ANNUAL REPORT BRAZIL: THE REFORM CHALLENGE “If you choose to sail upon the seas of banking, build your bank as you would your boat, with the strength to sail safely through any storm.” Jacob Safra, founder (1891-1963) J. Safra Group Key financial indicators (BRL million) BRAZIL Total assets Equity 9,769 Banco Safra S.A. 9,508 8,915 160,460 8,734 151,756 154,788 Banco J. Safra S.A. 142,898 7,559 131,647 Safra Leasing S.A. Arrendamento Mercantil Dec/13 Dec/14 Dec/15 Dec/16 Dec/17 Dec/13 Dec/14 Dec/15 Dec/16 Dec/17 J. Safra Asset Management Ltda. Net income Raised and managed assets (1) J. Safra Corretora de Valores e Câmbio Ltda. 216,398 J. Safra Serviços de Administração Fiduciária Ltda. 198,883 1,915 184,620 1,698 165,867 1,547 1,654 146,596 Safra Seguros Gerais S.A. 1,359 Safra Vida e Previdência S.A. Accum. until Accum. until Accum. until Accum. until Accum. until Dec/13 Dec/14 Dec/15 Dec/16 Dec/17 Dec/13 Dec/14 Dec/15 Dec/16 Dec/17 SIP Corretora de Seguros Ltda. Expanded credit portfolio (2) Non performing loans - NPL90 Sercom Comércio e Serviços Ltda. 87,461 1.5% Banco Safra (Cayman Islands) Limited 77,547 76,474 75,560 1.3% 67,639 Banco Safra S.A., Luxembourg Branch 0.7% 0.7% 0.4% Banco Safra S.A., Cayman Islands Branch Dec/13 Dec/14 Dec/15 Dec/16 Dec/17 Dec/13 Dec/14 Dec/15 Dec/16 Dec/17 (1) Represented by client funds, managed funds, repos, foreign exchange portfolio, collection of taxes and similar. (2) Stated by market value and including guarantees and sureties. 2 | J. Safra Group 2017, Annual Report J. Safra Group Key financial indicators J. Safra Group 2017, Annual Report | 3 J. Safra Group worldwide Luxembourg United Ireland Kingdom Germany Poland Austria Guernsey Switzerland United States Monaco of America Gibraltar United Arab Emirates Mexico Qatar Bahamas Hong Kong Cayman Islands Republic of Panama Singapore Brazil Chile Uruguay 4 | J. Safra Group 2017, Annual Report J. Safra Group worldwide J. Safra Group worldwide J. Safra Group 2017, Annual Report | 5 Contents Global and brazilian economy | 16 – 31 Message from the CEO | 8 – 11 Financial statements | 50 – 113 Locations around Brazil | 114 – 117 Article | 1 2 – 15 J. Safra Group | 32 – 49 6 | J. Safra Group 2017, Annual Report Contents Contents J. Safra Group 2017, Annual Report | 7 Farroupilha Park - Porto Alegre/RS Message from the CEO 9 Message from the CEO The economic environment during 2017 displayed signs of a recovery Banco Safra expanded its operations in market terms, high standards of sustainability and governance. It is from the worst economic crisis in Brazilian history. The agribusiness intensifying business with individual clients and exploring worth highlighting the priority given to social responsibility, sector performed strongly, setting a new record with 30% year-over- new corporate segments such as acquiring and retail, but materialized in longstanding support for philanthropic year growth in production of grains. always grounded in its core principles: rigorous approach institutions as well as internal campaigns focusing on Economic policy also played a decisive role. With inflation under to risk management and capital, sound management of health, wellbeing, education and social impact. Another control, the Central Bank of Brazil was able to take strong action its customers investments, conservative audit approval significant investment is the Safra Cultural Project, which to lower its benchmark interest rate (Selic), which at year-end reached policy, comprehensive internal controls, long-term relation- has completed 35 years producing books about Brazil’s 7% p.a., the lowest ever. This permitted a recovery in consumer ship, deep knowledge of its customers and operational leading museums, their collections and facilities. credit and an intensification of both stock and bond issuance in the efficiency. We know 2018 will present us with new challenges, capital markets. Technological innovation is a constant challenge for the starting with the global environment. On one hand, world Banco Safra, faithful as always to its traditional conservative business financial services industry, and Banco Safra is no exception. economic growth is expected to remain consistent, management strategy, maintained a solid and consistent balance-sheet Major technological upgrades were implemented in the while on the other hand the process of monetary policy position. Net income was BRL 1.9 billion in 2017, resulting in annualized bank’s various platforms in 2017, including the launch of normalization in the developed countries will gradually return on equity of 19.8% in the period. Assets totaled BRL 160.5 billion merchant acquirer SafraPay, a robust high-performance bring to a close the context of abundant liquidity and at December 31, 2017, and equity reached BRL 9.8 billion, making platform for online processing of payment transactions exceptionally low interest rates. Banco Safra the fourth-largest private bank in Brazil. The level of liquidity and credit sales. On the home front there is considerable expectancy remained significant, reaching BRL 25.2 billion at December 31, 2017, SafraPay joined the bank’s strategy of growing its regarding the elections and the choice of a new government and corresponding to 2.6 times the bank’s year-end equity. corporate client base and its product offering. It went live that will have to implement an agenda of structural reforms, In the credit segment, Safra focused on extending credit to low- in the first quarter of the year, initially in São Paulo State especially pension reform. This will be the main challenge. risk corporates and individuals, with loans rated AA and A, the best and then expanding nationwide during the course of the There can be no sustainable economic and fiscal recovery risk ratings on the scale established by the Central Bank, accounting year. It is now an important player in the segment. unless it is addressed. for 92.0% of the portfolio. Non performing loans, measured as the With regard to individual clients, the bank reinforced proportion of loans more than 90 days past due, accounted for only its operations in the high net worth and private banking 0.4% of the portfolio at end-2017, Banco Safra’s best rate in the past segment, growing funds under management by 28.2%. 13 years and certainly the lowest among the Brazilian banks. Similarly, vehicle and payroll linked loans grew 58.3% and 77.6% problem loans rated E-H accounted at end-2017 for 2.3% of the total year over year respectively in 2017. portfolio (considering both performing and nonperforming loans), Safra invests continuously in the adoption of best Rossano Maranhão compared with 8.7% for the industry’s private players. practices in its business activities, in accordance with Chief Executive Officer 10 | J. Safra Group 2017, Annual Report Message from the CEO Message from the CEO J. Safra Group 2017, Annual Report | 11 National Congress - Brasília/DF Article 13 heighten the legal uncertainty that hinders investment of steering it back to the path of economic, political and The reform challenge ahead decisions. The regulatory and antitrust frameworks are social development. There is little room to succeed and Pedro Malan vitally important, and a reform of the state should include enormous scope for failure – for errors old and new. the establishment of a system for permanent evaluation of The past is over and cannot be changed. The present is the quality of public spending. constantly becoming the past. It will be a gradual process “We may never know where we’re going, In the reform area the short-run priority is pension and will take many years, but some problems are clearly but we’d better have a good idea where we are.” reform, which is very urgent indeed. Our demographic more urgent than others unless we are to postpone our Howard Marks bonus will start to disappear in 2019, and the number meeting with the future yet again. of retirees and pensioners is rising five times faster than There will always be a future to be built – if a society the rate of population growth. Lastly, in the social area is capable of sharing at least a certain number of ideas The reform challenge facing Brazil today resides in three the importance of strengthening these regimes should the main challenge is education, especially a reduction of what the future should be like. As noted in the epi- major areas, which in turn can be considered from the be reaffirmed by presidential candidates, political leaders in inequality of opportunity, which means prioritizing the graph to this essay, we had better have a good idea of perspective of three time horizons. The areas are the and the new government. early years and learning at the right age. where we are, and of how we got to the current situation macroeconomic; the non-macro, comprising the reforms The fiscal regime should revolve around fiscal To address these challenges we must tackle the acute and the challenges that will have to be addressed. proper – pensions, taxation, and reorganization of the responsibility, which in Brazil is required by the eponymous uncertainty prevailing in three fundamental dimensions: the It will not be easy – it never has been – but Brazil has state; and the key area for the definition of our future law enacted in May 2000, establishing the conditions gravity of the fiscal question, which is not yet completely the human and technical resources, values, creative as a civilized society, which is the social area, including for compliance with budget constraints and hence for understood by public opinion; the unsustainable capacity and reserves of civic capital to rise to these the legitimate demands for a reduction in inequalities of the intertemporal solvency of public finance.