Relatório de Gestão de Riscos e Capital · Margin Capital with RBAN (a - e - f) 2,873 The Capital Ratio ended dec-16 at 15.1%, with a capital margin of R$ 3,2 billion, calculated

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Risk and Capital Management Report

4Q2016

1

Table of Contents

A. Introduction ....................................................................................................................................................................3

B. Balance Sheet Consolidation and Comparison Scope .......................................................................................................4

C. Internal Governance ........................................................................................................................................................7

1. Committees and Commissions ............................................................................................................................................7

2. Organizational Structure ...................................................................................................................................................10

3. Policies, Standards, Procedures and Manuals ...................................................................................................................10

4. Structured Flow of Information .........................................................................................................................................11 D. Capital management ..................................................................................................................................................... 11

1. Capital Adequacy (Regulatory view) .................................................................................................................................12 1.1 Basel III .....................................................................................................................................................................12

1.2 Available Capital (Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital) .................................................12

1.3 Risk-Weighted Assets ...............................................................................................................................................13

1.3.1 Risk-Weighted Assets for Credit Risk (RWACPAD) ..................................................................................................14

1.3.2 Risk-Weighted Assets for Market Risk (RWAMPAD) ...............................................................................................14

1.3.3 Risk-weighted assets for Operational risk (RWAOPAD) ..........................................................................................15

1.3.4 Capital Adequacy Analysis (Regulatory View) ......................................................................................................15

2. Internal Capital Adequacy Assessment Process – ICAAP ...................................................................................................18

3. Leverage Ratio ..................................................................................................................................................................18 E. Risk management .......................................................................................................................................................... 19

1. Credit Risk..........................................................................................................................................................................19 1.1 Definition ..................................................................................................................................................................19

1.2 Basic Principles .........................................................................................................................................................19

1.3 Risk management structure and involved areas ......................................................................................................20

1.3.1 Board of Risks structure – Involved areas ............................................................................................................20

1.3.2 Credit Lending Structure and Involved Areas ......................................................................................................21

1.3.3 Board of Internal Controls and Operational Risks structure – Involved Areas ....................................................21

1.4 Credit Risk Management: .........................................................................................................................................21

1.4.1 Total and Average Exposure in the Quarter .........................................................................................................22

1.4.2 Exposure by Country and Brazil Geographical Region .........................................................................................23

1.4.3 Exposure by Economic Sector ..............................................................................................................................23

1.4.4 Credit Concentration ............................................................................................................................................24

1.4.5 Unelapsed period of operations ..........................................................................................................................25

1.4.6 Operations overdue .............................................................................................................................................25

1.4.7 Allowance for loan losses .....................................................................................................................................27

1.5 Credit Risk Mitigation ...............................................................................................................................................27

1.6 Counterparty Credit Risk ..........................................................................................................................................29

1.6.1 Counterparty Credit Risk Management ...............................................................................................................29

1.6.2 Credit Derivatives .................................................................................................................................................30

1.7 Acquisition, sale and transfer of financial assets .............................................................................................................30

1.7.1 Exposures granted ...............................................................................................................................................30

1.7.2 Exposures Acquired ..............................................................................................................................................31

1.8 Securitization ............................................................................................................................................................31

2 Market Risk .......................................................................................................................................................................33 2.1 Definitions ................................................................................................................................................................33


2.3 Areas Involved ..........................................................................................................................................................33

2

2.4 Market Risk Management ........................................................................................................................................34

2.4.1 Segregation of Portfolios .....................................................................................................................................34

2.4.2 Risk Measures and Limits for Management and Control .....................................................................................34

2.4.3 Risk Measurement Methodology .........................................................................................................................35

2.4.3.1 Trading portfolio .........................................................................................................................................35

2.4.3.2 Banking portfolio .........................................................................................................................................35

2.4.4 Measurement Systems and Communication Process ..........................................................................................36

2.4.5 Reporting Limits Exceeded or Noncompliant Transactions .................................................................................36

2.4.6 Financial Derivative portfolio Profile ...................................................................................................................37

2.4.7 Sensitivity Analyses ..............................................................................................................................................38

3 Liquidity Risk .....................................................................................................................................................................40 3.1 Definition ..................................................................................................................................................................40


3.3 Management and control governance and commissions ........................................................................................40

3.4 Areas Involved ..........................................................................................................................................................41

3.5 Liquidity Risk Management ......................................................................................................................................41

3.5.1 Risk Measures and Limits for Management and Control .....................................................................................41

3.5.1.1 Liquidity Target and Minimum Operational Cash ............................................................................................42

3.5.1.2 Liquidity Coverage Ratio (LCR) .........................................................................................................................42

3.5.1.3 Internal Liquidity Coverage Ratio ....................................................................................................................43

3.5.2 Measurement Systems and Communication Process ..........................................................................................44

3.5.3 Notifying Limits Exceeded and Contingency Plan ................................................................................................44

4 Operational Risk ................................................................................................................................................................45 4.1 Definition ..................................................................................................................................................................45


4.3 Areas Involved ..........................................................................................................................................................45

4.4 Measurement System and Communication Process ................................................................................................46

4.5 Operating Losses by Category of risk .......................................................................................................................46

4.6 Business Continuity Management ............................................................................................................................47

5 Equity Risk .........................................................................................................................................................................48

6 Other risks .........................................................................................................................................................................49 6.1 Reputation risk .........................................................................................................................................................49

6.2 Strategy risk ..............................................................................................................................................................49

6.3 Environmental and Social Risk ..................................................................................................................................49

6.4 Underwriting risk ......................................................................................................................................................49

6.5 Model risk .................................................................................................................................................................49

6.6 Risks Appetite ...........................................................................................................................................................50

F. Attachments .................................................................................................................................................................. 51

1. Composition of Total Capital (TC) - Appendix 1 .................................................................................................................51

2. Main Characteristics of the Capital Instruments – Appendix 2 .........................................................................................54

3. Common Model of Disclosure of information on the Leverage Ratio – Appendix 3 .........................................................55

4. Information on the Liquidity Coverage Ratio – Appendix 4 ..............................................................................................56 G. Glossary ......................................................................................................................................................................... 57

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A. Introduction

This document presents information referring to risk

management, to the determination of the sum of risk-

weighted assets (RWA) and to the adequacy of the capital

of the Votorantim Prudential Financial Bank, in accordance

with the demands of the Brazilian Central Bank (“BACEN”),

through Circular No. 3,678 and Circular No. 3,716, and in

accordance with Pillar 3 rules of the Basel II Accord.

In accordance with CMN Resolutions 3,380, 3,464, 3,721,

4,090 and 3,988, the Bank has institutional structures and

policies for the management of operational risk, market

risk, credit risk, liquidity risk and capital management

approved by the Board of Directors and the basic

principles observed in the management and control were

established in compliance with the current regulations and

market practices, as detailed in the specific chapters on

each one of these topics to be presented in this report.

The Bank also declares that it has a formal policy for

disclosure of information about risk and capital

management approved by the Board of Directors, as

provided for in Art 12 of CMN Resolution No. 4,193.

In addition, according to BACEN Circular No. 3,678, the

information contained in this report is responsibility of the

Director appointed under the terms of art 14 of Resolution

No. 4,193.

Banco Votorantim has a portfolio of products and services,

classified internally in Wholesale and Consumer Finance.At

the end of 2015, the Bank Wholesale structure was

improved, focusing on 400 economic Corporate groups

with a better risk profile, beside Financial Institutions. In

Consumer Finance, the Bank is one of the market leaders

in consumer finance, focusing on the auto business and

positions in other supplementary business lines such as

credit cards, insurance brokerage and payroll loans.

The following is a summary of the main capital adequacy

indicators in the Regulatory View for base date December

2016.

The Bank ended dec-16 with a Total Capital of approximately R$ 9.2 billion, presenting an decrease of R$ 518 million (-5,3%) over the previous quarter, mainly due to the decrease of the Tier II. Tier 1 Capital ended dec-16 at R$ 6,8 billion, presenting stability over the prior quarter.

The total sum of Risk-Weighted Assets (RWA) ended dec-

16 at approximately R$ 61.2 billion, a decrease of R$ 1.4

billion relative to previous quarter (-2.2%), impacted

mainly by the decreased in Credit Risk (RWACPAD).

Prudential Consolidated - R$ million.

Capital Adequacy (Regulatory view) Dec-16

Total Capital (TC) (a) 9,218

Tier I Capital (b) 6,837

Common Equity Tier I (CET1) (c) 6,837

Tier II 2,382

Total Risk-Weighted Assets (RWA) (d) 61,230

Credit Risk (RWACPAD) 55,946

Market Risk (RWAMPAD) 670

Operational Risk (RWAOPAD) 4,615

Capital Requirement (e) 6,047

Margin Capital (a - e) 3,172

RBAN (f) 299

Margin Capital with RBAN (a - e - f) 2,873

The Capital Ratio ended dec-16 at 15.1%, with a capital margin of R$ 3,2 billion, calculated by the difference between the Capital and the Capital Requirement. And the Leverage Ratio ended dec-16 in 5.3%.

Ratios

Prudential Consolidated

Dec-16

Basel Ratio (a / d) 15.1%

Tier I Capital Ratio (b / d) 11.2%

Common Equity Tier 1 Ratio (c / d) 11.2%

LR - Leverage Ratio2 5.3%

Detailed information is described throughout this report and spreadsheets to support tables, available in the Investor Relations site at: www.bancovotorantim.com.br/ir

2More information is available in Section D 3.

http://www.bancovotorantim.com.br/ri

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B. Balance Sheet Consolidation and Comparison Scope

Risk and capital management is performed for the consolidated prudential according to recommendations published by the

Brazilian Central Bank (BACEN).

In this context, the table below lists the companies included in the Consolidated Balance Sheet (published in "Financial

Statements" report available on the investor relations website) and the Regulatory balance (Prudential Conglomerate -

Document 4060 BACEN), which is used to calculate the Capital Ratio.

R$ million.

Company Business Segment

Dec-16 Consolidated Balance Sheet

Regulatory Balance Sheet

Total Assets

Shareholders' Equity

Banco Votorantim S/A. Multiple Bank. 102,196 8,426

BV Financeira S.A. – Crédito, Financiamento e Investimento.

Credit society, financing and investment.

40,447 1,657

BV Leasing – Arrendamento Mercantil S/A.

Leasing company. 18,994 987

Votorantim – Corretora de Títulos e Valores Mobiliários LTDA.

Securities Brokerage. 453 265

Votorantim Asset Management Distribuidora de Títulos e Valores Mobiliários LTDA.

Distributor Company Securities.

206 81

Banco Votorantim Securities Inc. Foreign Financial Institution. 46 39

Votorantim Securities (UK) Limited. Foreign Financial Institution. 18 17

FIP BVIA Investment Fund and Participation

1,164 1,044

We present below a comparison between the Consolidated Balance Sheet and the Regulatory Balance Sheet, whose main objective is to highlight the equity elements that constitute the determination of Capital, according to rules established by CMN Resolution No. 4,192. Chapter F discloses the breakdown of capital through a standardized model made available by BACEN Circular No. 3,678.

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Assets – Comparison between Consolidated Balance Sheet and Regulatory Balance Sheet dec-16.

Prudential Consolidated, R$ million.

Assets Consolidated Balance Sheet

Regulatory Balance Sheet1

Variation Comments Ref. to Annex

1

1. Current Assets and Long-Term Assets 101,105 101,105 -

1.1. Cash and cash equivalents 184 184 -

1.2. Interbank funds applied 17,116 17,116 -

1.3. Securities and Derivative financial instruments 29,942 29,942 -

1.4. Interbank accounts/relations 341 341 -

1.5. Interbranch accounts - - -

1.6. Loan operations 40,746 40,746 -

1.7. Leases (5) (5) -

1.8. Other receivables 12,293 12,293 -

1.8.1. Credits for guarantees and collaterals honored 174 174 -

1.8.2. Foreign exchange portfolio 516 516 -

1.8.3. Income receivable 28 28 -

1.8.4. Securities clearing accounts 258 258 -

1.8.5. Other receivables - Other 11,632 11,632 -

1.8.5.1. Other 4,103 4,103 -

1.8.5.2. Deferred Tax Assets on the negative base and tax loss 1,165 1,165 - d

1.8.5.3. Deferred Tax Assets that rely on future profitability (except allowance for credit losses)

1,986 1,986 - f

1.8.5.4. Deferred Tax Assets for allowance for credit losses 4,378 4,378 -

1.8.6. Other receivables - allowance for credit losses (315) (315) -

1.9. Other assets 488 488 -

2. Fixed Assets 1,720 1,720 -

2.1. Investments 1,381 1,381 -

2.1.1. Interest in subsidiaries 1,310 1,310 -

2.1.2. Other investments 71 71 -

2.2. Fixed assets for use 98 98 -

2.3. Leases 134 134 -

2.4. Intangible assets 107 107 -

2.4.1. Intangible assets before oct/13 3 3 - l

2.4.2. Intangible assets after oct/13 104 104 - h

2.5. Deferred assets - - - g

Total Assets 102,825 102,825 -

1 - Refers to the Prudential Consolidated (Document 4060 of the Brazilian Central Bank).

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Liability – Comparison between Consolidated Balance Sheet and Regulatory Balance Sheet dec-16.


Liabilities Consolidated Balance Sheet

Regulatory Balance Sheet1

Variation Comments Ref. to Annex

1

1. Current Liabilities and Non-Current Liabilities 94,540 94,540 -

1.1. Deposits 4,578 4,578 -

1.2. Money market repurchase commitments 35,673 35,673 -

1.3. Acceptances and endorsements 21,802 21,802 -

1.4. Interbank accounts/relations - - -

1.5. Interbranch accounts 100 100 -

1.6. Borrowings 1,798 1,798 -

1.7. Domestic onlendings - Official institutions 3,405 3,405 -

1.8. Derivative financial instruments 2,708 2,708 -

1.9. Other liabilities 24,476 24,476 -

1.9.1. Collection and levy of taxes and alike 19 19 -

1.9.2. Foreign exchange portfolio 218 218 -

1.9.3. Social and statutory 240 240 -

1.9.4.Other liabilities - Tax and social security 619 619 -

1.9.4.1. Tax and social security 459 459 -

1.9.4.2. Deferred tax liabilities 160 160 - e

1.9.5. Other liabilities - Securities clearing accounts 483 483 -

1.9.6. Other liabilities - Subordinated debts 4,877 4,877 -

1.9.6.1. Debt instruments eligible for capital before Resolution 4.192 4,238 4,238 - k

1.9.6.2. Other Subordinated debts 639 639 -

1.9.7. Debt instruments eligible for capital 1,169 1,169 - j

1.9.8. Other liabilities - Other 16,844 16,844 -

1.9.9. Creditors for anticipation of the residual value guaranteed (VRG) 7 7 -

2. Deferred Income 38 38 -

3. Shareholders' Equity 8,247 8,247 -

3.1. Interest of Non-Controlling Shareholders - - - i

3.2. Elegible Instruments to Common Equity Tier 1 7,827 7,827 - a

3.3. Profit reserves 195 195 - b, i

3.4. Capital reserves 225 225 - c

Total Liabilities 102,825 102,825 -

1 - Refers to the Prudential Consolidated (Document 4060 of the Brazilian Central Bank).

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C. Internal Governance

The Bank’s governance structure is composed of collegial forums, formally organized and with delegation of levels of authority. Each governance body has its role, scope and composition defined in a dedicated norm, which specifies the management and the risk monitoring and tracking responsibilities.

1. Committees and Commissions

The Bank has decision-making committees and technical commissions so as to ensure adequate capital management and the self-assessment of its risks. Special emphasis is placed on the ALM, Risks and Capital Committee (CARC) as the primary risk and capital management forum, on the Control and Operational Risk Committee and, at a higher level, the Executive Committee (ComEx), which also performs the tracking of its general performance. The Board of Directors it’s responsible for approving the creation, composition and duties of each Committee and Commission. Finally, the bank also has a Administrative Council (CA

1), an Audit Committee (COAUD2) and independently a Fiscal Council (CF).

In December 2016, the structure of committees and commissions was changed, maintaining the proper control and observing their proportionality through the size of the institution, besides ensuring greater agility in the analysis and decision making, with the participation of top management. The new structure, approved in December 2016 and effective as of January 2017, will be updated in the base date report Mar / 17.

The figure below describes the structure of internal governance in force in 2016:

1. Sectoral of Risk Management and Control consists of 15 forums.

The internal governance structure ensures that all stakeholders contribute effectively to the internal risk management and mitigation and capital adequacy assessment process. As detailed below, all the bodies play an important role in the Bank’s risk and capital management.

1 Conselho de Administração

Credit

Executive Committee

Control

Product

ALM, Risk and Capital Committee

Sectoral of Risk

Management and Control1

Credit Risk

Liquidity

Tax

Market Risk

Committee

Commission

Information Security

ALM

Money LaunderingPrevention

Fraud Prevention

Register governance

Sustainability

Business CIB

Business Retail

Business BVEP

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Executive Committee - ComEx:

Attributions: definition of the strategy and monitoring the institution’s general performance, market context and of all the topics addressed in the committees and commissions, with the duty of deliberating matters that require the participation of senior management or of arbitrating in case of a standoff in the committees.

Periodicity: weekly.

Reporting: Board of Directors

ALM, Risk and Capital Committee (CARC)

Attributions: prepare a risk appetite proposal (to be ratified by the Board of Directors) and monitor relevant financial and non-financial risk indicators; analyze and ratify the proposals of the commissions (Market Risk, Credit, Liquidity, Tax and Business); assess and approve operations that may have an impact on consumption or capital base; monitor the capital planning for three years; monitor liquidity and cash reserves and forward proposals to the Executive Committee and to the Board of Directors regarding actions for risk management and control, as well as capital management.

Periodicity: fortnightly.

Reporting: Executive Committee.

Market Risk Commission:

Attributions: assesses exposures to market risks and follows up on the exposure limits of the main market risks of the trading portfolio.

Periodicity: monthly.

Reporting: CARC.

Credit Risk Commission:

Attributions: track and monitor the loan portfolio and the limits of exposure of the credit risk portfolio, both for Wholesale and for Consumer Finance; evaluation of stress testing results; tracking of the level of formation of provision for loans to deal with delinquency; evaluation of the credit risk measurement methodologies, evaluation of the contingency plans related to credit risk management, and issuance of opinions for the ALM, Risks and Capital Committee and/or for ComEx, on new strategies and rules for operations and management of the loan portfolio; monitor the effectiveness of credit collection and credit recovery actions as well as guarantees; discuss strategies for the promotion of timely debt payment.


Reporting: CARC.

Liquidity Commission:

Attributions: evaluation of exposures to liquidity risks and of the cash strategy scenarios; follows up on and reviews minimum capital limits, and monitors and updates the funding contingency plan.

Periodicity: monthtly.

Reporting: CARC. ALM Commission

Attributions: assess and propose initiatives to protect and maximize the structural balance sheet under the economic and financial point of view, accounting and tax, guiding and triggering the responsible areas for technical studies. This includes identifying and treating risks that may adversely affect the balance sheet conditions.


Reporting: CARC. Tax Commission

Attributions: assessment of tax risks that may impact the balance sheets of the companies from the Financial Conglomerate and statement for approval of the Technical Studies for realization of Tax Credits for financial businesses – Resolution No. 3,059.


Reporting: CARC.

Credit Committee

Attributions: approving limits and/or lending operations referred by the commercial departments, evaluation of negotiations or agreements for settlement of problematic loans, and the lowering of credit restrictions (temporary or permanent) to individuals, groups and sectors of the economy.


9


Product Committee:

Attributions: evaluation of opportunities for new products; evaluation of the impact on assessment systems, operations, processes and controls; tracking of the implementation of new products; tracking of the implementation of improvements and of the maintenance of existing products; validation of compliance of new products and of structured transactions.



Sustainability Committee:

Attributions: guiding the press office actions, internal communication, advertising and marketing, public relations and investor relations, carry out the governance related to sustainability and social responsibility projects, defining and developing strategies, policies, standards, investments that are related to sustainability and social investment and identifying and analyzing adherence to voluntary commitments that address the issue of sustainability; assess and mitigate situations that might bring image risk to the institution.

Periodicity: quarterly.


Control and Operational Risk Committee

Attributions: consolidation of the work of the Sectorial Commissions of Risks and Controls of each Board of Officers/Area; analysis and validation of actions for the correction of weak points and improvement of the risk management system; tracking of operational risks and of the internal control system; monitoring of money laundering prevention and fraud prevention actions; and tracking of information security issues and business continuity plans.



Sectorial Risk and Control Management Commissions

Attributions: discuss, analyze and deliberate relevant points of risks, internal controls, compliance and internal auditing of each Board of Executive Officers/Area; perform the tracking of corrective actions and define the method of implementation of the relevant points raised; prioritize projects according to the risks and weak points identified.

Periodicity: bimonthly.

Reporting: Control and Operational Risk Committee.

Information Security and Business Continuity Commission

Attributions: deliberate Information Security and Business Continuity strategy besides risk assessment versus corporate action plan, keeping track of the implementation of established plans; monitor Information Security and Business Continuity incidents and indicators; design and keep track of crisis management processes and procedures; quantify and mitigate risks relating to information leakage and business discontinuity.

Periodicity: quarterly.

Reporting: Control and Operational Risk Committee. Money Laundering Prevention Commission (PLD)

Attributions: defining standards for the performance of the different areas from the Conglomerate in relation to the PLD and to the fight of terrorist financing; reviewing the policies and procedures related to the subject, including the legal aspects related to the current legislation; establishing procedures for receiving and treating everything related to the subject.


Reporting: Control and Operational Risk Committee. Fraud Prevention Commission

Attributions: monitoring frauds volume, modus operandi and source; following the effectiveness of the preventive controls and detecting frauds; evaluation and proposing actions for fraud prevention through creating or modifying prevention rules, routines, operational processes and standards; proposing improvements on recovery values defrauded processes.


Reporting: Control and Operational Risk Committee.

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Register of Governance

Attributions: Manage the customer relationship transact with the institution (with the exception of suppliers), and set modus operandi, rules, forms, areas involved and scope of work for hire, maintenance and monitoring of these (where applicable), and may determine the actions it deems necessary for every situation

Periodicity: bimonthly.

Reporting: Committee Controls and Operational Risk.

Business CIB, Retail and BVEP Committee

Attributions: evaluation of the return on operations proposed by the business areas and preparation of opportunities for additional operations to increase revenue and maximize the return on the allocated capital.



2. Organizational Structure

For the execution of risk and capital management activities, the Bank relies on dedicated areas that are responsible for the consolidated controls of risks and capital. The main processes relating to risk and capital management are under the responsibility of the Board of Executive Officers of Risks, Executive Board of Internal Controls and Operational Risks to the Executive Board of Finance and Investor Relations.

See below the structure of these management boards:

The attributions of these specialized risk-management structures are detailed in the following chapters as part of the presentation of the Bank's approach to each type of risk management and control.

3. Policies, Standards, Procedures and Manuals

The risk and capital management process uses a set of documents which establish the main guidelines which must be followed in risk management activities.

The level of detail of these standards is structured depending on the purpose of each document and is organized according to the hierarchy shown below:

Corporate Policies: fundamental principles and guidelines established by the highest hierarchical level, which must be followed by the entire organization and govern all the other regulations, procedures and product and service manuals;

Rules: rules established to define the activities and the manner in which procedures are organized, detailing the aspects addressed by corporate policies;

Procedures: operational rules established to describe the activities and their completion stages, detailing aspects addressed by the standards; e

Product, Service, System and Calculation Modeling Manuals: set of documents that compile the main features on structuring of products, services, systems and calculation methodologies used.

These regulations are published for the internal consultation at the Corporate Portal (Intranet), a and are reviewed and updated in specific intervals for each type of document, or whenever there are significant changes in business aims and strategies, or in the risk management approach and methodology.

Board of Directors

Board of Executive Officers of Risks

Executive Board of Internal Controls and

Operational Risks

Executive Board of Finance and Investor

Relations

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4. Structured Flow of Information

The institution adopts the practice of communicating information about risks and capital through reporting with specific periodicity to the parties involved in the process and senior management, which reinforces the timely monitoring of information that subsidizes corporate decisions.

The Bank adopts an integrated approach for managing risks and capital, aiming at organizing the decision-making process and

defining tools for maintaining acceptable risk levels which are compatible with the volume of capital available, in line with the

business strategy adopted. The consolidation of risks covers material exposures inherent to the Bank's business lines. The

exposures are mainly grouped into the following risk categories: market, liquidity, credit and operational. This consolidation is

done through a structured process that includes mapping, counting and aggregating values at risk.

The levels of risk exposure and capital availability are monitored through a limit framework, incorporated into the Bank's

activities by means of an organized management and control process which assigns functional responsibilities to the areas

involved. Senior Management’s involvement consists of monitoring and taking the actions required to manage risks.

D. Capital management

Following the regulations of BACEN and in accordance with the recommendations of the Basel Committee on Banking Supervision, the Bank adopts the prudential guidelines of capital management aiming at the efficient and sustainable management of its resources and contributing to promote the stability of the National Financial System.

In accordance with CMN Resolution No. 3,988 and BACEN Circular No. 3,547, the Bank has an institutional structure and policies for capital management, approved by the Board of Directors, in accordance with the Internal Capital Adequacy Assessment Process (ICAAP), covering the following items:

Identification and appraisal of the relevant risks;

Documented policies and strategies;

Capital Plan for three years, including Capital targets and projections, main funding sources and Capital contingency plan;

Stress tests and their impacts on Capital;

Management reports to the Senior Management (Executive Board and Board of Directors);

Evaluation of Capital Adequacy in the Regulatory and Economic View; and

Annual Report of Internal Capital Adequacy Assessment Process (ICAAP).

Risk Managers andBusiness Units

Commission

Board of Directors Committee

Risk andCapital Report

12

1. Capital Adequacy (Regulatory view)

At the institution, capital is managed in order to ensure adequacy within regulatory limits and to establish a strong capital base enabling the Bank to develop business and transactions in accordance with its strategic plan.

Our annual capital plan includes growth projections for the loan portfolio and other transactions and assets, in order to assess adequacy of its capital to deal with the associated risks and ensure compliance with regulatory operational limits. Management reports tracking the capital allocated to risks and the capital ratios (Basel, Tier I and Common Equity Tier I) are disclosed on a monthly basis after the determination of the Capital and Capital Requirement to the areas involved.

1.1 Basel III

The new capital requirement rules of Basel III took effect in Brazil in October 2013, and establish the new definitions and the new minimum capital requirements. They also define which companies should compose the Prudential Consolidated Balance Sheet to be used to calculate the capital base and the capital requirement.

The schedule below, defined by BACEN, presents the necessary adequacy for implementation, in Brazil, of the requirements defined in Basel III:

Schedule for Basel III implementation 2013 2014 2015 2016 2017 2018 2019

Common Equity Tier I 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

Tier I Capital 5.5% 5.5% 6% 6% 6% 6% 6%

Total Capital 11% 11% 11% 9.875% 9.25% 8.625% 8%

Additional Capital - - - - - - -

Lower Limit - - - 0.625% 1.25% 1.875% 2.5%

Upper Limit - - - 1.25% 2.5% 3.75% 5%

Common Equity Tier I with Additional Capital (Lower Limit) 4.5% 4.5% 4.5% 5.125% 5.75% 6.375% 7%

Common Equity Tier I with Additional Capital (Upper Limit) 4.5% 4.5% 4.5% 5.75% 7% 8.25% 9.5%

Tier I Capital with Additional Capital (Lower Limit) 5.5% 5.5% 6% 6.625% 7.25% 7.875% 8.5%

Tier I Capital with Additional Capital (Upper Limit) 5.5% 5.5% 6% 7.25% 8.5% 9.75% 11%

Total Capital with Additional Capital (Lower Limit) 11% 11% 11% 10.5% 10.5% 10.5% 10.5%

Total Capital with Additional Capital (Upper Limit) 11% 11% 11% 11.125% 11.75% 12.375% 13%

Regulatory Adjustments - 20% 40% 60% 80% 100% 100%

In the following sections we present the breakdown of Capital and Risk-Weighted Assets (RWA), from the perspective of the Consolidated Prudential Balance Sheet

2, and the capital indicators.

1.2 Available Capital (Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital)

The Available Capital, classified as Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital, is the equity used as a basis for verification of compliance with the operational limits of financial institutions. The Total Capital is obtained by adding Tier 2 Capital and Tier 1 Capital. The latter is obtained by adding Common Equity Tier 1 Capital and Additional Tier 1 Capital, as defined in CMN Resolution No. 4,192 and No. 4,193. The Common Equity Tier 1 Capital is composed of the shareholders’ equity and specific regulatory adjustments.

The Bank ended dec-16 with Total Capital of approximately R$ 9.2 billion, presenting an decrease of R$ 518 million (-5,3%) over the capital ofsep-16, whereas that 74,2% of the value of this capital is composed of Tier 1 Capital.

Tier 1 Capital (which as it has no Additional Tier 1 Capital, represents the same value as the Common Equity Tier 1 Capital) ended dec-16 at R$ 6,8 billion, presenting stability over the prior quarter.

We present below the detailing of the breakdown of the Bank’s capital requirement:

2 The Consolidated Prudential Balance Sheet (CADOC 4060) is in force for base date June 15. Until December 14 the Consolidated Financial Balance Sheet, designated CADOC (Document 4040 of BACEN) was used to determine the Capital and the portions of the Risk-Weighted Assets (RWA).

13

Capital Composition Prudential Consolidated

Variation

Dec-16 Sep-16 Dec-15

Quarterly Annual

Shareholders' Equity Consolidated 8,247 8,254 7,617

-0.1% 8.3%

Common Equity Tier I Capital Regulatory Adjustments (1,411) (1,360) (931)

3.7% 51.6%

Common Equity Tier I 6,837 6,894 6,686

-0.8% 2.3%

Authorized Instruments to compose Additional Tier I Capital

- - -

N/A N/A

Additional Tier I Capital Regulatory Adjustments - - -

N/A N/A

Additional Tier I - - -

N/A N/A

Tier I (Common Equity Tier I + Additional Tier I) 6,837 6,894 6,686

-0.8% 2.3%

Authorized Instruments to compose Tier II Capital 2,382 2,843 4,056

-16.2% -41.3%

Tier II 2,382 2,843 4,056

-16.2% -41.3%

Total Capital (Tier I+Tier II) 9,218 9,737 10,742

-5.3% -14.2%

Additional information about the instruments that constitute the capital is available in chapter F (Appendix 1 and Appendix 2) of this report.

1.3 Risk-Weighted Assets

RWA, as defined by CMN Resolution No. 4,193, is composed of the sum of risk-weighted assets referring to the credit, market and operational risks:

Whereas:

RWACPAD: meaning the portion of risk-weighted assets (RWA) relating to credit risk exposures subject to the calculation of capital requirement using a standardized approach (Bacen Circular No. 3,644);

RWACAM: portion of risk-weighted assets (RWA) relating to exposures in gold, in foreign currency and in assets subject to exchange rate variation (Bacen Circular No. 3,641);

RWAJUR: portion of risk-weighted assets (RWA) relating to exposures subject to the variation of interest rates classified in the trading portfolio (Bacen Circulars No. 3,634, 3,635, 3,636 and 3,637);

RWACOM: portion of risk-weighted assets (RWA) relating to exposures subject to the variation of commodity prices (Bacen Circular No. 3,639);

RWAACS: portion of risk-weighted assets (RWA) relating to exposures subject to the variation of the price of shares classified in the trading portfolio (Bacen Circular No. 3,638);

RWAOPAD: portion of risk-weighted assets (RWA) relating to the calculation of capital required for operational risk using a standardized approach (Bacen Circular No. 3,640).

The Capital Requirement is obtained from the portions of Risk-Weighted Assets, and is calculated as follows:

Where Factor F is equal to:

Until 31/12/2015 01/01/2016 01/01/2017 31/12/2018 01/01/2019

11% 9.875% 9.25% 8.625% 8%

Capital Requirements = Factor F x RWA

Credit risk Market risk

RWACAM + RWAJUR + RWACOM + RWAACS RWACPAD RWAOPAD RWA = + +

Operational Risk

14

The evolution of the RWA composition is presented in consolidated form in the table below:

R$ million.

Composition of Risk-Weighted Assets (RWA) Prudential Consolidated

Variation


Quarterly Annual

Total Risk-Weighted Assets (RWA) 61,230 62,615 70,549

-2.2% -13.2%

Credit Risk (RWACPAD) 55,946 56,871 62,926

-1.6% -11.1%

Market Risk (RWAMPAD) 670 1,130 2,843

-40.7% -76.4%

Operational Risk (RWAOPAD) 4,615 4,615 4,780

0.0% -3.4%

We present below in detail the composition of RWA by Credit, Market and Operational Risks.

1.3.1 Risk-Weighted Assets for Credit Risk (RWACPAD)

The institution uses the Standardized Approach, defined by BACEN Circular No. 3,644, to calculate the portion of risk-weighted assets (RWA) relating to credit risk exposures subject to calculation of capital requirement (RWACPAD). The amount determined for RWACPAD is reported monthly to Senior Management, together with the Basel Ratio chart.

R$ million.

Composition of RWACPAD Prudential Consolidated

Variation


Quarterly Annual


-1.7% -11.1%

Risk Weight of 2% 37 47 31

-21.5% 19.4%

Risk Weight of 20% 506 281 361

79.8% 40.0%

Risk Weight of 50% 1,933 1,931 1,829

0.1% 5.7%

Risk Weight of 75% 23,130 23,193 22,920

-0.3% 0.9%

Risk Weight of 85% 10,104 10,470 11,930

-3.5% -15.3%

Risk Weight of 100% 16,374 16,942 20,025

-3.4% -18.2%

Risk Weight of 150% - - -

N/A N/A

Risk Weight of 250% 1,871 1,872 2,563

-0.1% -27.0%

Risk Weight of 300% 1,398 1,396 2,083

0.1% -32.9%

Risk Weight of 1012,65% 67 84 201 -20.0% -66.4%

Without Risk weight 503 653 985 -23.0% -48.9%

1.3.2 Risk-Weighted Assets for Market Risk (RWAMPAD)

The Bank uses the standardized approach to calculate the portion of risk-weighted assets (RWA), relating to the calculation of capital requirement for market risk (RWAMPAD). As defined by CMN Resolution No. 4,193, the RWAMPAD portion consists of the sum total of the following components: RWACAM, RWAJURS, RWACOM and RWAACS.

The table below presents the values of the risk-weighted assets for market risk (RWAMPAD):

R$ million.

Composition of RWAMPAD Prudential Consolidated

Variation


Quarterly Annual


-40.7% -76.4%

RWACAM 137 147 1,207

-7.4% -88.7%

RWAJURS 430 944 1,609

-54.5% -73.3%

RWAJUR [1] 133 126 164

5.8% -18.7%

RWAJUR [2] 134 157 559

-14.7% -76.0%

RWAJUR [3] 162 661 886

-75.4% -81.7%

RWAJUR [4] - - -

N/A N/A

RWACOM - - -

N/A N/A

RWAACS 103 38 27

172.4% 281.4%

15

The table below presents the value of operations subject to variation of interest rates of operations classified in the banking book (RBAN):

R$ million.

Interest Rate Risk in the Banking Book1


Variation


Quarterly Annual

RBAN 299 257 393

16.3% -23.9%

1 - Operation not classified in the trading portfolio.

As defined by CMN Resolution No. 4,193:

RWACAM: Operations subject to exposures in gold, foreign currency and assets subject to exchange rate variation;

RWAJURS: Operations subject to the variation of interest rates: RWAJUR [1]: Variation of Real-denominated prefixed interest rates; RWAJUR [2]: Foreign exchange variation coupon rates RWAJUR [3]: Changes in price index coupons rates RWAJUR [4]: Variation of coupon interest rates.

RWACOM: Operations subject to the variation of commodity prices;

RWAACS: Transactions subject to share price variation;

RBAN: Operations subject to the variation of interest rates of operations classified in the banking book.

1.3.3 Risk-weighted assets for Operational risk (RWAOPAD)

The Bank uses the Alternative Standardized Approach (ASA) defined by BACEN Circular No. 3,640 to calculate the portion of risk-weighted assets (RWA), relating to the calculation of capital requirement for operational risk (RWAOPAD). The table below presents the opening of the risk-weighted assets for operational risk:

R$ million.

Composition of RWAOPAD Prudential Consolidated

Variation


Quarterly Annual

Operational Risk (RWAOPAD)1 4,615 4,615 4,780

0.0% -3.4%

1 – Portion of Operational Risk for financial entities. 2 - Operational improvement in accounting assignment for the process of calculating operational risk

R$ million.

Operational Risk - Capital Requirement Prudential Consolidated

Variation


Quarterly Annual

Operational Risk (Capital Requirement)1 456 456 526

0.0% -13.3%

1 – Portion of Operational Risk for financial entities. 2 - Operational improvement in accounting assignment for the process of calculating operational risk

1.3.4 Capital Adequacy Analysis (Regulatory View)

The capital adequacy analysis in the regulatory view is aimed at assessing compliance with the Basel Ratio determined in accordance with the current regulation, defined by the Brazilian Central Bank. This evaluation verifies whether the institution has sufficient available capital to cover the capital requirement for the risks of Pillar I, besides the additional requirement for coverage of the interest rate risk of the banking book (RBAN) according to Bacen Circular No. 3,365.

16

R$ million.

Capital Adequacy (Regulatory view) Prudential Consolidated

Variation


Quarterly Annual

Total Capital (TC) (a) 9,218 9,737 10,742

-5.3% -14.2%

Tier I Capital (b) 6,837 6,894 6,686

-0.8% 2.3%

Common Equity Tier I (CET1) (c) 6,837 6,894 6,686

-0.8% 2.3%

Tier II 2,382 2,843 4,056

-16.2% -41.3%

Total Risk-Weighted Assets (RWA) (d) 61,230 62,615 70,549

-2.2% -13.2%


-1.6% -11.1%


-40.7% -76.4%

Operational Risk (RWAOPAD) 4,615 4,615 4,780

0.0% -3.4%

Capital Requirement (e) 6,047 6,183 7,760

-2.2% -22.1%

Margin Capital (a - e) 3,172 3,553 2,982

-10.7% 6.4%

RBAN (f) 299 257 393

16.3% -23.9%

Margin Capital with RBAN (a - e - f) 2,873 3,296 2,589

-12.8% 11.0%

Additional Common Equity Tier I Additional 383 385 -

-0.7% N/A

In 2016, Additional Common Equity Tier I Additional requirement came into effect, which is composed of the following portions of ACP Conservation, ACP Countercyclical and ACP Systmic, defined by CMN Resolution 4,193, in conjunction with the Minimum Capital Requirements.

Additional Common Equity Tier I Additional Prudential Consolidated

Variation

Dec-16 Sep-16

Tri

ACP Conservation 383 385

-0.7%

ACP Countercyclical - -

-

ACP Systemic - -

-

Additional Total Common Equity Tier I 383 385

-0.7%

The Institution ended dec-16 with a Basel Ratio at 15.1%, with excess capital, calculated by the difference between the Capital and the Capital Requirement, of approximately R$ 2,9 billion (including RBAN) higher than the R $ 383 million required by the Common Equity Tier I Additional. The Tier I Capital ratio reached 11.2%, which represents presenting stability over the prior quarter and of 517 bps above the regulatory limit (6%).

Ratios Prudential Consolidated

Variation


Quarterly Annual

Basel Ratio (a / d) 15.1% 15.6% 15.2%

-49 bps -17 bps

Tier I Capital Ratio (b / d) 11.2% 11.0% 9.5%

16 bps 169 bps

Common Equity Tier 1 Ratio (c / d) 11.2% 11.0% 9.5%

16 bps 169 bps

LR - Leverage Ratio 5.3% 5.5% -

-27 bps N/A

See below the evolution of the Basel Ratio and Tier I Capital Ratio from the regulatory perspective between dec-15 anddec-16:

17

Margin Capital calculated considering the Required Capital for Basel Pilar I. It doesn’t consider Rban.

(*) For the period analyzed Tier I Capital Ratio equal to the Common Equity Tier 1 Capital Ratio

10.7429.742 9.665 9.737 9.218

7.7606.687 6.397 6.183 6.047

2.982 3.055 3.268 3.553 3.172

0

2.0 00

4.0 00

6.0 00

8.0 00

10. 000

12. 000

14. 000

16. 000

18. 000

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

Capital Adequacy (Regulatory view)

Total Capital (PR) Capital Requirement Margin Capital (1)

9,5% 9,7%10,6%

11,0% 11,2%

6,0%


Tier I Capital

Tier I Capital * Regulatory limit

15.2% 14.4% 14.9% 15.6% 15.1%

9.875%


Capital Ratio

Capital Ratio Tier I Capital Regulatory limit

18

2. Internal Capital Adequacy Assessment Process – ICAAP

In accordance with Resolution No. 3,988 and Circular No. 3,547, the institution performs the Internal Capital Adequacy Assessment Process (ICAAP) and produces its respective report made available to BACEN yearly, covering the capital plan, stress test, capital contingency plan and management and evaluation of the need for capital in the presence of material risks to which the institution is exposed, among other topics.

According to the ICAAP report for the base date December 31, 2015, the Bank regards its capitalization levels as adequate, since both the current regulatory capital, and the capital projections aligned with strategies for the next three years, are within regulatory and internal limits.

3. Leverage Ratio

Starting in October 2015, entered into force Circular No. 3,748, which is about the methodology for the calculation of the Leverage Ratio (LR). This Circular is in line with the Basel III recommendations, disclosed in order to improve the financial institutions abilities to absorb shocks from the financial system itself or other sectors of the economy, favoring the maintenance of the financial stability.

The Leverage Ratio (LR), according to the circular, is defined as the ratio of Tier I Capital (numerator) and an exposure measure (denominator).

𝐿𝑅 =𝑇𝑖𝑒𝑟 𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 𝑀𝑒𝑎𝑠𝑢𝑟𝑒

Whereas:

Tier I Capital: it’s the sum of the Common Equity Tier I and Additional Capital, as defined in Resolution No. 4,192;

Exposure Measure: is determined through the use of the financial statements net of provisions, advances received, unearned income and without the deduction of any mitigating.

Ondec-16, the Leverage Ratio ended in 5.5%. More detailed information is available in Annex 3.

R$ million.

LR Composition Prudential Consolidated

Variation

Dec-16 Sep-16

Quarterly

Leverage Ratio 5.3% 5.5%

-4.8%

Tier I Capital 6,837 6,894

-0.8%

Exposure Measure 129,719 124,510

4.2%

19

E. Risk management

Risk management of the institution is performed for risks considered relevant to Senior Management (Material Risks), which are dealt with and monitored by specific processes means.

The identification of material risks is performed recurrently, based on specific internal methodology and with the participation of the risk area in committees related to business management, such as the Executive Committee and Product Committee.

1. Credit Risk

The aim of credit risk management is to provide support for the Senior Management in the decision-making process by defining strategies and policies and establishing operational limits, risk mitigation tools and procedures to maintain credit risk exposure within levels deemed acceptable by the Bank’s management.

1.1 Definition

Credit Risk is defined as the likelihood of losses occurring due to the borrower, issuer or counterparty not complying with their respective financial obligations in accordance with agreed terms.

1.2 Basic Principles

In accordance with CMN Resolution No. 3,721, the Bank has an institutional structure and policies for credit risk management approved by the Board of Directors and the basic principles observed in management and control were established in compliance with current regulations and market practices, as follows:

Manuals and documents containing the organizational structure, relevant products, corporate policies, standards and procedures including flowcharts and rules related to the governance, business and credit support processes;

Technological environment encompassing the credit cycle ranging from risk admission, tracking and monitoring, to restructuring when applicable;

Validation process covering risks involved in systems, accuracy of models used for calculations and quality of processed data, as well as the coverage of the documentation;

Committee structure and powers for approving credit;

Criteria and procedures for selecting clients and preventing money laundering;

Credit analysis, lending and management standards;

Procedures for analysis, approval and release of new products involving credit risk;

Classification of portfolio risk levels, considering the clients ratings, the collateral involved, the maturity dates and operational arrears;

Monitoring sector and conglomerate concentration, as well as monitoring internal and regulatory limits defined by policies and rules;

Managing counterparty credit risk and limits for derivatives;

Evaluating risk in transactions for sales or transfer of assets;

Formalized procedures covering credit recovery flows;

Setting limits for carrying out transactions subject to credit risk, both individually and at the aggregate level - a group of companies with common economic interest - and for borrowers or counterparties with similar characteristics;

Control of guarantees and instruments for mitigating credit risk;

Monitoring of the loan asset portfolio using indicators with the aim of minimizing the risk of losses;

Performance of stress tests, measuring the combined effect of adverse movements in macroeconomic indicators, estimating financial impacts affecting delinquency, provisions and consequently, available and required capital;

Periodic reporting to Senior Management addressing the performance indicators of risk management based on the policies and strategies adopted; and

Documented procedures for policy exceptions.

20

In addition, credit risk management activities are carried out by specific control units, strengthening their performance with independence in relation to their trading units, providing to the senior administration a global view of the risk exposures from the Banco Votorantim.

1.3 Risk management structure and involved areas

Credit risk management activities include a number of strategic, tactical and operational activities permeating the entire 'business chain', from product development, setting limits, portfolio management, management information, collection and credit recovery, as well as monitoring the effectiveness of processes and controls used.

1.3.1 Board of Risks structure – Involved areas Risk management attributions are performed by formally set up units with technically qualified staff, under separate management, with clearly defined responsibilities.

Wholesale and Retail Credit Risk Management - Wholesale Credit Risk Management: its mission is to direct and continuous monitor the credit risk from the

Wholesale Bank, aiming to mitigate the associated risks. It has three different structures: Credit Policies: responsible for elaborating analyses and technical studies that may result in policies identifying, measuring and mitigating the credit risk from the Wholesale Bank. Additionally, another aim is to ensure the adherence of the wholesale credit risk policies to regulatory devices, as well as answering the internal and external regulatory requirements, concerning the wholesale credit risk.

MIS and PDD Wholesale: responsible for measuring and controlling the exposures and the main wholesale portfolio indicators in an aggregate level (portfolio view) and calculating the allowance for doubtful account – PDD. Wholesale Infrastructure: responsible for elaborating the IT (Information Technology) demand referring to development of technological solutions ensuring that the users need are adequately reflected in the systems, as well as its management and maintenance.

- Retail Credit Risk Management: its mission is to direct and continuous monitor the credit risk from the Retail Bank, aiming to mitigate the associated risks through analyses and technical studies that may result in policies and monitoring risk deterioration indicators in a timely manner. It has four different structures:

MIS and PDD Retail: responsible for the reports of measure and control of the exposures and of the main retail portfolio indicators in an aggregate level (portfolio view) and calculating the allowance for doubtful account – PDD.

Retail Infrastructure: responsible for elaborating the IT (Information Technology) demand referring to development of technological solutions ensuring that the users need are adequately reflected in the systems, as well as its management and maintenance.

GRC Vehicles and Payroll: responsible for the management of the credit risk building risk outline strategies and valuing the careful control of the loss by acting promptly when the combined risk appetite is being disrespected, keeping documented and updated the existing policies.

GRC Credit Card and Personal loans: responsible for the management of credit risk cards and personal loans, appreciate the thorough control and act in time when the combined risk appetite is being disrespected, keeping documented and updated the existing policies.

Statistical Modelling: responsible for developing statistical models such as Credit Score, Behavior Score, Collection Score and classification of companies, in line with the new Basel accordance.

Credit collection and Strategy: manages the Retail Credit Recovery, Wholesale Credit Recovery and Planning and Recovery teams, whose main attributions are detailed below:

21

Credit recovery-Wholesale: responsible for management and control of loans in arrears, supporting the commercial unit's renegotiations, arranging friendly credit collections and ongoing monitoring, along with the legal department, and bringing judicial proceedings, acting as liaison and coordinator between the units involved, and analyzing and submitting renegotiating proposals to the proper court. Monitoring the Credit Risk: responsible for monitoring the recurrent wholesale banking portfolio, detecting warning signs that identify, with priority, advance and in a timely manner, the credit deterioration in individual and aggregate levels.

Credit recovery - Retail: Responsible for the mass and litigious administrative credit collection (products: payroll loans, cards, personal credit and consumer credit) guard and sales of resumed guarantees and conceptualization, specification and monitoring recovery projects.

Recovery Planning: responsible for report and collection indicator generation and monitoring, and establishing related policies.

Environmental and Social Risk: responsible for assessing the social and environmental aspects with which the client is involved, such as: Waste Management, Compliance with Legislation, Working Conditions and Use of Natural Resources, establishing their level of environmental and social risk and issuing a social and environmental opinion to subsidize the Lending area in the credit decision process.

Integrated Risk and Capital: responsible for the (procedural and methodological) coordination of the Internal Capital Adequacy Assessment Process (ICAAP), risk appetite, stress test and ALM, Risks and Capital Committee (CARC) and for the determination and analysis of the regulatory and economic capital of credit risk, as well as for the capital ratios (Basel, Tier I and Common Equity Tier I).

Derivative Risk Control: performs the daily monitoring of the portfolio of derivatives held with clients.

1.3.2 Credit Lending Structure and Involved Areas

Credit CIB (Corporate & Investment Banking): responsible for the credit analysis and approval process of the CIB segment. It’s a member of the CIB credit committee and of the decision-making committees of the area, monitoring the business strategy based on market scenarios and internal credit policies and instructs the commercial managers in relation to best credit practices, aiming at a sustainable growth and alignment with the organization's strategic objectives.

Retail Credit: responsible for the individual analysis, when required by policies, of requests for credit produced through the corporate commercial structures of the Retail segment, ensuring that they are dealt with in compliance with the norms and procedures and with the respective approval levels of each operation. It is also responsible for control over the risk exposure of the portfolio.

1.3.3 Board of Internal Controls and Operational Risks structure – Involved Areas

Validation of models: responsible for the independent assessment of the risks associated with the development process model, monitoring the action plans prepared to mitigate risks identified in the validation of models and monitoring the model performance.

1.4 Credit Risk Management: The institution performs credit risk management through the adoption of governance, instruments and tools that allow the identification, assessment and measurement, tracking and reporting of the risk incurred in its activities in the main stages of credit risk, which are lending, credit monitoring and credit recovery.

Credit Lending: The lending process of the wholesale segment is based on detailed assessments of proponent clients, either in the admission of prospective clients or in the renewal of credit limits for existing clients. In the credit analysis process, the institution relies on integrated systems that manage the entire analysis flow, from the proposition of limits, through to the updating of detailed knowledge of the client (Know Your Client “KYC”, verification of documentation and inquiries to credit bureaus and market information), submission to the credit approval levels and implementation of the decisions of the corresponding committees. Proposals evaluations are segmented into specific organizational structures as the customer service level (Industry Team and Regional Team) and consider aspects related to the company’s

22

management, socio-economic information, competitive environment, market aspects and economic sector, among others. After the evaluation a credit presentation is elaborated which compiles the main aspects of risks and its mitigation, that must be analyzed by the Credit Committee.

In the Retail segment, credit proposals are processed by an automated, parameterized system supported by a scoring model, which favor greater efficiency and reliability in lending decisions, which are intended for individuals that demonstrate payment ability and reputability. For cases where the scoring model does not automatically decide, the credit desk carries out a more detailed check of all the aspects involved in the contract, with the intention of approving or rejecting the credit proposal.

Credit Monitoring: In Wholesale, after the approval of the credit limit and/or loan for the client, these are tracked by means of recurrent monitoring of the portfolio, identifying warning signs that demonstrate, with propriety, in advance and in a timely manner, the deterioration of credit at individual and aggregate levels. In Retail segment, the institution performs the monitoring of the credit risk through performance indicators and management reports of the credit portfolio.

Credit Recovery: The credit recovery area works together with the monitoring area from the first day of delinquency observed in loans. Several strategies are used to maximize credit collection opportunities.

See below the credit risk exposures according to definitions established by Circular No. 3,644, segregated by products, country and geographical regions, and economic sector:

1.4.1 Total and Average Exposure in the Quarter

R$ million.

Total and Average Exposure in the Quarter Prudential Consolidated

Variation


Quarterly Annual

Individuals 31,695 31,567 31,913

0.4% -1%

Payroll 3,376 3,626 4,296

-6.9% -21%

Vehicle and Leasing 26,247 26,064 25,980

0.7% 1%

Credit Card1 1,714 1,533 1,324

11.8% 29%

Other 358 344 313

3.9% 14%

Companies 12,780 12,662 15,230

0.9% -16%

Investments 3,218 3,350 3,558

-3.9% -10%

Import and Export 4,206 4,536 5,951

-7.3% -29%

Working Capital, Discount Bonds and Guaranteed Account

2,010 2,262 2,973

-11.1% -32%

Rural Loans 417 438 378

-4.7% 10%

Other 2,929 2,077 2,369

41.1% 24%

Endorsements and Sureties 4,883 5,128 6,018

-4.8% -19%

Total Exposure 49,358 49,357 53,160

0.0% -7%

Average Exposure in the Quarter 49,358 49,239 53,168

0.2% -7%

1 - includes limits

23

1.4.2 Exposure by Country and Brazil Geographical Region

R$ million

Exposure by Country and Brazil

Geographic Regions


Variation

Dec-16

Sep-16 Dec-15

Quarterly Annual

Brazil Total

Brazil + Other

Countries

Midwest North Northeast Southeast South Total Brazil

Total Other

Countries

Individuals 3,098 4,681 825 15,887 7,205 31,695 - 31,695 31,567 31,913

0% -1%

Payroll 248 640 - 1,828 660 3,376 - 3,376 3,626 4,296

-7% -21%

Vehicle and Leasing 2,684 3,802 816 12,654 6,290 26,247 - 26,247 26,064 25,980

1% 1%

Credit Card1 113 196 - 1,232 172 1,714 - 1,714 1,533 1,324

12% 29%

Other 53 42 8 172 83 358 - 358 344 313

4% 14%

Companies 183 175 1,688 8,111 1,286 11,444 1,336 12,780 12,662 15,230

1% -16%

Investments 60 170 130 2,379 478 3,218 - 3,218 3,350 3,558

-4% -10%

Import and Export 48 - 1,327 1,840 498 3,713 493 4,206 4,536 5,951

-7% -29%

Working Capital, Discount Bonds and Guaranteed Account

75 5 215 1,450 266 2,010 - 2,010 2,262 2,973

-11% -32%

Rural Loans - - - 399 18 417 - 417 438 378

-5% 10%

Other 0 - 16 2,043 26 2,085 844 2,929 2,077 2,369

41% 24%

Endorsements and Sureties

7 - 181 3,967 658 4,813 70 4,883 5,128 6,018

-5% -19%

Total Exposure 3,289 4,856 2,694 27,965 9,149 47,952 1,406 49,358 49,357 53,160

0% -7%

1 - Includes limits

1.4.3 Exposure by Economic Sector

Individuals

R$ million

Exposure Individuals


Variation

Dec-16

Sep-16 Dec-15

Quarterly Annual

Payroll Vehicle and

Leasing Credit Card1 Other Total

Total 3,376 26,247 1,714 358 31,695 31,567 31,913

0.4% -1%

1 - includes limits

24

Companies and Endorsements and Sureties

R$ million

Exposure by Economic Sector

Companies and Endorsements and

Sureties


Variation

Dec-16

Sep-16

Dec-15

Quarterly Annual Investments

Import and

Export

Working Capital,

Discount Bonds and

Guaranteed Account

Rural Loans

Other Endorsements and Sureties

Total

Financial Institutions 3 - 84 - 726 2,147 2,960 2,577 3,108

15% -5%

Sugar and Ethanol 339 1,128 33 276 - 40 1,816 1,981 2,239

-8% -19%

Petrochemical 17 1,152 11 41 - 87 1,308 1,490 1,607

-12% -19%

Retail 146 - 308 - 624 141 1,219 820 1,201

49% 1%

Telecom 7 - 193 - 16 709 925 916 1,064

1% -13%

Agribusiness 134 311 22 99 - 143 710 768

-8% -29%

Railways 538 119 35 - - 16 708 760 750

-7% -6%

Mining 1 36 50 - - 491 578 719 721

-20% -20%

Electricity Generation 359 - 14 - - 169 542 591 683

-8% -21%

Automotive 153 386 - - - 0 539 450 399

20% 35%

Government - - - - 525 - 525 573 705

-8% -26%

Construction - residential / commercial

4 - 333 - - 76 413 412 522

0% -21%

Electricity Distribution 37 - 12 - 15 343 407 408 448

0% -9%

Oil and Gas 401 - - - - - 401 401 401

0% 0%

Road Cargo Transportation

144 115 59 - 7 47 372 466 533

-20% -30%

Pulp and Paper 27 318 8 - - 1 354 356 755

-1% -53%

Steel industry 246 0 5 - - 60 311 270 189

15% 65%

Fridge 2 30 4 - 223 - 258 263 284

-2% -9%

Food Industry 16 59 120 0 - 50 245 313 199

-22% 23%

Services 3 2 135 - 39 51 230 288 412

-20% -44%

Other sectors 640 548 585 1 754 313 2,841 2,966 4,025

-4% -29%

Total 3,218 4,206 2,010 417 2,929 4,883 17,663 17,790 21,248

-1% -17%

1.4.4 Credit Concentration

The Bank has credit concentration risk assessment processes for the wholesale and retail portfolios, mainly through the monitoring of portfolios by different dimensions and internal segments, revealed in several reports. Furthermore, the Bank has rules that limit exposure to counterparties and economic sectors, and monitors some of these credit concentration risk indicators monthly through the risk appetite dashboard.

The table below shows the evolution of credit exposures broken down by major debtors and other clients in the Bank's loan portfolio, in accordance with Circular No. 3.644:

R$ million

Credit Exposures Concentration Prudential Consolidated

Variation


Quarterly Annual

Tem largest exposures 5,811 11.77% 5,773 11.70% 5,937 11.17%

0.7% 8 bps -2.1% 61 bps

Fifty largest exposures 12,103 24.52% 11,802 23.91% 11,281 21.22%

2.5% 61 bps 7.3% 330 bps

Hundred largest exposures 14,993 30.38% 14,713 29.81% 14,417 27.12%

1.9% 57 bps 4.0% 326 bps

25

1.4.5 Unelapsed period of operations

Individuals

R$ million

Unelapsed period of operations Individuals


Variation

Dec-16

Sep-16 Dec-15

Quarterly Annual Payroll

Vehicle and Leasing

Credit Card1 Other Total

Up to 6 months; 62 444 1,714 11 2,231 2,103 1,844

6.1% 21%

6 to 12 months; 153 1,377 - 26 1,556 1,471 1,595

5.8% -2%

1 to 5 years 2,320 24,337 - 296 26,952 26,938 26,673

0.1% 1%

Above 5 years 842 89 - 25 956 1,055 1,801

-9.4% -47%

Total 3,376 26,247 1,714 358 31,695 31,567 31,913

0.4% -1%

1 - includes limits

Companies and Endorsements and Sureties

R$ million

Unelapsed period of operations

Companies and Endorsements and

Sureties


Variation

Dec-16

Sep-16 Dec-15

Quarterly Annual Investments

Import and

Export

Working Capital,

Discount Bonds and

Guaranteed Account

Rural Loans

Other Endorsements and Sureties

Total

Up to 6 months; 37 777 203 44 1,720 533 3,313 2,569 3,345

29% -1%

6 to 12 months; 80 396 160 208 306 295 1,445 1,561 1,893

-7% -24%

1 to 5 years 1,515 2,891 1,312 166 156 1,838 7,878 8,313 8,333

-5% -5%

Above 5 years 1,586 142 335 - 748 2,217 5,028 5,347 7,677

-6% -34%

Total 3,218 4,206 2,010 417 2,929 4,883 17,663 17,790 21,248

-1% -17%

1.4.6 Operations overdue

See below the amount of overdue operations, gross of provisions and excluding operations already written-off as loss, segmented by:

26

Economic sector with significant exposures:

R$ million

Overdue Amounts by Economic Sector


Variation

dez-16

set-16 dez-15

Quarterly Annual 15 to 60

days

61 to 90 days

91 to 180 days

181 to

360 days

Above 360 days

Total

Heavy Construction 0 2 - 276 - 278 279 35

0% 694%

Mining 0 - - 174 - 174 174 4

0% 3866%

Agrobusiness 0 - - 60 20 81 87 189

-7% -57%

Sugar and Ethanol - - 3 11 52 66 99 170

-33% -61%

Trading Agro - - - 64 - 64 64 4

0% 1543%

Fridge - - 7 11 21 39 39 -

1% N/A

Electricity Generation 33 - - - - 33 32 44

2% -25%

Construction - Construction Materials

4 - 13 8 - 24 39 20

-38% 21%

Services 3 - 16 2 - 22 22 91

-2% -76%

Truck Body 17 0 - - - 17 13 9

29% 87%

Metallurgy 1 - 5 10 - 15 19 160

-17% -90%

Trading - - - 14 - 14 15 15

-1% -2%

Vehicles Trade 3 7 0 1 - 12 7 45

75% -74%

Industry - - 10 - - 10 10 -

0% N/A

Food Industry 1 - - - 8 10 9 16

8% -41%

HOLDINGS - - - 7 - 7 47 -

-84% N/A

Road Cargo Transportation 1 6 0 - - 7 34 41

-79% -83%

Steel industry 3 - 4 - - 6 4 0

68% 7830%

Livestock 6 - - - - 6 - -

N/A N/A

Auto parts 5 - - 0 - 5 3 4

51% 12%

Other 5 1 4 5 1 17 35 321

-53% -95%

Total Companies 82 16 62 644 103 907 1,029 1,168

-12% -22%

Retail Individuals 2,028 517 807 1,013 66 4,430 4,779 4,423

-7% 0%

Total 2,109 533 869 1,657 169 5,337 5,809 5,591

-8% -5%

Due to changes in management markings, some data from Sep/15 and Jun/16 have changed for purposes of comparison.

27

Countries and geographical regions of Brazil:

R$ million

Overdue Amounts by Brazil Regions and

Countries1


Variation

Dec-16

Sep-16 Dec-15

Quarterly Annual 15 to 60

days 61 to 90

days 91 to 180

days 181 to 360

days

Above 360 days

Total

Brazil 2,109 533 866 1,603 66 5,176 5,660 5,552

-8.5% -7%

Midwest 236 59 94 173 7 569 592 474

-3.9% 20%

North 74 18 28 27 1 147 216 241

-31.8% -39%

Northeast 342 90 146 200 14 791 860 854

-8.1% -7%

Southeast 1,031 265 424 990 30 2,741 2,921 2,806

-6.2% -2%

South 426 101 174 213 14 928 1,070 1,178

-13.3% -21%

Other Countries - - 3 54 103 161 149 39

7.9% 314%

Total 2,109 533 869 1,657 169 5,337 5,809 5,591

-8.1% -5%

Due to changes in management markings, some data from Sep/15 and Jun/16 have changed for purposes of comparison.

1.4.7 Allowance for loan losses

The chart below presents the activity of allowance for loan losses and the flow of operations written-off as loss for the retail and wholesale sectors/segments:

R$ million

Allowance for Loan Losses (ALL)

Prudential Consolidated Variation

4rd

Quarter, 2016 3nd Quarter,

2016

Consumer

Finance Wholesale Total

Quarterly

Initial Balance 2,056 1,013 3,069 2,989

2.7%

Accruals / Reversals 673 436 1,109 705

57.3%

Write-off Loans (427) (80) (507) (625)

-18.9%

Final balance 2,302 1,369 3,671 3,069

19.6%

(1) Refers to the changes of the allowance for doubtful accounts for the Prudential Consolidated Investment Funds.

1.5 Credit Risk Mitigation

The functions related to the mitigation process involve a set of functional activities distributed around several areas of the

Bank, and are intrinsically related to the credit risk cycle as regards the credit concession, control, management and

monitoring and credit recovery processes.

Banco Votorantim has a governance structure for credit risk management arranged in committees and commissions formed

by executives who periodically monitor the credit risk appetite, concentrations by sector and by economic group, portfolio

exposure limits, contingencies related to credit risk management, and others. Besides the strategies and credit rules, the Bank

has policies related to enforceability, formalization and monitoring of guarantees to support lending and credit, which are also

evaluated from these forums that are responsible for assessing the methodologies for measurement and mitigation credit risk.

For the retail portfolio, the scope essentially involves auto finance operations, given their peculiarity and relevance to the total portfolio, and in this context, guarantees represent an important risk mitigation of the operation (auto finance). In the lending process, guarantees are assessed together with the other information necessary for approval of the credit proposals and undergo an automatic checking and control process (formalization of guarantees).

For wholesale, guarantees are assessed and classified together with the other information necessary for approval of the credit limit, and taking into account some relevant factors in their definition, such as: the risk represented by the client/operation;

28

the practicality and the costs incurred in their formation; liquidity: amount of the guarantee in relation to the debt value; control by the creditor over their own guarantee.

The table below presents the total amount mitigated by the instruments defined in §3 of art 36 of Circular No. 3,644, segmented by type of mitigation and by its respective Risk Weighting Factor (RWF), according to Arts. 37 to 39 of Circular No. 3,644.

R$ million

Type of Mitigation1 RWF


Variation

Dec-16 Sep-16 Dec-15 Quarterly Annual

Customer deposits and long term deposits; savings, deposits in gold or in government securities; owner financial letters; other guarantees.

0% 32,879 46,261 28,731

-28.9% 14%

Government Securities, pursuant to art. 37-A of Circular No. 3,644, guarantors of committed exposures that do not meet the requirement defined in inc. I of paragraph 6 of art. 37 from Circular No. 3644/13.

10% 5 136 292

-96.7% -98%

Guarantees from countries anda central banks; guarantees from public entities, other guarantees

20% - - -

N/A N/A

Guarantees from financial institutions; guarantees from funds; securities deposits; credit derivatives in in which the institution acts as transferring counterparty risk and discounts of transfers from payroll referred to in art. 36, § 3, item VIII, linked to payroll loans. Item VI of art. 39 of Circ. 3,644 / 13, as amended by Circ. 3,714 / 14.

50% 2,344 2,540 3,022

-8% -22%

1 - It is included in the above table the following guarantees: federal bonds used as mitigation of repos; Cash Collateral used in the credit / surety bail and operations; and the National Treasury to guarantee operation with the State of Mato Grosso.

To supplement the mitigation used to determine the necessary credit risk capital presented above, the table below lists other

guarantees considered in wholesale operations:

R$ million

Guarantees1


Variation


Quarterly Annual

Fidejussory Guarantees 8,701 9,380 10,718

-7% -19%

Stock Disposal 2,473 2,423 2,838

2.1% -13%

Agro/Rural Disposal 169 173 311

-2.6% -46%

Financed Assets Disposal 3,017 3,110 3,341

-3.0% -10%

Commodities Stock Disposal 685 709 864

-3.4% -21%

Property Disposal 1,122 1,078 1,072

4.1% 5%

Machines and Equipments Disposal 987 1,062 1,002

-7.1% -1%

Vehicles Disposal 85 103 128

-17.3% -34%

Ships Disposal 4 4 4

-1.7% 0%

Aircraft Disposal 141 143 147

-1.1% -4%

Fixed Income Investments 1,468 1,675 699

-12.4% 110%

Variable Income Investments 297 279 241

6.4% 23%

Granted of Commercial Invoice 88 146 208

-39.8% -58%

Real Estate Mortgage 1,343 1,371 1,159

-2.0% 16%

Mortgages Vessel 7 7 7

-0.4% 0%

Granted of asset-backed - - -

N/A N/A

Pledge of agribusiness 325 461 457

-29.5% -29%

Commercial Pledge 322 369 452

-12.7% -29%

Total of Guarantees 21,234 22,493 23,647

-5.6% -10%

1 - Wholesale operations

29

1.6 Counterparty Credit Risk

The counterparty credit risk is defined as the possibility of losses resulting from the bilateral risk relating to the uncertainty of the market value of the operation and its fluctuations associated with the movement of the risk factors or with the deterioration of the counterparty’s credit rating.

The roles of counterparty credit risk management are performed by specific units, with defined attributions, as presented below: Derivative Products

Responsible for the structuring of derivative products without central counterparty.

Credit Lending - Wholesale

Responsible for the concession of limits of derivative operations according to the current credit policies.

Integrated Risk and Capital

The area is responsible for the measurement of regulatory capital.

Derivative Control

Performs the daily monitoring of the portfolio of derivatives held with clients.

Market risk and liquidity

Responsible for mark-to-market, economic/ management models, analysis of structured derivative operations and support to Lending.

Credit Risk Management

Responsible for the control and monitoring of the limits used and preparation of management reports (after sales).

1.6.1 Counterparty Credit Risk Management

The Bank considers that counterparty credit risk is present mainly in operations with derivative financial instruments, unsettled operations, purchase and sale commitments and loans of assets.

Specific classifications and treatments are performed for derivative operations with regards the existence of a central counterparty.

Transactions with no central counterparty: the management and control process for derivative operations without a central counterparty is carried out in such a way that specific credit limits of derivatives are defined for each client. The credit policies and standards adopted by the Institution are employed both in the definition and in the periodic tracking of these limits.

Transactions with central counterparty: operations with a central counterparty have contract clauses (margin calls, etc.) that mitigate the counterparty credit risk.

The Bank has dedicated structure for managing limits, which monitors portfolio behavior and issues periodic reports informing Senior Management of business opportunities and any risks of exceeding limits.

The following table shows notional values of contracts subject to counterparty credit risk (as definitions of the Circular No. 3.644) that are to be submitted to clearing and settlement systems in which the entity acts as central counterparty with or without guarantee:

R$ million.

Exposure subject to counterparty-credit risk Prudential Consolidated

Variation


Quarterly Annual

Entity acts as central counterparty (Stock Exchange) 788 1,309 599

-39.8% 32%

Entity not acts as central counterparty (OTC) 33,501 39,121 29,224

-14.4% 15%

With Guarantee 30,542 37,091 27,098

-17.7% 13%

Without Guarantee 2,958 2,030 2,126

45.7% 39%

30

The following table shows gross positive value of contracts subject to counterparty credit risk:

R$ million.

Gross positive value of exposure subject to counterparty credit risk


Variation


Quarterly Annual

(+) Gross Positive Value 35,413 42,014 31,565

-15.7% 12%

Entity acts as central counterparty (Stock Exchange) 952 1,105 1,000

-13.8% -5%

Entity not acts as central counterparty (OTC) 34,461 40,909 30,564

-15.8% 13%

Derivatives 1,641 2,278 1,549

-28.0% 6%

Transactions to be Settled 4 4 119

4.2% -97%

Stock Rental - - -

N/A N/A

Repurchase Agreements 32,816 38,628 28,896

-15.0% 14%

(-) Guarantees 31,265 37,968 27,658

-17.7% 13%

Guarantees under specific conditions1 30,542 37,091 27,098

-17.7% 13%

Other Guarantees2 722 877 561

-17.7% 29%

(-) Amounts related to Netting Arrangements 262 163 198

60.7% 33%

(=) Net Global Exposure 3,886 3,883 3,709

0.1% 5%

1 - a) are maintained or held under custody at the actual institution; b) have the sole purpose of providing a guarantee for related transactions; c) are subject to transactions solely under orders by the depositary institution; and d) immediately available to the depositary institution in the event of delinquency by the debtor or need for their realization; 2 – Collateral

Starting from the base date June-14, information about credit risk of the counterparty will be determined according to the

base of information used in compliance with Circular No. 3,644.

1.6.2 Credit Derivatives

The following table shows the notional value of credit derivatives broken down by risk exposure transferred and risk received:

R$ million.

Credit Derivatives Prudential Consolidated

Variation


Quarterly Annual

Asset position – Risk received 279 279 349

0.0% -20.1%

Credit Swaps 279 279 349

0.0% -20.1%

Liability position – Transferred risk 375 471 390

-20.4% -3.8%

Credit Swaps 375 471 390

-20.4% -3.8%

1.7 Acquisition, sale and transfer of financial assets

The Bank carries out acquisitions, sales or transfers of financial assets to wholesale and retail portfolios, guided by the credit strategy defined by the institution or going from business opportunity identification. These operations can, by nature, be carried out with substantial retention or transfer of the risks and benefits.

In this respect, the Bank has policies designed to establish adequate criteria for a correct evaluation of the retention or transfer of risks and benefits in acquisitions, sales or transfers of financial assets, and through these policies, defines the general conditions (e.g. restrictions, criteria for the selection of the purchasing institution, necessary documentation of the portfolio, payment method of contracts and others).

1.7.1 Exposures granted

In general, sales or transfers of financial assets performed by the Bank are related mainly to the assignments of receivables of payroll loan and auto finance agreements (in a regular situation or delinquent) and assets of the wholesale portfolio. Such assignments are aligned with the funding strategies for new operations and portfolio management, and are normally

31

negotiated with other financial institutions, securitization companies or investment funds. The table below shows the value of assignments with recourse operations prior to Resolution No. 3,533:

R$ million.

Balance of exposures assigned recorded in memorandum accounts


Variation


Quarterly Annual

With Coobligation1 - 13 276

-100.0% -100.0%

1 - Include Financial Institutions, Related Parties and Other Financial Institutions.

The table below shows the flow of exposures granted in the period, broken down by recourse and assignee type (after the Resolution No. 3,533):

R$ million.

Value of granted exposures Prudential Consolidated

Variation


Quarterly Annual

With Coobligation 12,166 11,810 14,022

3.0% -13.2%

Financial institutions 12,166 11,810 14,022

3.0% -13.2%

1 - For the period presented there are no exposures in the classifications: Credit rights Investments Fund (FIDC); Securitization Companies; Specific Purpose Company (SPE); Adjustment to market value - Credit Assignements and Other.

The table below presents the total quantity of exposures granted in the last 12 months, which have been honored, repurchased or written-off as loss:

R$ million.

Exposures assigned honored, repurchased, or written-off


4th

Quarter, 2016 3rd

Quarter, 2016 2nd

Quarter, 2016 1st

Quarter, 2016

Honored and Repurchased 2,572 2,849 2,949 2,879

Written-off 165 155 162 154

In subsidiary BV Financeira a sale of overdue loans was performed (with delay greater than 360 days) in the amount of R$ 702,364 in 2016, without substantial retention of risks and benefits. The sale was received R $ 18,300 recognized in the income statement under "Revenue from loans - loans written off recovery".

1.7.2 Exposures Acquired The Bank sporadically acquires loan portfolios, depending on the business opportunity. We present below the balances of exposures acquired in the period, segregated by type and assignor:

R$ million

Balance of exposures acquired Prudential Consolidated

Variation

Transferor Type of exposures Risk and Benefit Dec-16 Sep-16 Dec-15

Quarterly Annual

Companies Receivables Without Coobligation 1,862 1,030 1,112

80.8% 67%

Companies Receivables With Coobligation 43 42 91

0.7% -53%

1.8 Securitization According in BACEN Circular No. 3,648, the securitization process is defined as the use of a flow of receivables associated with a set of underlying assets for compensation of asset-backed securities structured in at least two payment prioritization classes, classified as either traditional or synthetic.

In this respect, the Bank operates in the securitization process in the role of asset-backed security originating counterparty, given its performance in the direct or indirect origination of the underlying asset, or in counseling and coordination in the issuance of asset-backed securities from own or third-party underlying assets. The Bank has internal norms that provide

32

support to the valuation and origination process of securities originating from securitization processes. Operation proposals are approved at the competent levels and by specific committees (Structured Operations Committee and Credit Committee).

On the 4th

quarter of 2016 the Bank with other banks participated on the securitization process of six operations of the Real Estate Receivables Certificate (CRI) at the total amount of R$ 480 million, and a part of the CRI's was distributed to investors and the rest allocated to the Bank portfolio. Additionally, Banco Votorantim with other banks ended the distribution process of two Agribusiness Receivable Certificate (CRA) at the total amount of R$ 1.385 million and part of the CRA’st was distributed to investors. Besides the securitization process, the bank has in is portfolio, asset-backed securities as shown below:

R$ million

Balance of Exposures Securitization1 Prudential Consolidated Variation

Traditional or

Synthetic Type of asset-

backed security Type Underlying

Asset Class of asset-

backed security Dec-16 Sep-16 Dec-15

Quarterly Annual

Traditional CRA CCE2 N/A 0 0 1

N/A -100%

Traditional CRI CCB3 N/A 97 102 181

-5.3% -47%

Traditional CRI Debenture estate

allocation N/A 4 6 111

-33.3% -96%

1 – Book value concept

2- CCE - Export credit notes

3 - CCB - Bank Credit Bill

On the base date dec-16 the portion of RWACPAD attributed to securitization exposures resulted in a percentage of less than 5% of the total value of the portion of RWACPAD on the same base date.

33

2 Market Risk

It is the aim of market risk control to provide support for the business management, establish the processes and implement the tools required for assessing and controlling market risks, enabling the measurement and follow-up of the risk appetite levels defined by Senior Management.

2.1 Definitions

Market risk is defined as the possibility of financial losses arising from the variation in the market value of exposures held by a financial institution. These financial losses may be incurred due to the impact generated by the variation in interest rates, exchange rate parity and prices of shares and commodities.


In accordance with CMN Resolution No. 3,464, the Bank has an institutional structure and policies for market risk management approved by the Board of Directors and the basic principles observed in management and control were established in compliance with the current regulations and market practices, as follows:

Involvement of Senior Management: the existing committees and commissions are structured in manner that Senior Management participates in the overall supervision of risk-taking;

Segregation of portfolios: for a consolidated management and control of market risk exposures, operations are divided into two types of portfolios, in accordance with their business strategy: trading portfolio (trading) or banking portfolio (non-trading);

Segregation of attributions: segregation of functions between units responsible for trade execution and defining business strategies, and the units responsible for accounting, risk control, compliance and internal controls and auditing. This segregation is structured with the objective of ensuring independence and autonomy in the management of the attributions inherent to each role;

Definition of attributions: clear definition of processes and the range of activities of each function involved in market risk management and control. This definition is structured with the objective of enabling organized and efficient operations management;

Definition of pricing and risk calculation methods: for the purpose of risk control, structured methodologies based on market practices are adopted for mandatory corporate use;

Limits Establishment: clear and objective definition of the authorized risk levels, based on the risk measures. This definition is structured with the objective of including the risk appetite levels defined by the institution in the daily activities;

Monitoring of limits: definition of the process for monitoring and reporting on the level of usage of the authorized limits.

2.3 Areas Involved

Market risk management functions include a set of functional activities that permeate the entire 'business chain', from product development, to operations, modeling and control of market risk, P&L attribution and formalization, accounting and settlement of transactions, as well as monitoring the effectiveness of processes and controls used.

These functions are performed by formally set up functional units, with technically qualified teams, under separate management, and with clearly defined attributions, as presented below:

Market Risk Control

Responsible for pricing methodologies and modeling, and calculating market risk;

Responsible for the independent capture of the prices used;

Responsible for calculating the values at risk and the allocated capital and monitoring authorized limits.

Treasury

Responsible for trade execution with the market, constantly ensuring fair prices and trading compliance;

Responsible for monitoring market opportunities and trends and managing risk exposures, in compliance with the defined strategies and authorized limits;

34

Responsible for the effective operation of the management segregation of portfolios.

Operations

Responsible for the independent confirmation, formalization, registration, accounting and settlement of transactions, as well as for ensuring the completeness, consistency, integrity and reliability of databases.

Finance

Responsible for the determination and tracking of the accounting and management result of operations.

2.4 Market Risk Management

2.4.1 Segregation of Portfolios

For the purposes of consolidated management and control of market risk exposures, transactions are segregated into two types of portfolios depending on their business strategy: trading portfolio (trading) or banking portfolio (non-trading).

The trading portfolio covers all transactions, financial instruments, commodities or derivatives held with the intention of trading, or turning over, or hedging other trading portfolio transactions, and not subject to tradability restrictions. The banking portfolio encompasses all the operations not classified as trading.

The principal mechanisms adopted by the Bank for segregating portfolios are the following:

Segregation of transactions is based on business strategies intention, captured at the time of trading, reflecting proactive treasury management, and it might be classified as trading or banking;

Conditions for trading classification: intention of trading in short-term, need for liquidity, being marked to market on a daily basis, and observe rules for defined turnover dates and carrying levels; e

Breakdown of banking portfolio: includes other transactions, financial instruments, commodities or derivatives, which, by exclusion, are those not held for the sole purpose of trading in the short term.

2.4.2 Risk Measures and Limits for Management and Control

The Bank adopts a set of objective measures for managing and controlling market risks.

VaR (Value-at-risk): it seeks to determine the risk resulting from market exposures, by determining the highest expected loss within a confidence interval and a time horizon;

Stress test: it is used to estimate potential fluctuations in value of financial instruments, which occur because of extreme movements of market variables (or risk factors);

Market Risk Regulatory Capital: comprises the regulatory capital calculated as a result of the exposures of trading and non-trading portfolios;

Sensitivity Analysis: it is used to estimate the potential fluctuations in value of financial instruments, which occur because of fluctuations in the risk factors; and

GAP analysis: consists of the measurement of cash flow mismatching by risk factor.

Risk measures are used along with limits as market risk management tools. These limits include the definition of maximum authorized amounts, adhering to the strategies adopted, the scope of products authorized for trading, consistent with budgeted assumptions and targets. There are two types of limits, depending on decision-making powers:

Upper Limits: maximum authorized limits at the Board of Directors’ level;

Operating limits: internal authorized limits at the level of the ALM, Risk and Capital Committee and Market Risk Commission, always in compliance with the Upper limits.

35

The limits are established based on the risk appetite and defined in a manner to pragmatically enable the achievement of the intended financial performance targets. Limits and targets are matched at the budget programming level. Amounts or values set in limits are updated and revised at least annually, together with budgetary programming.

2.4.3 Risk Measurement Methodology

2.4.3.1 Trading portfolio

Trading portfolio is comprised of Bank transactions available for negotiation. The Bank measures the market risk from the trading portfolio through Historical Simulation VaR.

The following table shows the exposure of the trading portfolio by risk factor, segmented by long and short positions:

R$ million.

Exposure of the Trading Book


Variation


Quarterly Annual

Fixed 449 1,063 165

-57.7% 172.0%

Long 4,421 4,467 3,829

-1.0% 15.5%

Short (3,971) (3,404) (3,664)

-16.7% 8.4%

FX Coupon (82) 48 1,737

-271.7% -104.7%

Long 1,263 1,052 3,191

20.1% -60.4%

Short (1,345) (1,005) (1,453)

-33.9% -7.5%

Foreign Currency1 33 35 331

-5.6% -89.9%

Long 37,740 44,181 51,396

-14.6% -26.6%

Short (37,707) (44,146) (51,065)

14.6% -26.2%

Inflation 185 463 799

-60.0% -76.8%

Long 232 493 799

-52.8% -70.9%

Short (47) (30) -

-56.4% N/A

Equity 59 7 18

749.1% 227.6%

Long 1,394 1,724 576

-19.2% 142.1%

Short (1,334) (1,717) (557)

22.3% 139.3%

Commodity - - -

N/A N/A

Long - - -

N/A N/A

Short - - -

N/A N/A

TJLP / TR / TBF - - -

N/A N/A

Long - - -

N/A N/A

Short - - -

N/A N/A

From March/16 it is considered Trading and Banking Portfolio, and the other periods were changed for purposes of comparison

2.4.3.2 Banking portfolio The banking portfolio consists of structural exposures arising from lending and maintenance of credit operations, and the funding that comes from funding for these loans, regardless of maturity and currency of operations or its business segmentation (retail, middle or corporate). The banking portfolio also includes transactions to hedge assets or equity, and loans or funding in the banking portfolio. This portfolio is also known as the structural portfolio because it includes structural management of asset-liability mismatch.

The bank uses the Historical Simulation VaR methodology for the measurement of the banking portfolio risk and this methodology adopts guidelines stated in Bacen Circular 3,365, of September 12, 2007.

The Bank uses conservative assumptions for prepayment of loans and deposits that have no definite maturity date:

in the case of loans, the final settlement date is assumed with no statistical modeling for a scenarios in which amounts owed are received before due date;

36

in the cases of daily liquidity deposits, such as funding with repurchase commitment, the date assumed is after the redemption is possible (early settlement); and

in the case of sight deposits, which positions are non-material relevant, the first business day subsequent to the calculation base date is assumed to be maturity date.

We present below the breakdown of the banking portfolio:

R$ million.

Interest Rate Risk in the Banking Book Prudential Consolidated

Variation


Quarterly Annual

Interest Rate Risk in the Banking Book 299 257 393

16.3% -23.9%

2.4.4 Measurement Systems and Communication Process

The Bank adopts corporate systems for measuring and controlling market risk combined with internally developed applications with market solutions of proven robustness. These systems include integrated treatment of information in sequential order:

capturing price and curves from independent sources, reflecting parameters of trading conditions effectively practiced;

capturing records of trading and registration data;

continuous updating and archiving this information in structured databases, monitoring its integrity and consistency from an accounting point of view;

calculating market values of positions for accounting purposes, managerial monitoring of positions held and financial performance; and

calculating values at risk using VaR methodology.

In addition, the Bank has a structured process for reporting issues related to market risk management. This communication process comprises:

periodically issuing objective reports showing exposures and levels of use of authorized limits;

periodically holding collective monitoring forums, within decision-making competencies, in which current issues are discussed with full participation; and

specific electronic messages reporting and monitoring cases of limits being exceeded or non-compliance, in which positions and managers responsible are identified.

2.4.5 Reporting Limits Exceeded or Noncompliant Transactions

The procedure adopted for monitoring utilization of limits or noncompliant transactions comprises two steps: (i) reporting and (ii) return to compliance.

Notification: Notification is through standard “Utilization Alert” e-mails indicating predetermined trigger limits for using or “Exceeding Limits”, advising that above-authorized risk-exposure has occurred.

Return to compliance: Any limits being exceeded or non-compliance involves executing strategies for returning to authorized limits and reducing amounts utilized; These strategies are the responsibility of business managers, in light of market conditions, subsequently monitored by the Market Risk Commission.

37

2.4.6 Financial Derivative portfolio Profile

The following table shows the composition of the derivatives portfolio broken down by risk factor, segmenting positions by counterparty type, location and whether they are long or short:

R$ million.

Risk Factor: INTEREST Prudential Consolidated

Variation

Counterparty Location L/S Dec-16 Sep-16 Dec-15

Quarterly Annual

With Central Counterparty

Brazil L 36,190 40,695 32,425

-11.1% 11.6%

S 51,698 49,072 36,325

5.4% 42.3%

Foreign L - - -

N/A N/A

S 4,337 4,452 4,329

-2.6% 0.2%

No Central Counterparty

Brazil L 9,727 9,739 37,586

-0.1% -74.1%

S 13,883 14,303 48,097

-2.9% -71.1%

Foreign L 1,430 1,331 164

7.4% 770.5%

S 1,492 1,440 164

3.7% 808.4%

Net (24,064) (17,503) (18,740)

37.5% 28.4%

1 - L - Long or S - Short

R$ million.

Risk Factor: FOREIGN EXCHANGE Prudential Consolidated

Variation


Quarterly Annual


Brazil L 19,686 26,011 28,093

-24.3% -29.9%

S 19,344 25,407 18,889

-23.9% 2.4%

Foreign L - - -

N/A N/A

S - - -

N/A N/A


Brazil L 7,672 7,083 7,765

8.3% -1.2%

S 7,543 7,601 10,966

-0.8% -31.2%

Foreign L 145 143 99

1.0% 46.5%

S 285 226 190

25.9% 50.1%

Net 330 3 5,912

9397.6% -94.4%


R$ million.

Risk Factor: EQUITY Prudential Consolidated

Variation


Quarterly Annual


Brazil L 1,369 1,703 561

-19.6% 144.0%

S 1,517 1,717 557

-11.7% 172.1%

Foreign L - - -

N/A N/A

S - - -

N/A N/A


Brazil L - - -

N/A N/A

S - - -

N/A N/A

Foreign L - - -

N/A N/A

S - - -

N/A N/A

Net (147) (15) 4

910.9% -4102.4%


For the base dates presented the institution has no exposure to the risk factor Commodities in Derivatives.

38

Derivative instruments are used dynamically according to authorized limits and intended returns. From the derivatives portfolio profile, we highlight interest-rate derivatives, trading with central counterparties, namely the organized exchange market in Brazil. These exposures arise from the Bank's strategy for hedging interest-rate risk affecting structural portfolios.

2.4.7 Sensitivity Analyses

Banco Votorantim uses two methodologies for sensitivity analysis of its exposures.

Analysis 1 – Initially, it uses the application of parallel shocks on most relevant risk factor curves. The purpose of this method

is to simulate effects on Conglomerate income in view of possible scenarios, which consider possible fluctuations in market

interest rates. Two possible scenarios are simulated in which analyzed risk would be increased or reduced by 10 base points.

Analysis 1 - Sensitivity analysis for the non-trading portfolio

R$ million.

Risk Factor Exposure dez-16

dez-15

+10 bps -10 bps

+10 bps -10 bps

Prefixed rate Prefixed rate (11) 11

(18) 18

Interest rate coupon Interest rate coupon 1 (1)

1 (1)

Price indices Price indices (9) 9

(3) 3

Forex coupons Forex coupons 1 (1)

(0) 0

Total (18) 18

(20) 20

Analysis 2 – Simulations that measure the effect of changes in market and price curves on Conglomerate exposures for the

purpose of simulating effects on income of three specific scenarios, as follows:

Scenario 1 – Probable market scenario for risk factors, as estimated by the institution.

Scenario 2 – Scenario presenting a shock of 25% on probable market scenario (Scenario 1), according to internal standard for pricing assets and economic analysis consistent with best market practices.

Scenario 3 – Scenario presenting a shock of 50% on probable market scenario (Scenario 1), according to internal standard for pricing assets and economic analysis consistent with best market practices.

In the analysis performed for transactions classified in the banking portfolio, valuation or devaluation resulting from changes

in market interest rates and prices do not have a financial and accounting impact on Conglomerate income. The reason for this

is that the portfolio consists mostly of loans, retail funding and securities, which are mostly booked at the same rates as

agreed when transacted. In addition, note that the main characteristic of these portfolios is that they are classified as available

for sale and, therefore, effects of interest rate or price fluctuations are reflected in Shareholders’ equity and not in income.

There are also other transactions naturally linked to other instruments (natural hedge) that minimize impacts in stress

scenario.

The charts below contain a summary of the results for the Non-Trading Portfolio (Banking), composed of public and private securities and derivative financial instruments, presenting the values observed on dec-16:


Scenario I

Risk Factor Concept

Dec-16

Variation of rates

Exposure Income (loss)

Prefixed rate Prefixed interest rate variation risk

Increase 15,372 (11)

Forex coupons Exchange rate risk of Forex coupon

Increase (3,432) 1

Price indices Risk from variation in Price index coupon

Increase 1,838 (9)

TR/TBF Risk of TR (reference rate) and TBF (basic financial rate) coupon variation

Increase 8 0

TJLP Risk of TJLP coupon variation Increase (295) 0

39


Scenario II

Risk Factor Concept

Dec-16

Variation of rates



Increase 15,372 (330)


Decrease (3,432) (9)




Decrease 8 (0)

TJLP Risk of TJLP coupon variation Decrease (295) (4)


Scenario III

Risk Factor Concept

Dec-16

Variation of rates



Increase 15,372 (669)


Decrease (3,432) (17)




Decrease 8 (0)

TJLP Risk of TJLP coupon variation Decrease (295) (7)

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3 Liquidity Risk

Liquidity Risk management aims at organizing, assessing and monitoring the liquidity risk to which the Institution is exposed, establishing the processes, tools and limits required for creating and assessing prospective liquidity scenarios and monitoring the risk appetite levels set by Senior Management.

3.1 Definition

Liquidity risk is defined as:

a) possibility that the Institution may not be able to efficiently meet its expected and unexpected (current and future) obligations, including those arising from binding guarantees, without affecting its daily operations and incurring material losses; and

b) possibility that the institution may not be able to trade a position at market price due to its large size in relation to the usually traded volume, or due to market discontinuity.


In accordance with CMN Resolution No. 4,090, the Bank has an institutional structure and policies for liquidity risk management approved by the Board of Directors and the basic principles observed in the management and control were established in compliance with the current regulations and market practices, as follows:

Involvement of Senior Management: the existing committees and commissions are structured in manner that Senior

Management participates in the overall supervision of risk-taking;

Segregation of attributions: segregation of attributions between the areas responsible for the execution of operations and

for the definition of business strategies, and the areas in charge of their accounting, of risk control, compliance and

internal controls, and auditing. This segregation is structured with the objective of ensuring independence and autonomy

in the management of the attributions inherent to each role;

Definition of attributions: clear definition of the various processes and activities of each function involved in liquidity risk

management. This definition aims at providing for an organized and efficient operational management;

Definition of methodologies for construction of scenarios: adoption of structured methodologies, the use of which is

mandatory for the entire Bank, based on the market practices, which aim at incorporating the dynamics of the contracting

of new transactions and settlement of the existing portfolios;

Establishment of limits: clear and objective definition of authorized risk limits, based on measures of risk, structured so

that risk appetite levels defined by the Board of Directors are part of everyday business;

Monitoring of limits: definition of the process for monitoring and reporting on the level of usage of the authorized limits;

Liquidity contingency plan: definition and periodic review of a structured plan for recomposing the pre-established cash levels, with the assignment of responsible persons and instruments.

3.3 Management and control governance and commissions

The monitoring of liquidity risk management activities is an integral part of the attributions of the following collegiate bodies, with clearly defined tasks, composition and frequency:

Board of Directors:

Responsible for setting the basic guidelines of the Bank's general policy, and for checking and monitoring whether they are being complied with.

41

Executive Committee:

Responsible for discussing and monitoring recurring topics addressed in operational committees and commissions and continuously reviewing the internal governance structure, with a view to making improvements and approving potential adjustments and changes to internal governance operating committees, commissions and sub-commissions.

ALM, Risk and Capital Committee

Responsible for assessing and approving proposals submitted by subordinate Commissions when they refer to measures aimed at risk management and control.

Liquidity Commission:

Responsible for monitoring and deciding on matters related to risk liquidity management, submitting them to the follow-up of the ALM Risk and Capital Committee.

3.4 Areas Involved

Liquidity risk management includes a set of functional activities that permeate the entire “business chain” from product development, trading and disbursement, liquidity risk modeling and control and the formalization, accounting records and disbursement of transactions, as well as monitoring the effectiveness of processes and controls used.

Liquidity risk management functions are carried out by formally constituted functional units with technically capable staff under separate management with clearly defined responsibilities, as shown below:

Market risk and liquidity

Responsible for modeling methodologies and to validate the assumptions used to liquidity-risk scenarios and metrics;

Responsible for updating and periodically revising liquidity scenarios, liquidity contingency plan and for monitoring of authorized cash limits;

Responsible for calculating the Liquidity Coverage Ratio (LCR).

Treasury and Commercial Units

Responsible for executing trades and transactions with the market and clients, seeking fair prices all times and compliance for these transactions;

Responsible for the definition and periodic update of investment and funding assumptions and the implementation of the liquidity contingency plan, in compliance with the strategies defined and previously approved instruments.

Finance

Responsible for the preparation and delivery of the projected budget;

Responsible for monitoring portfolios and composition of assets, and evaluating proposals to issue subordinated debt instruments.

3.5 Liquidity Risk Management

3.5.1 Risk Measures and Limits for Management and Control

The Bank has a set of objective measures to manage and control liquidity risk. The Liquidity limits are established by the Liquidity Target, the Minimum Operational Cash and the Risk Appetite for LCR.

Those limits include the definition of the maximum values authorized, by establishing ominimums levels of cash and contingent actions. The Market and Liquidity Risk are is responsible for daily monitoring the liquidity risk and trigger the appropriate forums in the event of increased risk.

42

The values established on the liquidity limits and on the contingent plan are updated and reviewed periodically, in the light of significant changes in market conditions or the dynamics and composition of portfolios.

3.5.1.1 Liquidity Target and Minimum Operational Cash

The Liquidity Target and Minimum Operational Cash consists of establishing minimum acceptable levels and ranges, setting limits for the various prospective liquidity scenarios;

Maturity scenarios: consist of the calculation of the future liquidity profile, based on the general maturity assumption of the current portfolios and all the cash flows;

Budgetary scenarios: consist of the calculation of the future liquidity profile, using assumptions which are consistent with the budgetary planning, based on the general rollover assumption of the current portfolios;

Stress scenarios: consist of the simulations of impact on portfolios arising from extreme market conditions and/or the dynamics and composition of portfolios, which may change significant the Bank’s projected liquidity scenarios;

Sensitivity analyses: consist of the simulations of the sensitivity of the future liquidity profile to slight fluctuations in market conditions and/or the dynamics and composition of the portfolios; and

Funding Concentration Profile: consist of monitoring the concentration profile of the portfolios in terms of volumes, timing, tools, threads and counterparties.

3.5.1.2 Liquidity Coverage Ratio (LCR)

Starting in October 2015, entered into force Circular No. 3,749, which is about the methodology for the calculation of the Liquidity Coverage Ratio (LCR). This Circular is in line with the Basel III recommendations, disclosed in show that financial institutions have high liquidity resources to withstand a standardized acute financial stress scenario lasting on month, provided pre-established criteria in the regulation.

The LCR, according to the circular, is defined as the ratio of total high quality liquid assets (HQLA) and the total cash inflows for a 30 days period.

𝐿𝐶𝑅 =𝑇𝑜𝑡𝑎𝑙 𝐻𝑖𝑔ℎ 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠≥ 100%

Total High Quality Liquid Assets (HQLA): Assets that remain liquid in times of stress and meet the minimum requirements set by the legislation, as:

o Are easily and immediately converted in cash by little or no loss in market value;

o Are free of any impediments or legal restrictions, regulatory, statutory or contractual for trading;

o Present low risk and have an easy and right pricing, among other requirements.

Total Net Cash Outflows: It’s considered the potential cash outflows in 30 days, under a severe stress scenario, and subtracted from the cash inflows for the same period.

Standard stress scenario: Considers idiosyncratic and market shocks defined by regulatory standard as:

o Partial loss of retail funding;

o Partial loss of wholesale funding capacity without collateral;

o Partial loss of the ability to raise funds in short term;

o Additional resources outputs due to downgrading of credit risk;

43

o Increase of the price volatilities, rates or ratios that impact the quality of the collateral or the future exposure of derivatives;

o Withdrawals higher than expected of credit lines and liquidity granted;

o Potencial need of the bank to buy back stock or honoring non-contractual obligations to mitigate their reputational risk

The Resolution number 4.401 establishes from October 2015 a schedule for the ratio implementation:

Oct - 2015 2016 2017 2018 2019

LCR Minimum 60% 70% 80% 90% 100%

On the 4th

quarter, the LCR ended in 165%, staying above the regular limit for the period (70%). The ratio reflects a conservative liquidity management and founding of the institution. More detailed information is available in Annex 4.

R$ million.

Liquidity Coverage Ratio Prudential Consolidated

Variation

4th

Quarter 3rd

Quarter

Quarterly

LCR 165% 160%

3.4%

Total HQLA 13,155 12,908

1.9%

Total net cash outflows 7,955 8,068

-1.4%

It’s primarily considered HQLA federal public titles and banks reservations. The cash outflows are impacted mainly due wholesale funding with maturity or liquidity in 30 days.

It was considered the average concerning the closing months of october, november and December/16 (3 observations). The LCR detailed table is available in Annex 4.

Additionally, the Votorantim Bank established the appetite for the LCR risk, that consists on the comparison of the current LCR with the projection of the ratio for the next 6 months with a index minimum pre-established.

3.5.1.3 Internal Liquidity Coverage Ratio

The Bank has a credit line with Banco do Brasil in the amount of R$ 6.8 billion, which represents a significant liquidity reserve and has never been used.

And, despite the current regulation does not allow including this credit line on the LCR calculation, the institution estimates the internal LCR ratio using it.

R$ million.

Internal Liquidity Coverage Ratio Prudential Consolidated

Variation

4th

Quarter 3rd

Quarter

Quarterly

LCR 251% 244%

2.7%

Total HQLA + BB credit line 19,955 19,708

1.3%

Total net cash outflows 7,955 8,068

-1.4%

44

3.5.2 Measurement Systems and Communication Process

The Bank adopts corporate systems for measuring and controlling liquidity risk, combining internally developed applications with market solutions of proven robustness. These systems deploy integrated treatment of information on a sequential basis:

capturing records of trading and registration data;

continuous updating and archiving of this information in structured databases, monitoring its integrity and consistency from an accounting point of view;

determining liquidity profile, by calculating rollover and maturity of transactions, according to the premises of the various scenarios under consideration.

In addition, the Bank has a structured process for reporting liquidity-risk management related issues. This communication process is comprised of:

periodically issuing objective reports showing liquidity scenarios and evolution of the profile of funding portfolios, and showing levels of use of authorized limits;

periodically holding collective monitoring forums, within decision-making competencies, in which current issues are discussed with full participation.

3.5.3 Notifying Limits Exceeded and Contingency Plan

There is a two-stage procedure for monitoring cash levels and a contingency plan: communication and monitoring.

Notification:

For notification purposes, the liquidity scenarios and metrics are submitted to the ALM Committee and Liquidity Risk Commission, where the variations are analyzed with predetermine trigger levels if there may be failure to maintain limits.

Monitoring:

Any eventual extrapolation of limits will necessarily lead to implementation of agreed business strategies, with investment and funding portfolio management to rebuild liquidity levels, including, if necessary, taking initiatives previously determined in the contingency plan;

These strategies are the responsibility of business managers, considering market conditions and are monitored by the Liquidity Commission and ALM, Risk and Capital Committee.

45

4 Operational Risk

4.1 Definition

Operational risk is defined as the possibility of losses from any failure, deficiency or inadequacy of internal processes, people or systems, or from the institution external events.


In accordance with CMN Resolution No. 3,380, the Bank has an institutional structure and policies for operational risk management approved by the Board of Directors and the basic principles observed in the management and control were established in compliance with the current regulations and best market practices, as follows:

Involvement by Senior Management in global supervision and risk assumption by means of established committees and commissions;

Acculturation of the organization in operational risk management concepts through corporate training and through promoting discussions on specific governance forums

Capturing operational losses and maintaining a structured database with information relating to events;

Mapping systemic and operational processes, mapping existing controls, and analysis of inherent and residual risks;

Evaluation of the potential financial impact and of the vulnerability of the control environment to the mapped through the Control Risk Self-Assessment.. Based on this assessment, operating risk level is defined according to entire institution’s standard risk matrix;

Analysis, communication, and deployment of action plans to improve processes and controls for mitigation of the risks incurred; and

Calculating Capital allocated to operating risk based on structured methods, based on market practices that are appropriate with regulatory requirements.

4.3 Areas Involved

Operational risk management is carried out by formally constituted functionally segregated units staffed by qualified teams with clearly defined attributions, as shown below:

Internal Controls Unit

Responsible by:

Providing support in the identification and assessment of the operational risks and controls existing in the areas and processes of the Institution, including relevant outsourced services;

Evaluate the design and test the effectiveness of the controls of business, support and IT processes;

Assess the adequacy of the technological architecture made available by the Technology area, as well as the integrity of the systemic interfaces that affect internal risk models;

Monitoring the progress and implementation of action plans developed to mitigate operational risks and promote improvements in the control environment;

Providing methodologies, models and tools to assure the identification and monitoring of relevant risks;

Training and fostering a culture of internal controls to the Institution’s employees;

Informing the Controls Committee the results of mapping assessment, evaluating and testing of control, as well as risks and relevant potential weaknesses found.

46

Operational Risk Area

Responsible for managing and maintaining the database of operating losses, monitoring action plans for significant losses, establishing methods and tools for structuring operating risk indicators, building scenarios and calculating capital charge to operating risk;

Responsible for periodic review and for updating policies, procedures and communication plans related to the activities of management and measurement of operational risk.

Responsible for the calculation of capital allocated to operational risk and to make studies to measure the economic capital for operational risk.

Responsible for the unitary value calculation for the civil contingencies massed provisioning and calculating the provision for labor contingencies.

Managers & Staff

Responsible for managing and reviewing operational risks pertaining to their activities and processes, implementing controls and definition of indicators for monitoring the risks and action plans for their mitigation;

Responsible for timely reporting of incidents related to operational risk.

4.4 Measurement System and Communication Process

The evaluation of operational risks existing in the organization’s processes considers the “impact” and “vulnerability” factors defined in the corporate Risk Ruler, which categorizes them in Low, Medium, High or Extreme.

The mapped and classified risks are submitted for validation from the process managers, to define the appropriate treatment: accept or reduce the risk. If the treatment is to reduce the risk, the process managers are responsible for proposing mitigation actions.

The Operational Risk unit prepares and publishes to Senior Management the Operational Risk Annual Report, describing the structure of operational risk management as well as actions done in the current year and planned for the next year in order to improve the management of the operational risk in the Bank.

4.5 Operating Losses by Category of risk

The graph below presents the distribution of operating losses disbursed and expenses with provision in the years from 2013 to the third semester of 2016, classified by risk category.

* According BACEN Circular No. 3,678, considers Prudential Consolidated

53%

16%20%

10%

0%

42%

21% 22%

13%

2%

41%

23%19%

12%5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3. Employment Practices& Workplace Safety

4. Clients, Products &Business Pratices

2. External Fraud 9. Execution, Delivery &Process Management

Other

Operational Loss by Risk Category

2014 2015 2016

47

4.6 Business Continuity Management

The Bank has a high-availability and highly-resilient technology environment, composed of the following elements:

Two hot site datacenters, built according to the safe room concept by Aceco, where the infrastructure to support critical systems is replicated – one of them in the Rochaverá building in Morumbi and the other in the BFC building on Avenida Paulista;

Data storage system at both data centers where the production databases are mirrored in a synchronous manner;

Application server pool and file-server cluster for critical processes and systems;

Tape units at both datacenters and external storage of the backup media;

Remote access to critical applications;

Tool for Internet access to accessible contingency plans;

The Business Continuity area uses the RPX system (Recovery Planner) to manage occurrences of interruption, definition of continuity plans and supporting documentation of the evidence of the tests and exercises applied.

For companies in the retail segment, the continuity plan encompasses the sites of third parties, such as card processing (EDS) and client service (Tivit and Contax). The corporate guidelines of Business Continuity Management involve policies, standards, procedures, roles and responsibilities targeting the implementation of effective Business Continuity and Crisis Management in the Organization, guaranteeing greater resilience in the presence of adverse situations.

Starting from the established concepts, principles and guidelines, the Consolidated Entity strengthens its risk management structure and its corporate governance, offers greater security to its clients and shareholders in the event of unforeseen incidents to potential crises and during recovery until return to normality.

The Information Security and Business Continuity area is the structure responsible for coordinating the information security and business continuity activities at the Consolidated Entity with the Business and Support areas and is, in principle, independent in the performance of its attributions. The application of the Business Impact Analysis (BIA) methodology makes it possible to identify and classify the impact of critical business processes on financial loss, image, reputational and legal risks, should they suffer an event that makes it impossible for them to Executed in the usual way. The impact classification in business processes is measured through qualitative analysis, which assesses image risk before clients, market and regulators and / or quantitative, which evaluates potential financial impacts arising from unavailability. This business continuity discipline enables the strategic planning of the contingency plans of the Votorantim Economic-Financial Consolidation and prioritization of the projects to meet the new needs and / or the adequacy of the existing plans.

48

5 Equity Risk The equity risk is defined as the possibility of losses not classified in the trading portfolio. The risk arises from the fact that the bank has investments in companies that (i) do not have majority interest and

consequently, do not predominate in the control of its management or (ii) are not part of the consolidation scope and

consequently, are not part of typical activities of financial entities, and that for various reasons (market, credit, operational,

liquidity, management and others), this company may affect the result of the consolidated financial entity.

Regarding the accounting policy for investments in companies, the institution abides by the rules established by BACEN, described in COSIF Basic Standards (Chapter 11, Fixed Assets items 1 and 2), whose content covers the rules or methods for valuation of investments and the methodologies applied to each situation, such as the equity method of accounting, and the assumptions to be adopted for the accounting processes. For the other permanent investments, the institution uses the cost method, applying the accounting rule of CPC 01 “Impairment of Assets” approved by BACEN by Resolution No. 3,566. This procedure aims to ensure that assets are not accounted for in an amount higher than that recoverable over time or in a potential sale.

See below the value of the equity interests represented by the investment account recorded in the institution’s assets:

R$ million.

Investments in other entities Activity Segmentation

Book Valuel1

Variation


Quarterly Annual


BVIP - BV Inv. E Partic S.A Holdings of non-financial

institutions Close companies 17 13 5

31% 240%

BVIA - BV Inv. E Gestão S.A Holdings of non-financial

institutions Close companies 134 130 36

3.1% 272%

Votorantim Corretora de Seguros S.A

Brokers and insurance agents, private pension

plans and health Close companies 234 192 215

21.9% 9%

BVEP - BV Empreendimentos e Participações Ltda

Participation in projects and real estate

development, consulting services and planning and business advice

Close companies 925 900 -

2.8% N/A

1 – Related companies are classified as close companies and the book value is the same as the fair value. There were no sales or liquidations without realization or recognition of earnings and losses for the period analyzed.

The institution has other investments characterized by tax incentives (FINOR), equity securities (CETIP and CIP), and shares and quotas (ANDIMA).Additional information can be found in note No. 13 of the Report of Consolidated Financial Statements, available on the Investor Relations website (www.bancovotorantim.com.br/ir). For the period analyzed, the amount of capital requirement relating to equity interests not classified in the trading portfolio, according to criteria presented above, totaled R$ 129,4 million indec-16. Given the low relevance of equity not classified in the trading portfolio relative to the total asset portfolio, the institution does not perform the categorization of their holdings.

http://www.bancovotorantim.com.br/ri

49

6 Other risks

In addition to the material risks described above, the institution also regards the risks listed below to be relevant, and has specific processes for their handling and monitoring, which form part of the scope of the Internal Capital Adequacy Assessment Process (ICAAP):

6.1 Reputation risk

The reputation risk is defined as the occurrence or the possibility of damage to the institution’s reputation as a result of the negative perception of clients, shareholders, investors, rating agencies, civil society, employees, trade unions and regulatory agencies, in relation to the institutions’ business practices, conduct or financial condition.

The aim of the strategic planning is to define the strategies and ambitions of the Consolidated Banco Votorantim for medium to long term (five years following the current year), ensuring an assessment of the potential risks and benefits in the institution and is based primarily on market trends, on the competitive environment, on a regulatory vision and aspirations of senior management and shareholders of the bank.

Reputation risk management is performed using specific processes contained in several areas of the institution, which are designed to mitigate the occurrence of events that affect reputation, and to act by containing the dissemination of these impacts, upon the occurrence of these events. In addition, the Board of Executive Officers of Risks performs the integrated management of the reputation risk, by means of consolidated evaluations and monitoring of actions and reporting (among other activities) of the individual areas involved in the reputation risk mitigation process.

6.2 Strategy risk

The strategy risk is defined as the possibility of loss resulting from the use of an inadequate business strategy, assumption or policy, or absence thereof, including the absence of response to market changes and to factors outside the institution.

The monitoring of goals are monthly performed, and the strategy risk evaluation happens to the consolidated through the use of indicators, that tries to show if the goals might affect any event related to the strategy risk, triggering if necessary the appropriate levels of responsibility for decision making.

6.3 Environmental and Social Risk

Environmental and social risk is defined as the possibility of losses due to the damage and social issues.

Environmental and Social Risk management notes relevant environmental legislation, as well as evaluate and monitor the environmental and social aspects which clients are involved in order to subsidize the lending decision making when it is possible the previous identification of the purpose of the use of the resources.

6.4 Underwriting risk

The underwriting risk is defined as the possibility of losses originating from the issuance of third-party debts in which the institution is obliged to place these instruments in its active portfolio due to the execution of firm commitment clauses. Its management and control process is accomplished through individual evaluations from each underwriting operation and the monitoring of the consolidated exposures.

6.5 Model risk

The model risk is defined as the set of possible adverse consequences of incorrect results from models, or inappropriate use.

The control and mitigation of the model risk at the institution is mainly performed through analyses of the predictive power, itemization and stability of its models, internal validation process, independent from the development and implementation processes, adequate maintenance of the control of versions of the modeling documents and monitoring the performance of models.

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6.6 Risks Appetite

In addition to the risk management and mitigation processes described in the foregoing items, the institution has a risk appetite framework that consists of the declaration of the risk that the Bank is willing to accept to achieve its goals, and is monitored by means of indicators and their respective limits and reported to the Management Board of Risks and ALM, Risks and Capital Committee (CARC) and to the Board of Directors on a monthly basis.

51

F. Attachments

1. Composition of Total Capital (TC) - Appendix 1

See below a table with the breakdown of the Total Capital and information about the adequacy of this capital, as provided for

in Circular No. 3,716 for the base date dec-16:

Line Number

Common Equity Tier 1 Capital: instruments and reserves

Value (R$mil) Amount subject to

pre-Basel III treatment (R$ mil)

Balance Sheet Reference

1 Directly issued qualifying Common Equity Tier 1 Capital instruments 7,826,980 - a

2 Retained earnings - - b, c

3 Accumulated other comprehensive income (and other reserves) 420,143 - b, c

4 Authorized Instruments to compose Common Equity Tier 1 Capital before Resolution No. 4,192, 2013

5 Common share capital issued by subsidiaries and held by third parties 1 0 - i

6 Common Equity Tier 1 Capital before regulatory adjustments 8,247,124 - -

Line Number

Common Equity Tier 1 Capital: regulatory adjustments Value (R$mil) Amount subject to



7 Prudential valuation adjustments 2,099 - -

8 Goodwill paid on acquisition of investments on the basis of expected future profitability

- - -

9 Intangibles Assets 62,272 103,787 h

10 Deferred Tax Assets on the negative base and tax loss of Social Contribution on Net Income and those originating from this contribution related to determination periods ended until December 31, 1998

698,857 1,164,761 d-e 2

11 Adjustments related to the fair value of derivative financial instruments used to hedge cash flow of hedged items that do not have their settings checkbox to market accounted

- - -

12 Shortfall of provisions to expected losses from institutions under internal ratings-based approach

- - -

13 Securitisation gain on sale

14 Gains and losses due to changes in own credit risk on fair valued liabilities

15 Defined-benefit pension fund net assets - - -

16 Shares or other instruments issued by itself allowed to compose the Common Equity Tier 1 Capital, acquired directly, indirectly or synthetically

- - -

17 Securitisation investments in eligible Common Equity Tier 1 Capital instruments

18

Aggregate value of holdings lower than 10% of the share capital from institutions authorized to operate by the Brazilian Central Bank or by a foreign financial institution that does not compose the conglomerate, companies resembled the open unconsolidated financial institutions, the insurance companies, reinsurers, capitalization and pension entities, that exceeds 10% of Common Equity Tier 1 Capital value, not considering specific adjustments

- - -

19

Holdings higher than 10% of the share capital from institutions authorized to operate by the Brazilian Central Bank or by a unconsolidated foreign financial institutions, companies resembled the open unconsolidated financial institutions, the insurance companies, reinsurers, capitalization and pension entities

- - -

20 Mortgage servicing rights

21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability)

647,358 1,078,930 f-e 3

22 Amount exceeding the 15% of the Common Equity Tier 1 - - -

52

23

of which: holdings on the share capital from institutions authorized to operate by the Brazilian Central Bank or by a unconsolidated foreign financial institutions, companies resembled the open unconsolidated financial institutions, the insurance companies, reinsurers, capitalization and pension entities

- - -

24 of which: mortgage servicing rights

25 of which: deferred Tax Assets that rely on future profitability or future taxable income for their realization

- - -

26 National regulatory adjustments - - -

26.a Deferred permanent assets - - g

26.b Investment on dependence, foreign subsidiary financial institution or non-financial entity that compose the cluster, for which the Brazilian Central Bank has no access to information, data and documents

- - -

26.c Funding instruments eligible to Common Equity Tier 1 Capital issued by an institution authorized to operate by the Brazilian Central Bank or by a foreign financial institution that does not compose the conglomerate

- - -

26.d Unauthorized increase in share capital - - -

26.e Excess of the adjusted value of Common Equity Tier 1 Capital - - -

26.f Deposit to cover capital deficiency - - -

26.g Amount of intangible assets constituted before Resolution No. 4192, 2013 - 2,532 l

26.h Excess funds invested in fixed assets -

26.i Total Capital featured -

26.j Other differences concerning the methodology of Common Equity Tier 1 Capital's calculation for regulatory purposes

-

27 Regulatory adjustments applied to Common Equity Tier 1 Capital due to insufficient Additional Tier 1 Capital and Tier 2 Capital to cover deductions

- - -

28 Total regulatory adjustments to Common equity Tier 1 Capital 1,410,586 - -

29 Common Equity Tier 1 Capital (CET1) 6,836,537 - -

Line Number

Additional Tier 1 Capital: instruments Value (R$mil) Amount subject to



30 Directly issued qualifying Additional Tier 1 Capital instruments - - -

31 of which: classified as equity under applicable accounting standards - - -

32 of which: classified as liabilities under applicable accounting standards - - -

33 Authorized Instruments to compose Additional Tier 1 Capital before Resolution No. 4,192, 2013

- - -

34 Noncontrolling interest in subsidiary members of the conglomerate, not deductible from Additional Tier 1 Capital

- - -

35 of which: instruments issued by subsidiaries before Resolution No. 4,192, 2013

- - -

36 Additional Tier 1 Capital before regulatory adjustments - - -

Line Number

Additional Tier 1 Capital: regulatory adjustments Value (R$mil) Amount subject to



37 Shares or other instruments issued by itself allowed to compose the Additional Tier 1 Capital, acquired directly, indirectly or synthetically

- - -

38 Reciprocal cross-holdings in Additional Tier 1 Capital instruments

39

Aggregate value of holdings lower than 10% of the share capital from institutions authorized to operate by the Brazilian Central Bank or by a foreign financial institution that does not compose the conglomerate, that exceeds 10% of Additional Tier 1 Capital value

-

40 Investments higher than 10% of the share capital from institutions authorized to operate by the Brazilian Central Bank or by a foreign financial institution that does not compose the conglomerate

-


53

41.a

Funding instruments eligible to Additional Tier 1 Capital issued by an institution authorized to operate by the Brazilian Central Bank or by a foreign financial institution that does not compose the conglomerate, considering the amout lower than 10% of the Additional Tier 1 Capital

- - -

41.b Noncontrolling interest in Additional Tier 1

41.c Other differences concerning the methodology of Additional Tier 1 Capital's calculation for regulatory purposes

-

42 Regulatory adjustments applied to Additional Tier 1 Capital due to insufficient Tier 2 Capital to cover deductions

- - -

43 Total regulatory adjustments to Additional Tier 1 Capital - - -

44 Additional Tier 1 Capital (AT1) - - -

45 Tier 1 Capital (T1 = CET1 + AT1) 6,836,537 - -

Line Number

Tier 2 Capital: instruments Value (R$mil) Amount subject to



46 Directly issued qualifying Tier 2 Capital instruments 956,147 - m

47 Authorized Instruments to compose Tier 2 Capital before Resolution No. 4,192, 2013

1,425,750 - k

48 Noncontrolling interest in subsidiary members of the conglomerate, not deductible from Tier 2 Capital

- - -

49 of which: instruments issued by subsidiaries before Resolution No. 4,192, 2013

- - -

50 Excess provisions regarding the expected loss on internal ratings-based approach

- - -

51 Tier 2 Capital before regulatory adjustments 2,381,897 - -

Line Number

Tier 2 Capital: regulatory adjustments Value (R$mil) Amount subject to



52 Shares or other instruments issued by itself allowed to compose Tier 2 Capital, acquired directly, indirectly or synthetically

- - -

53 Reciprocal cross-holdings in Tier 2 instruments

54

Aggregate value of holdings lower than 10% of the share capital from institutions authorized to operate by the Brazilian Central Bank or by a foreign financial institution that does not compose the conglomerate, that exceeds 10% of Tier 2 Capital value

-

55 Investments higher than 10% of the share capital from institutions authorized to operate by the Brazilian Central Bank or by a foreign financial institution that does not compose the conglomerate

-


56.a Funding instruments eligible to Tier 2 Capital issued by an institution authorized to operate by the Brazilian Central Bank or by a foreign financial institution that does not compose the conglomerate

- - -

56.b Noncontrolling interest in Tier 2 -

56.c Other differences concerning the methodology of Tier 2 Capital's calculation for regulatory purposes

-

57 Total regulatory adjustments to Tier 2 Capital - - -

58 Tier 2 Capital (T2) 2,381,897 - -

59 Total Capital (TC = T1 + T2) 9,218,435 - -

60 Total risk weighted assets 61,207,071 - -

Line Number

Basio Ratio and buffers %

61 Common Equity Tier 1 Capital Ratio 11.2%

62 Tier 1 Capital Ratio 11.2%

63 Basel Ratio 15.1%

64 Institution specific Common Equity Tier 1 Capital requirement (RWA percentage)

5.125%

65 of which: capital conservation buffer requirement 0.625%

66 of which: countercyclical buffer requirement 0.0%

67 of which: G-SIB buffer requirement

54

68 Common Equity Tier 1 Capital available to meet buffers (RWA percentage) 382,544

Line Number

National Minimum %

69 Common Equity Tier 1 Capital Ratio if different from Basel III

70 Tier 1 Ratio Capital if different from Basel III 6.00%

71 Basel Ratio if different from Basel III 9.875%

Line Number

Amounts below the thresholds for deduction (before risk weighting) Value (R$mil) Amount subject to



72 Aggregate value of holdings lower than 10% of the share capital of companies resembled the open unconsolidated financial institutions, the insurance companies, reinsurers, capitalization and pension entities

-

-

73 Holdings higher than 10% of the share capital of companies resembled the open unconsolidated financial institutions, the insurance companies, reinsurers, capitalization and pension entities

-

-

74 Mortgage servicing rights

75 Deferred tax assets arising from temporary differences not deducted from Common Equity Tier 1 Capital

748,390 f-e 3

Line Number

Applicable caps on the inclusion of provisions in Tier 2 Capital Value (R$mil)

76 Generic provisions eligible for inclusion in Tier 2 Capital in respect of exposures subject to standardised approach

77 Cap on inclusion of generic provisions in Tier 2 Capital under standardised approach

78 Provisions eligible for inclusion in Tier 2 Capital in respect of exposures subject to internal ratings-based approach

-

79 Cap for inclusion of provisions in Tier 2 Capital under internal ratings-based approach

-

Line Number

Authorized Instruments to compose Total Capital before Resolution No. 4,192, 2013 (applicable from October 1, 2013 to January 1, 2022)

Value (R$mil) Valor sujeito a

tratamento transitório (R$ mil)

Referência do balanço do

conglomerado

80 Current cap authorized to compose Common Equity Tier 1 Capital instruments before Resolution No. 4,192, 2013

81 Amount excluded from Common Equity Tier 1 Capital due to cap

82 Authorized Instruments to compose Additional Tier 1 Capital before Resolution No. 4,192, 2013

- - -

83 Amount excluded from Additional Tier 1 Capital due to cap - - -

84 Authorized Instruments to compose Tier 2 Capital before Resolution No. 4,192, 2013

1,425,750 4,238,016 k

85 Amount excluded from Equity Tier 2 Capital due to cap - - -

1 - Contemplates the prudential adjustment related to non-controlling interest, as Art. 5, section VI of Resolution No. 4,192.

2 - The amount is subject to specific rules application established on Art. 5, section VIIII, § 4º and § 5º of Resolution No. 4,192.

3 - The amount is subject to specific rules application established on Art. 5, section VII, § 2º, § 3º and § 5º of Resolution No. 4,192.

2. Main Characteristics of the Capital Instruments – Appendix 2

Annex 2 is available in the Investor Relations (www.bancovotorantim.com.br/ir) site, on the Corporate Governance Menu - Risk Management.

http://www.bancovotorantim.com.br/ir

55

3. Common Model of Disclosure of information on the Leverage Ratio – Appendix 3 The table below shows the detailed information on the Leverage Ratio foreseen by Circular No. 3,748 for the base date December 2016:

Line Number

item Value(R$mil)

Items shown in the Balance Sheet

1 Balance sheet items other than derivative financial instruments, securities received on loan and resales

85.441.640

2 Adjustments for equity items deducted in calculating Level I Capital 1.564.838

3 Total exposure shown in the Balance Sheet 83.876.802

Transactions using Derivative Financial Instruments

4 Replacement value for derivatives transactions 2.599.821

5 Potential future gains from derivatives transactions 1.929.698

6 Adjustment for collateral in derivatives transactions

7 Adjustment for daily margin held as collateral 0

8 Derivatives in the name of customers where there is no contractual obligation to reimburse in the event of bankruptcy or default of the entities responsible for the settlement system

0

9 Reference value adjusted for credit derivatives 278.653

10 Adjustment of reference value calculated for credit derivatives 0

11 Total exposure for derivative financial instruments 4.808.172

Repurchase Transactions and Securities Lending (TVM)

12 Investments in repurchase transactions and securities lending 2.189.209

13 Adjustment for repurchases for settlement and creditors of securities lending 0

14 Amount of counterparty credit risk 30.627.018

15 Amount of counterparty credit risk in transactions as intermediary 0

16 Total exposure for repurchase transactions and securities lending 32.816.226

Off-balance sheet items

17 Reference value of off-balance sheet transactions 9.538.997

18 Adjustment for application of FCC specific to off-balance sheet transactions -1.285.192

19 Total off-balance sheet exposure 8.253.805

Capital and Total Exposure

20 Level I 6.836.537

21 Total Exposure 129.755.006

Leverage Ratio

22 Basel II Leverage Ratio 5,3%

56

4. Information on the Liquidity Coverage Ratio – Appendix 4 The table below shows the detailed information on the CRL provided by Circular No. 3,749 for the base date December 2016:

Average Amount1

(R$ mil) Weighted Average

Médio2 (R$ mil)

Number of Line

High Quality Liquid Assets (HQLA)

1 Total High Quality Liquid Assets (HQLA) - 13.155.458

Number of Line

Cash Outlows - -

2 Retail funding:

666.127 119.074

3 Stable funding - -

4 Less stable funding

666.127 119.074

5 Non-collateralized wholesale funding: 13.641.175 8.277.795

6 Operating deposits (all counterparties) and affiliated cooperative deposits - -

7 Non-operating deposits (all counterparties) 13.339.070 7.975.690

8 Other non-collateralized wholesale funding

302.105 302.105

9 Collateralized wholesale funding - 663.203

10 Additional requirements: 3.684.371 933.102

11 Related to exposure to derivatives and other collateral requirements 2.218.270 859.796

12 Related to funding losses through the issue of debt instruments

- -

13 Related to lines of credit and liquidity 1.466.101 73.305

14 Other contractual obligations 1.337.637 1.337.637

15 Oher contingent obligations 8.331.210 234.856

16 Total cash outlows - 11.565.666

Number of Line

Cash Inflows - -

17 Collateralized loans 3.919.816 8.530

18 Outstanding loans whose payments are fully up-to-date 2.001.416 1.601.619

19 Other cash inflows 2.079.886 2.000.805

20 Total cash inflows 8.001.118 3.610.955

-

Total Adjusted Amount (R$ mil)

21 Total HQLA - 13.155.458

22 Total net cash outflow - 7.954.712

23 LCR (%)

165%

1 - Total balance of cash inflow/outlow item.

2 - Total balance of cash inflow/outlow item after application of weighting factors.

3 - Total balance of cash inflow/outlow item after application of weighting factors and limits.

57

G. Glossary

Multiple Bank: private financial institution that performs the active and ancillary operations of the various financial

institutions through the following portfolios: commercial, investment and / or development of real estate loans, leases and

credit, financing and investment;

Capital Requirement: It is the capital representation of the Risk Weighted Assets, determined by Factor F x RWA;

Tier I Capital: obtained by adding the Common Equity Tier I Capital and Additional Tier I Capital, as defined in Resolution No.

4,192 of the CMN;

Common Equity Tier I: it is the composition of the Shareholders' Equity and specific deductions, as defined in Resolution No.

4,192 of the CMN;

Basel Committee on Banking Supervision: Forum for regular cooperation on banking supervisory matters. Its objective is to

enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide;

ICAAP: Internal Capital Adequacy Assessment Process;

Capital Ratio: Index that measures the relation between capital and risk weighted assets;

Behavior Score Model: System that assigns scores to a lot of credit decisions variables to a borrower, including the historical

purchase and customer payments, through the application of statistical techniques, in order to identify features that

segregate the good from the bad customers;

Collection Score Model: it is a model that seeks to identify the likelihood of the customer payment after default, used to

optimize the credit recovery process. Through statistical techniques, it is attributed scores to several variables (historical

payment, contract information, etc.) that make up the final score of the customer, identifying its payment profile;

Credit Score Model: Similar to Behavior Scoring Model, however, does not consider the historical variables customer in

modeling;

Capital (PR): PR is the capital used as the basis for verification compliance with operational limits of financial institutions. Its

value is obtained by adding Tier 1 Capital and Tier 2 Capital, as defined by National Monetary Council (CMN) Resolution 4192;

Rating: System to rate credit quality of an individual, company or country.

RWA: Risk Weighted Assets.

Documents

Relatório de Gestão de Riscos e Capital · Margin Capital with RBAN (a - e - f) 2,873 The Capital Ratio ended dec-16 at 15.1%, with a capital margin of R$ 3,2 billion, calculated