Before making an investment decision, prospective investors should carefully consider all of the information available in the November 13, 2007 Final Prospectus and this website, particularly the risks mentioned below. PAN´s financial situation and transaction results may be adversely and materially affected by any of these risks, which, in turn, may negatively impact the securities issued by the Bank. The risks described below are those that have been identified by PAN and are believed to have the potential to materially affect the Bank. Additional risks that are unknown or immaterial to PAN may also affect its business.
Risk factors that may influence investment decisions, particularly those related to:
a. The Company.
The inability of management to successfully restructure the Company
Our ability to consistently generate profits largely depends on our ability to continue the Company’s restructuring, including, without limitations, the implementation of cost-saving measures, continuous improvement of our credit analysis and approval processes, data processing and management control systems, as well as on the management of the Company’s existing legacy. Our inability to successfully implement these changes, which we believe are necessary, could result in an adverse material effect for us.
We may not have sufficient capital to comply with the minimum capital requirements of the National Monetary Council (CMN) and the Brazilian Central Bank (Bacen)
Brazilian financial institutions must comply with guidelines imposed by the National Monetary Council and the Central Bank that are similar to the Basel Accords with respect to the capital requirements, including minimum capital. In addition, financial institutions may only distribute earnings, in any capacity, in an amount superior to that which may have been established by law or the current regulations, provided that this payment does not compromise compliance with the equity and capital requirements.
We cannot ensure that we will, in the future, have access to sufficient funds or means to capitalize the Bank and thereby comply with the minimum capital requirements imposed by the National Monetary Council and the Brazilian Central Bank. Moreover, compliance with the minimum capital rules may negatively affect our ability to distribute dividends and interest on equity to our shareholders.
Mismatches between the interest rates, exchange rates and maturities of the Company´s loan portfolio and its sources of funding may adversely affect the Company and its ability to expand its lending operations
The Company is exposed to mismatches between the interest rates and maturities of its loans and funding sources. The largest portion of the Company´s loan portfolio consists of loans with fixed interest rates and the profitability of the loan operations depends on the Company´s ability to balance the cost of obtaining funding with the interest rates charged to our customers. An increase in the interest rates on the market in Brazil may increase our fundraising costs, particularly the cost of deposits, reducing the spread that we have on our loans, adversely affecting the results from our operations.
Any mismatch between the maturity of our loans and our funding sources will enhance the effect of any imbalance in the interest rates, thereby representing a liquidity risk should the Company fail to raise funds in an ongoing manner. Additionally, given that part of the fundraising comes from securities that are issued abroad and denominated in dollars, a devaluation of the Brazilian real against the US dollar would increase the cost of obtaining funds from the issue of these securities, if not hedged. An increase in the total cost of the funding sources for any of these reasons may result in an increase in the interest rates that the Company charges on the loans that it grants, which may, consequently, affect our ability to attract new customers. A decline in the growth of the Company´s loan transactions may adversely affect our operating results and financial condition.
We may be unable to use all of the deferred tax credits
The accounting records of tax credits from tax losses (IRPJ Corporate Income Tax), negative bases (CSLL Social Contribution) and temporal differences are regulated based on CMN Resolutions 3059/02, 3355/06 and 3655/08, and constitute a significant portion of our capital requirement. If we are unable to generate taxable income in the future, or if the tax authority does not grant these credit, we may have to write off these deferred tax credits or reduce the amount at which they were recorded, which may adversely affect our capital structure and results.
Damage to our reputation could have an adverse impact on our businesses and prospects
Our business involves the assumption of risks of various natures and the success of our operations depends, among other factors, on our ability to identify, measure, report and mitigate these risks, not only under normal market conditions, but also under extreme conditions, when our exposures can lead to material losses. We cannot guarantee that our risk management system will be enough to prevent losses in these cases, which could adversely affect the Company‘s results.
We are subject to operational mistakes or problems that may adversely affect our business, our financial condition and our operating results
We are exposed to a variety of operational risks, including risks of fraud on the part of our employees or third parties, the failure to appropriately document our operations and faults in our equipment and systems. Any operational mistakes or problems could adversely affect our business, our financial condition and our operating results.
Operational failures, including those resulting from fraud and human error, not only increase our costs and cause losses, but they also lead to conflict with our customers, lawsuits, regulatory fines, sanctions, intervention, reimbursements and other indemnification costs and all these factors could have an adverse material impact on our business, our reputation and the result of our operations.
A deterioration of our credit rating could increase our funding costs, which could adversely affect us
Our funding costs are influenced by a variety of factors, including some that are out of our control, such as the macroeconomic conditions and the regulatory environment for Brazilian banks. Any unfavorable change in these factors could negatively impact our credit rating, which may restrict our ability to borrow funds, assign credit portfolios and issue securities on acceptable terms, increasing our funding costs, and adversely affecting the results of our operations.
The growth of the Company‘s loan portfolio may lead to an increase in defaults in relation to the total portfolio
The company‘s management may adopt the strategy of expanding its portfolio of loans, increasing the origination and approval of new transactions. The increase in the loan portfolio may cause an increase in the Company‘s financial leverage and could possibly result in an increase in late payments, defaults and provision expenses, which could adversely affect the Company‘s results.
The Company‘s ability to collect the payments due on payroll loans depends on the effectiveness and validity of the agreements signed with public-sector employers, as well as the job retention levels of borrowers
Part of the Company‘s revenue is derived from payroll loans, which are directly deducted from borrowers‘ paychecks or pensions. These deductions from paychecks or pensions may be interrupted if an employee or official from the public sector resigns or is removed from their position, or in the event of their death.
In the event that a borrower is fired or removed from their position, the payment of the loan may exclusively depend on the financial capacity of the borrower. We cannot guarantee that we will recover our loans.
In addition, if a borrower whose payments are deducted from their paycheck is divorced or legally separated, in certain circumstances, in accordance with Brazilian law, any alimony owed by the borrower may be deducted directly from that paycheck. Those payroll deductions have priority over other debts held by the borrower (including those with the Company) and, as a result, the Company may not receive the full amount due under those circumstances.
There are also risks related to the employer. Any events that affect payments to employees, such as the employer‘s financial problems, defaults or changes to their internal system, may delay or reduce the amount taken from employees´ salaries and therefore result in losses to our payroll loan portfolio, negatively affecting our business and operating results.
Any of the risks above could result in increased defaults in the portfolio, increasing provision expenses and other expenses related to the collection of payments due.
The interruption of relationships with third parties that provide services or assist the Company in the origination and maintenance of its products and services related to loan transactions could disrupt operations or result in a loss of revenue for the Company
Our revenues from credit operations partially depend on the willingness and ability of our service providers to find customers interested in taking out loans with the Company. The termination of a relationship with such agents and the inability to substitute them with new agents could cause a loss of customers and a significant decrease in revenue and earnings from our loans.
Interruptions or failures in our information technology or communication systems, the lack of integration and redundancy in the systems and the limitations of a single site may adversely affect the Company‘s operations
The Company‘s operations depend on the efficient and uninterrupted service of our information technology and communications systems. Our information technology infrastructure is concentrated at the company‘s headquarters in São Paulo. Our computers and communications systems may be damaged or have their operations interrupted by internal failures or by a fire, flood, blackout, lapse in service from telecommunications operators, computer virus, physical or electronic intrusion, or other similar incidents. Any of these events could cause an interruption in our systems, delays or the loss of essential information, impairing the Company‘s operations. Our systems are not fully redundant and our disaster recovery plan may not be sufficient for all eventualities. In addition, the company may have in adequate insurance coverage or insurance limits that do not allow it to receive reimbursement for the losses caused by a major interruption in service. Any of these events could harm the Company‘s reputation, require costly and time-consuming corrections, and adversely affect its operations and financial condition.
The Company is subject to labor contingencies related to the hiring of service providers that may have a significant adverse effect on its business
The Company is subject to labor contingencies related to the hiring of service providers in its various areas of operations and to possible disputes regarding the employment relationships with the agents and employees of these service providers. These potential labor contingencies are difficult to quantify.
If a significant portion of these contingencies materialize and the decisions are unfavorable for the Company, the Company would be subject to a liability for which it has no provision. These contingencies could have a significant adverse effect on its business.
Alteration of the professional category of the workers who provide services to the Company through other companies may have an adverse effect on the Company
The Company is subject to labor complaints regarding the manner in which it hires the companies that provide services in its various fields. Should direct links be established with the Company, through administrative or judicial decisions that are unfavorable with respect to the professional category of these workers, the Company´s activities may be adversely affected.
The Company may be exposed to credit risks from counterparties during the normal course of business, wherein any deficiency or insolvency on the part of these counterparties may impair the effectiveness of hedging transactions and other risk management strategies
The Company could be exposed to risk from counterparties in the financial services sector during the normal course of business. This risk exposure can arise from trading, lending, deposits, clearing and settlement, among other activities and relationships. These counterparties include brokers and operators, commercial banks, investment banks, mutual funds and other institutional clients. These relationships expose the Company to credit risks in the event of a default by a counterparty. Moreover, the credit risk to the Company may be intensified when the collateral held cannot be executed upon or is liquidated at a price that is not sufficient to recover the full amount of the loan or derivative owed to the Company. Many of the hedging operations and other risk management strategies utilized by the company involved transactions with financial services counterparties. Any deficiency or insolvency among these counterparties may impair the effectiveness of the hedging transactions and other risk management strategies.
The exposure to risks from Brazilian government that may have an adverse effect on our business
If the Brazilian government fails to make payments that are due to the holders of bonds issued by the treasury to finance the national debt, this may have an adverse effect on our liquidity and our operating results due to the investments that we have in these notes and the buyback transactions tied to these bonds. In addition, a significant reduction in the market value of the Brazilian government bonds that we hold in our portfolio would result in a decrease in our earnings or equity, depending on the classification of these notes.
The registration of the trademark “PAN” is still pending approval from the INPI
In Brazil, the ownership of a brand requires registration with the National Institute of Industrial Property (“INPI”). As the Company does not have obtained the definite registration of the trademark “PAN”, this request may suffer third-party objections, or even be rejected by the competent authority. As a consequence, the Company believes that its activities may be adversely affected by these objections and, if the objections become definitive, by the impossibility of using the trademark.
b. Its direct or indirect controlling shareholder or controlling group
Adverse events related to the controlling shareholders may negatively affect the Company´s business
Negative events related to the direct or indirect controlling shareholders, may have an adverse effect on the company‘s activities.
Conflict or lack of consensus among the controlling shareholders could negatively affect the Company‘s business
Control of the Company, in accordance with the Shareholder Agreement signed between Caixapar and BTG Pactual, is shared among the shareholders. Conflict or disagreement between controlling shareholders may lead to deadlock situations, which may adversely affect the Company.
c. the Company´s shareholders
The Company‘s dividend policy may occasionally be altered, which could have a material adverse effect on its financial position and operating results
The Company must pay its shareholders dividends representing at least 35% of its annual net income from 2013 onwards, after executing the permitted deductions. The dividend policy, including mandatory minimum dividends, may be altered from time to time. There can be no assurance that the shareholders will not decide to change the Company‘s future dividend policy, and that any increase in dividends will not have an adverse effect on the Company‘s operating results and financial position.
We may need additional funding in the future, which may be obtained through additional capital financing; these capital increases may dilute shares held by the Company‘s shareholders
We may need additional funds in the future and we may not be able to obtain financing at attractive, or even prohibitive, rates. If we are unable to obtain adequate funds to satisfy our capital requirements, we may need to increase our capital. Moreover, we may choose to seek additional capital, if we believe that it will be on more favorable terms. Any additional funds obtained through a capital increase may dilute the shares held by our shareholders, should they not proportionally participate in our capital increase.
d. The Company´s subsidiaries and affiliates
Negative results from the Company‘s subsidiaries may affect the Company‘s results
The Company directly controls PAN Arrendamento Mercantil S.A., Panamericano Administradora de Consórcio Ltda., Brazilian Securities Cia de Securitização, BM Sua Casa Promotora de Vendas Ltda. and Brazilian Finance Real Estate S.A. and the results from these subsidiaries are included in the Company‘s results. The Company may, at some point, suffer an impact from the negative results of these companies.
e. The Company´s suppliers
Impacts caused by the activities of the Company‘s suppliers
We rely on a wide network of suppliers and service providers, who perform activities that are relevant to the conduct of our business. Any breaches of obligations, failures or interruptions in service from these suppliers could negatively affect the Company.
f. The Company‘s clients
An increase in defaults among our borrowers could affect our results
The combined capacity of our borrowers to punctually honor their obligations is directly related to Brazil‘s economic performance and income levels. Situations of economic crisis or weak economic performance may result in an increase in loan defaults, which could, in turn, resulting in increases in losses from loan transactions and adversely affect the Company‘s business and financial condition.
g. The sectors of the economy in which the Company operates
Changes in the macroeconomic environment could adversely affect the Company‘s results
Changes in the macroeconomic environment may adversely affect funding costs and terms, operating margins, and liquidity conditions faced by the Company, and may also affect the default profile of its loan portfolios and the demand for its products, which could adversely affect the Company‘s results.
Difficulties in raising funds may negatively affect the Company‘s results
Sources of funding are an important factor for the Company‘s business. The company‘s ability to gain additional funding will depend on factors such as its performance and future market conditions. The Company cannot guarantee that it will continue to raise funds on favorable terms and at the same levels that are currently being practiced. If it is unable to raise new funds, the Company will not be able to maintain or expand its loan portfolio or to effectively respond to changing business conditions and competitive pressures of the market. Moreover, if there is a reduction in the volume of loans granted due to adverse changes in the conditions required by those granting loans, regulatory changes that limit the Company‘s ability to grant loans or modify the accounting treatment for loans, or for any other reason, our ability to raise funds, our liquidity and revenue would be adversely affected.
The increasingly competitive environment of the banking sector in Brazil may adversely affect our business prospects
The market for financial and banking services in Brazil is highly competitive. We face significant competition from other Brazilian and international banks, both public and private. The Brazilian banking industry went through a period of consolidation in the 1990s, when several Brazilian banks were liquidated and major state and private banks were sold. Competition increased significantly during this period, with foreign banks entering the Brazilian market through the acquisition of Brazilian financial institutions. The privatization of state banks also made the banking market and the market for other financial services more competitive. Even though Brazilian legislation has imposed barriers to entry into the Brazilian market, the presence of foreign banks in Brazil has increased, as has competition in the banking industry and in the markets for certain products.
There is no guarantee that we will continue to adequately compete with other banks and financial institutions in the markets for specific products, particularly with the entry of major Brazilian and international financial institutions, which have much greater resources than us, as well as an extensive network of branches and other in-house distribution channels. The recent acquisitions of competitors by major banks may be followed by other major banks (domestic or foreign), which could represent the start of a new consolidation process, which may significantly alter the competitive landscape of the banking sector.
The increasing competition may adversely affect the results of our business and our economic condition due to, among other factors, the limitation of our ability to increase our client base and expand our operations, resulting in a reduced profit margin on our activities, and increasing the competition for investment opportunities.
h. Regulation of the sectors in which the Company operates
Minimum capital requirements imposed on financial institutions may adversely affect the Company‘s operating income and its financial condition
In response to the 2007/2008 global financial crisis, the Basel Committee on Banking Supervision (BCBS) issued a set of recommendations to the global banking system, known as Basel III. Its main purpose is to make the financial system more resilient, reduce the cost of banking crises and support the banking system’s sustainable growth through best practice recommendations and, mainly, through more and better quality capital.
In 2013, the Central Bank published a set of Resolutions and Circular Letters that came into effect in October 2013, in compliance with recommendations of the BCBS regarding capital requirements. The prudential measures issued as part of these standards included those related to the calculation of the Regulatory Capital, through prudential adjustments, and minimum capital requirements, which will increase over the coming years, including through additional capital amounts.
In Brazil, the methodology for calculating the Regulatory Capital is described in CMN Resolution 4,192/13. The minimum Regulatory Capital, Tier I Capital and Core Capital requirements, as well as their additions, are described in CMN Resolution 4,193/13. The calculation of capital requirements is based on BACEN Circular Letter 3,644/13 for credit risk, BACEN Circular Letters 3,634/13 to 3,639/13, 3,641/13 and 3,645/13 for market risk and BACEN Circular Letter 3,640/13 for operational risk.
In addition to the factors cited above, the Company may not be able to meet the minimum capital adequacy requirements due to changes in the Brazilian economy in general or alterations to the rules relating to capital adequacy. The Company could also be compelled by the Central Bank to limit its lending operations, sell assets or take other steps that may have a negative impact on the results of the Company‘s operations or its financial condition.
The Company´s liquidity and financial condition may be adversely affected by future Central Bank interventions in other financial institutions
Midsize Brazilian banks may experience a reduction in deposits due to certain situations or facts related to the financial markets in Brazil, particularly concerns about the financial health of these institutions. We observed such a situation or in the second half of 2008 and the early months of 2009, when the crisis in the US market severely affected the liquidity available to lending banks in Brazil. Should the Central Bank intervene in any other Brazilian financial institution, the Company may experience withdrawals that adversely affect its liquidity and financial condition.
Payroll loans, one of the Company‘s main products, are subject to laws and regulations that may be altered and are subject to interpretation by the courts overseeing these laws and regulations
The payroll deduction is regulated by a variety of laws and regulations at the federal, state and municipal levels, which establish deduction limits and the irrevocability of the authorization given by the employee or INSS beneficiary for deductions to pay the loan.
The publication of any new law or regulation or amendment, or revocation or reinterpretation of the existing laws and regulations that results in the prohibition or restriction of the company‘s ability to carry out these direct deductions may increase the risk profile of its loan portfolio, leading to a higher percentage of loan losses. The Company cannot guarantee that the laws and regulations covering direct payroll or INSS benefit reductions will not be amended or repealed in the future. Payroll loan payments are made through deductions to the employees´ paycheck or INSS benefits. The Company is therefore exposed to the credit risk of the government entity responsible for paying the employee‘s salary or the benefit being received.
Furthermore, the Company is subject to the imposition of limits on the interest rates it charges on its loans to INSS pensioners and retirees and civil servants from other government entities with which it has payroll loan agreements, as well as delays in receiving the transfer of the deducted amounts. The Company cannot guarantee that the entities with which it has these agreements will maintain the maximum applicable interest rates at current levels.
In addition, the granting of payroll loans to public employees and INSS retirees and pensioners depends on authorization from the government agencies to which these individuals are linked. The Federal Government and other governmental agencies may alter the regulation of these authorizations. Currently, the Company is not authorized to offer payroll loans to the employees of certain state or municipal governments because the laws of these states and municipalities only allow such operations to be carried out by state banks. Other government agencies may impose regulations that restrict or prevent the Company from offering payroll loans to their employees. On October 18, 2007, the Ministry of Planning issued a decree that prevented the inclusion of new loans into the Integrated Human Resource Management System (SIAPE) for a period of 90 days, in order to investigate allegations of fraud committed in the granting of payroll loans to federal employees. Moreover, unfavorable administrative or judicial rulings related to or issued within this segment, including, but not limited to those that impose any restrictions or encumbrances on the Company with respect to (i) the possibility of issuing payroll loans; (ii) the form or conditions of employment of the relevant institutions or their employees or officers; or (iii) the deduction of amounts directly from the payments to retirees, pensioners, civil servants and private sector employees, could lead to an increase in the losses and expenses related to these transactions. Any change in these factors could have an adverse effect on the Company.
Base interest rate alterations by the Central Bank could adversely affect the results of our operations
The Central Bank, through the Brazilian Committee for Monetary Policy (Comitê de Política Monetária), or COPOM, periodically establishes the SELIC rate, which is the base interest rate for the Brazilian banking system. The COPOM has frequently adjusted the SELIC rate in order to control price increases, due to the system of inflation targets adopted by the agency.
Increases in the SELIC rate could adversely affect our operations by reducing demand for credit, increasing its funding costs and decreasing the market value of the loan portfolio, with its predominance of fixed rates. Decreases in the SELIC rate could also adversely affect our operating results, to a lesser extent, by decreasing the income from government bonds and floating-rate contracts, among other factors.
Changes to the laws and regulations governing banking or the introduction of new laws and regulations that may adversely affect our operations and revenue
Brazilian banks, including us, are subject to extensive and ongoing supervision by the Central Bank. We have no control over the government regulations that apply to our operations, including those that apply to:
- Minimum capital requirements;
- Compulsory deposit requirements;
- Lending limits and other credit restrictions;
- Accounting and statistical requirements; and
- Changes to the minimum rural credit funding limits.
The structure of the rules governing Brazilian financial institutions is constantly evolving. The existing laws and regulations may be amended, the manner in which laws and regulations are applied and interpreted by the Judiciary could change and new laws and regulations may be introduced. These changes could adversely affect our operations and results.
Monetary regulations imposed by the Central Bank and changes to the limits regarding reserve requirements and compulsory deposits may adversely affect us
The Federal Government, in order to implement economic policies, has historically promulgated regulations affecting financial institutions. These regulations are used by the Federal Government to control the availability of credit and reduce or increase consumption in Brazil. To this end, the Central Bank changes the level of reserve requirements and compulsory deposits that financial institutions in Brazil must maintain with the Central Bank. Banks comply with the minimum reserves through deposits with the Central Bank or, in some cases, buying bonds from the Federal Government.
Changes to the level of reserve requirements and compulsory deposits may adversely affect our operating results, given that (i) the reserve requirements and mandatory deposits reduce our liquidity and availability to make loans and other investments, and (ii) monies held as compulsory deposits generally do not yield the same return as its other investments and, deposits as part of such compulsory deposits do not yield interest and must be invested in Brazilian government bonds or used to finance rural development programs.
There is no way to guarantee that the Central Bank will not increase the limits on reserve requirements or will not establish new requirements for reserves or mandatory deposits, or will not change any other regulations that could negatively affect our liquidity and, as a result, our business prospects, our funding strategy, the expansion of our credit portfolio and our profitability.
The application of a limit on loan interest rates may have an adverse effect on the revenue from interest charged by us, while also affecting our ability to grant loans
Decree 22,626 of April 7, 1933, commonly known as the Usury Law, prohibits charging interest exceeding 12% per annum. However, Law 4,595, of December 31, 1964, exempted financial institutions from having to adhere to the provisions of the said Decree, which law has been upheld in a number of court decisions.
Changes in the Brazilian courts´ interpretation of existing regulations or significant changes in the legislation and regulations restricting interest rates that may be charged by financial institutions could have a material adverse effect our business, financial condition and operating profits.
i. The foreign countries where the Company operates
The Company does not operate outside of Brazil.
j. Social-environmental issues
The Company does not identify material risks related to social-environmental issues in the development of its activities.