exposure--applicable credit risk mitigators being taken into consideration, such as the adjacent asset issuer risk, the volatility of the asset, the collateral given (haircut), and the rules for additional collateral margin calls, according to the characteristics of the operation performed. In operations conducted via Clearing Houses (Clearings), there is a risk transfer, where the value of the operations is reflected in the credit limit of the Clearing House. The approval of operations depends, at least, on the collateral required by the credit limit order, and on those defined as mandatory by the credit line, being that the level of demand for collaterals varies according to the client s credit risk. In collateralization, preference is given: a) to assets acquired, produced, or processed with the credit; b) to collaterals that offer self-liquidity to the operation; c) to goods that are easily commercialized and non-perishable; d) to goods of the same type, kind and category as the ones to be acquired or to be hold with the credit; and e) To goods that will produce income to pay for the operation. In order to link goods as collateral, it is assessed through a technical evaluation or through an opinion of value, whose period of validity is up to twelve months. In the case of personal collateral, the economic-financial situation of guarantors or sureties is analyzed, in addition to direct and indirect liabilities at the Bank, with debts to third parties being considered, especially those related to tax, social security, and labor debts. When accepting a good or right as collateral, the maximum value considered is obtained by applying a percentage on the value of said good or right, according to the type and kind of good. In the case of a trade bills and checks in custody, the maximum value is obtained by applying the percentage of the advance corresponding to the Annual Liquidity Ratio (ILA) of the client s portfolio on the bound value as collateral. Goods received as collateral for loans must be backed until the operation is concluded, or, in the case of funds given as collateral, remain blocked until the operation is concluded. Collaterals linked to loans are registered on a corporate basis, which allows automated control of the linked goods and rights, and the generation of administrative information, such as the collateral sufficiency analysis, and the adequacy analysis. For operations subject to counterparty credit risk, Banco do Brasil follows the BACEN Circular 3,068/01, considering such risk as a parameter when adjusting the market value 46

48 of such exposures, which affects the profit/loss of the period, or in separated account of the Stockholder s Equity, subject to the exposure s classification. Below is the notional value of contracts subject to counterparty credit risk to be liquidated in clearing house liquidation systems, in which clearing houses acts as central counterparty. Table 26 - Notional value of contracts to be liquidated in clearing house liquidation systems, in which clearing houses acts as central counterparty R$ thousand Stock Market Negotiation Counterparty 4Q14 3Q14 2Q14 1Q14 4Q13 Futures Contracts 14,885,592 16,188,412 15,041,532 18,047,792 12,602,133 Purchase commitments B 14,885,592 16,188,412 15,041,532 18,047,792 12,602,133 Options Market 24,583,462 22,456,140 6,331,737 9,221,096 4,979,401 Short Position B 24,583,462 22,456,140 6,331,737 9,221,096 4,979,401 Note: Counterpart = (B) Stock Market In the next table, it is showed the notional value of the contracts subject to the counterparty credit risk, in which there s no work of the clearing houses as central counterparty, segmented in uncollateralized agreements and collateralized agreements Table 27 - Notional value of contracts subject to counterparty credit risk in which clearing houses do not act as central counterparty, Segmented in uncollateralized agreements and collateralized agreements. R$ Thousand Without guarantees 4Q14 3Q14 2Q14 1Q14 4Q13 Forw ard operations (C) and (IF) 10,175,507 6,415,977 6,474,151 11,043,960 7,187,094 "Sw aps" contracts (C) 4,871,047 4,112,682 7,245,134 6,157,882 4,353,755 Other derivative financial instruments 3,739,804 2,039,204 1,571,374 5,016,856 5,119,037 Currency arbitrage (future and prompt settlement) 1,995, ,452 2,195, ,575 87,403 Inter-bank exchange (future and prompt settlement) - 1,537, ,318 2,251,909 2,865,019 With guarantees 4Q14 3Q14 2Q14 1Q14 4Q13 "Sw aps" contracts (IF) 12,644,330 11,109,988 10,197,816 11,888,051 32,942,758 Inter-bank exchange (future and prompt settlement) 134,663 77, , , ,775 Reverse Repo 262,986, ,801, ,491, ,802, ,039,995 Repo 291,156, ,784, ,120, ,038, ,591,113 Note: Counterpart = (C) Client and (IF) Financial Institution. The following table shows the positive gross value of contracts subject to counterparty credit risk, including derivatives, outstanding operations, asset loans and repo transactions, disregarding the positive values from compensation agreements, as set forth in CMN Resolution 3,263/05. Table 28 - Positive gross value of the respective contracts, including derivatives, loans to settle, assets loans and repurchase agreements, disregarded the positive values related to compensation agreements defined in Resolution nº 3.263/05. R$ Thousand 4Q14 3Q14 2Q14 1Q14 4Q13 Total Gross Positive Value 4,529,774 2,459,855 1,785,758 1,769,856 1,434,942 Derivative Financial Instruments 1,493,161 1,016, ,721 1,110, ,679 Currency arbitrage (future and prompt settlement) , Inter-bank exchange (future and prompt settlement) Reverse Repo 6 9,119 2, Repo 3,036,607 1,434,315 1,004, , ,973 47

49 Next, the positive gross collateral received in operations subject to credit risk that cumulatively attends the following requirements, as art.9.º, section VII, of the Central Bank Circular 3.678/13: a) be kept or held in custody by the institution itself; b) whose exclusive purpose is to guarantee operations to which they are linked; c) are subject to movement, exclusively, by order from the depositary institution; and d) are immediately available to the depositary institution in the event default by the debtor or need for its realization. Table 29 - The value of collaterals that cumulatively meet the requirements of paragraph VII, Art.9, of Bacen Circular 3,678/13 R$ thousand 4Q14 3Q14 2Q14 1Q14 4Q13 3Q13 Financial investments fixed-income Checks ,947,978 4,046,504 4,164,181 9,949,925 9,634,257 Checks , , , , ,811 Agricultural products w ith w arrant ,466 74,438 87,072 75,339 78,659 Financial investments variable yield TOTAL ,527,304 4,687,013 4,847,948 10,676,283 10,378,172 Note: Information includes BB branches in Brazil and abroad (BB-Multiple Bank). According to the classification of types of collaterals adopted by BACEN, we have identified those that cumulatively meet the conditions established in BACEN Circular 3,678/13, being that for the purpose of collateral s calculation it was considered the value committed as collateral to the linked operation. Following, it is showed the global exposure to the counterparty credit risk, net of compensation agreements effects and the collateral received. Table 30 - The value of collaterals that cumulatively meet the requirements of paragraph VII, Art.9, of Bacen Circular 3,678/13: R$ thousand Counterparty Credit Risk 3Q14 2Q14 1Q14 4Q13 3Q13 Guarantees Rendered Value 580,243, ,124, ,911, ,459, ,896,947 Global Exposure (1) 46,966,730 59,723,177 50,756,127 57,874,114 75,813,271 (1) net of the effects from the guarantees value Mitigating instruments When accepting guarantees in loans, preference is given to guarantees which help the operation self-liquidate. In order to accept a guaranty, the maximum value considered is reached by applying a certain percentage on the value of said good or right. Below are presented the percentages used: Table 31 - Collateral coverage. 48

50 Asset Coverage (%) Credit rights - Receipt for bank deposit 100% - Certificate of bank deposit (1) 100% - Saving deposits 100% - Fixed income investiment founds 100% PledgeAgreement cash collateral (2) 100% - Standby letter od credit 100% - Others 80% Guerantee Funds - Guarantee Fund for Generation of Employment and Income (Funproger) 100% - Guarantee Fund for Micro and Small Business (Fampe) 100% - Guarantee Fund for Operations (FGO) 100% - Guarantee Fund for Investments (FGI) 100% - Others 100% Guarantee (3) 100% Credit insurance 100% PledgeAgreement securities (4) 77% Offshore Funds - BB Fund (5) 77% Livestock (6) 70% PledgeAgreement - cashcollateral (7) 70% Others (8) 50% (1)Except the ones possessing swap agreement (2) In the same currency of the operation. (3) Provided by a banking institution taht has a credit limit at the bank, with sufficient margin to suport the co-obligation. (4) Contract of deposit / Transfer of Customer funds (5) Exclusive or retail. (6) Excpet in Rural Product Notes Transactions (CPR). (7) Celebrated in a different currency of the operations supported and wich have no hedding mechanism. (8) According to certain characteristics, real state, vehicle, machinery and equipment can be received with highest percentage of guarantee. The credit rights guarantees represented by financial investments must be internalized at the Bank and are blocked by the institution. This block must remain until the operation is concluded. When the financial investment matures, the Bank may, at its discretion, use it to liquidate the balance of remaining installments, with no notice or notification to the assignor/borrower. Besides credit assignment or credit rights assignment clauses, the credit instrument--for linked mitigators--the credit instrument has a guarantee reinforcement clause to ensure, for the duration of the operation, the coverage percentage agreed on when it was contracted. The fund guarantees, such as the Guarantee Fund for Generation of Employment and Earnings (Funproger), Operations Guarantee Fund (FGO), Investments Guarantee Fund (FGI) and the (Endorsement for Micro and Small Enterprises Fund (Fampe) are used as collateral by Banco do Brasil, mitigating the risks of operations. Overall, the fund guarantees have the following characteristics: a) maximum coverage percentage limits when using the fund to back operations, according to the type of operation: Investment or Working Capital; b) target market, according to the billing or the client s risk; c) whether or not a counter guarantee was given; d) maximum limits on the amount of resources that constitute the Fund s Net Worth (Leverage Ratio); and e) limits for accrued losses, or, the Stop Loss Limits. 49

51 Guarantee fund managers keep up with whether an operation falls under the funds rules before granting them in guarantees, as well as manage guarantee operations and fund assets, freezing the use of these funds in guarantee operations, if necessary, before the amount of linked resources surpasses the leverage established for each fund. Considering the credit risk mitigating instruments defined in articles 36 to 39 of BACEN Circular 3.644/13, the following table shows the total mitigated value in terms of exposure, weighted by risk factor, and segmented by the mitigator type and FPR. Table 32 - Mitigated value of exposure, weighted by the respective weighting factor R$ thousand 4Q14 3Q14 2Q14 1Q14 4Q13 Total (1) Mitigator 41,885,245 37,642,429 29,579,201 28,641,279 28,566,534 Guarantee given by the National Treasury or the Banco Central do Brasil 0% 30,019,755 26,564,576 22,648,638 21,510,949 21,713,938 Guarantee given by Guarantee Funds 0% 1,628,348 1,539,519 1,602,680 1,620,716 1,690,472 Guarantee given by Guarantee Funds 50% 3,558,687 3,304,949 4,101,585 3,883,355 3,824,807 Guarantee constituted w ith resources from the States Participation Fund (FPE) or the Cities Participation Fund (FPM) 5.2 Market and Liquidity Risks Management Objectives The objective of Banco do Brasil s market and liquidity risk management process is to identify, assess, monitor, and control risks related to each individual institution, and to the financial conglomerate, as well as identify and accompany the risks associated with the rest of the companies who are part of the consolidated economic and financial. Aligned with the best market practices, the Bank regularly uses procedures that enable managing the market and liquidity risks of its positions, taking internal and external economic scenarios under consideration in order to minimize possible effects on the net financials Management Policies and Strategies 0% Deposits held by the institution itself 0% 1,209,427 1,042, , , ,447 Guarantee from financial institutions 50% 391, , , , ,524 Payroll Discount Transfers (2) 50% 5,077,550 4,663, (1) Total value mitigated bythe instruments defined in articles 36 and 39 of BACEN Circular 3.644/2013 for exposures in loans,leasing,commitments after applying the conversion factor,credits to release and guarantees rendereds (2) Credit risk mitigation instrument represented by payroll discount transfers was established by BACEN Circular 3,714, which became effective on Aug /14 The Bank has established policies and strategies for managing market and liquidity risks, and to manage derivative financial instruments. These policies and strategies determine the Company s operating directives in the risk management process. Additionally, the market and liquidity risks management process uses mechanisms set forth in regulatory systems which detail the operational procedures necessary to implement the organizational decisions concerning to the Company s business and activities and to meet legal, as well as regulatory and oversight bodies requirements. Finally, records that in market and liquidity risks management, systems are used that guarantee that positions registered in negotiable and non-negotiable portfolios are 50

52 measured, monitored, and controlled, as are operations aimed at meeting the hedge objectives established. With respect to hedging policies adopted for the management of market risks and liquidity, are defined objectives to be achieved with hedging operations on consolidated basis, guaranteed the effectiveness of each individual transaction, in accordance to the regulations of each jurisdiction. It s also worth noting that negotiating with derivative financial instruments is subject to prior evaluation of the nature and scale of risks involved. The tables below represent the total exposure to derivative financial instruments by category of market risk factor, segmented into positions bought and sold in the following way: I. Derivative financial instrument transactions carried out with a central counterpart, subdivided into those in Brazil and those abroad; and II. Derivative financial instrument transactions carried out without a central counterpart, subdivided into those in Brazil and those abroad. Table 33 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 4Q14 4Q13-R$ thousand Risk Factor Brazil Abroad Consolidated-BB Negotiation Reference Market Reference Market Reference location Cost value Cost value Cost value Market value value value value value value Long position 59,786,503 1,018,160 1,367,391 7,397, , ,299 67,184,178 1,155,934 1,519,689 Interest rates Stock market 35,291, , , ,291, , ,773 Counter 2,226,924 30,782 71, ,226,924 30,782 71,755 Exchange rates Stock market 10,902, , ,601 4,014, , ,409 14,917, , ,009 Counter 11,040, , ,948 3,383,410 27,583 33,890 14,424, , ,838 Share price Stock market 305,600 8,562 7, ,600 8,562 7,207 Counter Commodities price Stock market 9, , Counter 8, , , ,091 Short position 70,981,724 (3,194,352) (3,390,112) 11,887,010 (189,954) (301,394) 82,868,734 (3,384,306) (3,691,506) Interest rates Stock market 52,267,206 (2,436,946) (2,649,017) 1,999, ,266,910 (2,436,946) (2,649,017) Counter 2,468,124 (115,095) (136,218) ,468,124 (115,095) (136,218) Exchange rates Stock market 7,411,934 (166,117) (191,910) 2,840,854 (95,767) (200,812) 10,252,788 (261,884) (392,722) Counter 8,722,618 (470,883) (406,326) 7,046,452 (94,187) (100,582) 15,769,070 (565,070) (506,908) Share price Stock market 16,700 (456) (154) ,700 (456) (154) Counter Commodities price Stock market 79,457 (2,149) (2,203) ,457 (2,149) (2,203) Counter 15,685 (2,706) (4,284) ,685 (2,706) (4,284) Net position (11,195,221) 4,212,512 4,757,503 (4,489,335) 327, ,693 (15,684,556) 4,540,240 5,211,195 51

53 Table 34 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 3Q14 3Q14-R$ thousand Risk Factor Brazil Abroad Consolidated-BB Negotiation Reference Market Reference Market Reference location Cost value Cost value Cost value Market value value value value value value Long position 59,465,595 1,367,083 1,655,081 2,856,808 55,107 65,564 62,322,403 1,422,190 1,720,645 Interest rates Stock market 27,878,232 6,865 2, ,878,232 6,865 2,498 Counter 5,922, , , ,922, , ,450 Exchange rates Stock market 10,353, , , ,353, , ,490 Counter 14,846, ,228 1,003,314 2,856,808 55,107 65,564 17,703, ,335 1,068,878 Share price Stock market 412,650 9,877 14, ,650 9,877 14,007 Counter Commodities price Stock market Counter 51,735 9,038 33, ,735 9,038 33,322 Short position 85,897,034 (2,418,634) (2,485,425) 9,684,144 (381,629) (428,410) 95,581,178 (2,800,263) (2,913,835) Interest rates Stock market 57,141,328 (1,151,851) (1,185,269) 2,080, ,221,744 (1,151,851) (1,185,269) Counter 8,717,745 (398,153) (480,926) 98, ,815,781 (398,153) (480,926) Exchange rates Stock market 7,892,055 (206,050) (278,480) ,892,055 (206,050) (278,480) Counter 11,285,158 (643,273) (515,974) 7,505,692 (381,629) (428,410) 18,790,850 (1,024,902) (944,384) Share price Stock market 715,175 (16,251) (20,761) ,175 (16,251) (20,761) Counter Commodities price Stock market 125,788 (2,666) (1,422) ,788 (2,666) (1,422) Counter 19,785 (390) (2,593) ,785 (390) (2,593) Net position (26,431,439) 3,785,717 4,140,506 (6,827,336) 436, ,974 (33,258,775) 4,222,453 4,634,480 Table 35 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 2Q14 Risk Factor Brazil Abroad Consolidated-BB Negotiation Reference Market Reference Market Reference location Cost value Cost value Cost value Market value value value value value value Long position 41,669,984 1,114,278 1,109,226 5,191, , ,465 46,861,744 1,258,694 1,295,691 Interest rates Stock market 12,426,158 1, ,426,158 1, Counter 10,787, , , ,787, , ,295 Exchange rates Stock market 8,565,937 60,183 52, ,565,937 60,183 52,465 Counter 9,444, , ,746 5,191, , ,465 14,636, , ,211 Share price Stock market 375,250 10,055 9, ,250 10,055 9,756 Counter Commodities price Stock market 5, , Counter 64,376 8,763 30, ,376 8,763 30,964 Short position 62,609,655 (3,667,073) (3,591,035) 4,606,961 (92,310) (178,455) 67,216,616 (3,759,383) (3,769,490) Interest rates Stock market 42,590,620 (2,422,161) (2,575,680) ,590,620 (2,422,161) (2,575,680) Counter 9,454,886 (622,300) (575,620) 145, ,600,195 (622,300) (575,620) Exchange rates Stock market 4,048,300 (162,939) (153,255) ,048,300 (162,939) (153,255) Counter 5,854,361 (442,292) (272,090) 4,461,652 (92,310) (178,455) 10,316,013 (534,602) (450,545) Share price Stock market 557,493 (12,981) (12,275) ,493 (12,981) (12,275) Counter Commodities price Stock market 91,310 (2,922) (1,303) ,310 (2,922) (1,303) Counter 12,685 (1,478) (812) ,685 (1,478) (812) Net position (20,939,671) 4,781,351 4,700, , , ,920 (20,354,872) 5,018,077 5,065,181 52

54 Table 36 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 1Q14 Risk Factor Brazil Abroad Consolidated-BB Negotiation Reference Market Reference Market Reference location Cost value Cost value Cost value Market value value value value value value Long position 54,257,817 1,406,794 1,446,900 7,243, , ,193 61,500,845 1,552,455 1,605,093 Interest rates Stock market 21,251, , , ,251, , ,487 Counter 4,554, , , ,554, , ,001 Exchange rates Stock market 13,808, , ,509 3,867, , ,993 17,675, , ,502 Counter 14,350, , ,338 3,375,213 30,020 34,200 17,725, , ,538 Share price Stock market 214,320 7,760 6, ,320 7,760 6,494 Counter Commodities price Stock market 14, , Counter 63,231 10,269 35, ,231 10,269 35,978 Short position 70,729,001 (3,668,528) (3,670,545) 10,489,295 (143,796) (251,790) 81,218,296 (3,812,324) (3,922,335) Interest rates Stock market 51,159,753 (2,753,411) (2,874,516) ,159,753 (2,753,411) (2,874,516) Counter 3,013,825 (176,437) (185,442) 223, ,237,775 (176,437) (185,442) Exchange rates Stock market 7,182,890 (153,304) (143,725) 3,298,024 (76,684) (179,935) 10,480,914 (229,988) (323,660) Counter 8,885,051 (571,985) (453,796) 6,967,321 (67,112) (71,855) 15,852,372 (639,097) (525,651) Share price Stock market 314,001 (9,383) (8,447) ,001 (9,383) (8,447) Counter Commodities price Stock market 157,173 (2,196) (452) ,173 (2,196) (452) Counter 16,308 (1,812) (4,167) ,308 (1,812) (4,167) Net position (16,471,184) 5,075,322 5,117,445 (3,246,267) 289, ,983 (19,717,451) 5,364,779 5,527,428 Table 37 - Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart 4Q13 Risk Factor Brazil Abroad Consolidated-BB Negotiation Reference Market Reference Market Reference location Cost value Cost value Cost value Market value value value value value value Long position 59,786,503 1,018,160 1,367,391 7,397, , ,299 67,184,178 1,155,934 1,519,689 Interest rates Stock market 35,291, , , ,291, , ,773 Counter 2,226,924 30,782 71, ,226,924 30,782 71,755 Exchange rates Stock market 10,902, , ,601 4,014, , ,409 14,917, , ,009 Counter 11,040, , ,948 3,383,410 27,583 33,890 14,424, , ,838 Share price Stock market 305,600 8,562 7, ,600 8,562 7,207 Counter Commodities price Stock market 9, , Counter 8, , , ,091 Short position 70,981,724 (3,194,352) (3,390,112) 11,887,010 (189,954) (301,394) 82,868,734 (3,384,306) (3,691,506) Interest rates Stock market 52,267,206 (2,436,946) (2,649,017) 1,999, ,266,910 (2,436,946) (2,649,017) Counter 2,468,124 (115,095) (136,218) ,468,124 (115,095) (136,218) Exchange rates Stock market 7,411,934 (166,117) (191,910) 2,840,854 (95,767) (200,812) 10,252,788 (261,884) (392,722) Counter 8,722,618 (470,883) (406,326) 7,046,452 (94,187) (100,582) 15,769,070 (565,070) (506,908) Share price Stock market 16,700 (456) (154) ,700 (456) (154) Counter Commodities price Stock market 79,457 (2,149) (2,203) ,457 (2,149) (2,203) Counter 15,685 (2,706) (4,284) ,685 (2,706) (4,284) Net position (11,195,221) 4,212,512 4,757,503 (4,489,335) 327, ,693 (15,684,556) 4,540,240 5,211, Hedge Policies With respect to hedging policies adopted for market and liquidity risks management, are defined the objectives to be achieved with hedging operations on a consolidated basis, guaranteed the individual effectiveness of each transaction, subject to the regulations of each jurisdiction Risk measuring systems and communication and information processes The market risk measuring process makes use of corporate systems and of the Riskwatch application, developed by the Canadian company Algorithmics, The infrastructure of information technology associated with this process is installed in environments located in Brasília (DF) and in Rio de Janeiro (RJ). The main objectives of the Riskwatch application are to: 53

55 I. consolidate management information of the Bank, ascertaining and providing information for market and liquidity risk management and for assets and liabilities management; and II. provide market and liquidity risk measurements (products/cash flows by currency and index), as well as assets and liabilities management. Riskwatch functions that merit special emphasis are: I. calculate market risk indicators, such as Value-at-Risk (parametric and nonparametric), duration, yield, and; II. elaborate cash flow reports, either consolidated or by product, marked to market or nominal; III. determine the portfolio sensitivity to the fluctuations in national and international interest rates; IV. calculate the theoretical result of portfolios after the application of historical and stress scenarios; and V. Elaborate reports on the mismatching of maturities, rates, indexes and currencies. In the Bank, proprietary positions are segregated in trading portfolio and no trading portfolio. Through a resolution issued by the CSRG, a policy is stipulated for classification of transactions in the trading portfolio, This document defines that in the sphere of Banco do Brasil, its subsidiaries and controlled companies, operations with own positions carried out with the intention of trading or to hedge the trading portfolio, for which there is the intention of trading them prior to their contractual period, observing normal market conditions, and in cases where they are not nonnegotiable, are classified in the trading portfolio. Transactions with proprietary positions not classified in the trading portfolio are considered components of the non-trading portfolio, the proprietary positions held by companies that are not part of the Bank are not subject to classification in the trading portfolio. For the market risk management process, the Bank makes use of a structure of management groups and books, both for the domestic area and for the international area, with specific objectives and limits of exposure to risks. As regards the limits of exposure to market risks, the CSRG establishes the following classification criteria: Global limits: applied to the trading and banking book portfolios, to the set of transactions subject to capital requirements and to the interest rate risk in the banking book portfolio (RBan) and approved by CSRG, The main metrics used for management are Value-at- Risk, stress and financial volume. Specific limits: applied to the management groups and books of the trading and banking book portfolios or to both portfolios, to the market risk factors of transactions subject to capital requirements and to the market risk factors sensitive to the interest rate risk in the 54

56 banking book portfolio (risk factors of RBan) and approved by the CRML, The main metrics used for management are Value-at-Risk and stress. Operational limits: applied to transactions that make up the management groups and books, enabling the disclosure of the effective risk level of assumed exposures and aiming to ensure compliance with the strategies and the global and specific limits established, They are defined and approved by DIRIS presenting as main metrics the Value-at-Risk and operating bands of exposure to market risks. DIRIS reports daily to the managers of the groups and books of the trading and banking book portfolios, on the consumption of the specific and operational limits. It reports monthly to the strategic committees on the consumption of overall limits, through the market risk management report. In case limits exceeded, DIRIS, responsible for controlling and monitoring the portfolio, issues a document called the "Limit Exceeding Form". The managers of groups and books should submit their reasons for exceeding limits and specify the deadline for regularization. In turn, the hierarchical level with the authority to manage the case should issue an opinion on the manager's pronouncement. The team responsible for monitoring the limit is responsible for keeping track of the categorization actions. The communication of the Bank risks to Senior Management occurs at the monthly ordinary meetings of the strategic risk superior committees and executive committees Market Risk Management Structure The CMN Resolution 3.464/07 states the implementation of the market risk management structure, compatible with the nature of operations, the complexity of products and the dimension of the institution's market risk exposure. Risk Management Unit (Diris), which reports to the Office of the Vice President for Internal Controls and Risk Management (Vicri), is responsible for managing market risks. The governance model adopted by BB is organized in risk superior committee and executive committees structure, with participation of several areas of the institution. All decisions related to risk management are conjointly made and in accordance with the guidelines and internal rules. The figure below shows the structure of BB's market risk management: 55

57 Figure 8 - Market risk management structure The main forums involved in market risk management are: Board of Directors (CA) The Board of Directors (CA) Banco do Brasil S.A. defines general business of the Bank and its subsidiaries. The Board has, in the manner provided by law and the Statute, strategic, guidance, elective and monitoring assignments, not covering operating and executive functions. The composition and management term of the Council is defined by the Bank's bylaws. The Board of Directors shall decide on: Specific policies for market risk management; Policy of the use of financial derivative instruments; and Appetite and risk tolerance. Global Risk Superior Committee (CSRG): Purposes: to set market risk management strategy; to determine global limits to market risk exposure; to approve the risk factors that will make up the documents and reports to be submitted to regulatory agencies and other institutions. 56

58 Market and Liquidity Risk Executive Committee (CRML): To approve: Models, methodologies, criteria and parameters for market, liquidity and actuarial risks; specific limits to market and actuarial risk exposures; the contingency plans regarding market, liquidity and actuarial risk management; to assess the internal validations results and specify, whenever necessary, corrective measures for models of market, liquidity risk and actuarial risk management. To analyse and propose to CSRG: the global limits to Market risk exposures; the market risk management strategy; to monitor the recommendations and guidelines resolved by Committee. Asset-Liability and Liquidity Management Superior Committee (CSGAP) Purposes: To set assets and liabilities management strategy; to set guidelines for treasury operations, subject to the overall limits set by the Global Risk Superior Committee; to monitor the recommendations and guidelines resolved by Committee Market Risk Management Process Banco do Brasil uses statistical and simulation methods to analyze the market risk of its exposures. Among the metrics used in the application of these methods, we highlight the following: sensitivities; Value at Risk (VaR); and, Stress. Sensitivity metrics simulate the effects in the value of exposures resulting from variations in the level of market risk factors. VaR is a metric used to estimate the potential loss under routine market conditions, dimensioned daily in monetary values, under a set confidence interval and time frame. The risk factors used in VaR metrics to measure the market risk of exposures are classified into the following categories: interest rates; exchange rates; share prices; and, Commodity prices. The VaR metrics performance is monthly evaluated by a backtesting process. 57

59 Finally, BB uses stress metrics resulting from simulations on the behavior of its exposures subject to market risks under extreme conditions, such as financial crises and economic shocks. The objective of stress tests is to calculate the impact of events which are plausible, but very unlikely to occur, on regulatory requirements. Stress tests include exposure simulations, retrospective--based on historical series of shocks to market risk factors--and prospective--based on projections of economic and financial scenarios. For more information on the sensitivities, VaR, and stress metrics, visit our website at bb.com.br/relacoescominvestidores, at the Análise do Desempenho (Performance Analysis) link, chapter 8: Gestão dos Riscos Risco de Mercado (Risk Management - Market Risk). The models used to measure market risk and backtesting models are subject to validation process by Dicoi, segregated of areas responsible for the development and for the use of the models. In turn, the independent validation process of models is subjected to independent evaluation, conducted by Internal Auditing. Therefore, it is seen that Banco do Brasil uses three layers of control over its market risk measurement models, which are the following: 1st Layer: development and use of models; 2nd Layer: validation of models; and, 3rd Layer: evaluation of model validation. The process of market risk management involves continuous flow of information, according phases in chapter process risk management. The next figure illustrates the process of market risk management. The processes and procedures of the market risk management structure are validated and performed by two internal units at different points in time, a fact that ensures the adequate separation of duties and the independence of work. The Internal Control Board (DICOI) is responsible for validating the financial conglomerate s risk determination and measurement models and the bank s internal control system. Internal Audit (AUDIT) periodically evaluates credit risk management processes to verify whether they are consistent with the strategic guidelines, market policy, and regulatory and internal rules. 58

60 The next figure illustrates the process of market risk management: Negotiable Portfolios Figure 9 - Management Process The Bank s market risk management processes own positions are divided into Negotiable Portfolios and Non-negotiable Portfolios. Through a resolution issued by the Global Risk Superior Committee (CSRG), a policy for classification of operations in the negotiable portfolio is stipulated. This document defines that, for the Financial Conglomerate, Negotiable Portfolios cover all operations in own positions carried out with the intent to negotiate, or intended to hedge the negotiable portfolio for which there is intended for negotiation before their contractual deadline, given normal market conditions, and which are not non-negotiable. 59

61 For measuring the VaR of the Negotiable Portfolio, Banco do Brasil adopts the Historical Simulation technique, and the following parameters: a) Total VaR: (VaR + Stressed VaR) x Multiplier, where: a.1) VaR: the potential expected loss considering a series of 252 daily shocks (business days), a confidence level of 99% and a holding period of 10 business days (Central Bank of Brazil, Circular 3,568); a.2) Stressed VaR: the potential expected loss considering a series of daily shocks under stress scenarios within 12 months periods starting at January 2nd, 2004, a confidence level of 99% and a holding period of 10 business days (Central Bank of Brazil, Circular 3,568); and a.3) Multiplier: M, as defined by Central Bank of Brazil, Circular 3,568. The following table show the total value of the Negotiable Portfolio by relevant market risk factor, divided into positions purchased and positions sold. Table 38 - Negotiable Portfolio by relevant market risk factor, divided into positions purchased and positions sold. R$ Thousand Risk Factor 4Q14 3Q14 2Q14 1Q14 4Q13 Prefixed purchased 6,178,207 6,280,065 6,636,749 6,388,385 13,371,180 sold 4,481,286 4,409,145 5,658,426 5,177,751 10,646,356 CDI/TMS/FACP purchased 1,117,235 1,114,054 1,745,948 2,154,030 2,769,935 sold Price index purchased 33,489 31,184 30,046 76,843 61,147 sold Foreign currency /gold purchased 2,322,212 2,442,896 1,885,589 2,027,831 1,237,328 sold 117, , , , ,774 Shares purchased sold Note: Patagônia Bank included Non-negotiable Portfolios The Financial Conglomerate s own operations positions not classified under the Negotiable Portfolio are considered components of the Non-negotiable Portfolio. Note too that the own positions held by the companies that are not a part of the Financial Conglomerate cannot be classified under the Negotiable Portfolio. In accordance with best market practices and the requirements of regulators, Bank sets policies for managing market risk, including interest rate risk transactions classified in the non-trading portfolio. These policies are in accordance with the strategic guidelines of the institution and the general objectives of the management process and predict: 60

62 control of exposures by setting limits; portfolio management considering the best risk-return relationship and the internal and external scenarios; performing operations to reduce the risks arising from changes in market value or cash flows of the assets and liabilities; Management of foreign exchange exposure to minimize the effects on the outcome of the institution; Assessment of impacts on exposures during the creation or modification of products and services; and Performing monthly stress testing of interest rate exposures. For measuring the VaR of the Non-negotiable Portfolio, Banco do Brasil adopts the Historical Simulation technique, and the following parameters: 99% one-tailed confidence interval; 1,260 retrospective scenarios of daily shock factors; and, Holding period of 21 business days. Among other aspects, it s emphasized that the Historical Simulation VaR technique: includes all operations which are sensitive to variations in interest rates, and uses widely accepted risk-measurement techniques and financial concepts; considers data on fees, deadlines, prices, optionality, and other suitably specified information; requires that suitable premises be defined to transform positions into cash flow; measures sensitivity to changes in the temporal structure of interest rates, between the different rate frameworks and in the premises; is integrated into daily risk management practices; allows the simulation of extreme market conditions (stress tests); and, Allows an estimation of the Referential Equity (PR) that is compatible with the risks, as determined in Article 3 of CMN Resolution 3.490/07. Banco do Brasil adopts statistical and econometric methods, as referenced in literature, to analyze temporal series, more specifically, methods known as ARIMA (Autoregressive, Integrated, and Moving Average) for treatment of products with no set maturity. In line with the Historical Simulation methodology adopted by Banco do Brasil to calculate the Value-at-Risk (VaR) metrics, the models for products with no set maturity assume the hypothesis that the retrospective behavior of the variations observed in the balances is relevant to forecasting the future behavior of cash flow from redemptions (random variable of interest) of the balances of funding products referenced. Therefore, such methods assume the possibility of future balance (financial amount of partial redemptions) fluctuations with a scope similar to that observed in the historical series. The criteria for identifying operations that may be classified in Non-negotiable Portfolio follow the definitions and objectives defined in the resolution issued by the Global Risk Superior Committee. It s also worth noting that the definitions, criteria, and procedures established must be reviewed annually. 61

63 The Negotiable and Non-negotiable Portfolios are divided into Groups and Books, always observing the internal norms (technical notes and resolutions) approved by the Liquidity and Market Risks Executive Committee (CRML) and by the Global Risk Superior Committee (CSRG), which establish the objectives, makeup, financial limits, and market and liquidity risk limits for each Group or Book. The main types of limits used for market risk management are: Value-at-Risk VaR; and, Stress. In order to provide suitable conditions for assessing the capacity for loss absorption and identifying future risk reduction measures, global limits are defined as a percentage of Referential Equity (PR). The VaR and Stressed VaR metrics are used to demonstrate the level of market risk generated by exposures, and the respective effect in terms of capital required to cover said risk, for the VaR limits of the Negotiable Portfolio. The models of products that have no defined maturity assume the hypothesis that the retrospective behavior of variations in the balances constitutes relevant information for predicting the future behavior of the cash flow redemptions (random variable of interest) balances of the funding products under reference. Therefore, such methods assume as feasible the possibility of future balance (financial amount of partial redemptions) fluctuations with a scope similar to that observed in the historical series. The table below shows the impact on income or in assessing the value of the institution due to shocks in interest rates segmented by foreign currencies. Table 39 - Impact on income or in assessing the value of the institution due to shocks in interest rates segmented by foreign currencies R$ Thousand Hypothetical result Risk Factor-Interest Rate 4Q14 3Q14 2Q14 1Q14 4Q13 Prefixed 4,879,369 4,742,499 4,766,177 3,861,375 4,272,092 US$ Dollar 1,542,784 1,440,947 1,488,860 1,403,451 1,092,351 Euro 163, , , , ,212 Sw iss Franc 20,897 22,915 27,757 40,359 49,054 Yen 50,458 41,372 49,122 43,979 46,344 Pound Sterling 86,469 85,852 82,969 82,603 62,816 TR 2,497,374 2,380,884 1,891,203 2,280,397 2,492,555 TJLP 31,123 27,510 28,761 30,396 25,841 TBF 1,348 1, IPCA 34,185 21,693 32,979 62,570 73,165 IGP-M 75,909 79,534 74,494 76,124 75,833 INPC 119, , , , ,799 Others 256, , , , , Liquidity Risk Management Structure CMN Resolution 4.090/12 addresses the implementation of liquidity risk management structure, observing the operations nature, the complexity of products and the Institution s dimension of liquidity risk exposure. 62

64 The Diretoria de Gestão de Riscos (Diris), subordinated to Vice Presidency of Internal Controls and Risk Management, is the unit responsible for liquidity risk management of Banco do Brasil SA. The governance model adopted by BB is organized in risk superior committee and executive committees structure, with participation of several areas of the institution. All decisions related to risk management are conjointly made and in accordance with the guidelines and internal rules. Liquidity risk management held by the Bank in Diris applies to the following managerial visions: Banco do Brasil s National Currency Liquidity; Banco do Brasil s Foreign Currency Liquidity; and Liquidity of each Liquidity Center and Banco do Brasil s abroad. The figures below shows Banco do Brasil S.A. liquidity risk management structure: Figure 10 - Liquidity Risk Management The main forums involved in the management of liquidity risk with their respective purposes are described below: 63

65 Board of Directors (CA) Banco do Brasil S.A. Board of Directors defines general business of the Bank and its subsidiaries. The Board has, in the manner provided by law and the Statute, strategic, guidance, elective and monitoring assignments, not covering operating and executive functions. The composition and management term of the Council is defined by the Bank's bylaws. The Board of Directors shall decide on: Specific policies for the management of liquidity risk; and Apetites and risk tolerance. Global Risk Superior Committee (CSRG): Purposes: to set liquidity risk management strategy; to determine global limits to liquidity risk exposure; to decide on minimum reserves of liquidity and liquidity contingency plans; to approve the risk factors that will make up the documents and reports to be submitted to regulatory agencies and other institutions; Market and Liquidity Risk Executive Committee (CRML): To approve: models, methodologies, criteria and parameters for liquidity risks; the contingency plans regarding liquidity risk management; to assess the internal validations results and specify, whenever necessary, corrective measures for models of liquidity risk risk management; To analyse and propose to CSRG: the minimum reserve and the global limits to liquidity risks; the contingency plans for liquidity; the liquidity risk management strategy; to monitor the recommendations and guidelines resolved by Committee. Asset-Liability and Liquidity Management Superior Committee (CSGAP) Purposes: To set liquidity management strategy; to set guidelines for treasury operations, subject to the overall limits set by the Global Risk Superior Committee; to set guidelines for liquidity management of the Conglomerate; to monitor the recommendations and guidelines resolved by Committee Liquidity Risk Management Process Banco do Brasil maintains liquidity levels suitable to the Institution s commitments in Brazil and abroad, as a the result of its broad and diversified base of depositors, the quality of its assets, the capillarity of its network of external offices and of its access to 64

66 international capital markets. The strict liquidity risk control is in line with the Liquidity and Market Risks Policy established for the Conglomerate, meeting the requirements of national banking oversight, as well as of the other countries in which the Bank operates. The process of managing liquidity risk involves continuous flow of information, following the steps listed in the section of the risk management process. Banco do Brasil s liquidity risk management segregates the liquidity in Reais from the liquidity in Foreign Currencies. For this, the following instruments are used: Liquidity Forecasts; Stress test; Liquidity Risk Limits; and, Liquidity Risk Limits. The liquidity risk management instruments are regularly monitored and reported to the institutions Strategic Committees. The Liquidity Forecasts allow a prospective assessment of the effect of the mismatch between funding s and investments, in order to identify situations that could compromise the liquidity of the Institution, taking into account both budgetary planning and market conditions. Periodically, Short-term Liquidity Forecasts are assessed under alternative and stress scenarios. If the result of any of these liquidity projection scenarios remain below the adopted liquidity level limit, then the previously established Contingency Measures Potential is put into effect, in order to recover the Institutions liquidity. Furthermore, Banco do Brasil uses the following metrics: Liquidity Reserve (RL); Liquidity Cushion; and Free Resources Statement (DRL). Liquidity Reserve is the metric used in short-term liquidity risk management. It is the minimum level of high liquidity assets the Bank must maintain, compatible with the risk exposure arising from the nature of its operations and market conditions. The Liquidity Reserves methodology is used as a parameter to identify a liquidity contingency and to activate the Liquidity Contingency Plan, being monitored daily. The Liquidity Cushion limit aims to monitor the daily liquidity under stressed conditions, while the Liquidity Reserve limit monitors the going - concern daily liquidity and the liquidity forecast. The Availability of Free Resources (DRL) indicator, used in planning and in the execution of its annual budget, is intended to ensure a balance between funding and resources invested, with a focus on Commercial Divisions and provide liquidity financing. 65

67 The DRL limit used to guide the execution and planning of the budget, according to the funding and investment goals, is defined annually by the Global Risk Superior Committee (CSRG), and its monitoring occurs on a monthly basis. The Liquidity Contingency Plan, on its turn, establishes procedures and responsibilities to be adopted on liquidity stress situations. On this case, one or more measures may be adopted so that the institution can assure its payment capacity. The measurement of the potential measures is made monthly. The processes and procedures of the liquidity risk management structure are validated and performed by two internal units at different points in time, a fact that ensures the adequate separation of duties and the independence of work. The Internal Control Board (DICOI) is responsible for validating the financial conglomerate s risk determination and measurement models and the bank s internal control system. Internal Audit (AUDIT) periodically evaluates credit risk management processes to verify whether they are consistent with the strategic guidelines, liquidity policy, and regulatory and internal rules. 5.3 Operational Risk Management Objectives The operational risk management at BB aims to identify, assess, mitigate, control and monitor the exposure to operational risks inherent to the Bank s processes, business, products and services. The functions and activities related to the management of that risk was centralized in Operational Risk Unit (URO), leaving the Risk Management Unit (Diris) the calculation of the values of capital allocation. The responsible of Banco do Brasil for operational risk management in the Central Bank of Brazil is the Vice President of Internal Controls and Risk Management. The Internal Controls Unit (Dicoi) is responsible for the 2nd layer of control that includes, among other activities, control and compliance assessment and risk management models validation. The Board of Directors remains responsible for the disclosed information. Internal Audit is responsible for verifying operational risk management and its structure. In order to fulfill strategies and policies set up for and meeting the regulatory requirements, activities relating to phases of management, are summarized in the following table: 66

68 Table 40 - Phases of the operational risk management process Management Phase Summary of Activities Consists of identify and classify the operational risk events w hich ones the Bank is exposed, Identification indicating incidence areas, causes an potentials finance impacts associated to organization s processes, products and services. It is the quantification of the operational risk exposure w ith the objective of to assess the impact in the Assessment Bank business. Consist; also, of the qualitative assess of the identified risks, analyzing their probability to happen and their impact, determining the risk tolerance level. Consists of register the behavior of operational risks, limits, indicators and operational loss events, as Control w ell as to implement mechanisms, to ensure that the limits and operational risk indicators remain w ithin desired levels. Consists of create and implement mechanisms to modify the risk, w ith the objective to reduce the Mitigation operational losses by removing the cause of the risk, changing the probability of occurrence or changing the risk events consequences. The objective is identifying operational risk management process deficiencies so that the w eaknesses Monitoring detected are reported to the Board. It is the feedback phase of the operational risk management process, w hich it is possible to detect w eaknesses in the previous phases Operational Risk Policy The Operational Risk Policy reviewed and approved annually by the Board of Directors (CA) contains guidance for the Bank s units, intended to ensure the effectiveness of the operational risk management model and it is expected that the Subsidiaries, Affiliates and investments Companies define their directions based on these guidelines, taking into account the specific needs, legal and regulatory issues to which they are subject. In adherence the requirements of CMN Resolution 3.380/06, politics permeates the activities regarding to operational risk management. The Bank follows operational risk management in order to identify, assess, monitor, control and mitigate operational risks associated with each individual institution's Financial Conglomerate, even as identify and monitor the risks associated with other group companies of the Economic Financial Consolidated. The Bank also has other policies that make up the list of policies associated with the management of operational risk, such as the Prevention and Combating of Money Laundering and Terrorism Financing; Business Continuity Management; Relationships with Suppliers; Legal Risk; and Information Security Management Processes and Strategies Banco do Brasil performs the operational risk management conservatively, segregating the functions of risk management, in compliance to the standards and guidelines for supervision and bank regulation. The current Corporate Strategy and Master Plan of the Bank, approved by the Board of Directors (CA), has defined indicators and targets linked to corporate objectives, in order to reduce operating losses. Strategic management takes place at the Superior Global Risk Committee (CSRG), composed by the President and Vice Presidents, whose purpose is to propose policies and decide about the risk guidelines. 67

69 Banco do Brasil defines Global Operational Loss Limit, which is based on the maximum amount of losses for the period of one year. That limit is in line with the strategy of reducing operating losses and with the values established in the institution's budget. The Bank also uses Specific Limits Operating Loss with the definition of the managers of products, services and channels in order to involve several areas in the operational risk mitigation. In order to speed up the management process, issues related to operational risk are deliberate in the Executive Committee of Internal Controls and Operational Risk (CRO). It also is among the assignments of the CRO, the proposition/adoption of measures to keep the risk parameters (exposure, limits etc.) within the pre-defined tolerance approved by CSRG. The Bank has also a Forum called Fórum Técnico Preventivo de Risco Legal - subordinate to CRO - with the aim of contributing to the reduction of operational losses by identifying, evaluating and proposing mitigating actions, within the legal service. Mainly aims to identify the main causes of litigation, case law and decisions that may impact the Bank and evaluate action plans for treatment of risks and control their effectiveness in mitigation Communication and Notification Processes Monthly, are presented in CSRG and CRO the position of global and specific limits. The behavior of operational losses, mitigation actions, as well as the main operational risks are detailed. Monthly is communicated to managers of processes, products and services, the operational losses position, the position of legal issues and the specific limits position of their respective areas. These reports are designed to allow the identification of operational risks and their causes for generating proposals for mitigating actions. Regarding the culture of operational risk management is continuously reviewed internal certification of internal controls, compliance and operational risk, as well as courses related to operational risk management. These trainings are available via Corporate University (UniBB) for the whole staff of the Institution Measurement Systems Bank uses a model based on the Alternative Standardized Approach (ASA) to calculate capital for operational risk. The capital portion value for operational risk corresponds to the Referential Equity (PR) consumption with capital for operational risk. This metric monitoring is defined by strategic committees - CSRG and CRO. 68

70 As the management of the provision for contingent demands, the Bank uses methodology based on statistical techniques, which ensures greater stability and accuracy in estimating disbursement to cover losses with lawsuits Operational Risk Mitigation The units that manage processes, products, and services, based on the operational risks highlighted in the risk identification step and the decisions issued by the CSRG or CRO, must develop and implement action plans and instruments to mitigate that risk. The action plans are registered in a specific tool that allows the monitoring and the reporting of the measures. The Bank also acts in the analysis of security incidents - physical and virtual channels - with continuous monitoring, seeking to inhibit attacks and retrieve values. Actions are developed to mitigate operational losses with electronic fraud and measures are developed to suppress criminal activities related to external theft. Aiming to prevent, correct or inhibit weaknesses or deficiencies, which may generate risks, the Bank may issue Recommendation Risk Technique (RTR), so that the manager presents an action plan, aimed at mitigating operational risk, and strengthen the culture of risk management Control of Operational Risk The Bank monitors the behavior of the risks, limits, indicators and operational loss events in order to ensure that the values remain within the desired levels. The following table presents the monitoring of the operating losses of the Bank held by categories of risk events, in percentage terms. It is noteworthy that the Bank considers the constitutions / reversals of provisions - especially for contingent liabilities - total calculated in operating losses for categories Labor Issues, Business Failures and Faults in Processes. Table 41 - Operational losses monitoring by loss events category. 4Q14 3Q14 2Q14 1Q14* 4Q13 Client, Products and Business Practices 68,3% 52,3% 55,9% 56,1% 4,0% External Fraud 13,1% 11,8% 17,2% 11,7% 20,2% Employment Practices and Workplace Safety 8,8% 29,9% 24,0% 29,8% 61,9% Execution, Delivery and Process Management 8,2% 5,1% 1,4% 1,4% 11,7% Internal Fraud 0,8% 0,6% 1,2% 0,5% 1,3% Technology and Infrastructure Failure 0,5% 0,0% 0,0% 0,1% 0,0% Disasters and Public Safety 0,4% 0,2% 0,2% 0,4% 1,0% Disruption of Activities 0,0% 0,0% 0,0% 0,0% 0,0% Total 100,0% 100,0% 100,0% 100,0% 100,0% *1st quarter/2014: not considered the extraordinary effects in provisions. 69

71 5.3.8 Banco do Brasil Related Entities The Bank uses procedures to evaluate the operational risk management of the entities, issuing guidelines for adequacy of the adopted business model. Aspects, such as structure, policies, instruments and operational risk management process are evaluated as well as the assessment of impact and probability of losses. Additionally, the Bank measures the regulatory capital requirement for operational risk of financial companies, ensuring the adequacy of capital to cover this risk under the Financial Conglomerate. 5.4 Other Risks Risk strategy, reputation, environmental and actuarial On the adequacy of the Bank to the requirements of CMN Resolution 3988/11 and Central Bank Circular 3547/11 process, work was developed in order to structure the management of risks strategy, reputational and environmental. The Bank instituted the concepts, and management activities for these risks, assigning responsibility for management, as follows: a) Board Risk Management (DIRIS) - develop evaluation models to assist the development of methods for identification, exposure control and verify the adequacy of the management process, the latter in conjunction with the Directorate of Strategy and Organization (DIREO) to the risks of strategy and reputation, and in conjunction with the Unit for Sustainable Development (UDS) for the environmental risk; b) Strategy and Organization (DIREO) - to develop models identifying risk, evaluating events, assist in mitigating and verify the adequacy of the risk management strategy and reputation process, the latter in conjunction with DIRIS; c) Unit of sustainable development (UDS) - develop models for identifying, evaluating events, assist in risk mitigation and verify the adequacy of the management process, the latter in conjunction with DIRIS; d) Other strategic units - identify events, mitigate and verify the adequacy of identification and mitigation of risks. In addition, the Internal Controls and Operational Risk Executive Committee, CSRG and the CA, were defined as the governance structure to resolve issues related to these risks. Currently, the Bank has established procedures related to reputational risk, among which we can mention those listed below: a) Crisis Management - the process of the Board of Marketing and Communication (DIMAC) which consists in treating disseminated in the news media that can affect the image of the Bank; b) Customer Satisfaction Survey - process of the Board of Strategy and Organization (DIREO) which consists of measuring customer satisfaction regarding products and services, as well as meeting the service channels; 70

72 c) CARPS - control and monitoring of risks of products, services and self-service channels - system under the management of DIREO, keeps track of the creation, modification and deletion of the Bank's products, features and questions recorded by several product managers answers channels and risks, identifying potential risks, including those related to the image of the Bank. With regard to the risk strategy during the process of formulation of corporate strategy, the Bank has a policy analysis of macroeconomic scenarios and the financial industry in order to better assess the opportunities and threats in the market and mitigate the risks of decisions strategic mistaken. The institution has processes to monitor its performance against strategic objectives and also the negotiation and administrative goals. With respect to environmental risk, the Bank has processes that contribute to the implementation of social and environmental actions. Examples are, Dow Jones Sustainability Index, Agenda 21, the Stakeholders Panel, the Forum for Sustainability Executives, the Equator Principles and IFC Performance Standards, which corroborate with strategic planning and continuous improvement of sustainability issues and the environmental risk. In addition, the Bank has structured an area with activities related to environmental risk in DICRE, whose duties include the development of methodology for environmental risk analysis for credit, monitoring standards and legal requirements and preparation of sectoral guidelines. Additionally, the creation of the Division of Environmental Management in Agribusiness, the Board of Agribusiness (DIRAG) assists in managing processes related to environmental responsibility, since it aims, advise on agribusiness market linked to environmental issues, propose adjustments in products and services to include attributes related to environmental responsibility, among others. The Bank also has a Plan Supply Division, Eco-efficiency and Supplier Development, in the Board of Operations and Business Support (DINOP), which aims to monitor and develop Plan Supplier of Goods, Services and Materials Engineering, coordinate and monitor the implementation of projects under implementation in fixed investment Bank, to develop strategies for the development of suppliers, develop strategies for implementing programs and actions related to eco-efficiency, among others. With regard to the actuarial risk, the Bank of Brazil, in the role of sponsor pension funds and health care, through the Employee Relations Board and sponsored entities (DIREF) develops activities that contribute to the control of any impacts related to this risk. Among the activities developed by DIREF, it is worth mentioning: a) manage solutions for governance of Sponsoring Entities; b) relate to entities sponsored by the Bank and employees; c) relate to the regulatory and supervisory bodies; d) supervise and inspect the pension funds and health sponsored by BB; 71

73 e) develop solutions to actuarial calculation; f) monitoring solutions, methodologies, criteria and standards for the management of actuarial calculation implemented; g) monitoring, under the actuarial technical aspect, the commitments of the Bank with health care, pension plans and other retirement obligations complementation of employees; h) an opinion on documents formulated by the Sponsoring Entities actuarial nature as to be signed by representatives of the Bank; i) provide advice to the Board of Deliberative sponsored entities in matters relating to actuarial calculation; j) manage the process of calculating gains and losses relating to pension plans and health sponsored by the Bank. Notwithstanding the existing processes, there are actions in progress in the institution in order to identify and implement necessary improvements to the managements of these risks. Moreover, the process of identifying relevant risk to the Bank of Brazil, considering those incurred in banking activities and also in other companies where the Bank holds interest, undergoes periodic review and may indicate new risks to be managed Shareholdings Banco do Brazil SA has wide range of businesses, products, services and customers. By organizational, strategic choice or by legal and regulatory requirements, the operation of its business and processes are distributed between multiple bank and its Related Entities (ELBB), located in the country and abroad, under various organizational and legal forms. In the regulatory field, the National Monetary Council (CMN), through Resolutions No. 3380, 3464, 3721 and 4090 established, among other things, that the structure of management of market risks and liquidity must identify, evaluate, control and monitor, as well as the management structure of credit risk and operational shall identify, evaluate, control, mitigate and monitor risks associated with the financial conglomerate. As well as identify and monitor market risks, liquidity, credit and operational risks associated with the other companies of the Consolidated Financial and Economic. Additionally, through Resolution No. 3988, the CMN established that the structure of capital management should encompass all institutions and financial conglomerate also consider the possible impacts in its capital coming from the risks associated with other companies of the economic-financial consolidated. As a leading institution of economic-financial consolidated, it is the Bank of Brazil responsibility for ensuring the effectiveness and integrity of this business model, establishing corporate governance mechanisms that promote the alignment of the Related Entities of the Bank of Brazil (ELBB). In February/2013, the Executive Board of Directors was approved the benchmark assignments for Organizational Units model. Among other things defines the 72

74 responsibilities of the units, with regard to the relationship with the Affiliated Entities to the Bank from the following roles: a) guidelines; b) monitoring and control; c) providing the Services; d) Governance. The area of risk management accounts for the roles of Guidance, Control and Monitoring and Service Provider Management and Risk Management Unit Entities of the role of governance. In June/13, the Executive Board of Directors was approved the Process Guidance on Risk Management of ELBB consisting of the risk assessment model of enterprises. Procedures for the identification and assessment were developed based on two dimensions: qualitative and quantitative. In qualitative terms, the form covers aspects related to risk management in the companies such as: a) risk appetite; b) existence of policies and strategies applied to risk management; c) organizational structure; d) processes, procedures and systems; e) concepts, criteria, models and methodologies, metrics, indicators, parameters and limits applied to risk management; f) reporting tools; g) existence of strategic committees for deliberations and monitoring risks; h) segregation between the areas responsible for the business management and risk management. The quantitative assessment uses methods of measuring the risks incurred. After the evaluations of the companies, the area of risk management presents the degree of risk exposure of companies, the weaknesses identified, the guidance for risk management, among other aspects process. The process is complemented with guidance along the Bank's representatives to ELBB's on the adoption of measures for reducing risks, which is held by the respective areas of governance. Below is the equity holdings not classified in the trading portfolio, segregated by business segments as requested in Article 14 of Circular 3678/13: 73

75 Table 42 - Shareholdings Banking Book R$ mil Banking Segment Activity % of Total Shares Book Value of Equity Interests Value of Capital (1) (2) Requirement Banco Votorantim S.A. (3) Bank 50.00% 3,714,070 - Investment Segment Kepler Weber S.A. (3) Industry 17.56% 86,639 9,230 Companhia Brasileira de Securitização - Cibrasec (5) (6) Credits Acquisition 12.12% 9,102 2,191 Neoenergia S.A. (3) Energy 11.99% 1,144, ,896 Segment o f Insurance. P rivate P ensio n F und and C apitalizatio n BB Seguridade Participações S.A. (4) Holding 66.25% 3,662, ,004 Seguradora Brasileira de Crédito à Exportação - SBCE (5) Insurance Company 12.09% 2, Segment of P ayment M ethods BB Administradora de Cartões de Crédito S.A. (4) Service Rendering % 19,030 4,583 BB Elo Cartões Participações S.A. (4) Holding % 586, ,444 Cielo S.A. (3) Service Rendering 28.75% 1,274, ,015 Tecnologia Bancária S.A. - Tecban (5) Service Rendering 13.53% 47,668 5,243 Other Segments Ativos S.A. Securitizadora de Créditos Financeiros (4) Credits Acquisition % 972, ,315 Ativos S.A. Gestão de Cobrança e Recuperação de Crédito (4) Credits Acquisition % 5 1 BB Administradora de Consórcios S.A. (4) Consortium % 164,162 39,538 BB Tur Viagens e Turismo Ltda. (4) (6) Tourism % 14,535 1,599 BB Tecnologia e Serviços S.A. (4) IT 99.97% 207,606 22,837 Cadam S.A. (5) mining 21.64% 25,201 2,328 Cia Hidromineral Piratuba (5) Tourism 15.46% 2, Estruturadora Brasileira de Projetos - EBP (5) Project Development 11.11% 8, Provisão para Investimentos (7) (6,770) (1) Value for the minimum capital requirement for equity interests registered in the fixed assets and included in the calculation of risk-weighted assets regarding exposure to credit risk (RWA CPAD ) under Central Bank Circular No. 3,644/2013. (2) According to Resolution CMN No. 4,192/2013, the value of the investment in Banco Votorantim S.A. is deducted from the Reference Equity, with no capital requirement. (3) Joint venture, evaluated by the equity method. (4) Subsidiaries, evaluated by the equity method. (5) Associated companies, evaluated by the equity method. (6) The Financial Statements, evaluated by the equity method, refers to November/2014. (7) Unrealized, but acknowledged losses, referring to companies Cadam S.A. and Kepler Weber S.A., whose value is computed in the calculation of Common Equity. 4T/14 74

76 6. Capital 6.1 Capital Management Banco do Brasil defined as members of its capital management structure the Accounting Unit and Risk Management, Controller and Finance and boards. In January 2012, the Board of Directors of BB indicated the Comptroller director in charge of the Capital Management with the regulator (BACEN). The areas defined in the capital management structure respond jointly or individually by: identification of relevant risks; assessment of the capital required to support them; projection of risk and capital indicators; calculation of the Referential Equity (PR); elaboration of the capital plan and contingency plan and; evaluating capital sources and its restoration. ICAAP, Stress Tests, and Managerial Report, and Capital Management Policy. In December 2014, the Board of Directors, with good governance practices, approved the establishment of a specific committee to capital management process named Capital Management Executive Committee having as main purposes: to approve models, methodologies, criteria and parameters for capital management; to define the scenarios to be used in the capital management process; to analyse and propose to CSRG the: capital management strategy; capital allocation regarding risks; adoption of the measures in the capital contingency plan; assess capital stress testing results; to monitor capital contingency plan and measures; to monitor Internal Capital Adequacy Assessment Process (ICAAP); to monitor the recommendations and guidelines resolved by Committee. For Capital Management, BB calculates the Core Capital Ratio (ICP), Tier 1 Capital Ratio, Capital Adequacy Ratio (IB). The Prudential Capital Adequacy Ratio (IBP) that represents the Bank's directive to keep the IB two points above the minimum regulatory in order to sustain the risk of interest rate transactions not included in the trading book (plot RBAN) and serve as a prudential margin to face the other risks not considered in Pilar I. The Resolution CMN 3.988/11 yet established the need for Internal Capital Adequacy Assessment Process (ICAAP), which the Risk Management Unit is responsible for. At BB, the Unit of Internal Controls, independent area of capital management structure, is responsible for the validation of the ICAAP. Already Internal Audit annually evaluates the process of capital management. BB constituted a technical forum for capital management, so-called Forum de Capital, which has members from the Units of capital management structure. The Forum meets 75

77 monthly, and has as main activities the preparation of the capital structure projections, the analysis of the main variations and trends of the Institution s IB, and the impacts of changes in the regulatory and business environment. Banco do Brasil also periodically prepares managerial reports on capital adequacy for intervening areas and strategic committees, such as Executive Committee of Risks (Operational, Market and Liquidity, and Credit), the Capital Management Executive Committee, the Global Risk Superior Committee, the Executive Board and the Board of Directors. 6.2 Referential Equity (RE) Details On , the Conselho Monetário Nacional (CMN) approved changes in the rules for defining and determining the RE of financial institutions by CMN Resolution No. 4,192/2013, included in the regulatory scope of Basel III. The new rules adopted address the following issues: a) new methodology for calculating regulatory capital, which continues to be divided into Tier I and II, the Tier I consists of the Core Capital (net of Regulatory Adjustments) and Additional Tier I Capital; b) new methodology for calculating the capital requirement maintenance, adopting minimum requirements for Referential Equity, Tier I and Core Capital, and the introduction of the Additional Core Capital. On August 28, 2014, the Hybrid Instrument, in the amount of R$ 8,100,000 thousand which composed the Additional Tier 1 Capital was authorized by Banco Central do Brasil to compose the Common Equity Tier 1 Capital of the Bank. According to Bacen Circular 3,726/2014, the calculation of the Regulatory Equity (RE) and the amount of Risk-Weighted Assets (RWA) should be elaborated based on Consolidated Financial Report until December, 31, 2017, and, from January 2015, the informations should be also elaborated based on the Prudential Conglomerate, according to CMN Resolution No. 4,192/

78 Table 43 - RE Historical Series Financial Conglomerate. 4Q14 4Q13 R$ thousands Regulatory Adjustments deducted from CET1: Financial Financial RE - Referential Equity 126,588, ,234,351 Tier I 89,538,218 85,500,897 Common Equity Tier 1 Capital 71,035,684 67,055,163 Shareholders' Equity 70,675,464 70,537,211 Instrument Qualifying as Common Equity Tier 1 Capital 8,100, Regulatory adjustments (7,739,780) (3,482,048) Additional Tier 1 Capital 18,502,534 18,445,734 Hybrid instruments authorized in accordance w ith CMN Resolution No. 4,192/ ,132,770 8,489,750 Hybrid instruments authorized in accordance w ith regulations preceding the CMN Resolution No. º 4,192/2013 (1) 2,369,764 9,955,984 Tier II 37,050,267 32,733,454 Subordinated Debt Qualifying as Capital 37,065,165 32,747,645 Subordinated Debt authorized in accordance w ith CMN Resolution No. 4,192/ Financial Bills 3,959, Subordinate Debt authorized in accordance w ith regulations preceding the CMN Resolution No. 4,192/ ,105,392 32,747,645 Funds obtained from the FCO (2) 20,467,309 18,529,802 Funds obtained abroad (3) 4,800,822 5,400,925 Funds obtained from the CD (3) 1,292,346 1,453,889 Funds raised in Financial Bills (3) 6,544,915 7,363,029 Deduction from Tier II (14,898) (14,191) Funding instruments issued by financial institution (14,898) (14,191) (1) The Instruments authorized by Bacen to compose the Referential Equity according to CMN Resolution No. 3,444/2007 and do not fulfill the requirements established by CMN Resolution No. 4,192/2013 are reduced by 10% per year from 2013 to This reduction is applied on the values that composed the RE on December 31, (2) According to CMN Resolution No. 4,192/2013, balances of the FCO are eligible to compose the RE. (3) It w as considered the balance of subordinated debt instruments that composed the RE in December 31, 2012, applying on it the decay of 20%, as determined by CMN Resolution No. 4,192/2013. The regulatory adjustments are deductions from the Core Capital of elements that can compromise its quality due to their low liquidity, difficulty to evaluate or reliance on future profits to be realized. The following items relating to regulatory adjustments started to be deducted from the Referential Equity from January 2014: a) Goodwill; b) Intangible assets constituded from October 1, 2013; c) actuarial assets related to defined benefit pension funds net of deferred tax liabilities; d) Non-controlling interest; e) investments, directly or indirectly, greater than 10% of the capital of unconsolidated entities similar to financial institutions, and insurance companies, reinsurance companies, capitalization companies and open pension entities (superior investments); f) Tax credits resulting from temporary differences that rely on the generation of future taxable profits or revenues for its realization; g) Tax credits resulting from tax loss of excess depreciation; h) Tax credits resulting from tax losses and negative basis of social contribution on net income. 77

79 According to CMN Resolution No. 4,192/2013, these deductions will be gradually implemented, 20% per year, from 2014 to 2018, with the exception of deferred assets and funding instruments issued by institutions authorized to operate by Banco Central do Brasil (Bacen) which are already being fully implemented since October Table 44 - Regulatory Adjustments R$ thousands 4Q14 4Q13 Funding instruments issued by financial institutions (1) (2) (3,714,071) (3,433,968) Actuarial assets related to defined benefit pension funds net of deferred tax liabilities (3) (4) (1,192,027) -- Intangible assets constituted after October 2013 (3) (1,066,295) -- Goodw ill (3) (5) (715,281) -- Significant investments and tax credits resulting from temporary differences that rely on the generation of future taxable profits or revenues for their realization (amount exceeding the 15% threshold) (3) (556,174) -- Tax credits resulting from tax losses and negative base for social contribution on net income (3) (255,318) -- Non-controlling interests (3) (171,050) -- Tax credits resulting from tax loss of excess depreciation (3) (37,922) -- Deferred assets (2) (31,642) (48,080) Total (7,739,780) (3,482,048) (1) Refers to the investment in Banco Votorantim. (2) Regulatory Adjustments that are being fully computed since October, 2013, in accordance w ith CMN Resolution No. 4,192/2013. (3) Regulatory Adjustments subject to phase-in, according to the CMN Resolution No. 4,192/2013. (4) See notes 27.e Benefits for Employee and 25.d - Taxes, of the financial statements of Banco do Brasil. (5) The base value for calculating the goodw ill is composed of: R$ 861,037 thousand in the investment line and R$ 2,715,371 thousand in the intangible assets line (Notes 14 - Investments and 16 - Intangible Assets, of the financial statements of Banco do Brasil). The value in Intangible assets refers to the goodw ill paid for the acquisition of Banco Nossa Caixa, merged in November/

80 Table 45 - RE Historical Series Financial Conglomerate R$ thousands 4Q14 3Q14 2Q14 1Q14 4Q13 RE - Referential Equity 126,588, ,713, ,042, ,293, ,234,351 Tier I 89,538,218 88,810,290 84,276,305 80,571,363 85,500,897 Common Equity Tier 1 Capital (CET1) 71,035,684 71,554,346 62,049,999 63,520,399 67,055,163 Shareholders' Equity 70,675,464 71,488,952 70,043,646 72,096,740 70,537,211 Instrument Qualifying as CET1 8,100,000 8,100, Regulatory adjustments (7,739,780) (8,034,606) (7,993,647) (8,576,341) (3,482,048) Funding instruments issued by financial institutions (3,714,071) (3,775,618) (3,706,985) (3,547,425) (3,433,968) Actuarial assets related to defined benefit pension funds net of deferred tax liabilities (1,192,027) (1,628,046) (1,578,241) (2,283,281) -- Intangible assets constituted after October 2013 (1,066,295) (758,059) (734,037) (687,425) -- Goodw ill (715,281) (757,830) (800,288) (843,911) -- Significant investments and tax credits resulting from temporary differences that rely on the generation of future taxable profits or revenues for their realization (amount exceeding the 15% threshold) (556,174) (640,823) (591,384) (634,568) -- Tax credits resulting from tax losses and negative base for social contribution on net income (255,318) (250,932) (257,610) (284,166) -- Non-controlling interests (171,050) (148,610) (120,245) (126,437) -- Tax credits resulting from tax loss of excess depreciation (37,922) (39,392) (41,736) (44,500) -- Deferred assets (31,642) (35,296) (39,170) (43,392) (48,080) Tax credits resulting from temporary differences that rely on the generation of future taxable profits or revenues for its realization (excess of 10%) (123,951) (81,236) -- Additional Tier 1 Capital (AT1) 18,502,534 17,255,944 22,226,306 17,050,964 18,445,734 Hybrid instruments authorized in accordance w ith CMN Resolution No. 4,192/ ,132,770 14,886,180 13,376,542 8,201,200 8,489,750 Hybrid instruments authorized in accordance w ith regulations preceding the CMN Resolution 2,369,764 2,369,764 8,849,764 8,849,764 9,955,984 No. º 4,192/2013 (1) Tier II 37,050,267 34,902,756 33,766,565 31,721,919 32,733,454 Subordinated Debt Qualifying as Capital 37,065,165 34,936,894 33,772,649 31,741,950 32,747,645 Subordinated Debt authorized in accordance w ith CMN Resolution No. 4,192/ Financial Bills 3,959,773 2,307,987 1,716, Subordinated Debt authorized in accordance w ith regulations preceding the CMN Resolution No. 4,192/ ,105,392 32,628,907 32,056,151 31,741,950 32,747,645 Funds obtained from the FCO (2) 20,467,309 19,990,824 19,614,708 19,103,867 18,529,802 Funds obtained abroad (3) 4,800,822 4,800,822 6,341,472 4,800,822 5,400,925 Funds obtained from the CD (3) 1,292,346 1,292, ,678 1,292,346 1,453,889 Funds raised in Financial Bills (3) 6,544,915 6,544,915 5,788,293 6,544,915 7,363,029 Deduction from Tier II (14,898) (34,138) (6,084) (20,031) (14,191) Funding instruments issued by financial institutions (14,898) (34,138) (6,084) (20,031) (14,191) (1) The Instruments authorized by Bacen to compose the Referential Equity according to CMN Resolution No. 3,444/2007 and do not fulfill the requirements established by CMN Resolution No. 4,192/2013 are reduced by 10% per year from 2013 to This reduction is applied on the values that composed the RE on December 31, (2) According to CMN Resolution No. 4,192/2013, balances of the FCO are eligible to compose the RE. (3) It w as considered the balance of subordinated debt instruments that composed the RE in December 31, 2012, applying on it the decay of 20%, as determined by CMN Resolution No. 4,192/2013. To learn more about the composition of Referential Equity consult the Attachment 1 - Composition of the Reference Equity". 6.4 Minimum Reference Equity Required (MRER) The Minimum Reference Equity Required (MRER) is the equity required (capital volume required) of institutions, financial conglomerates, and other institutions authorized to operate by Bacen, to face the risks to which they are exposed in light of the risks to which they are exposed due to the activities they are involved in, and it is definied by CMN Resolution 4.193/13. The MRER, which relaced the Required Referential Equity (PRE) from , corresponds to the application of the factor "F" to the amount of RWA, with: 11% of RWA, from to ; 9.875% from RWA to , 9.25% of RWA from to ; 8.625% of RWA from to ; and 8% of the RWA from In determining the amount of risk-weighted assets, we consider the sum of the following portions: 79

81 I - RWACPAD concerning credit risk exposures subject to the calculation of capital requirements under the standardized approach; II - RWAMPAD concerning market risk exposures subject to the calculation of capital requirements under the standardized approach, and, III - RWAOPAD on the calculation of the capital requirement for operational risk under the standardized approach. In took effect in Brazil the legislative set that implemented the recommendations of the Basel Committee on Banking Supervision regarding the capital structure of financial institutions, known as Basel III. The new rules adopted address the following issues: I - new methodology for calculating regulatory capital, which continues to be divided into Tier I and II, the Tier I consists of the Core Capital (net of Regulatory Adjustments) and Additional Tier I Capital; II - new methodology for calculating the capital requirement maintenance, adopting minimum requirements for Referential Equity, Tier I and Core Capital, and the introduction of the Additional Core Capital. The consolidation scope used as the basis for establishing the operating limits was also amended, considering the Consolidated Financial Report of until , and the Prudential Conglomerate, defined in CMN Resolution n.º 4.280/2013, from All quotes to the Required Referential Equity (RRE), prior to dates, refer to the Basel II methodology and were determined according to the criteria established by CMN Resolution 3.490/2007. The tables below show the PRE of the Financial Conglomerate and the Consolidated Economic and Financial, by type of risk. 80

82 Table 46 - Minimum Reference Equity Required of the Financial Conglomerate R$ thousand 4Q14 3Q14 2Q14 1Q14 4Q13 RWA CPAD 734,716, ,363, ,472, ,068, ,431,384 2% 392 7,283 1,908 2,250 7,528 20% 7,534,545 6,681,196 9,159,634 9,288,966 8,874,952 35% 8,444,573 7,667,104 6,943,504 5,997,569 5,056,319 50% 17,044,092 18,082,035 17,435,975 16,070,332 17,112,938 Credit Risk 75% 203,654, ,795, ,523, ,667, ,895,552 85% 152,691, ,237, ,804, ,006, ,841, % 314,009, ,533, ,274, ,982, ,037,068 Operational Risk Market Risk 150% ,166,606 53,815,658 50,023, % 26,638,381 26,832,880 23,268,750 23,820,150 24,117, % 3,518,881 3,483,891 21,721,836 20,910,092 22,549, % 602, , , , ,439 Credit Value Adjustment (CVA) 577, , , , ,602 RWA OPAD 39,712,004 39,712,004 36,578,814 36,578,814 36,951,723 Asset Management 1,115,551 1,115,551 1,130,176 1,130,176 1,126,657 Commercial 15,860,595 15,860,595 13,457,208 13,457,208 13,625,178 Retail Brokerage 44,602 44,602 44,065 44,065 42,045 Corporate Finance - 1,907,520-1,907, , , ,066 Trading and Sales 10,229,334 10,229,334 9,939,540 9,939,540 9,463,981 Payments and Settlements 4,557,642 4,557,642 4,291,040 4,291,040 4,291,234 Financial Agent Services 986, , , , ,705 Retail 8,825,002 8,825,002 7,589,455 7,589,455 7,820,989 RWA MPAD 11,545,497 11,317,920 12,534,491 11,727,133 15,239,976 Prefixed interest rate, in reais - RWA JUR [1] Foreign currency coupons - RWA JUR [2] Price index coupons - RWA JUR [3] Interest rate coupons - RWA JUR [4] Share price fluctuations - RWA ACS Commodity price fluctuations - RWA COM Exchange rate fluctuations - RWA CAM 286, , , , ,898 2,863,103 2,931,659 2,017,763 2,022,121 1,530,899 38,541 39,935 42,448 38,905 47, ,883 15,319 8,203 3,968 13,868 8,330,427 7,529,293 10,299,558 9,492,795 13,533,033 Risk Weighted Assets (RWA) (1) 785,973, ,393, ,585, ,374, ,623,083 Minimum Referential Equity Requirement (MRER) (2) 86,457,087 84,853,320 91,474,451 89,251,164 89,498,539 (1) According to CMN Resolution (2) In compliance with CMN Resolution No /2013, corresponds to the application of the factor "F" to the amount of RWA, with "F" equals to 11% of RWA, from to ; 9.875% from RWA to , 9.25% of RWA from to ; 8.625% of RWA from to , and 8% of the RWA from Capital Adequacy Ratio In compliance with the recommendations of the Basel Committee on Banking Supervision, BACEN established operational limits to be observed by financial institutions, among which the Total Capital Ratio (IB), the Core Capital Ratio (ICP) and the Tier 1 Capital Ratio stand out. The Capital Adequacy Ratio was determined according to the criteria established by CMN Resolutions n. º 4.192/2013 and n. º 4.193/2013, which refer to the calculation of the Referential Equity (RE) and Minimum Reference Equity Require (MRER) in relation to Risk Weighted Assets (RWA ), respectively. BACEN has determined that financial institutions must permanently maintain, a PR value higher than the PRMR value. Complementarily CMN Resolution 4.193/13 established minimum requirements for core capital (4.5% of RWA) and Tier I (5.5% of RWA and 6% until , from ), also demanding that institutions maintain sufficient PR to address the banking book interest rate risk (RBAN portion). The following tables show the evolution of the ratio (IB), Core Capital Index (PCI), Tier I Capital Ratio (ICN1), the RBAN portion and the margin of compatibility of PR. 81

83 Table 47 - The Total Capital Ratio and RE margin - Financial Conglomerate. 4Q14 3Q14 2Q14 1Q14 4Q13 Referential Equity (RE) (R$ thousand) (1) 126,588, ,713, ,042, ,293, ,234,351 Tier I (R$ thousand) 89,538,218 88,810,291 84,276,305 80,571,363 85,500,897 Core Capital (R$ thousand) 71,035,684 71,554,347 62,049,999 63,520,399 67,055,163 Minimum Referential Equity Requirements (MRER) (R$ thousand) (2) 86,457,087 84,853,320 91,474,451 89,251,164 89,498,539 Risk Weighted Assets (RWA) (R$ thousand) (3) 785,973, ,393, ,585, ,374, ,623,083 Capital Adequacy Ratio 16,11% 16,04% 14,19% 13,84% 14,53% Tier I Ratio 11,39% 11,51% 10,93% 9,69% 10,54% Core Capital Ratio 9,04% 9,28% 8,04% 7,64% 8,26% Interest rate risk of operations not classified under negotiable portfolio (R BAN ) (R$ thousand) 3,459,809 3,324,429 3,333,193 2,669,626 2,710,568 Compatibility Margin of RE (RE - MRER - RBAN) (R$ thousand) 36,671,589 35,535,297 23,235,225 20,372,491 26,025,244 (1) In compliance with CM N Resolution No 4.192/2013. (2) In compliance with CMN Resolution No /2013, corresponds to the application of the factor "F" to the amount of RWA, with "F" equal to 11% of RWA, from to ; 9.875%from RWA to , 9.25% of RWA from to ; 8.625% of RWA from to , and 8% of the RWA from (3) According to CM N Resolution No / Assessment of Sufficiency and Adequacy of Referential Equity (PR) Banco do Brasil annually prepares/reviews its capital planning considering a minimum time horizon of 36 months and linking the matter to the business and economic guidelines from its Corporate Strategy, aiming to ensure that its capital is sufficient to support, beyond relevant risks, the business growth. The Capital Plan is submitted for analysis of technical forums and approved by the Board of Officers and the Board of Directors. The Capital Plan aims to guarantee that the strategy adopted is appropriate to ensure the solvency ratios of the institution, without compromising the results. For this purpose, projections for PR and RWA are prepared, incorporating the impact of full implementation of Basel III in Brazil. The monitoring of the Capital Plan is performed monthly by the Forum and reported to the management. In this monitoring, projections and needs of realignment of the strategy are evaluated, taking into account the amounts realized, regulatory changes and business expectations. In this context, the Bank assesses the projections based on the limits of each indicator and the deadline for any breach, as shown below: Table 48 - Criteria and parameters for classification of the capital condition Capital Index Period of noncompliance (months) 0 to 6 7 to to to to 30 From 31st month Common Equity Tier 1 Index CRITICAL ALERT SURVAILLANCE Tier 1 Index CRITICAL ALERT SURVAILLANCE Basel Prudential Index CRITICAL ALERT SURVAILLANCE 82

84 According to Table 45 above, the projections indicate that when extrapolating Basel Prudential Index (IBP) - currently at 13% - or other indicator of capital, the Company will have enough time to promote strategic changes to prevent the extrapolation of the same. The capital control conditions are monthly reported by the Capital Forum at the regular meetings of strategic risk committees related to the capital management structure (CRC, CRML, CRO and CSRG), containing, when necessary, suggestions of capital contingency measures to be adopted. 83