SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20112012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period fromto
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number 001-12518
BANCO SANTANDER, S.A.
(Exact name of Registrant as specified in its charter)
Kingdom of Spain
(Jurisdiction of incorporation)
Ciudad Grupo Santander
28660 Boadilla del Monte (Madrid), Spain
(address of principal executive offices)
José Antonio Álvarez
Banco Santander, S.A.
Ciudad Grupo Santander
28660 Boadilla del Monte
Madrid, Spain
Tel: +34 91 289 32 80
Fax: +34 91 257 12 82
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered, pursuant to Section 12(b) of the Act
Title of each class | Name of each exchange on which registered | |
American Depositary Shares, each representing the right to receive one Share of Capital Stock of Banco Santander, S.A., par value | New York Stock Exchange | |
Shares of Capital Stock of Banco Santander, S.A., par value | New York Stock Exchange * | |
Guarantee of Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal, Series | New York Stock Exchange ** |
* | Banco Santander Shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange. |
** | The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal (a wholly owned subsidiary of Banco Santander, S.A.) |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act
None.
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP ¨ | International Financial Reporting Standards as issued by the International Accounting Standards Board x | Other ¨ |
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close
of business covered by the annual report.
9,076,853,40010,538,683,145 shares
BANCO SANTANDER, S.A.
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ITEM 11. |
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Part 1. Corporate principles of risk management, control and risk appetite | ||||||
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ITEM 12. |
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ITEM 14. |
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ITEM 16 | ||||||
D. Exemptions from the Listing Standards for Audit Committees | ||||||
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers | ||||||
ITEM 17. | ||||||
ITEM 18. | ||||||
ITEM 19. |
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Accounting Principles
Under Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). The Bank of Spain Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) requires Spanish credit institutions to adapt their accounting systems to the principles derived from the adoption by the European Union of International Financial Reporting Standards. Therefore, Grupo Santander (“the Group” or “Santander”) is required to prepare its consolidated financial statements for the year ended December 31, 20112012 in conformity with the EU-IFRS and Bank of Spain’s Circular 4/2004. Differences between EU-IFRS, Bank of Spain’s Circular 4/2004 and International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS-IASB) are not material. Therefore, we assert that the financial information contained in this annual report on Form 20-F complies with IFRS-IASB.
We have formatted our financial information according to the classification format for banks used in Spain. We have not reclassified the line items to comply with Article 9 of Regulation S-X.S-X (see Note 55 of our consolidated financial statements). Article 9 is a regulation of the US Securities and Exchange Commission that contains formatting requirements for bank holding company financial statements.
Our auditors, Deloitte, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the three years ended December 31, 2012, 2011 2010 and 20092010 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2012, 2011 2010 and 20092010 report prepared by Deloitte, S.L.
General Information
Our consolidated financial statements are in Euros, which are denoted “euro”, “euros”, “EUR” or “€” throughout this annual report. Also, throughout this annual report, when we refer to:
“dollars”, “US$” or “$”, we mean United States dollars;
“pounds” or “£”, we mean United Kingdom pounds; and
“one billion”, we mean 1,000 million.1 billion.
When we refer to “average balances” for a particular period, we mean the average of the month-end balances for that period, unless otherwise noted. We do not believe that monthly averages present trends that are materially different from trends that daily averages would show. In calculating our interest income, we include any interest payments we received on non-accruing loans if they were received in the period when due. We have not reflected consolidation adjustments in any financial information about our subsidiaries or other business units.
When we refer to “loans”, we mean loans, leases, discounted bills and accounts receivable, unless otherwise noted. The loan to value “LTV” ratios disclosed in this report refer to LTV ratios upon origination unless otherwise noted. Additionally, if a debt is approaching a doubtful status, we update the appraisals which are then used to estimate allowances for loan losses.
When we refer to “impaired balances” or “non-performing balances”, we mean impaired or non-performing loans and contingent liabilities (“NPL”), securities and other assets to collect.
When we refer to “allowances for credit losses”, we mean the specific allowances for credit losses, and unless otherwise noted, the collectively assessed allowance for credit losses and any allowances for country-risk. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Allowances for Credit Losses and Country-Risk Requirements”.
Where a translation of foreign exchange is given for any financial data, we use the exchange rates of the relevant period (as of the end of such period for balance sheet data and the average exchange rate of such period for income statement data) as published by the European Central Bank, unless otherwise noted.
Management makes use of certain financial measures in local currency to help in the assessment of on-going operating performance. These non-GAAP financial measures include the results of operations of our subsidiary banks located outside the
eurozone, excluding the impact of foreign exchange. We analyze these banks’ performance on a local currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on the results of operations, we believe that evaluating their performance on a local currency basis provides an additional and meaningful assessment of performance to both management and the company’s investors. For a discussion of the accounting principles used in translation of foreign currency-denominated assets and liabilities to euros, see Note 2(a) of our consolidated financial statements.
4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains statements that constitute “forward-looking statements” within the meaning of the USU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, information regarding:
exposure to various types of market risks;
management strategy;
capital expenditures;
earnings and other targets; and
asset portfolios.
Forward-looking statements may be identified by words such as “expect,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “VaR,” “RORAC,” “target,” “goal,” “objective,” “estimate,” “future” and similar expressions. We include forward-looking statements in the “Operating and Financial Review and Prospects,” “Information on the Company,” and “Quantitative and Qualitative Disclosures About Market Risk” sections. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements.
You should understand that adverse changes in the following important factors, in addition to those discussed in “Key Information—Risk Factors”, “Operating and Financial Review and Prospects,” “Information on the Company” and elsewhere in this annual report, could affect our future results and could cause those results or other outcomes to differ materially from those anticipated in any forward-looking statement:
Economic and Industry Conditions
exposure to various types of market risks, principally including interest rate risk, foreign exchange rate risk and equity price risk;
general economic or industry conditions in Spain, the United Kingdom,U.K., the United States,U.S., other European countries, Brazil, other Latin American countries and the other areas in which we have significant business activities or investments;
a default on, or a ratings downgrade of, the sovereign debt of Spain, and the other countries where we operate;
a worsening of the economic environment in the United Kingdom,U.K., other European countries, Brazil, other Latin American countries, and the United States,US, and an increase of the volatility in the capital markets;
a further deterioration of the Spanish economy;
a further widening of Spain’s “risk premium”, or the spread between the yields on Spanish Government securities and comparable German Government securities;
the effects of a continued decline in real estate prices, particularly in Spain, the UKU.K. and the US;U.S.;
monetary and interest rate policies of the European Central Bank and various central banks;
inflation or deflation;
the effects of non-linear market behavior that cannot be captured by linear statistical models, such as the VaR model we use;
changes in competition and pricing environments;
the inability to hedge some risks economically;
the adequacy of loss reserves;
acquisitions or restructurings of businesses that may not perform in accordance with our expectations;
changes in demographics, consumer spending, investment or saving habits; and
changes in competition and pricing environments as a result of the progressive adoption of the internet for conducting financial services and/or other factors.
5
Political and Governmental Factors
political stability in Spain, the United Kingdom, other European countries, Latin America and the US;
changes in Spanish, UK,U.K., EU, Latin American, USU.S. or other jurisdictions’ laws, regulations or taxes; and
increased regulation in light of the global financial crisis.
Transaction and Commercial Factors
damage to our reputation;
our ability to integrate successfully our acquisitions and the challenges inherent in diverting management’s focus and resources from other strategic opportunities and from operational matters while we integrate these acquisitions; and
the outcome of our negotiations with business partners and governments.
Operating Factors
potential losses associated with an increase in the level of substandard loans or non-performance by counterparties to other types of financial instruments.instruments;
technical difficulties and the development and use of new technologies by us and our competitors;
a downgrade in our credit rating;
the occurrence of force majeure, such as natural disasters, that impact our operations or impair the asset quality of our loan portfolio; and
the impact of changes in the composition of our balance sheet on future net interest income.income
The forward-looking statements contained in this annual report speak only as of the date of this annual report. We do not undertake to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.
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Item 1. Identity1.Identity of Directors, Senior Management and Advisers
A. Directors and Senior Management
Not applicable.
B. Advisers
Not applicable.
C. Auditor
Not applicable.
Item 2. Offer2.Offer Statistics and Expected Timetable
A. Offer Statistics
Not applicable.
B. Method and Expected Timetable
Not applicable.
A. SelectedA.Selected financial data
Selected Consolidated Financial Information
We have selected the following financial information from our consolidated financial statements. You should read this information in connection with, and it is qualified in its entirety by reference to, our consolidated financial statements.
In the F-pages of this annual report on Form 20-F, the audited financial statements for the years 2012, 2011 2010 and 20092010 are presented. The audited financial statements for 20082009 and 20072008 are not included in this document, but they can be found in our previous annual reports on Form 20-F.
Under IFRS-IASB, revenues and expenses of discontinued businesses must be reclassified from each income statement line item to “Profit from discontinued operations”. Revenues and expenses from prior years are also required to be reclassified for comparison purposes to present the same businesses as discontinued operations. This change in presentation does not affect “Consolidated profit for the year” (see Note 37 to our consolidated financial statements).
In addition, the income statement for the year ended December, 31, 2011 reflects the impact of the consolidation of Bank Zachodni WBK, S.A. and the income statement for the year ended December, 31, 2009 reflects the impact of the consolidation of Banco Real, Alliance & Leicester, Bradford & Bingley’s branch network and retail deposits, Sovereign and other consumer businesses.
Interest and similar income Interest expense and similar charges Interest income / (charges) Income from equity instruments Income from companies accounted for using the equity method Fee and commission income Fee and commission expense Gains/losses on financial assets and liabilities (net) Exchange differences (net) Other operating income Other operating expenses Total income Administrative expenses Personnel expenses Other general administrative expenses Depreciation and amortization Provisions (net) Impairment losses on financial assets (net) Impairment losses on other assets (net) Gains/(losses) on disposal of assets not classified as non-current assets held for sale Gains/(losses) on non-current assets held for sale not classified as discontinued operations Operating profit/(loss) before tax Income tax Profit from continuing operations Profit/(loss) from discontinued operations (net) Consolidated profit for the year Profit attributable to the Parent Profit attributable to non-controlling interest Per share information: Average number of shares (thousands) (1) Basic earnings per share (euros) Basic earnings per share continuing operation (euros) Diluted earnings per share (euros) Diluted earnings per share continuing operation (euros) Remuneration paid (euros) (2) Remuneration paid (US$) (2) Year ended December 31, 2012 2011 2010 2009 2008 (in millions of euros, except percentages and per share data) 59,024 60,856 52,907 53,173 55,044 (28,877 ) (30,035 ) (23,683 ) (26,874 ) (37,506 ) 30,147 30,821 29,224 26,299 17,538 423 394 362 436 553 427 57 17 (1 ) 792 12,827 12,749 11,681 10,726 9,741 (2,519 ) (2,277 ) (1,946 ) (1,646 ) (1,475 ) 3,329 2,838 2,164 3,802 2,892 (189 ) (522 ) 441 444 582 6,693 8,050 8,195 7,929 9,436 (6,585 ) (8,032 ) (8,089 ) (7,785 ) (9,163 ) 44,553 44,078 42,049 40,204 30,896 (17,928 ) (17,781 ) (16,255 ) (14,825 ) (11,666 ) (10,323 ) (10,326 ) (9,329 ) (8,451 ) (6,813 ) (7,605 ) (7,455 ) (6,926 ) (6,374 ) (4,853 ) (2,189 ) (2,109 ) (1,940 ) (1,596 ) (1,240 ) (1,622 ) (2,601 ) (1,133 ) (1,792 ) (1,641 ) (18,906 ) (11,868 ) (10,443 ) (11,578 ) (6,283 ) (508 ) (1,517 ) (286 ) (165 ) (1,049 ) 906 1,846 350 1,565 101 (757 ) (2,109 ) (290 ) (1,225 ) 1,731 3,549 7,939 12,052 10,588 10,849 (575 ) (1,776 ) (2,923 ) (1,207 ) (1,836 ) 2,974 6,163 9,129 9,381 9,013 (7 ) (24 ) (27 ) 31 319 2,967 6,139 9,102 9,412 9,332 2,205 5,351 8,181 8,942 8,876 762 788 921 470 456 9,766,689 8,892,033 8,686,522 8,554,224 7,271,470 0.23 0.60 0.94 1.05 1.22 0.23 0.60 0.94 1.04 1.18 0.22 0.60 0.94 1.04 1.21 0.22 0.60 0.94 1.04 1.17 0.60 0.60 0.60 0.60 0.63 0.80 0.78 0.80 0.86 0.88
7
Year ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(in millions of euros, except percentages and per share data) | ||||||||||||||||||||
Interest and similar income | 60,856 | 52,907 | 53,173 | 55,044 | 45,512 | |||||||||||||||
Interest expense and similar charges | (30,035 | ) | (23,683 | ) | (26,874 | ) | (37,506 | ) | (31,069 | ) | ||||||||||
Interest income / (charges) | 30,821 | 29,224 | 26,299 | 17,538 | 14,443 | |||||||||||||||
Income from equity instruments | 394 | 362 | 436 | 553 | 420 | |||||||||||||||
Income from companies accounted for using the equity method | 57 | 17 | (1 | ) | 792 | 438 | ||||||||||||||
Fee and commission income | 12,749 | 11,681 | 10,726 | 9,741 | 9,290 | |||||||||||||||
Fee and commission expense | (2,277 | ) | (1,946 | ) | (1,646 | ) | (1,475 | ) | (1,422 | ) | ||||||||||
Gains/losses on financial assets and liabilities (net) | 2,838 | 2,164 | 3,802 | 2,892 | 2,306 | |||||||||||||||
Exchange differences (net) | (522 | ) | 441 | 444 | 582 | 649 | ||||||||||||||
Other operating income | 8,050 | 8,195 | 7,929 | 9,436 | 6,740 | |||||||||||||||
Other operating expenses | (8,032 | ) | (8,089 | ) | (7,785 | ) | (9,163 | ) | (6,449 | ) | ||||||||||
Total income | 44,078 | 42,049 | 40,204 | 30,896 | 26,415 | |||||||||||||||
Administrative expenses | (17,781 | ) | (16,255 | ) | (14,825 | ) | (11,666 | ) | (10,777 | ) | ||||||||||
Personnel expenses | (10,326 | ) | (9,329 | ) | (8,451 | ) | (6,813 | ) | (6,435 | ) | ||||||||||
Other general administrative expenses | (7,455 | ) | (6,926 | ) | (6,374 | ) | (4,853 | ) | (4,342 | ) | ||||||||||
Depreciation and amortization | (2,109 | ) | (1,940 | ) | (1,596 | ) | (1,240 | ) | (1,247 | ) | ||||||||||
Provisions (net) | (2,601 | ) | (1,133 | ) | (1,792 | ) | (1,641 | ) | (896 | ) | ||||||||||
Impairment losses on financial assets (net) | (11,868 | ) | (10,443 | ) | (11,578 | ) | (6,283 | ) | (3,430 | ) | ||||||||||
Impairment losses on other assets (net) | (1,517 | ) | (286 | ) | (165 | ) | (1,049 | ) | (1,548 | ) | ||||||||||
Gains/(losses) on disposal of assets not classified as non-current assets held for sale | 1,846 | 350 | 1,565 | 101 | 1,810 | |||||||||||||||
Gains/(losses) on non-current assets held for sale not classified as discontinued operations | (2,109 | ) | (290 | ) | (1,225 | ) | 1,731 | 643 | ||||||||||||
Operating profit/(loss) before tax | 7,939 | 12,052 | 10,588 | 10,849 | 10,970 | |||||||||||||||
Income tax | (1,776 | ) | (2,923 | ) | (1,207 | ) | (1,836 | ) | (2,322 | ) | ||||||||||
Profit from continuing operations | 6,163 | 9,129 | 9,381 | 9,013 | 8,648 | |||||||||||||||
Profit/(loss) from discontinued operations (net) | (24 | ) | (27 | ) | 31 | 319 | 988 | |||||||||||||
Consolidated profit for the year | 6,139 | 9,102 | 9,412 | 9,332 | 9,636 | |||||||||||||||
Profit attributable to the Parent | 5,351 | 8,181 | 8,942 | 8,876 | 9,060 | |||||||||||||||
Profit attributable to non-controlling interest | 788 | 921 | 470 | 456 | 576 | |||||||||||||||
Per share information: | ||||||||||||||||||||
Average number of shares (thousands) (1) | 8,892,033 | 8,686,522 | 8,554,224 | 7,271,470 | 6,801,899 | |||||||||||||||
Basic earnings per share (euros) | 0.60 | 0.94 | 1.05 | 1.22 | 1.33 | |||||||||||||||
Basic earnings per share continuing operation (euros) | 0.60 | 0.94 | 1.04 | 1.18 | 1.20 | |||||||||||||||
Diluted earnings per share (euros) | 0.60 | 0.94 | 1.04 | 1.21 | 1.32 | |||||||||||||||
Diluted earnings per share continuing operation (euros) | 0.60 | 0.94 | 1.04 | 1.17 | 1.19 | |||||||||||||||
Remuneration paid (euros) (2) | 0.60 | 0.60 | 0.60 | 0.63 | 0.61 | |||||||||||||||
Remuneration paid (US$) (2) | 0.78 | 0.80 | 0.86 | 0.88 | 0.89 |
8
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||
(in millions of euros, except percentages and per share data) | (in millions of euros, except percentages and per share data) | |||||||||||||||||||||||||||||||||||||||
Total assets | 1,251,526 | 1,217,501 | 1,110,529 | 1,049,632 | 912,915 | 1,269,628 | 1,251,526 | 1,217,501 | 1,110,529 | 1,049,632 | ||||||||||||||||||||||||||||||
Loans and advances to credit institutions (net) (3) | 51,726 | 79,855 | 79,837 | 78,792 | 57,643 | 73,900 | 51,726 | 79,855 | �� | 79,837 | 78,792 | |||||||||||||||||||||||||||||
Loans and advances to customers (net) (3) | 750,100 | 724,153 | 682,551 | 626,888 | 571,099 | 720,482 | 750,100 | 724,153 | 682,551 | 626,888 | ||||||||||||||||||||||||||||||
Investment securities (net) (4) | 154,015 | 174,258 | 173,990 | 124,673 | 132,035 | 152,066 | 154,015 | 174,258 | 173,990 | 124,673 | ||||||||||||||||||||||||||||||
Investments: Associates and joint venture | 4,155 | 273 | 164 | 1,323 | 15,689 | 4,454 | 4,155 | 273 | 164 | 1,323 | ||||||||||||||||||||||||||||||
Contingent liabilities (net) | 48,042 | 59,795 | 59,256 | 65,323 | 76,217 | 45,033 | 48,042 | 59,795 | 59,256 | 65,323 | ||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits from central banks and credit institutions (5) | 143,138 | 140,112 | 142,091 | 129,877 | 112,897 | 152,966 | 143,138 | 140,112 | 142,091 | 129,877 | ||||||||||||||||||||||||||||||
Customer deposits (5) | 632,533 | 616,376 | 506,975 | 420,229 | 355,407 | 626,639 | 632,533 | 616,376 | 506,975 | 420,229 | ||||||||||||||||||||||||||||||
Debt securities (5) | 197,372 | 192,873 | 211,963 | 236,403 | 233,287 | 205,969 | 197,372 | 192,873 | 211,963 | 236,403 | ||||||||||||||||||||||||||||||
Capitalization | ||||||||||||||||||||||||||||||||||||||||
Guaranteed subordinated debt excluding preferred securities and preferred shares (6) | 6,619 | 10,934 | 13,867 | 15,748 | 16,742 | 5,207 | 6,619 | 10,934 | 13,867 | 15,748 | ||||||||||||||||||||||||||||||
Other subordinated debt | 10,477 | 12,189 | 15,193 | 14,452 | 11,667 | 8,291 | 10,477 | 12,189 | 15,193 | 14,452 | ||||||||||||||||||||||||||||||
Preferred securities (6) | 5,447 | 6,917 | 7,315 | 7,622 | 7,261 | 4,319 | 5,447 | 6,917 | 7,315 | 7,622 | ||||||||||||||||||||||||||||||
Preferred shares (6) | 449 | 435 | 430 | 1,051 | 523 | 421 | 449 | 435 | 430 | 1,051 | ||||||||||||||||||||||||||||||
Non-controlling interest (including net income of the period) | 6,445 | 5,897 | 5,203 | 2,415 | 2,358 | 9,672 | 6,445 | 5,897 | 5,203 | 2,415 | ||||||||||||||||||||||||||||||
Stockholders’ equity (7) | 76,414 | 75,018 | 68,667 | 57,587 | 55,200 | 74,654 | 76,414 | 75,018 | 68,667 | 57,587 | ||||||||||||||||||||||||||||||
Total capitalization | 105,851 | 111,390 | 110,675 | 98,875 | 93,751 | 102,564 | 105,851 | 111,390 | 110,675 | 98,875 | ||||||||||||||||||||||||||||||
Stockholders’ equity per share (7) | 8.59 | 8.64 | 8.03 | 7.92 | 8.12 | 7.64 | 8.59 | 8.64 | 8.03 | 7.92 | ||||||||||||||||||||||||||||||
Other managed funds | ||||||||||||||||||||||||||||||||||||||||
Mutual funds | 102,611 | 113,510 | 105,216 | 90,306 | 119,211 | 89,176 | 102,611 | 113,510 | 105,216 | 90,306 | ||||||||||||||||||||||||||||||
Pension funds | 9,645 | 10,965 | 11,310 | 11,128 | 11,952 | 10,076 | 9,645 | 10,965 | 11,310 | 11,128 | ||||||||||||||||||||||||||||||
Managed portfolio | 19,200 | 20,314 | 18,364 | 17,289 | 19,814 | 18,889 | 19,200 | 20,314 | 18,364 | 17,289 | ||||||||||||||||||||||||||||||
Total other managed funds | 131,456 | 144,789 | 134,890 | 118,723 | 150,977 | 118,141 | 131,456 | 144,789 | 134,890 | 118,723 | ||||||||||||||||||||||||||||||
Consolidated ratios | ||||||||||||||||||||||||||||||||||||||||
Profitability ratios: | ||||||||||||||||||||||||||||||||||||||||
Net yield (8) | 2.74 | % | 2.68 | % | 2.62 | % | 2.05 | % | 1.80 | % | 2.52 | % | 2.74 | % | 2.68 | % | 2.62 | % | 2.05 | % | ||||||||||||||||||||
Return on average total assets (ROA) | 0.50 | % | 0.76 | % | 0.86 | % | 1.00 | % | 1.10 | % | 0.24 | % | 0.50 | % | 0.76 | % | 0.86 | % | 1.00 | % | ||||||||||||||||||||
Return on average stockholders’ equity (ROE) | 7.14 | % | 11.80 | % | 13.90 | % | 17.07 | % | 21.91 | % | 2.80 | % | 7.14 | % | 11.80 | % | 13.90 | % | 17.07 | % | ||||||||||||||||||||
Capital ratio: | ||||||||||||||||||||||||||||||||||||||||
Average stockholders’ equity to average total assets | 6.10 | % | 5.82 | % | 5.85 | % | 5.55 | % | 4.71 | % | 6.12 | % | 6.10 | % | 5.82 | % | 5.85 | % | 5.55 | % | ||||||||||||||||||||
Ratio of earnings to fixed charges (9) | ||||||||||||||||||||||||||||||||||||||||
Excluding interest on deposits | 1.63 | % | 2.28 | % | 2.01 | % | 1.57 | % | 1.67 | % | 1.27 | % | 1.63 | % | 2.28 | % | 2.01 | % | 1.57 | % | ||||||||||||||||||||
Including interest on deposits | 1.27 | % | 1.52 | % | 1.40 | % | 1.27 | % | 1.35 | % | 1.11 | % | 1.27 | % | 1.52 | % | 1.40 | % | 1.27 | % | ||||||||||||||||||||
Credit quality data | ||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers | ||||||||||||||||||||||||||||||||||||||||
Allowances for impaired balances including country risk and excluding contingent liabilities as a percentage of total gross loans | 2.46 | % | 2.65 | % | 2.55 | % | 1.95 | % | 1.50 | % | 3.42 | % | 2.46 | % | 2.65 | % | 2.55 | % | 1.95 | % | ||||||||||||||||||||
Impaired balances as a percentage of total gross loans | 4.07 | % | 3.75 | % | 3.43 | % | 2.19 | % | 1.05 | % | 4.74 | % | 4.07 | % | 3.75 | % | 3.43 | % | 2.19 | % | ||||||||||||||||||||
Allowances for impaired balances as a percentage of impaired balances | 60.52 | % | 70.58 | % | 74.32 | % | 89.08 | % | 143.24 | % | 72.17 | % | 60.52 | % | 70.58 | % | 74.32 | % | 89.08 | % | ||||||||||||||||||||
Net loan charge-offs as a percentage of total gross loans | 1.38 | % | 1.31 | % | 1.27 | % | 0.60 | % | 0.46 | % | 1.36 | % | 1.38 | % | 1.31 | % | 1.27 | % | 0.60 | % | ||||||||||||||||||||
Ratios adding contingent liabilities to loans and advances to customers and excluding country risk (*) | ||||||||||||||||||||||||||||||||||||||||
Allowances for impaired balances (**) as a percentage of total loans and contingent liabilities | 2.39 | % | 2.58 | % | 2.44 | % | 1.83 | % | 1.42 | % | 3.30 | % | 2.39 | % | 2.58 | % | 2.44 | % | 1.83 | % | ||||||||||||||||||||
Impaired balances (**) (10) as a percentage of total loans and contingent liabilities | 3.89 | % | 3.55 | % | 3.24 | % | 2.02 | % | 0.94 | % | 4.54 | % | 3.89 | % | 3.55 | % | 3.24 | % | 2.02 | % | ||||||||||||||||||||
Allowances for impaired balances (**) as a percentage of impaired balances (**) | 61.37 | % | 72.74 | % | 75.33 | % | 90.64 | % | 150.55 | % | 72.56 | % | 61.37 | % | 72.74 | % | 75.33 | % | 90.64 | % | ||||||||||||||||||||
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities | 1.29 | % | 1.21 | % | 1.17 | % | 0.55 | % | 0.41 | % | 1.27 | % | 1.29 | % | 1.21 | % | 1.17 | % | 0.55 | % |
(*) | We disclose these ratios because our credit risk exposure comprises loans and advances to customers as well as contingent liabilities, all of which are subject to impairment and, therefore, allowances are taken in respect thereof. |
(**) | Impaired or non-performing loans and contingent liabilities, securities and other assets to collect. |
9
(1) | Average number of shares has been calculated on the basis of the weighted average number of shares outstanding in the relevant year, net of treasury stock. |
(2) | The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a dividend of €0.6508 per share to be paid out of our profits for 2008. In accordance with IAS 33, for comparative purposes, dividends per share paid, as disclosed in the table above, take into account the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008. As a result of this adjustment, the dividend per share for 2008 amounts to €0.6325. The shareholders also approved a new remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the |
(3) | Equals the sum of the amounts included under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss” and “Loans and receivables” as stated in our consolidated financial statements. |
(4) | Equals the amounts included as “Debt instruments” and “Equity instruments” under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss”, “Available-for-sale financial assets” and “Loans and receivables” as stated in our consolidated financial statements. |
(5) | Equals the sum of the amounts included under the headings “Financial liabilities held for trading”, “Other financial liabilities at fair value through profit or loss” and “Financial liabilities at amortized cost” included in Notes 20, 21 and 22 to our consolidated financial statements. |
(6) | In our consolidated financial statements, preferred securities and preferred shares are included under “Subordinated liabilities”. |
(7) | Equals the sum of the amounts included at the end of each year as “Own funds” and “Valuation adjustments” as stated in our consolidated financial statements. We have deducted the book value of treasury stock from stockholders’ equity. |
(8) | Net yield is the total of net interest income (including dividends on equity securities) divided by average earning assets. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Earning Assets—Yield Spread”. |
(9) | For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of pre-tax income from continuing operations before adjustment for income or loss from equity investees plus fixed charges. Fixed charges consist of total interest expense (including or excluding interest on deposits as appropriate) and the interest expense portion of rental expense. |
(10) | Impaired loans reflect Bank of Spain classifications. These classifications differ from the classifications applied by U.S. banks in reporting loans as non-accrual, past due, restructured and potential problem loans. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Bank of Spain Classification Requirements”. |
10
Set forth below is a table showing our allowances for impaired balances broken down by various categories as disclosed and discussed throughout this annual report on Form 20-F:
IFRS-IASB | IFRS-IASB | |||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||
Allowances refers to: | (in millions of euros) | (in millions of euros) | ||||||||||||||||||||||||||||||||||||||
Allowances for impaired balances (*) (excluding country risk) | 19,661 | 20,748 | 18,497 | 12,863 | 9,302 | 26,194 | 19,661 | 20,748 | 18,497 | 12,863 | ||||||||||||||||||||||||||||||
Allowances for contingent liabilities and commitments (excluding country risk) | (648 | ) | (1,011 | ) | (623 | ) | (622 | ) | (587 | ) | ||||||||||||||||||||||||||||||
Less: Allowances for contingent liabilities and commitments (excluding country risk) | 614 | 648 | 1,011 | 623 | 622 | |||||||||||||||||||||||||||||||||||
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Allowances for impaired balances of loans (excluding country risk): | 19,013 | 19,737 | 17,874 | 12,241 | 8,715 | |||||||||||||||||||||||||||||||||||
Allowances referred to country risk and other | 210 | 121 | 192 | 660 | 173 | |||||||||||||||||||||||||||||||||||
Allowances for Balances of Loans (excluding country risk): | 25,580 | 19,013 | 19,737 | 17,874 | 12,241 | |||||||||||||||||||||||||||||||||||
Allowances relating to country risk and other | 98 | 210 | 121 | 192 | 660 | |||||||||||||||||||||||||||||||||||
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Allowances for impaired balances (excluding contingent liabilities) | 19,223 | 19,858 | 18,066 | 12,901 | 8,888 | 25,678 | 19,223 | 19,858 | 18,066 | 12,901 | ||||||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||||||
Allowances for Loans and receivables: | 18,988 | 19,739 | 17,899 | 12,720 | 8,796 | 25,549 | 18,988 | 19,739 | 17,899 | 12,720 | ||||||||||||||||||||||||||||||
Allowances for Customers | 18,936 | 19,697 | 17,873 | 12,466 | 8,695 | 25,504 | 18,936 | 19,697 | 17,873 | 12,466 | ||||||||||||||||||||||||||||||
Allowances for Credit institutions and other financial assets | 36 | 17 | 26 | 254 | 101 | 30 | 36 | 17 | 26 | 254 | ||||||||||||||||||||||||||||||
Allowances for Debt Instruments | 16 | 25 | 0 | 0 | 0 | 15 | 16 | 25 | 0 | 0 | ||||||||||||||||||||||||||||||
Allowances for Debt Instruments available for sale | 235 | 119 | 167 | 181 | 92 | 129 | 235 | 119 | 167 | 181 |
(*) | Impaired or non-performing loans and contingent liabilities, securities and other assets to collect. |
Exchange Rates
Fluctuations in the exchange rate between euros and dollars have affected the dollar equivalent of the share prices on Spanish stock exchanges and, as a result, are likely to affect the dollar market price of our American Depositary Shares, or ADSs, in the United States. In addition, dividends paid to the depositary of the ADSs are denominated in euros and fluctuations in the exchange rate affect the dollar conversion by the depositary of dividends paid on the shares to the holders of the ADSs. Fluctuations in the exchange rate of euros against other currencies may also affect the euro value of our non-euro denominated assets, liabilities, earnings and expenses.
The following tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for euros and dollars (expressed in dollars per euro), based on the Noon Buying Rate as announced by the Federal Reserve Bank of New York for the dates and periods indicated.
The New York Federal Reserve Bank announced its decision to discontinue the publication of foreign exchange rates on December 31, 2008. From that date, the exchange rates shown are those published by the European Central Bank (“ECB”), and are based on the daily consultation procedures between central banks within and outside the European System of Central Banks, which normally takes place at 14:15 p.m. ECB time.
Rate During Period | Rate During Period | |||||||||||||||
Calendar Period | Period End ($) | Average Rate ($) | Period End ($) | Average Rate ($) | ||||||||||||
2007 | 1.46 | 1.38 | ||||||||||||||
2008 | 1.39 | 1.47 | 1.39 | 1.47 | ||||||||||||
2009 | 1.44 | 1.39 | 1.44 | 1.39 | ||||||||||||
2010 | 1.34 | 1.33 | 1.34 | 1.33 | ||||||||||||
2011 | 1.29 | 1.39 | 1.29 | 1.39 | ||||||||||||
2012 | 1.32 | 1.28 |
11
Rate During Period | Rate During Period | |||||||||||||||
Last six months | High $ | Low $ | High $ | Low $ | ||||||||||||
2011 | ||||||||||||||||
2012 | ||||||||||||||||
October | 1.42 | 1.32 | 1.31 | 1.29 | ||||||||||||
November | 1.38 | 1.32 | 1.30 | 1.27 | ||||||||||||
December | 1.35 | 1.29 | 1.33 | 1.29 | ||||||||||||
2012 | ||||||||||||||||
2013 | ||||||||||||||||
January | 1.32 | 1.27 | 1.36 | 1.30 | ||||||||||||
February | 1.35 | 1.30 | 1.36 | 1.31 | ||||||||||||
March | 1.34 | 1.31 | 1.31 | 1.28 | ||||||||||||
April (through April 26) | 1.33 | 1.30 | ||||||||||||||
April (through April 17) | 1.31 | 1.28 |
On April 26, 2012,17, 2013, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.32.$1.31.
For a discussion of the accounting principles used in translation of foreign currency-denominated assets and liabilities to euros, see Note 2 (a) of our consolidated financial statements.
B. Capitalization and indebtedness.
Not Applicable.
C. Reasons for the offer and use of proceeds.
Not Applicable.
Because our loan portfolio is concentrated in Continental Europe, the United Kingdom and Latin America, adverse changes affecting the economies of Continental Europe, the United Kingdom or certain Latin American countries could adversely affect our financial condition.
Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom and Latin America. At December 31, 2011,2012, Continental Europe accounted for 42%40% of our total loan portfolio (Spain accounted for 29%28% of our total loan portfolio), while the United Kingdom and Latin America accounted for 34% and 19%20%, respectively. Accordingly, the recoverability of these loan portfolios in particular, and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Continental Europe (in particular, Spain), the United Kingdom and Latin America. Continued recessionary economic conditions in the economies of Continental Europe (in particular, Spain), or a return to recessionary conditions in the United Kingdom or the Latin American countries in which we operate, would likely have a significant adverse impact on our loan portfolio and, as a result, on our financial condition, cash flows and results of operations. See “Item 4. Information on the Company—B. Business Overview.”
Some of our business is cyclicalWe are vulnerable to the current disruptions and our income may decrease when demand for certain products or services isvolatility in a down cycle.the global financial markets.
The levelIn the past five years, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of income we derive from certainspreads and, in some cases, lack of our productsprice transparency on interbank lending rates. Global economic conditions deteriorated significantly between 2007 and services depends on the strength of the economies in the regions where we operate2009, and market trends prevailing in those regions. Customer loans and deposits, which collectively account for most of our earnings, are particularly sensitive to economic conditions. In 2011, Continental Europe, the United Kingdom, Latin America and Sovereign (US) represented 31%, 12%, 51% and 6%, respectively, of the profit attributable to the Group’s operating areas for the year. However, many of the economiescountries in which we operate fell into recession. Recessionary conditions continue in some countries. Many major financial institutions, including some of Continental Europe, including Spainthe world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and Portugal, are forecast to have flat or weakening economies in 2012. If the business environment in any of our geographic segments does not improve or worsens, our results of operations could be materially adversely affected.
Our business could be affected if our capital is not managed effectively or if changes limiting our ability to manage our capital position are adopted.
Effective management of our capital position is important to our ability to operate our business, toinsurance companies experienced, and some continue to grow organically and to pursue our business strategy. However, in response toexperience, significant difficulties. Around the recentworld, there have also been runs on deposits at several financial crisis, a number of changes to the regulatoryinstitutions, numerous institutions have sought additional capital frameworkor have been adopted or are being considered. For example, on December 16, 2010assisted by governments, and January 13, 2011, the Basel Committee on Banking Supervision issued its final guidance on a number of regulatory reforms to the regulatory capital framework in order to strengthen minimum capital requirements, including the phasing out of Innovative Tier 1 Capital instruments with incentives to redeem and implementing a leverage ratio on institutions in addition to current risk-based regulatory requirements. As these and other changes are implemented or future changes are considered or adopted that limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms, we may experience a material adverse effect on our financial condition and regulatory capital position.
12
Reduced access to financing or increases in our cost of funding could have an adverse effect on our liquidity and results of operations.
Historically, our principal source of funds has been customer deposits (demand, time and notice deposits). Total time deposits (including repurchase agreements) represented 52.5%, 53.0% and 46.8% of total customer deposits at the end of 2011, 2010 and 2009, respectively. Large-denomination time deposits may be a less stable source of deposits than other type of deposits and, at December 31, 2011, 21.5% of total customer deposits were time deposits in amounts greater than $100,000. The ongoing availability of deposits as a source of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of retail depositors in the economy and the financial services industry, in general, and in our creditworthiness, in particular, and the availability and extent of deposit guarantees, as well as competition between banks for deposits. In the event deposit levels decrease, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to increase our reliance on capital markets financing, which may be more expensive or unavailable.
We also fund our operations through the capital markets by issuing long-term debt, by issuing promissory notes and commercial paper or by obtaining bank loans or lines of credit. The cost and availability of capital markets financing generally are dependent on our short-term and long-term credit ratings and the market’s perception of the risks inherent in European banks and Spain. Factors that are important to the determination of our credit ratings include the level and quality of our earnings, capital adequacy, liquidity, risk appetite and management, asset quality, business mix and actual and perceived levels of government support. Banco Santander S.A.’s rating, together with that of the other main Spanish banks, was downgraded by all three rating agencies in October 2011 and by Standard & Poor’s and Fitch in February 2012. Any further downgrade in our ratings would likely increase our borrowing costs and could limit our access to capital markets and adversely affect our commercial business. See “—Credit, market and liquidity risks may have an adverse effect on our credit ratings and our cost of funds. Any reduction in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.”
The effects of the widespread crisis in investor confidence and resulting liquidity crisis experienced in 2008 and early 2009, and to some extent in 2011, have resulted in increased costs of funding and limited access to some of our traditional sources of liquidity, such as domestic and international capital markets and the interbank market, which has adversely affected our results of operations and financial condition. Further or continued reductions in our access to financing or increases in our cost of funding may make it harder and more expensive to obtain funding for our businesses. If our available funding is limited or we are forced to fund our operations at a higher cost, we may experience further adverse effects on our results of operations and financial condition.
The possibility of the moderate economic recovery returning to recessionary conditions or of turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position and results of operations.
In 2011, the global economy began to recover from the severe recessionary conditions of mid-2009, and certain regions (such as Latin America, the US and the UK) experienced a moderate economic recovery. However, the sustainability of this partial recovery has been dependent on a number of factors that are not within our control, such as a return of job growth and investment in the private sector, strengthening of housing sales and construction and timing of the exit from government credit easing policies. In addition, the modest economic recovery that had been experienced in Continental Europe has been tempered by adverse financial conditions in Europe, triggered by high sovereign budget deficits, austerity measures and rising sovereign debt levels in Greece, Ireland, Italy and Portugal, and is projected to slow or, in some cases, reverse in 2012. We continue to face risks resulting from the aftermath of the severe recession and the uneven and fragile recovery. A slowing or failing of the economic recovery or a deterioration in the economy of Continental Europe, especially in Spain, could result in a return of some or all of the adverse effects of the earlier recessionary conditions.
Since the middle of 2007, there has been disruption and turmoil in financial markets around the world. Throughout many of our largest markets, including Spain, there have been dramatic declines in the housing market, with falling home prices and increasing foreclosures, high levels of unemployment and underemployment, and reduced earnings, or, in some cases, losses, for businesses across many industries, with reduced investments in growth.
13
This overall environment resulted in significant stress for the financial services industry, led to distress in credit markets, reduced liquidity for many types of financial assets, including loans and securities and caused concerns regarding the financial strength and adequacy of the capitalization of financial institutions. Some financial institutions around the world have failed, some have needed significant additional capital, and others have been forced to seek acquisition partners.
Concerned about the stability of the financial markets generally, the strength of counterparties and about their own capital and liquidity positions, many lenders and institutional investors have reduced or ceased providing funding to borrowers. borrowers (including to other financial institutions).
In particular, we may face, among others, the following risks related to the economic downturn:
We potentially face increased regulation of our industry. Compliance with such regulation may increase our costs, may affect the pricing for our products and services, and limit our ability to pursue business opportunities.
Reduced demand for our products and services.
Inability of our borrowers to timely or fully comply with their existing obligations.
The resultingprocess we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic pressure on consumersconditions and businesseshow these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the lackquality of confidenceour assets.
The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.
Worsening of the global economic conditions may delay the recovery of the international financial industry and impact our financial condition and results of operations.
The recoverability of our retail loans in particular may be increasingly vulnerable to macroeconomic shocks that could negatively impact the financial markets exacerbatedhousehold income of our retail customers and result in increased loan losses.
Some uncertainty remains concerning the state offuture economic distress and hampered, and to some extent continues to hamper, efforts to bring about sustained economic recovery.environment. While certain segments of the global economy are currently experiencing a moderate recovery, we expect these conditions tosuch uncertainty will continue, towhich could have an ongoinga negative impact on our business and results of operations. Global investor confidence remains cautious and downgrades of the sovereign debt of Ireland, Greece, Portugal, Spain, Italy and France, as well as the recent developments and banking crisis in Cyprus, have caused volatility in the capital markets. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.
In an attempt to prevent the failure of the financial system, Spain, the United States and other European governments intervened on an unprecedented scale. In Spain, the government increased consumer deposit guarantees, made available a program to guarantee the debt of certain financial institutions, created a fund to purchase assets from financial institutions and the Spanish Ministry of Economy and Finance was authorized, on an exceptional basis and until December 31, 2009, to acquire, at the request of credit institutions resident in Spain, shares and other capital instruments (including preferred shares) issued by such institutions. Additionally, in 2009 the Spanish government created the Orderly Banking Restructuring Fund (FROB) to manage the restructuring processes of credit institutions and reinforce the equity of institutions undergoing integration. In the United States, the federal government took equity stakes in several financial institutions, implemented a program to guarantee the short-term and certain medium-term debt of financial institutions, increased consumer deposit guarantees, and brokered the acquisitions of certain struggling financial institutions, among other measures. In the United Kingdom, the government effectively nationalized some of the country’s largest banks, provided a preferred equity program open to all financial institutions and a program to guarantee short-term and certain medium-term debt of financial institutions, among other measures. For more information on recent regulatory changes, see “—Changes in the regulatory framework in the jurisdictions where we operate could adversely affect our business.”
Despite the extent of the aforementioned intervention, global investor confidence remains cautious. The economies of the United States, United Kingdom, Brazil and other Latin American countries grew during 2011, although, in most cases, still at a slow pace. Spain, however, continued to suffer from a recession. In addition, recent downgrades of the sovereign debt of Ireland, Greece, Portugal, Italy and Spain have caused volatility in the capital markets. Our exposure to the sovereign debt of Greece, Portugal, Italy and Spain as of December 31, 2011 was €0.1, €1.8, €0.7 and €39.3 billion, respectively, and we had no exposure to the sovereign debt of Ireland.
Risks and ongoing concerns about the debt crisis in Europe could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these countries and the financial condition of European financial institutions, including us, and international financial institutions with exposure to the region. Market and economic disruptions have affected, and may continue to affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and residential mortgages, and housing prices, among other factors. There can be no assurance that the market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not continue, nor can there be any assurance that future assistance packages will be available or, even if provided, will be sufficient to stabilize the affected countries and markets in Europe or elsewhere. To the extent uncertainty regarding the European economic recovery continues to negatively impact consumer confidence and consumer credit factors, or should the EU enter a deep recession, our business and results of operations could be materially adversely affected.
Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers.customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding costs or deposit rates could have a material adverse effect on our interest margins.
If all or some of the foregoing risks were to materialize, this could have a material adverse effect on us.
We may suffer adverse effects as a result of the ongoing economic and sovereign debt tensions in the eurozone
Eurozone markets and economies continue to show signs of fragility and volatility, with recession in several economies, including Germany, and only sporadic access to capital markets in others. Interest rate differentials among eurozone countries are affecting government finance and borrowing rates in those economies.
The European Central Bank (the “ECB”) and European Council took actions in 2012 to aim to reduce the risk of contagion throughout and beyond the eurozone. These included the creation of the Open Market Transaction facility of the ECB and the decision by eurozone governments to create a banking union. Nonetheless, a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by nations that are under financial pressure. Should any of those nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized, resulting in the further spread of the ongoing economic crisis.
The continued high cost of capital for some European governments has impacted the wholesale markets and there has been a consequent increase in the cost of retail funding, with greater competition in a savings market that is growing slowly by historical standards. In the absence of a permanent resolution of the eurozone crisis, conditions could deteriorate.
We have direct and indirect exposure to financial and economic conditions throughout the eurozone economies. Although we believe the possibility to be remote following the measures taken in 2012, if a wide-scale break-up of the eurozone were to occur, it would entailmost likely be associated with a repricingdeterioration in the economic and financial environment and could have a material adverse impact on the whole financial sector, creating new challenges in sovereign and corporate lending and resulting in significant disruptions in financial activities at both the market and retail levels. This could materially and adversely affect our operating results, financial position and prospects.
Market conditions have, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects
In the past five years, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit
spreads. We have material exposures to securities and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.
In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.
Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provision for liabilities.
The valuation of financial instruments measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove to be inaccurate.
If the judgment, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.
We are subject to substantial regulation which could adversely affect our business and operations.
As a financial institution, we are subject to extensive regulation, which materially affects our businesses. For example, we are subject to capital adequacy requirements which, among other things, require us to maintain minimum ratios of regulatory capital to risk-weighted assets. Any failure by us to comply with capital adequacy requirements may result in administrative actions or sanctions which may affect our ability to fulfill our obligations.
Statutes, regulations and policies to which we are subject, in particular those relating to the banking sector and financial institutions, may be changed at any time. For example, in response to the recent financial crisis, regulators world-wide have imposed, and may continue to impose, more stringent capital adequacy requirements, including increasing the minimum regulatory capital requirements imposed on us. Regulators world-wide have also produced a range of proposals for future legislative and regulatory changes which could force us to comply with certain operational restrictions or take steps to raise further capital, or could increase our expenses, or otherwise adversely affect our operating results, financial condition and prospects. The interpretation and the application by regulators of the laws and regulations to which we are subject may also change from time to time. Any legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not adversely affect us.
Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some of the banking laws and regulations have
been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, it may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations.
Extensive legislation affecting the financial services industry has recently been adopted in Spain, the United States, the European Union and other jurisdictions, and regulations are in the process of being implemented.
The European Union has created a European Systemic Risk Board to monitor financial stability and has implemented rules that will increase capital requirements for certain trading instruments or exposures and impose compensation limits on certain employees located in affected countries. In addition, the European Union Commission is considering a wide array of other initiatives, including new legislation that will affect derivatives trading, impose surcharges on “globally” systemically important firms and possibly impose new levies on bank balance sheets.
Regulators in the U.K. have produced a range of proposals for future legislative and regulatory changes, which could force us to comply with certain operational restrictions or take steps to raise further capital, or could increase our expenses, or otherwise adversely affect our operating results, financial condition and prospects. These proposals include (i) the introduction of recovery and resolution planning requirements (popularly known as “living wills”) for banks and other financial institutions as contingency planning for the failure of a financial institution that may affect the stability of the financial system, (ii) implementation of the Financial Services Act 2012, which enhances the FSA’s disciplinary and enforcement powers, (iii) the introduction of more regular and detailed reporting obligations, (iv) a move to pre-funding of the deposit protection scheme in the U.K., (v) a proposal to require large U.K. retail banks to hold a minimum Core Tier 1 to risk-weighted assets ratio of at least 10 percent., which is, broadly, 3 percent higher than the minimum capital levels required under Basel III, and to have a minimum primary loss-absorbing capacity of 17 percent of risk-weighted assets, and (vi) proposed revisions to the approaches for determining trading book capital requirements and banking book risk-weighted assets from the Basel Committee.
In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) reached agreement on comprehensive changes to the capital adequacy framework, known as Basel III. A revised version of Basel III was published in June 2011. Basel III is intended to raise the resilience of the banking sector by increasing both the quality and quantity of the regulatory capital base and enhancing the risk coverage of the capital framework. Among other things, Basel III introduces new eligibility criteria for Common Equity Tier 1, Additional Tier 1 and Tier 2 capital instruments that are intended to raise the quality of regulatory capital, and increases the amount of regulatory capital that institutions are required to hold. Basel III also requires institutions to maintain a capital conservation buffer above the minimum capital ratios in order to avoid certain capital distribution constraints. The capital conservation buffer, to be comprised of Common Equity Tier 1 capital, would result in an effective Common Equity Tier 1 capital requirement of 7 percent of risk-weighted assets. In addition, Basel III directs national regulators to require certain institutions to maintain a reductioncounter-cyclical capital buffer during periods of volume,excessive credit growth. Basel III introduces a leverage ratio for institutions as a backstop measure, to be applied alongside current risk-based regulatory capital requirements. The implementation of Basel III in the European Union is being performed through the Capital Requirements Directive IV & Capital Requirements Regulation (“CRDIV/CRR”) legislative package. In early 2013 the draft legislation remains under discussion between the European Parliament, the European Commission and the Council of Ministers. The final capital framework to be established in the EU under CRDIV/CRR is likely to differ from Basel III in certain areas and the implementation date is still subject to uncertainty.
In addition to the changes to the capital adequacy framework published in December 2010 described above, the Basel Committee also published its global quantitative liquidity framework, comprising the Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) metrics, with objectives to (1) promote the short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to survive a significant stress scenario; and (2) promote resilience over a longer time horizon by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The LCR has been subsequently revised by the Basel Committee in January 2013 which amended the definition of high-quality liquid assets and agreed a revised timetable for phase-in of the standard from 2015 to 2019, as well as making some technical changes to some of the stress scenario assumptions. As with the Basel Committee’s proposed changes to the capital adequacy framework, the draft liquidity framework remains under discussion within the EU and the final framework to be established could differ from Basel III in certain areas. The implementation date is still subject to uncertainty.
The Spanish Government approved on February 3, 2012 the Royal Decree-Law 2/2012 and on May 18, 2012 the Royal Decree-Law 18/2012 on the clean-up of the financial sector, through which the following actions were performed:
Review of the minimum provisioning percentages to be taken into consideration in the estimate of the impairment losses relating to financing granted to the property sector in Spain and to the foreclosed assets and assets received in payment of debt arising from financing granted to that sector, as a result of the impairment of these assets.
Increase in the level of minimum capital requirements of Spanish credit institutions on the basis of the assets relating to the property sector in Spain presented on the balance sheet of each entity at December 31, 2012.
In September 2011, the European Commission (the “Commission”) tabled a proposal for a common system of financial transactions taxes (“FTT”). Despite intense discussions on this proposal there was no unanimity amongst the 27 Member States. Eleven Member States (“participating Member State”) requested enhanced cooperation on a FTT based upon the Commission’s original proposal. The Commission presented a decision to this effect which was adopted by the EU’s Council of Finance Ministers at its committee meeting on January 22, 2013. The formal Directive was published on February 14, 2013, under which participating Member States may alsocharge a FTT on all financial transactions with effect from January 1, 2014 where (i) at least one party to the transaction is established in the territory of a participating Member State and (ii) a financial institution established in the territory of a participating Member State is a party to the transaction acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction. We are still assessing the proposals to determine the likely impact on us.
In the United Kingdom, on June 16, 2010, the Chancellor of the Exchequer announced the creation of the Independent Commission on Banking (the ‘ICB’), chaired by Sir John Vickers. The ICB was asked to consider structural and related non-structural reforms to the U.K. banking sector to promote financial stability and competition, and to make recommendations to the U.K. Government. The ICB gave its recommendations on September 12, 2011 and proposed: (i) implementation of a retail ring fence; (ii) increased capital requirements; and (iii) improvement of competition – which were broadly endorsed by the Government in its response published on December 19, 2011. A White Paper was published on June 14, 2012 detailing how the Government intends to implement the recommendations of the ICB. A draft of the initial bill to implement the ICB recommendations was published on October 12, 2012, in the format of framework legislation to put in place the architecture to effect the reforms, with detailed policy being provided for through secondary legislation. On February 4, 2013, the Financial Services (Banking Reform) Bill was introduced to Parliament. The Government expects the legislation to be in place by 2015 and to take effect by 2019. Implementation of the proposals may require us to make changes to our structure and business.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which was adopted in 2010 will continue to result in significant structural reforms affecting the financial services industry. This legislation provides for, among other things, the establishment of a Consumer Financial Protection Bureau with broad authority to regulate the credit, savings, payment and other consumer financial products and services that we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the over-the-counter derivatives market, prohibitions of our engagement in certain proprietary trading activities and restrictions on our ownership of, investment in or sponsorship of hedge funds and private equity funds, restrictions on the interchange fees we earn through debit card transactions, and a requirement that bank regulators phase out the treatment of trust preferred capital instruments as Tier 1 capital for regulatory capital purposes.
With respect to OTC derivatives, the Dodd-Frank Act provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants will be required to register with the SEC or the CFTC, or both, and will become subject to new capital, margin, business conduct, recordkeeping, clearing, execution, reporting and other requirements. We will likely register one or more entities as swap dealers with the CFTC or SEC, or both. Although the full impact of U.S. derivatives regulation on us is still unclear, registration with the CFTC and SEC could materially increase our operating costs and adversely affect our derivatives business.
In June 2012, U.S. bank regulators proposed a broad revision of the regulatory capital rules applicable to U.S. banks, bank holding companies and other U.S. banking organizations. The proposals would implement the Basel III capital standards in the United States and modify existing standardized risk weights for certain types of asset classes, including residential mortgages and securitization exposures. The proposals are intended to comply with the Dodd-Frank Act’s minimum risk-based capital requirements and would be phased in over a multi-year period. Once fully implemented, the new rules would generally increase both the quality and quantity of regulatory capital that U.S. banking organizations are required to maintain. It was originally contemplated that the revised capital rules would be phased in beginning in January 2013. In November 2012, however, U.S. bank regulators announced that the proposals would not become effective in January 2013. The announcement did not specify new implementation or phase-in dates. U.S. bank regulators are working to finalize the proposals.
In addition, in December 2012, pursuant to the Dodd-Frank Act’s systemic risk regulation provisions, the Board of Governors of the Federal Reserve System (“Federal Reserve”) proposed to apply enhanced prudential standards to the U.S.
operations of large foreign banking organizations, including us. Under the Federal Reserve’s proposal, a number of large foreign banking organizations would be required to establish a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that would hold all of the large foreign banking organization’s U.S. bank and nonbank subsidiaries. Under the Federal Reserve’s proposal, an IHC would be subject to U.S. capital, liquidity, single counterparty credit limits, risk management, stress testing and other enhanced prudential standards on a consolidated basis, and the Federal Reserve would have the authority to examine any IHC and any subsidiary of an IHC. Although U.S. branches and agencies of foreign banks would not be required to be held beneath an IHC, such branches and agencies would be subject to liquidity, single counterparty credit limits, and, in certain circumstances, asset maintenance requirements. The rules have a proposed effective date of July 1, 2015. The Federal Reserve is currently accepting comments on its proposal.
These and any additional legislative or regulatory actions in Spain, the European Union, the United States, the U.K. or other countries, and any required changes to our business operations resulting from such legislation and regulations, could result in reduced capital availability, significant loss of revenue, limit our ability to continue organic growth (including increased lending), pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or regulations would not have an adverse effect on our interest margins.
We may also face increased compliance costs. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, we may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have material adverse effect on our business and results of operations.
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Risks concerning borrowerChanges in taxes and other assessments may adversely affect us.
The Spanish Government regularly enacts reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified and there can be no assurance that these reforms will not, once implemented, have an adverse effect upon our business. Furthermore, such changes may increase the cost of borrowing and contribute to the increase in our non-performing credit portfolio.
We cannot predict if tax reforms will be implemented in the future. The effects of these changes, if enacted, and any other changes that could result from the enactment of additional tax reforms, cannot be quantified.
Changes in accounting standards could impact reported earnings.
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
If we are unable to effectively control the level of non-performing or poor credit quality and general economic conditionsloans in the future, or if our loan loss reserves are inherent in our business.insufficient to cover future loan losses, this could have a material adverse effect on us.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. AdverseNon-performing or low credit quality loans can negatively impact our results of operations. We cannot assure you that we will be able to effectively control the level of the impaired loans in our total loan portfolio. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in Spanish,economic conditions in Continental Europe, the United Kingdom, Latin American,America, the United States or global economic conditions, impact of political events, events affecting certain industries or arising from systemic risksevents affecting financial markets and global economies.
Our current loan loss reserves may not be adequate to cover any increase in the financial systems, could reduceamount of non-performing loans or any future deterioration in the recoverability and valueoverall credit quality of our assetstotal loan portfolio. Our loan loss reserves are based on our current assessment of and require an increase in our level of allowances for credit losses. Deterioration inexpectations concerning various factors affecting the economies in which we operate could reduce the profit margins for our banking and financial services businesses.
The financial problems faced by our customers could adversely affect us.
Market turmoil and economic recession, especially in Spain, the United Kingdom, the United States and certain Latin American countries, could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan (“NPL”) ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. The uneven global recovery from the recent market turmoil and economic recession and the possibility of renewed economic contraction in Continental Europe, combined with continued high unemployment and low consumer spending, could cause the value of assets collateralizing our secured loans, including homes and other real estate, to decline significantly, which could result in the impairment of the valuequality of our loan assets. Accordingly, in 2011portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of
any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the recent global financial crisis has demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and we experienced ancannot assure you that our loan loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, including the increase in lending to individuals and small and medium enterprises, the volume increase in the credit card portfolio and the introduction of new products, or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our loan loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing ratios and a deterioration in assetor poor credit quality as compared to 2010. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described aboveloans, this could have a material adverse effect on our business, financial condition and results of operations.
We are exposed to risks faced by other financial institutions.
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. In 2011, the financial health of a number of European governments was shaken by the European sovereign debt crisis, contributing to volatility of the capital and credit markets, and the risk of contagion throughout and beyond the Eurozone remains, as a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by nations which are under considerable financial pressure. These liquidity concerns have had, and may continue to have, an adverse effect on interbank financial transactions in general. Should any of those nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized. A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on our business, financial condition and results of operations.
Our exposure to Spanish and UK real estate markets makes us more vulnerable to adverse developments in these markets.us.
Mortgage loans are one of our principal assets, comprising 52%51% of our loan portfolio as of December 31, 2011.2012. As a result, we are highly exposed to developments in real estatehousing markets, especially in Spain and the United Kingdom. In addition, we have exposure to a number of large real estate developers in Spain. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Spain as a vacation destination and historically low interest rates in the Eurozone.eurozone. The United Kingdom experienced an increase in housing and mortgage demand driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. During late 2007, the housing market began to adjust in Spain and the United Kingdom as a result of excess supply (particularly in Spain) and higher interest rates. Since 2008, as economic growth stalled in Spain and the United Kingdom, persistent housing oversupply, decreased housing demand, rising unemployment, subdued earnings growth, greater pressure on disposable income, a decline in the availability of mortgage finance and the continued effect of global market volatility have caused home prices to decline, while mortgage delinquencies increased. As a result of these and other factors, our NPL ratio increased from 0.94% at December 31, 2007, to 2.02% at December 31, 2008, to 3.24% at December 31, 2009, and to 3.55% at December 31, 2010.2010 and to 3.89% at December 31, 2011. At December 31, 2011,2012, our NPL ratio was 3.89%4.54%. These trends, especially higher unemployment rates coupled with declining real estate prices, could have a material adverse impact on our mortgage payment delinquency rates, which in turn could have a material adverse effect on our business, financial condition and results of operations.
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PortionsThe value of the collateral securing our loan portfolio are subjectmay fluctuate or decline due to risks relating to force majeure eventsfactors beyond our control, including macroeconomic factors affecting Europe, the United States and any such event could materially adverselyLatin American countries. The real estate market is particularly vulnerable in the current economic climate and this may affect our operating results.
Our financial and operating performance may be adversely affected by force majeure events, suchus as natural disasters, particularly in locations wherereal estate represents a significant portion of the collateral securing our residential mortgage loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region.
portfolio. We may generate lower revenues from brokerage and other commission—and fee—based businesses.
Market downturnsalso not have lead, and are likely to continue to lead, to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in our non-interest revenue. In addition, because the fees that we charge for managing our clients’ portfolios are in many cases basedsufficiently recent information on the value or performance of those portfolios, a market downturn that reduces the valuecollateral, which may result in an inaccurate assessment for impairment losses of our clients’ portfolios or increases the amountloans secured by such collateral. If this were to occur, we may need to make additional provisions to cover actual impairment losses of withdrawals would reduce the revenues we receive from our asset management, private banking and custody businessesloans, which may materially and adversely affect our results of operations.
Even in the absence of a market downturn, below-market performance by our mutual funds may result in increased withdrawalsoperations and reduced inflows, which would reduce the revenue we receive from our asset management business and adversely affect our results of operations.financial condition.
Market risks associated with fluctuations in bondFailure to successfully implement and equity prices and other market factors are inherent in our business. Protracted market declines can reduce liquidity in the markets, making it hardercontinue to sell assets and leading to material losses.
The performance of financial markets may cause changes in the value of our investment and trading portfolios. In some of our businesses, protracted adverse market movements, particularly asset price declines, can reduce the level of activity in the market, reducing market liquidity. These developments can lead to material losses if we cannot close out deteriorating positions in a timely way. This risk is especially great for assets with normally less liquid markets. Assets that are not traded on stock exchanges or other public trading markets, such as derivative contracts between banks, may have values that we calculate using models other than publicly quoted prices. Monitoring the deterioration of prices of assets like these is difficult and could lead to losses that we did not anticipate.
The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in entities in this sector and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results.
Volatility in interest rates may negatively affect our net interest income and increase our non-performing loan portfolio.
Changes in market interest rates could affect the interest rates charged on our interest-earning assets differently than the interest rates paid on our interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income leading to a reduction in our net interest income. Income from treasury operations is particularly vulnerable to interest rate volatility. Because the majority of our loan portfolio reprices in less than one year, rising interest rates may also lead to an increasing non-performing loan portfolio. Interest rates are highly sensitive to many factors beyond our control, including deregulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors.
As of December 31, 2011, our interest rate risk measured in daily Value at Risk (“VaRD”) terms amounted to €328.5 million.
Foreign exchange rate fluctuations may negatively affect our earnings and the value of our assets and shares.
Fluctuations in the exchange rate between the euro and the US dollar will affect the US dollar equivalent of the price of our securities on the stock exchanges in which our shares and ADSs are traded. These fluctuations will also affect the conversion to US dollars of cash dividends paid in euros on our ADSs.
In the ordinary course of our business, we have a percentage of our assets and liabilities denominated in currencies other than the euro. Fluctuations in the value of the euro against other currencies may adversely affect our profitability. For example, the appreciation of the euro against some Latin American currencies and the US dollar will depress earnings from our Latin American and US operations, and the appreciation of the euro against the sterling will depress earnings from our UK operations. Additionally, while most of the governments of the countries in which we operate have not imposed material prohibitions on the repatriation of dividends, capital investment or other distributions, no assurance can be given that these governments will not institute restrictive exchange control policies in the future. Moreover, fluctuations among the currencies in which our shares and ADSs trade could reduce the value of your investment.
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As of December 31, 2011, our largest exposures on temporary positions (with a potential impact on the income statement) were concentrated on, in descending order, the pound sterling, the Mexican peso, the Chilean peso the Polish zloty (PLN) and the US dollar. At December 31, 2011, our largest exposures on permanent positions (with a potential impact on equity) were concentrated on, in descending order, the Brazilian real, the pound sterling, the US dollar, the Mexican peso, and the Polish zloty.
Despiteimprove our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may nonetheless be exposed to unidentified or unanticipated risks.
OurThe management of risk managementis an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.
As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating to a customer or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating system.
In addition, we have been trying to refine our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect these risks before they occur, or due to limited tools available to us, our employees may not be able to effectively implement them, which may increase our credit risk. Failure to effectively implement, consistently follow or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.
Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in ourits statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits.
Our recentloan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.
Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on us.
We may generate lower revenues from fee and commission based businesses.
The fees and commissions that we earn from the different banking and other financial services that we provide (credit and debit cards, insurance, account management, bill discounting, guarantees and other contingent liabilities, advisory and custody services, etc.) and from our mutual and pension funds management services represent a significant source of our revenues.
Market downturns have led and are likely to continue to lead, to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in our non-interest revenues. In addition, because the fees that we charge for managing our clients’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our asset management, private banking and custody businesses and adversely affect our results of operations. Moreover, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income.
Even in the absence of a market downturn, below-market performance by our mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenue we receive from our asset management business and adversely affect our results of operations.
Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.
Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rate, exchange rate or equity price. Changes in interest rates affect the following areas, among others, of our business:
net interest income;
the volume of loans originated;
the market value of our securities holdings; and
gains from sales of loans and securities.
Variations in short-term interest rates could affect our net interest income, which comprises the majority of our revenue. When interest rates rise, we may be required to pay higher interest on our floating-rate borrowings while interest earned on our fixed-rate assets does not rise as quickly, which could cause profits to grow at a reduced rate or decline in some parts of our portfolio. Interest rate variations could adversely affect us, including our net interest income, reducing its growth rate or even resulting in losses. Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors.
Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets.
If interest rates decrease, although this is likely to decrease our funding costs, it is likely to adversely impact the income we receive arising from our investments in securities as well as loans with similar maturities. In addition, we may also experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.
The market value of a security with a fixed interest rate generally decreases when the prevailing interest rates rise, which may have an adverse effect on our earnings and financial condition. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure. The market value of an obligation with a floating interest rate can be adversely affected when interest rates increase, due to a lag in the implementation of repricing terms or an inability to refinance at lower rates.
Increases in interest rates may reduce gains or require us to record losses on sales of our loans or securities.
We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.
We are also exposed to equity price risk in connection with our trading investments in equity securities as part of our normal course of business as a commercial bank. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in entities in this sector and, depending on their fair value and future acquisitionsrecovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income or the market value of our assets and liabilities could be adversely affected.
Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.
Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate completely these risks. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, has affected and may not be successfulmaterially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations as well as limit growth possibilities.
Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us.
Our cost of obtaining funding is directly related to prevailing market interest rates and to our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be disruptiveinfluenced by market perceptions of our creditworthiness. Changes to interest rates and our business.credit spreads occur continuously and may be unpredictable and highly volatile.
If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding (whether directly or indirectly).
We rely, and will continue to rely, primarily on commercial deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy, in general, and the financial services industry in particular, and the availability and extent of deposit guarantees, as well as competition between banks for deposits. Any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on appropriate terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.
We anticipate that our customers will continue, in the near future, to make short-term deposits (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of this funding source could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.
We cannot assure you that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.
Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.
We have acquired controlling interestsCredit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Spanish sovereign debt. If Spain’s sovereign debt is downgraded, our credit rating would also likely be downgraded by an equivalent amount.
Any downgrade in various companiesour debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts, we may be required to maintain a minimum credit rating or terminate such contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have engagedan adverse effect on us, including our operating results and financial condition.
Banco Santander, S.A.’s long-term debt is currently rated investment grade by the major rating agencies—Baa2 by Moody’s Investors Service España, S.A., BBB by Standard & Poor’s Ratings Services and BBB+ by Fitch Ratings Ltd.—all of which have a negative outlook due to the difficult economic environment in other strategic partnerships. See “Item 4. Information on the Company—A. History and developmentSpain. All three agencies downgraded our rating in February 2012 together with that of the Company.” Additionally,other main Spanish banks, due to the weaker-than-previously-anticipated macroeconomic and financial environment in Spain with dimming growth prospects in the near term, depressed real estate market activity and heightened turbulence in the capital markets. In addition, Standard & Poor’s Ratings Services downgraded our rating by two notches in April 2012 together with that of 15 other Spanish banks following that rating agency’s decision to downgrade Spain’s sovereign debt rating by two notches. Moody’s Investors Service España, S.A. further downgraded our rating in May 2012, together with downgrades of 15 other Spanish banks and Santander UK plc, our United Kingdom-domiciled subsidiary. In June 2012, Fitch Ratings Ltd. cut the rating of Spanish sovereign debt three notches to BBB with a negative outlook, and Moody’s followed shortly thereafter by downgrading Spanish sovereign debt three notches to Baa3, its lowest investment grade rating. Following its downgrade of Spanish sovereign debt, Fitch Ratings Ltd. further downgraded our rating on June 11, 2012 from A to BBB+. Moody’s Investors Service downgraded our rating on June 25, 2012 from A3 to Baa2. Santander UK’s long-term debt is currently rated investment grade by the major rating agencies: A2 with negative outlook by Moody’s Investors Service, A with negative outlook by Standard & Poor’s Ratings Services and A with stable outlook by Fitch Ratings. All three agencies revised Santander UK’s ratings during 2012 following the downgrades of the Kingdom of Spain.
We conduct substantially all of our material derivative activities through Banco Santander, S.A. and Santander UK. We estimate that as of December 31, 2012, if all the rating agencies were to downgrade Banco Santander, S.A.’s long-term senior debt ratings by one notch we may considerwould be required to post up to €3 million in additional collateral pursuant to derivative and other strategic acquisitionsfinancial contracts. A hypothetical two notch downgrade would result in a requirement to post up to €14 million in additional collateral. We estimate that as of December 31, 2012, if all the rating agencies were to downgrade Santander UK’s long-term credit ratings by one notch, and partnershipsthereby trigger a short-term credit rating downgrade, this could result in outflows from Santander UK’s total liquid assets of £2.0 billion of cash and £6.6 billion in additional collateral that Santander UK would be required to post under the terms of secured funding and derivatives contracts. A hypothetical two notch downgrade would result in an additional outflow of £0.4 billion of cash and £1.4 billion of collateral under secured funding and derivatives contracts.
However, while certain potential impacts are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to time. While we are optimisticits short-term credit rating, and assumptions about the acquisitionspotential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although, unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on us. In addition, if we have made,were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.
In light of the difficulties in the financial services industry and the financial markets, there can be no assurancesassurance that wethe rating agencies will be successfulmaintain our current ratings or outlooks. Our failure to maintain favorable ratings and outlooks would likely increase our cost of funding and adversely affect our interest margins, which could have a material adverse effect on us.
We are subject to market, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.
We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to market and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in our plans regarding the operationspread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of theseinsolvency or other acquisitionsinability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).
Market practices and strategic partnerships.
We can give no assurance that our recent and any future acquisition and partnership activities will perform in accordance with our expectations. We base our assessment of potential acquisitions and partnerships on limited and potentially inexact information and on assumptions with respect to operations, profitability and other matters that may prove to be incorrect. We can give no assurances that our expectations with regards to integration and synergies will materialize.
Increased competitiondocumentation for derivative transactions in the countries where we operate may adversely affect our growth prospectsdiffer from each other. In addition, the execution and operations.
Mostperformance of the financial systems in which we operate are highly competitive. Financial sector reforms in the markets in which we operate have increased competition among both local and foreign financial institutions, and we believe that this trend will continue. In particular, price competition in Europe, Latin America and the US has increased recently. Our success in the European, Latin American and US markets will dependthese transactions depends on our ability to remain competitivedevelop adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, to a great extent, on our information technology systems. This factor further increases the risks associated with these transactions and could have a material adverse effect on us.
Competition with other financial institutions. institutions could adversely affect us.
We face substantial competition in all parts of our business, including in originating loans and in attracting deposits. The competition in originating loans comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.
In addition, there has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations. We also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.
Changes inIncreasing competition could require that we increase our rates offered on deposits or lower the regulatory framework in the jurisdictions whererates we operatecharge on loans, which could adverselyalso have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.
In addition, if our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.
We are exposed to risks faced by other financial institutions.
Extensive legislation affectingWe routinely transact with counterparties in the financial services industry, has recently been adopted in Spain, the United States, the European Unionincluding brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other jurisdictions,institutional clients. Defaults by, and regulations are ineven rumors or questions about the processsolvency of, being implemented. In Spain, the Bank of Spain issued Circular 9/2010 on December 22, 2010, which amends certain rules in order to establish more restrictive conditions regarding capital requirements for credit risk, credit risk mitigation techniques, securitizationfinancial institutions and treatment of counterparty and trading book risk. This Circular has not had and it is not expected that it will have a quantifiable material impact on our business. The Circular was issued following the passage of two EU Directives on risk management (Directive 2009/27/CE and Directive 2009/83/CE).
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The European Union has created a European Systemic Risk Board to monitor financial stability and has implemented rules that will increase capital requirements for certain trading instruments or exposures and impose compensation limits on certain employees located in affected countries. In addition, the European Union Commission is considering a wide array of other initiatives, including new legislation that will affect derivatives trading, impose surcharges on “globally” systemically important firms and possibly impose new levies on bank balance sheets.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that was adopted in 2010 will result in significant structural reforms affecting the financial services industry. This legislation provides for, amongindustry generally have led to market-wide liquidity problems and could lead to losses or defaults by other things:institutions. Many of the establishmentroutine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. In 2012, the financial health of a Consumer Financial Protection Bureau which will have broad authority to regulate the credit, savings, payment and other consumer financial products and services that we offer; the creationnumber of a structure to regulate systemically important financial companies; more comprehensive regulation of the over-the-counter derivatives market; prohibitions on our engaging in certain proprietary trading activities and restricting our ownership of, investment in or sponsorship of, hedge funds and private equity funds; restrictions on the interchange fees that we earn on debit card transactions; and a requirement that bank regulators phase out the treatment of trust preferred capital debt securities as Tier 1 capital for regulatory capital purposes.
Regulators in the UK have produced a range of proposals for future legislative and regulatory changes, which could force us to comply with certain operational restrictions or take steps to raise further capital, or could increase our expenses or otherwise adversely affect our results of operations and financial condition. These proposals include: (i) the introduction of recovery and resolution planning requirements (popularly known as ‘living wills’) for banks and other financial institutions as contingency planning for the failure of a financial institution that may affect the stability of the financial system; (ii) the implementation of the Financial Services Act 2010, which enhances the FSA’s disciplinary and enforcement powers; (iii) the introduction of more regular and detailed reporting obligations; and (iv) a requirement for large UK retail banks to hold a minimum Core Tier 1 to risk-weighted assets ratio of at least 10%, which is approximately 3% higher than the minimum capital levels required under Basel III.
In December 2010, the Basel Committee on Banking Supervision announced revisions to its Capital Accord, which will require higher capital ratio requirements for banks, narrow the definition of capital, and introduce short term liquidity and term funding standards, among other things. The Basel Committee is also proposing to consider the imposition of a bank surcharge on institutions that are determined to be “globally significant financial institutions,” a liquidity coverage ratio and a net stable funding ratio. Compliance with these requirements could increase our funding and operational costs.
During the last few months of 2011 the European Banking Authority (EBA) established new requirements to strengthen capital ratios. These requirements are part of a series of measures adoptedgovernments was shaken by the European Council in the second half of 2011, which aimsovereign debt crisis, contributing to restore stability and confidence in the European markets. These capital requirements are expected to be exceptional and temporary.
The selected banks are required to have a core capital Tier 1 ratio of at least 9% by June 30, 2012, in accordance with the EBA’s rules. Each bank was required to present by January 20, 2012 their capitalization plan to reach the requirement by June 30, 2012. In the beginning of December 2011, the EBA disclosed its capital requirements for the main European banks. According to the EBA, our additional capital needs amounted to €15,302 million.
During the last few months of 2011 we have carried out a series of measures which allowed us, at the beginning of 2012, to achieve a core capital ratio of 9% aheadvolatility of the EBA deadlinecapital
and credit markets, and the risk of June 30, 2012.
On February 3, 2012contagion throughout and beyond the Ministryeurozone remains, as a significant number of Economyfinancial institutions throughout Europe have substantial exposures to sovereign debt issued by nations which are under considerable financial pressure. These liquidity concerns have had, and Competitiveness approved the Royal Decree-Law 2/2012 on the clean-up of the financial sector (see Item 4. Information on the Company—A. History and Development of the Company – Recent Events)
These and any additional legislative or regulatory actions in Spain, the European Union, the United States, the UK or other countries, and any required changesmay continue to our business operations resulting from such legislation and regulations, could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or regulations would not have, an adverse effect on interbank financial transactions in general. Should any of these nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized. A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on us.
The financial problems faced by our business, results of operations customers could adversely affect us.
Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial conditionconditions of our borrowers, which could in the future.
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Weturn increase our own non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may also face increased compliance costsfurther significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and limitations onmutual funds, which would adversely affect our ability to pursue certain business opportunitiesfee and provide certain products and services. As somecommission income. Any of the banking laws and regulationsconditions described above could have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, we may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have material adverse effect on our business, financial condition and results of operations.
Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.
The success of our operations and our profitability depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.
As we expand the range of our products and services, some of which may be at an early stage of development in the markets of certain regions where we operate, we will be exposed to new and potentially increasingly complex risks and development expenses in those markets, with respect to which our experience and the experience of our partners may not be helpful. Our employees and our risk management systems may not be adequate to handle such risks. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.
If we are unable to manage the growth of our operations, this could have an adverse impact on our profitability.
We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. We can give no assurances that our expectations with regards to integration and synergies will materialize. We also cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:
manage efficiently the operations and employees of expanding businesses;
maintain or grow our existing customer base;
assess the value, strengths and weaknesses of investment or acquisition candidates;
finance strategic investments or acquisitions;
fully integrate strategic investments, or newly-established entities or acquisitions in line with its strategy;
align our current information technology systems adequately with those of an enlarged Group;
apply our risk management policy effectively to an enlarged Group; and
manage a growing number of entities without over-committing management or losing key personnel.
Any failure to manage growth effectively, including relating to any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operating results, financial condition and prospects.
Operational risks, including risks relating to data collection, processing and storage systems are inherent in our business.
Our businesses depend on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent against cyber attacks, we routinely exchange personal, confidential and proprietary information by electronic means, and we may be the target of attempted cyber attacks. If we cannot maintain an effective data collection, management and processing system, we may be materially and adversely affected.
We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm. Although we have not experienced any material losses to date relating to cyber attacks or other such security breaches, we have suffered losses from operational risk in the past, and thereThere can be no assurance that we will not suffer material losses from operational risk in the future.future, including relating to cyber attacks or other such security breaches. Further, as cyber attacks continue to evolve, we may incur significant costs in ourits attempt to modify or enhance our protective measures or investigate or remediate any vulnerabilities.
We manage and hold confidential personal information of customers in the conduct of our banking operations. Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our results of operations and financial condition.
In addition, there have beenour businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of highly publicized cases aroundmultinational financial institutions have suffered material losses due to the world involving actual or alleged fraudactions of ‘rogue traders’ or other misconduct by employees in the financial services industry in recent years and we run the risk that employee misconduct could occur. This misconduct has included and may include in the future the theft of proprietary information, including proprietary software.employees. It is not always possible to deter or prevent employee misconduct and the precautions we take to prevent and detect this activity have not been and may not always be effectiveeffective.
Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in all cases.a timely manner could have a material adverse effect on us.
Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure you that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.
We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.
Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff ourits operations appropriately or loses one or more of ourits key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, and financial condition, including control and operational risks, may be adversely affected.
In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.
We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.
We are required to comply with applicable anti-money laundering, anti-terrorism and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to the applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems and sophisticated monitoring and compliance personnel and have become the subject of enhanced government supervision.
While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, such policies and procedures have in some cases only been recently adopted and may not completely eliminate instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the power and authority to impose fines and other penalties on us, including the revocation of licenses. In addition, our business and reputation could suffer if customers use our banking network for money laundering or illegal or improper purposes.
In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our (and our relevant counterparties) as a conduit for money laundering (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering, then our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “black lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.
We are exposed to risk of loss from legal and regulatory proceedings.
We face various issues that may give rise to risk of loss from legal and regulatory proceedings, including tax litigation. These issues, including appropriately dealing with potential conflicts of interest, and legal and regulatory requirements, could increase the amount of damages asserted against us or subject us to regulatory enforcement actions, fines and penalties. The current regulatory environment, which suggests an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, may lead to material operational and compliance costs.
We are from time to time subject to certain claims and parties to certain legal proceedings incidental to the normal course of our business, including in connection with our lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.
Damage to our reputation could cause harm to our business prospects.
Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees. Damage to our reputation can therefore cause significant harm to ourits business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties. Further, negative publicity regarding us, whether or not true, may result in harm to our business prospects.
Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.
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We could suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interest has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.
Different disclosureWe rely on third parties for important products and accounting principles between Spain and the US may provide you with different or less information about us than you expect.services.
There may be less publicly available information about us than is regularly published about companies in the United States. While we are subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the disclosure required from foreign private issuers under the Exchange Act is more limited than the disclosure required from US issuers. Additionally, we present our financial statements under IFRS-IASB which differs from U.S. GAAP.
The lack of PCAOB inspectionsThird party vendors provide key components of our auditor in Spain may reduce the confidence inbusiness infrastructure such as loan and deposit servicing systems, internet connections and network access. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our reported financial information.
Our auditor, Deloitte, S.L., as auditor of companies, including the Bank, that are traded publicly in the United Statesability to deliver products and a firm registered with the US Public Company Accounting Oversight Board (United States) (“the “PCAOB”), is required by the laws of the United Statesservices to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United Statescustomers and applicable United States professional standards.
Because our auditor is located in Spain, a jurisdiction where the PCAOB is currently unableotherwise to conduct inspections without the approval of the Spanish authorities, our auditor is not currently inspected by the PCAOB. Inspections of other firms that the PCAOB has conducted outside Spain have identified deficiencies in those firms’ audit proceduresbusiness. Replacing these third party vendors could also entail significant delays and quality control procedures. This lack of PCAOB inspections in Spain prevents the PCAOB from evaluating our auditor’s audit and quality control procedures and deprives investors in our securities and those of other Spanish companies of the potential benefits of such inspections.expense.
We are exposedengage in transactions with our subsidiaries or affiliates that others may not consider to risk of loss from legal and regulatory proceedings.be on an arm’s-length basis.
We face various issues that may give rise to risk of loss from legal and regulatory proceedings. These issues, including appropriately dealing with potential conflicts of interest, legalour subsidiaries and regulatory requirements, ethical issues and conduct by companies in which we hold strategic investments or joint venture partners, could increase the number of litigation claims and the amount of damages asserted against the Group or subject the Group to regulatory enforcement actions, fines and penalties. In addition, amidst the changing regulatory landscape described above, many of our consumers, customers and counterpartiesaffiliates have become more litigious. The current regulatory environment, which suggests a migration toward increasing supervisory focus on enforcement, including in connection with alleged violations of law and customer harm, combined with enhanced enforcement and uncertainty about the evolution of the regulatory regime, may lead to significant operational and compliance costs.
Currently, the Bank and its subsidiaries are the subject ofentered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal proceedingsservices and regulatory actions. For information relatingothers. In addition, we have entered into services agreements with certain affiliates to allow these companies to offer their products and services within our branch network or that assist with our activities in consideration for certain fees.
Spanish law applicable to public companies and financial groups and institutions, as well as our bylaws, provide for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries do not deviate from prevailing market conditions for those types of transactions, including the requirement that our board of directors approve such transactions.
We are likely to continue to engage in transactions with our subsidiaries or affiliates. Future conflicts of interests between us and any of our subsidiaries or affiliates, or among our subsidiaries and affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.
Our business could be affected if its capital is not managed effectively or if changes limiting our ability to manage our capital position are adopted.
Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. However, in response to the legal proceedings andrecent financial crisis, a number of changes to the regulatory actions involving our businesses, see “Item 8. Financial Information—A. Consolidated statementscapital framework have been adopted or are being considered. As these and other financial information—Legal proceedings.” Additionally, the Bank and its subsidiaries may be the subject of future legal proceedings and regulatory actions. An adverse result in one or more of the Bank’s currentchanges are implemented or future legal proceedingschanges are considered or regulatory actions could haveadopted that limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms, we may experience a material adverse effect on our operating results for any particular period, could require changes to our business practicesfinancial condition and may even require that we exit certain businesses.regulatory capital position.
Credit, marketPortions of our loan portfolio are subject to risks relating to force majeure events and liquidity risksany such event could materially adversely affect our operating results.
Our financial and operating performance may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse effectimpact on our credit ratings and our cost of funds. Any reduction in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength as well as conditions affecting the financial services industry generally.
Any downgrade in our ratings would likely increase our borrowing costs, and require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, such as subordinated securities, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest. This, in turn, could reduce our liquidity and have an adverse effect on our operating results and financial condition. Under the terms of certain of our derivative contracts, we may be required to maintain a minimum credit rating or terminate such contracts.
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Banco Santander, S.A.’s long-term debt is currently rated investment grade by the major rating agencies Aa3 by Moody’s Investors Service España, S.A., A+ by Standard & Poor’s Ratings Services and A by Fitch Ratings Ltd. all of which have a negative outlook due to the difficult economic environment in Spain. Banco Santander, S.A.’s rating together with thateconomy of the other main Spanish banks, was downgraded by all three rating agencies in October 2011 (and by Standard & Poor’s and Fitch additionally in February 2012), due to the tougher-than-previously-anticipated macroeconomic and financial environment in Spain with dimming growth prospects in the near term, depressed real estate market activity and heightened turbulence in the capital markets. Santander UK’s long-term debt is currently rated investment grade by the major rating agencies A1 with outlook under review by Moody’s Investors Service, A+ with negative outlook by Standard & Poor’s Ratings Services and A+ with stable outlook by Fitch Ratings. Standard & Poor’s Ratings Services downgraded Santander UK’s rating in February 2012 from AA- to A+ with negative outlook, following their downgrading of Banco Santander, S.A. because the rating for both entities is equalized under Standard & Poor’s rating criteria of ‘core subsidiaries’.
We conduct substantially all of our material derivative activities through Banco Santander, S.A. and Santander UK. Following the credit rating downgrades described above, Banco Santander, S.A. posted a total of approximately €250 million of additional collateral pursuant to derivative and other financial contracts while the impact on Santander UK was not significant. Under the terms of certain derivative and other financial contracts, in the event of a further downgrade of Banco Santander, S.A.’s or a downgrade of Santander UK’s long-term debt rating, counterparties to those agreements may require Banco Santander, S.A. or Santander UK, as appropriate, to provide additional collateral, terminate these contracts or provide other remedies.
If the rating agencies were to downgrade their long-term senior debt ratings for Banco Santander, S.A. by one or two incremental notches, we expect that the amount of additional collateral we would post would likely be in line with the collateral posted in response to Banco Santander, S.A.’s most recent downgrades. An additional downgrade of Santander UK’s long-term senior debt ratings would lower Santander UK’s credit ratings below the minimum allowed by certain of its derivative and other financial contracts and could require that such counterparty contracts be renegotiated. The impact of any such downgrade cannot be accurately predicted as the impact would largely depend on the response of Santander UK, the Group and the respective counterparties. For example, as a result of the renegotiations, Santander UK could be required to cancel derivative contracts, post additional collateral, sell its position to another party that holds the required minimum credit ratings and/or provide a guarantee from an entity that holds the required minimum credit ratings, among others. It is not possible to know in advance what actions Santander UK, the Group and the respective counterparties would undertake in the event of a further downgrade of Santander UK’s credit ratings. We expect that any such downgrade would have a material adverse effect on the Group’s financial condition and results of operations, significantly larger than the impact of the downgrades of Banco Santander, S.A.’s credit ratings in October 2011 and February 2012 and of Santander UK in February 2012. In addition, if due to future downgrades, Banco Santander, S.A. or Santander UK were required to cancel their derivative contracts with certain counterparties and were unable to replace such contracts, the Group’s market risk profile could be altered.
The derivative and financial contracts that would be at risk of renegotiation as a result of a one-notch downgrade of Santander UK’s long-term credit rating primarily are basis swaps with a consolidated special purpose entity used in Santander UK’s covered bond programme. The aggregate notional amount of these swaps as at December 31, 2011 was approximately £40 billion. The derivative and financial contracts that would be at risk of renegotiation as a result of a two -notch downgrade of Santander UK’s long-term credit rating primarily are basis swaps and currency swaps with consolidated special purposes entities used in Santander UK’s Residential Mortgage Backed Securities (RMBS) and covered bond programs. The aggregate notional amount of these swaps as at December 31, 2011 was approximately £83 billion (in addition to the £40 billion notional amount of swaps that would be at risk of renegotiation as a result of a one-notch downgrade). Santander UK would also be required to take action in relation to the bank account arrangements with the consolidated special purposes entities under these programs. Such accounts are currently held by Santander UK. The action required could involve obtaining guarantees, transferring the accounts to another bank or re-negotiating the account bank agreement.
While certain potential impacts are contractual and quantifiable, the full consequences of a credit ratings downgrade to a financial institution are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties. For a further discussion of our liquidity matters, see “Item 5. Operating and Financial Review and Prospects — B. Liquidity and capital resources.”
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In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies that have a negative outlook on the Group, there can be no assurances that such agencies will revise such outlooks upward. The Group’s failure to maintain favorable ratings and outlooks would likely increase our cost of funding and adversely affect the Group’s interest margins and results of operations.affected region.
Our Latin American subsidiaries’ growth, asset quality and profitability in Latin America may be adversely affected by volatile macroeconomic and political conditions.
The economies of some of the eight Latin American countries where we operate have experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. Latin American banking activities (including Retail Banking, Global Wholesale Banking, Asset Management and Private Banking) accounted for €4,664 million of our profit attributable to the Parent bank for the year ended December 31, 2011 (a decrease of 1% from €4,728 million for the year ended December 31, 2010).
Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in somethese Latin American countriesregions could also result in government defaults on public debt. This
could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in several of thethese Latin American countries in which we operate.regions.
In addition, revenues from our Latin American subsidiariesrevenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies.
No assurance can be given that our growth, asset quality and profitability will not be affected by volatile macroeconomic and political conditionsconditions.
Changes in our pension liabilities and obligations could have a material adverse effect on us.
We provide retirement benefits for many of our former and current employees through a number of defined benefit pension plans. We calculate the amount of our defined benefit obligations using actuarial techniques and assumptions, including mortality rates, the rate of increase of salaries, discount rates, inflation, the expected rate of return on plan assets, or others. These calculations are based on IFRS and on those other requirements defined by the local supervisors. Given the nature of these obligations, changes in the Latin American countriesassumptions that support valuations, including market conditions, can result in actuarial losses which would in turn impact the financial condition of our pension funds. Under IFRS, the discount rate is set considering the term and performance of high credit quality corporate bonds with similar maturities in the same currency, and is the assumption that is most vulnerable to market volatility. Because pension obligations are generally long term obligations, fluctuations in interest rates have a material impact on the projected costs of our defined benefit obligations and therefore on the amount of pension expense that we accrue.
Changes in the size of the deficit in our defined benefit pension plans, due to reduction in the value of the pension fund assets (depending on the performance of financial markets) or an increase in the pension fund liabilities due to changes in mortality assumptions, the rate of increase of salaries, discount rate assumptions, inflation, the expected rate of return on plan assets, or other factors, could result in our having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of our business and reduce our capital resources. While we can control a number of the above factors, there are some over which we operate.
Latin American economies can be directlyhave no or limited control. Increases in our pension liabilities and negatively affected by adverse developments in other countries.
Financial and securities markets in the Latin American countries where we operate are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. Negative developments in the economy or securities markets in one country, particularly in an emerging market, mayobligations could have a negative impactmaterial adverse effect on other emerging market economies. These developments may adversely affect theour business, financial condition and operating results of operations.
Exposure to sovereign debt could have a material adverse effect on us.
Like many other European banks, we invest in debt securities of European governments, including debt securities of the countries that have been most affected by the deterioration in economic conditions in Europe, such as Spain, Portugal, Italy and Ireland. A failure by any such government to make timely payments under the terms of these securities, or a significant decrease in their market value, could have a material adverse effect on us. For more information, see Item 4-B. Business overview—Exposure to sovereign counterparties by credit rating.
We depend in part upon dividends and other funds from subsidiaries.
Some of our operations are conducted through our financial services subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and to pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent upon our subsidiaries’ earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. Additionally, our right to receive any assets of any of our subsidiaries as an equity holder of such subsidiaries, upon their liquidation or reorganization, will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.
Our corporate disclosure may differ from disclosure regularly published by issuers of securities in Latin America.other countries, including the United States.
Issuers of securities in Spain are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in countries with more developed capital markets, including the United States. In particular, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with IFRS-IASB, which differs from U.S. GAAP in a number of respects. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.
As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.
Our corporate affairs are governed by our by-laws and Spanish corporate law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Spain. Under Spanish corporate law, you may have fewer and less well-defined rights to protect your interests than under the laws of other jurisdictions outside Spain.
Although Spanish corporate law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in Spain, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the shares underlying ADSs.
ADS holders may be subject to additional risks related to holding ADSs rather than shares.
Because ADS holders do not hold their shares directly, they are subject to the following additional risks, among others:
as an ADS holder, we will not treat you as one of our direct shareholders and you may not be able to exercise shareholder rights;
we and the depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs; and
the depositary may take or be required to take actions under the Deposit Agreement that may have adverse consequences for some ADS holders in their particular circumstances.
Item 4. Information4.Information on the Company
A. HistoryA.History and development of the company
Introduction
Banco Santander, S.A. (“Santander”, the “Bank”, the “Parent” or the “Parent bank”) is the Parent bank of Grupo Santander. It was established on March 21, 1857 and incorporated in its present form by a public deed executed in Santander, Spain, on January 14, 1875.
On January 15, 1999, the boards of directors of Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. agreed to merge Banco Central Hispanoamericano, S.A. into Banco Santander, S.A., and to change Banco Santander’s name to Banco Santander Central Hispano, S.A. The shareholders of Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. approved the merger on March 6, 1999, at their respective general meetings. The merger and the name change were registered with the Mercantile Registry of Santander, Spain, by the filing of a merger deed. Effective April 17, 1999, Banco Central Hispanoamericano, S.A. shares were extinguished by operation of law and Banco Central Hispanoamericano, S.A. shareholders received new Banco Santander shares at a ratio of three shares of Banco Santander, S.A. for every five shares of Banco Central Hispanoamericano, S.A. formerly held. On the same day, Banco Santander, S.A. changed its legal name to Banco Santander Central Hispano, S.A.
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The general shareholders’ meeting held on June 23, 2007 approved the proposal to change the name of the Bank to Banco Santander, S.A.
The general shareholders’ meeting held on March 22, 2013 approved the merger by absorption of Banesto and Banco Banif, S.A.
We are incorporated under, and governed by the laws of the Kingdom of Spain. We conduct business under the commercial name “Santander”. Our corporate offices are located in Ciudad Grupo Santander, Avda. de Cantabria s/n, 28660 Boadilla del Monte (Madrid), Spain. Telephone: (011) 34-91-259-6520.
Principal Capital Expenditures and Divestitures
Acquisitions, Dispositions, Reorganizations
Our principal acquisitions and dispositions in 2012, 2011 and 2010 were as follows:
Transfer of interest in Banco Santander (Brasil), S.A.
In January and March 2012 the Group transferred shares representing 4.41% and 0.77%, respectively, of the capital stock of Banco Santander (Brasil), S.A. to two leading international financial institutions. These institutions have undertaken to deliver these shares to the holders of bonds issued by Banco Santander in October 2010 which are exchangeable for Banco Santander (Brasil), S.A. shares upon maturity, in accordance with their terms.
Santander and KBC agree to merge Bank Zachodni WBK and Kredyt Bank in Poland
On February 28, 2012, we announced that Banco Santander, S.A. and KBC Bank NV (‘KBC’) had entered into an investment agreement to combine their Polish banking subsidiaries, Bank Zachodni WBK S.A. (‘Bank Zachodni WBK’) and Kredyt Bank S.A. (‘Kredyt Bank’).
The transaction entailed a share capital increase in Bank Zachodni WBK, where the newly issued shares in Bank Zachodni WBK were offered and rendered to KBC and the other shareholders of Kredyt Bank in exchange for their shares in Kredyt Bank. Under the agreements Bank Zachodni WBK would merge with Kredyt Bank at the ratio of 6.96 Bank Zachodni WBK shares for every 100 Kredyt Bank shares. At market prices as of the date of the announcement, the transaction valued Kredyt Bank at PLN 15.75 a share and BZ WBK at PLN 226.4 a share. The combined bank’s total pro forma value would be PLN 20.8 billion (€5 billion). Both Bank Zachodni WBK and Kredyt Bank were listed on the Warsaw Stock Exchange. The merged bank would continue to be listed on the Warsaw Stock Exchange.
Under the investment agreement, Santander also committed to acquire 100% of Zagiel, the consumer finance arm of KBC in Poland. Beginning to 2013 Zagiel was integrated into SCF.
Valores Santander
On March 30, 2012, we informed that the Ordinary General Shareholders’ Meeting held that day had resolved to grant the holders ofValores Santander an option to convert their securities on four occasions before October 4, 2012, the mandatory conversion date for the outstandingValores Santander. As a result on June 7, 2012, July 5, 2012, August 7, 2012 and September 6, 2012 we issued 73,927,779, 193,095,393, 37,833,193 and 14,333,873 new shares related to the conversion requests of 195,923, 511,769, 98,092 and 37,160Valores Santander, respectively.
In October 2007, a total of 1,400,000Valores Santander were issued. On October 2008, 2009, 2010 and 20092011, and on June, July, August and September 2012 a total to 880,700Valores Santander were voluntarily converted. On October 4, 2012, the mandatory conversion of the remaining 519,300Valores Santandertook place, representing 37.1% of the original issuance.
Invitation to tender certain securitization bonds for cash
On April 16, 2012, we announced an invitation to all holders of certain securities (the Securities) to tender such Securities for purchase by Banco Santander for cash (the Invitation). The Securities are fixed rate securities (securitization bonds) listed on the AIAF Fixed Rate Market which correspond to 33 different series issued by specific securitization funds managed by Santander de Titulización, S.G.F.T., S.A. series with an aggregate outstanding principal amount of €6 billion.
The rationale for the Invitation was to effectively manage the Group’s outstanding liabilities and to strengthen our balance sheet. The Invitation was also designed to provide liquidity to Security holders.
On April 25, 2012 we announced the aggregate outstanding principal amount of each of the Securities accepted for purchase, which for senior securities amounted to €388,537,762.18 and for mezzanine securities €61,703,163.58.
Sale of our Colombian unit to the Chilean group Corpbanca
In December 2011, we entered into an agreement with the Chilean group Corpbanca to sell our shareholding in Banco Santander Colombia S.A. and our other business subsidiaries in this country (Santander Investment Valores Colombia S.A., Comisionista de Bolsa Comercial, Santander Investment Colombia S.A., Santander Investment Trust Colombia S.A., Sociedad Fiduciaria y Agencia de Seguros Santander, Ltda.).
Following receipt of the regulatory authorizations from the competent authorities and the delisting of the shares of Banco Santander Colombia S.A., in the second quarter of 2012 we sold our shareholding in Banco Santander Colombia S.A. and our other business subsidiaries in Colombia to the Corpbanca Group for a total of $1,229 million (€983 million), giving rise to a gain of €619 million, which was recognized under Gains/(losses) on disposal of assets not classified as follows:non-current assets held for sale in the consolidated income statement.
Agreement with Abbey Life Assurance
On July 19, 2012, we reached an agreement with Abbey Life Assurance Ltd, a subsidiary of Deutsche Bank AG, under which Abbey Life Assurance Ltd reinsured 100% of the individual life risk portfolio of the insurance companies of Banco Santander in Spain and Portugal.
This reinsurance transaction enabled us to monetize our life risk insurance portfolio. This transaction gave rise to income of €435 million recognized under Other operating income—Income from insurance and reinsurance contracts issued in the consolidated income statement (€308 million net of tax).
The policies ceded to Abbey Life Assurance Ltd consist of the portfolio as of June 30, 2012. This reinsurance agreement does not involve any changes for our customers as services will continue to be provided by Santander’s insurance companies. Our branches in Spain and Portugal will continue to offer products designed by our insurance companies as the agreement reached with Abbey Life Assurance Ltd does not involve any commitment on future distribution and is limited to the portfolio existing at June 30, 2012.
Placement of shares of Grupo Financiero Santander, S.A.B. de C.V. on the secondary market
On August 16, 2012, we announced our intention to register with both the Mexican Comisión Nacional de Banca y Valores (National Commission of Banking and Securities) and the U.S. Securities & Exchange Commission the registration statements for the placement of shares of Grupo Financiero Santander, S.A.B. de C.V. on the secondary market. The selling institutions would be Banco Santander, S.A. and its subsidiary Santusa Holding, S.L.
On September 26, 2012, we announced that the price of the offering of shares of Grupo Financiero Santander Mexico was set at 31.25 Mexican pesos ($2.437) per share, valuing Santander Mexico at €12,730 million ($16,538 million), making it the 82nd largest bank in the world by market capitalization.
The total volume of the offering represented 24.9% of the share capital of Santander Mexico after the exercise of the green shoe option. The value of the transaction was €3,178 million, making it the largest equity offering in Latin America in 2012 and one of the largest in the world.
The gains obtained by Banco Santander in this transaction were fully allocated to reserves, in line with current accounting requirements, as Banco Santander will continue to maintain control over its Mexican subsidiary.
Of the total shares sold, 81% were placed in the United States and elsewhere outside Mexico and 19% in Mexico. The American Depositary Shares of Santander Mexico commenced trading on the New York Stock Exchange on September 26, 2012. The shares of Santander Mexico continue to trade on the Mexican Stock Exchange.
The IPO of our unit in Mexico was an important step in our strategy of having market listings for all of our significant subsidiaries.
Invitation to tender offer
On August 22, 2012, the Bank and Santander Financial Exchanges Limited (each an Offeror and, jointly, the Offerors) invited holders of 21 specific series of subordinated debt and preferred securities to sell them to the Offerors. The aggregate principal amount of the securities traded in euros and sterling amounted to €7,201 million and £3,373 million, respectively.
The rationale for the invitation was to effectively manage the Group’s outstanding liabilities and to strengthen our balance sheet. The invitation was also designed to provide liquidity to Security holders.
On August 31, 2012, the Offerors announced that the holders had accepted to sell an aggregate principal amount of €755 million for the securities traded in euros and £311 million for the securities traded in sterling.
Termination of the agreement to purchase Royal Bank of Scotland branch offices
On October 15, 2012, we announced that the agreement for the sale by The Royal Bank of Scotland (“RBS”) to Santander UK of approximately 300 branches of RBS in England and Wales and NatWest in Scotland (the “Business”) would not be completed in view of the foreseeable lack of satisfaction of the conditions precedent by the agreed final deadline of February 2013.
Santander and Elavon agreement
On October 19, 2012, we announced that we had reached an agreement with Elavon Financial Services Limited (“Elavon”) to jointly operate in Spain a payment services business for credit and debit cards through merchants’ point of sale terminals.
The transaction involves the incorporation of a joint venture company whose share capital will be held 51% by Elavon and 49% by the Bank, and to which Santander Group will transfer its aforementioned payment services business in Spain (excluding that of Banesto).
The agreement values the transferred business at €165.8 million and will generate a capital gain of approximately €87 million after tax.
As of March 31, 2013, all the necessary authorizations had been obtained. The transaction was closed in April 2013.
Mergers by absorption of Banesto and Banco Banif
On December 17, 2012, we announced that we had resolved to approve the plan for the merger by absorption of Banesto and Banco Banif, S.A. as part of the restructuring of the Spanish financial sector. These transactions are part of a commercial integration which will bring Banesto and Banif under the Santander brand.
After the end of the reporting period, at their respective board of directors meetings held on January 9, 2013, the directors of the Bank and Banco Español de Crédito, S.A. (Banesto) approved the common draft terms of the merger by absorption of Banesto into the Bank with the dissolution without liquidation of the former and the transferen bloc of all its assets and liabilities to the Bank, which will acquire, by universal succession, the rights and obligations of the absorbed entity. As a result of the merger, the shareholders of Banesto, other than the Bank, will receive in exchange shares of the Bank.
The ratio at which shares of Banesto will be exchanged for shares of the Bank, which was determined based on the fair value of their assets and liabilities, will be 0.633 shares of the Bank, of €0.5 par value each, for each share of Banesto, of €0.79 par value each, without provision for any additional cash payment.
January 1, 2013 was established as the date from which the transactions of Banesto shall be considered to have been performed for accounting purposes for the account of the Bank.
On March 22, 2013 and March 21, 2013, the general shareholders meetings of the Bank and Banesto, respectively, approved the terms of the merger.
After the end of reporting period, the directors of Banco Banif, S.A., at its board of directors meeting held on January 28, 2013, and the directors of Banco Santander, S.A., at its board of directors meeting held on that same day, approved the
common drafts terms of the merger by absorption of Banco Banif, S.A. into Banco Santander, S.A. with the dissolution without liquidation of the former and the transferen bloc of all its assets and liabilities to Banco Santander, S.A., which will acquire, by universal succession, the rights and obligations of the absorbed entity.
As of the date of this annual report on Form 20-F the mergers of Banesto and Banif with the Bank are subject to the condition precedent of authorization of the Minister of Economy and Competitiveness.
Insurance business in Spain
On December 20, 2012, we announced that we had reached an agreement with Aegon. In this regard, we created two insurance companies, one for life insurance and the other for general insurance, in which Aegon will acquire ownership interests of 51%, and management responsibility will be shared by Aegon and the Group. We will hold 49% of the share capital of the companies and we will enter into a distribution agreement for the sale of insurance products in Spain through the commercial networks for a period of 25 years. The agreement does not affect savings, health and vehicle insurance, which will continue to be owned and managed by Santander.
The transaction is subject to the receipt of the relevant authorizations from the Directorate-General of Insurance and Pension Funds and the European competition authorities and, therefore, it is scheduled to be completed by the first half of 2013.
Acquisition of the Polish institution Bank Zachodni WBK
On September 10, 2010, we announced that we had reached an agreement with Allied Irish Banks (“AIB”) to acquire 70.36% of the Polish institution Bank Zachodni WBK (“BZ WBK”) for an amount of approximately €2.938 billion in cash. On February 7, 2011, we announced that we had launched a tender offer in Poland (the “Tender Offer”) for 100% of the share capital of BZ WBK in accordance with applicable Polish law and regulation. The Tender Offer forms part of the agreement of Banco Santander with AIB for the acquisition of AIB’s stake in BZ WBK announced in September 10, 2010.
Under the Tender Offer, Banco Santander offered PLN 226.89 in cash per share (approximately €58.74) resulting in a total maximum consideration of PLN 16,580,216,589.57 (approximately €4,293.4 million) for the total share capital of BZ WBK.
The Tender Offer was made in Poland subject to Polish law and subject to the terms and conditions included in the Tender Offer document (dokument wezwania) submitted to the Polish securities regulator—Polish Financial Supervision Commission (Komisja Nadzoru Finansowego) and the Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.). The consummation of the Tender Offer was subject to the satisfaction of the conditions indicated in the Tender Offer document, including the acceptance of the tender offer by holders of more than 70% of the outstanding shares of BZ WBK and the approval by the Polish regulatory authorities of the acquisition by Grupo Santander of BZ WBK.
The acceptance period of the tender offer commenced on February 24, 2011 and ended on March 25, 2011.
69,912,653 BZ WBK shares were tendered, representing 95.67% of BZ WBK’s capital. Since the Tender Offer was made at a cash price of PLN 226.89 per share (approximately €57.05), the purchase of the shares tendered in the offer resulted in a payment of PLN 15,862.48 million (approximately €3,987 million).
Since the 70% acceptance threshold (which was a condition of the Tender Offer) was exceeded and all the remaining conditions, including the obtaining of the appropriate regulatory authorizations, were met, the tender offer was settled and the transfer of the shares was made on April 1, 2011.
Additionally, on April 1, 2011, we acquired AIB’s 50% stake in BZ WBK Asset Management for €174 million in cash. Subsequently, based on the terms and conditions of the takeover bid, certain non-controlling shareholders of BZ WBK opted to sell their shares. As a result, the Group acquired 421,859 additional shares for €24 million.
Finally, in May and June 2011, we acquired and aggregate of 113,336 additional BZ WBK shares. As of December 31, 2011, the Group held a total of 70,334,512 shares of Bank Zachodni WBK S.A. (96.25%).
Sales of 1.9% and 7.8% of Banco Santander Chile
On February 17, 2011, we announced that we had sold shares representing 1.9% of the share capital of Banco Santander Chile, for a total consideration of US$291 million. This transaction generated a capital gain for Banco Santander of approximately €110 million, entirely accounted for as reserves. Following the transaction, we hold a 75% stake in the share capital of Banco Santander Chile.
On November 22, 2011, we announced the launch of a public secondary offering of approximately 14,741.6 million shares of common stock of Banco Santander Chile, representing 7.8% of the company’s share capital.
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On December 7, 2011, we announced that we had successfully completed the offering. As a result, 7.82% of the capital of such bank was sold at a price of 33 Chilean pesos per share and US$66.88 per ADR. The placement amounted to US$950 million, with a positive impact on the core capital of the Group of 11 basis points.
Following the transaction, we holdheld 67% of the share capital of Banco Santander Chile. We have agreed not to reduce our stake in Banco Santander Chile for one year.
Agreement with Zurich Financial Services Group
On February 22, 2011, the Groupwe signed a Memorandum of Understanding with insurer Zurich Financial Services Group (“Zurich”) to form a strategic alliance to strengthen insurance distribution in five key Latin American markets: Brazil, Chile, Mexico, Argentina and Uruguay.
Once the required authorizations from the various regulators were obtained, in the fourth quarter of 2011 Zurich acquired, for €1,044 million 51% of the share capital of ZS Insurance América, S.L. (holding company for the Group’s insurance businesses in Latin America), thereby gaining control over this company, and it has taken over management of the companies concerned. The agreement also provides for deferred payments based on the achievement of the business plan targets over the coming 25 years.
Following this transaction Santander retained 49% of the share capital of the holding company and entered into a distribution agreement for the sale of insurance products in each of the relevant countries for 25 years.
As a result of the aforementioned transaction, the Group recognized a gain of €641 million (net of the related tax effect) under Gains (losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2011, of which €233 million related to the measurement at fair value of the 49% ownership interest retained in this company.
Santander Banif Inmobiliario
On December 3, 2010, exclusively for commercial reasons, we decided to contribute resources to the Santander Banif Inmobiliario, FII property investment fund (the “Fund”) through the subscription of new units and the granting of a two-year liquidity guarantee in order to meet any outstanding redemption claims by the unit holders of the Fund and to avoid winding up the Fund. We offered the unit holders of the Fund the opportunity to submit new requests for the total or partial redemption of their units or for the total or partial revocation of any redemption requests that they had previously submitted. Any such requests were required to be submitted before February 16, 2011.
Redemptions from the Fund, managed by Santander Real Estate, S.G.I.I.C. S.A., had been suspended for a period of two years in February 2009, in accordance with the request filed with the Spanish National Securities Market Commission (CNMV), due to the lack of sufficient liquidity to meet the redemptions requested at that date.
On March 1, 2011, we paid the full amount of the redemptions requested by the Fund’s unit holders, which amounted to €2,326 million (93.01% of the Fund’s net assets), through the subscription of the related units by us at their redemption value at February 28, 2011.
Following the aforementioned acquisition, we own 95.54% of the Fund. The suspension of redemptions was lifted from said date and the Fund is operating normally.
Metrovacesa, S.A. (“Metrovacesa”)
On February 20, 2009, certain credit institutions, includingMarch 17, 2011, Banco de Sabadell, S.A., Caja de Ahorros y Monte de Piedad de Madrid (now Bankia, S.A.), Banco Bilbao Vizcaya Argentaria, S.A., Banco Popular Español, S.A., Banco Santander, S.A. and Banco Español de Crédito, S.A., entered into an agreement for the restructuringholders in aggregate of the debt of the Sanahuja Group, whereby they received shares representing 54.75%65.52% of theMetrovacesa’s share capital of Metrovacesa in consideration for payment of the Sanahuja Group’s debt.
The agreement also included the acquisition(of which a 23.63% stake was held by the creditor entities of an additional 10.77% of the share capital of Metrovacesa (shares for which the Sanahuja family was granted a call option for four years), which gave rise to an additional disbursement of €214 million for the Group, and other conditions concerning the administration of this company.
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Following the execution of the agreement, Grupo Santander had an ownership interest of 23.63% in Metrovacesa, S.A., and 5.38% of the share capital was subject to the call option described above.
At 2009 year-end, the Group measured this investment at €25 per share, which gave rise to additional write-downs and impairment losses of €269 million net of tax.
At December 31, 2010, the value of this holding amounted to €402 million, after deducting the write-downs, equivalent to €24.4 per share. Also, the Group has granted the company loans amounting to €109 million, which were fully provisioned.
On March 17, 2011, the creditor entities that had been party to the agreement for the restructuring of Metrovacesa’s debt in 2009, including Banco Santander, S.A. and Banco Español de Crédito, S.A.Group), entered into a capitalization and voting agreement relating to Metrovacesa (which iswas subject to certain conditions
precedent, including the implementation by Metrovacesa of a capital increase through monetarycash contributions and the conversion of debt into equity)equity referred to below) whereby the creditorsaid credit entities taken as a whole, will convertcollectively undertook to capitalize approximately €1,360 million of Metrovacesa’s financial debt into equity,credits to Metrovacesa, the Group’s share of which would bewas €492 million.
On June 28, 2011, theMetrovacesa’s shareholders at the annual general meeting of Metrovacesa resolved to approveapproved the aforementioned capital increase for a par value of €1,949 million, subject to certain conditions precedent such asincluding the CNMV releasing the Group from the obligation to launch a mandatory takeover bid for allthe entire share capital of Metrovacesa as a result of the share capital, since the transaction might raiseincrease of the Group’s holding in the share capital of Metrovacesa above 30%. of the company’s voting rights. This release was granted by the CNMV on July 6, 2011.
On August 1, 2011, we announced that,and following the execution of the abovementioned capital increase of Metrovacesa, S.A. as approved by the shareholders at the annual general meeting held on June 28, 2011, Banco Santander, S.A. and the individuals and legal entities whose voting rights are attributed to the Bank pursuant to the assumptions provided in article 5 of Royal Decree 1066/2007, of July 27, governing the legal framework for public take-over bids of securities, have become the holders of a total ofheld 344,530,740 shares in Metrovacesa, S.A., representing 34.88% of the company’s voting rights.
On December 19, 2012, Banco de Sabadell, S.A., Bankia, S.A., Banco Bilbao Vizcaya Argentaria, S.A., Banco Popular Español, S.A., Banco Santander, S.A. and Banco Español de Crédito, S.A. announced that they had reached an agreement to promote the delisting of the shares of Metrovacesa through a delisting tender offer to be launched by Banco de Sabadell, S.A., Banco Bilbao Vizcaya Argentaria, S.A., Banco Popular Español, S.A. and Banco Santander, S.A. at a price of €2.28 per Metrovacesa share. Bankia, S.A. and Banco Español de Crédito, S.A. agreed to not tender their shares in Metrovacesa in any such tender offer. On January 29, 2013, Metrovacesa’s shareholders approved the company’s delisting and the delisting tender offer. On April 18, 2013, the CNMV authorized the delisting tender offer, which will be open for acceptance until May 13, 2013. The Group’s share capital (excludingof the treasurydelisting tender offer will be 45.56% and, as a result, if all the eligible shareholders of Metrovacesa tendered their shares held by it which, accordingpursuant to the information provided byoffer, the Group would acquire an additional 2.007% of Metrovacesa S.A., amounted to 401,769 as at July 29, 2011).for a total consideration of €45 million.
New partners for Santander Consumer USA
On October 21, 2011 we announced that Santander Holdings USA, Inc. (“SHUSA”) and Santander Consumer USA Inc. (“SCUSA”), a majority-owned subsidiary of SHUSA, entered into an investment agreement with Sponsor Auto Finance Holdings Series LP, a Delaware limited partnership (“Auto Finance Holdings”). Auto Finance Holdings is jointly owned by investment funds affiliated with each of Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P. (collectively, the “New Investors”), as well as DFS Sponsor Investments LLC, a Delaware limited liability company affiliated with Thomas G. Dundon, the Chief Executive Officer of SCUSA and a Director of SHUSA, and Jason Kulas, Chief Financial Officer of SCUSA. As previously reported on October 20, 2011, SCUSA also entered into an investment agreement with DDFS LLC (“DDFS”), a Delaware limited liability company affiliated with Thomas G. Dundon.
On December 31, 2011, Auto Finance Holdings Series and DDFS completed their investments in SCUSA. SCUSA increased its share capital on that date through the issuance of shares to Auto Finance Holdings for an aggregate consideration of $1.0 billion and to DDFS for an aggregate consideration of $158.2 million.
The transaction valued SCUSA at $4 billion. Upon its completion, Banco Santander, S.A. realized a capital gain of €872 million under Gains (losses) on disposal of assets not classified as non-current assets held for sale, of which €649 million related to the measurement at fair value of the 65% ownership interest retained in SCUSA. The fair value of SCUSA was determined using comparable market data, recent transactions and discounted cash flow analyses, taking into account contingent payments.
As a result of these transactions, SHUSA, the New Investors (indirectly through Auto Finance Holdings) and Mr. Dundon (indirectly through DDFS and DFS Sponsor Investments LLC) own approximately 65%, 24% and 11% of the common stock of SCUSA, respectively.
Also on December 31, 2011, SHUSA, SCUSA, Auto FinancingFinance Holdings, DDFS, Thomas G. Dundon and Banco Santander, S.A. entered into a shareholders agreement (the “Shareholders Agreement”). The Shareholders Agreement provides each of SHUSA, DDFS and Auto Finance Holdings with certain board representation, governance, registration and other rights with respect to their ownership interests in SCUSA. Subject to the terms and conditions of the Shareholders Agreement, SHUSA, Auto Finance Holdings and DDFS jointly manage SCUSA and share control over it.
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Pursuant to the Shareholders Agreement, depending on SCUSA’s performance during 2014 and 2015, if SCUSA exceeds certain performance targets, SCUSA may be required to pay up to $595.0 million in favor of SHUSA. If SCUSA does not meet such performance targets during 2014 and 2015, SCUSA may be required to make a payment to Auto Finance Holdings of up to the same amount.
The Shareholders Agreement also provides that each of Auto Finance Holdings and DDFS will have the right to sell, and SHUSA will be required to purchase, their respective shares of SCUSA common stock, at its then fair market value, and Auto
Finance Holdings and DDFS, if applicable, will receive the payment referred to above at that time (i) at the fourth, fifth and seventh anniversaries of the closing of the investments, unless an initial public offering of SCUSA common stock has been previously consummated or (ii) in the event there is a deadlock with respect to certain specified matters which require the approval of the board of directors or shareholders of SCUSA.
Offer to exchange subordinated debt instruments for non-subordinated debt instruments
On November 15, 2011, we announced an offer (“the Offer”) to holders of the existing securities identified in the table below (“the Existing Securities”), to exchange Existing Securities for new securities to be issued (“the New Securities”).
The Existing Securities constituted eight series of subordinated debt instruments issued by Santander Issuances, S.A.U., which are listed on the Luxembourg Stock Exchange.
The New Securities are senior debt instruments denominated in pounds sterling and euros with a maturity date of December 1, 2015. The New Securities trade on the Luxembourg Stock Exchange.
We used funds pursuant to the Offer from our ordinary available liquidity to comply with our payment obligations pursuant to the Offer.
The Offer allows managing more effectively the Group’s outstanding liabilities, taking into consideration prevailing market conditions.
On November 24, 2011, we announced (i) the aggregate nominal amount of the Existing Securities accepted for the exchange; and (ii) the final nominal amount and interest rate of the New Securities. Such amounts as set forth in the table below.
Series No. | ISIN | Aggregate Amount of Existing Securities accepted for Exchange | Aggregate Nominal Amount of New Securities to be issued | Aggregate Outstanding Amount of Existing Securities after the exchange | ||||||||||||
1 | XS0291652203 | € | 274,000,000 | € | 243,300,000 | € | 1,226,000,000 | |||||||||
2 | XS0261717416 | € | 202,200,000 | € | 180,000,000 | € | 347,800,000 | |||||||||
3 | XS0327533617 | € | 394,250,000 | € | 347,500,000 | € | 1,105,750,000 | |||||||||
4 | XS0284633327 | £ | 146,053,000 | £ | 124,800,000 | £ | 153,947,000 | |||||||||
5 | XS0255291626 | € | 165,471,000 | € | 141,300,000 | € | 334,529,000 | |||||||||
6 | XS0301810262 | € | 85,150,000 | € | 72,600,000 | € | 414,850,000 | |||||||||
7 | XS0440402393 | € | 135,500,000 | € | 131,500,000 | € | 313,750,000 | |||||||||
8 | XS0440403797 | £ | 70,950,000 | £ | 65,000,000 | £ | 772,400,000 |
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The final nominal amount and interest rate of the New Securities are set forth below:
€1,116,200,000 3.381% senior notes due December 1, 2015.
GBP 189,800,000 3.160% senior notes due December 1, 2015.
The Offer generated gross capital gains of approximately €144 million, included in the 2011 accounts.
Offer to repurchase preferred securities and subscribe Banco Santander shares
On December 2, 2011, we announced an offer (the “Repurchase Offer”) to repurchase Series X Preferred Securities issued by Santander Finance Capital, S.A.U. in June 2009 and guaranteed by the Bank (the “Series X Preferred Securities”) and a simultaneous public offer to subscribe for newly-issued shares of Banco Santander (the “New Shares”), on the terms set out below. We refer to the Repurchase Offer and the issuance of New Shares as the “Capital Increase.”
In order to participate in the Repurchase Offer, holders of Series X Preferred Securities were required to irrevocably subscribe the number of New Shares which corresponded to the repurchase price of their Series X Preferred Securities. The New Shares were offered solely to the abovementioned holders of Series X Preferred Securities who accepted the Repurchase Offer.
The issue price of the New Shares (nominal plus premium) equaled the arithmetic mean of the average weighted prices of Banco Santander shares on the Spanish stock exchanges during the Acceptance Period. Consequently, the number of New Shares to be subscribed by each holder of Series X Preferred Securities who accepted the Repurchase Offer was the result of dividing the nominal value of the preferred securities (€25.00) by the issue price of the New Shares.
On December 28, 2011, we announced that during the acceptance period, the holders of 77,743,969 preferred securities, representing 98.88% of the preference shares outstanding, had accepted the repurchase offer.
The holders of these preferred securities subscribed 341,802,171 shares under the Capital Increase. Consequently, the total amount (nominal plus premium) subscribed was €1,943,599,225, and the nominal value of the Capital Increase was €170,901,085.50. The New Shares represented 3.84% of the share capital of Banco Santander following the Capital Increase.
On December 30, 2011, Banco Santander acquired the Series X Preferred Securities and the new shares subscribed by the holders of those preferred securities were paid up.
The new shareholders were, as of December 30, 2011, entitled to all of the rights pertaining to the shares of Banco Santander and, in particular, have the right to participate in theSantander Dividendo Elección program.
The Capital Increase resulted in a raise in core capital of 34 basis points.
Sale of the Colombian unit to the Chilean group Corpbanca
On December 6, 2011, we reported that we had reached an agreement with the Chilean group Corpbanca for the sale of Banco Santander Colombia and its other subsidiaries in that country.
The transaction values our Colombian operations (which in 2010 contributed US$54 million to the Group’s profits and is not a core market for the Group) at US$1,225 million and will generate for Santander a capital gain of approximately €615 million, which will be allocated to reinforce our balance sheet.
Banco Santander Colombia shares are listed on the Colombian Stock Exchange and has a free float of approximately 2.15% of its share capital.
The transaction is subject to obtaining the relevant regulatory approvals and is expected to be completed within the second quarter of 2012.
New capitalCapital requirements
On December 8, 2011, the European Banking Authority (“EBA”) published aggregate figures relating to capital requirements of a temporary and extraordinary nature applicable to financial institutions, calculated on the basis of data as of September 30, 2011.
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According to the updated calculations, the additional capital required for Grupo Santander amounts to €15,302 million versus the €14,971 million published by the EBA on October 26, 2011, which was based on estimated figures for September 30, 2011.
In accordance with This amount has been reached as follows: (i) €6,829 million of Valores Santander, which have to be converted into shares before October 2012; (ii) €1,943 million through the exchange of preferred shares for ordinary new requirementsshares; (iii) €1,660 million through the application of the EBA, our objective is to attain a 10% core capital ratio, which we expect to achieve throughSantander Dividendo Elección program (scrip dividend) at the organic creation of capital, optimization of risk-weighted assets, expansiontime of the usefinal dividend corresponding to fiscal year 2011; and (iv) €4,890 million through organic capital generation and the transfer of internal capital calculation modelscertain stakes, mainly in Chile and other measures, including the possible sale of assets.Brazil.
Tender offer for subordinated notes
On January 11, 2010, Banco Santander, S.A. offered to purchase for cash 13 series of subordinated notes issued by several entities of Grupo Santander for an aggregate nominal amount of €3.3 billion.
The acceptance level of the exchange offers reached 60% and the nominal amount of the securities accepted for purchase was approximately €2 billion.
Also, on February 17, 2010, Banco Santander, S.A. offered to purchase for cash perpetual subordinated notes issued by Santander Perpetual, S.A.U. for a total nominal amount of US$1.5 billion (of which Santander held approximately US$350 million). The aggregate nominal amount of securities accepted for purchase was US$1.1 billion, representing 95% of the outstanding notes not held by Santander.
Bolsas y Mercados Españoles (“BME”)
On February 22, 2010, we sold to institutional investors 2,099,762 shares of BME representing approximately 2.5% of its share capital, at a price of €20.0 per share, which amounts to a total of approximately €42 million. The capital gain for Grupo Santander was of €30.4 million. Grupo Santander maintains a stake of 2.5% in the capital of BME and will continue to be represented on its board of directors.
James Hay Holdings Limited
On March 10, 2010, Santander Private Banking UK Limited completed the sale of James Hay Holdings Limited (including its five subsidiaries) through the transfer of all the shares of James Hay Holdings Limited to IFG UK Holdings Limited, a subsidiary of the IFG Group, for a total of £39 million.
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Companhia Brasileira de Soluções e Serviços (“CBSS”) and Cielo S.A.
On April 25, 2010, we announced that we had reached an agreement with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale of the entire stake held by Grupo Santander in the companies Companhia Brasileira de Soluções e Serviços (15.32% of the capital), and Cielo S.A. – —formerly Visanet – (7.20%Visanet—(7.20% of the capital).
The total agreed sale price was BRL200 million (approximately €89 million) for the 15.32% of CBSS and BRL1,487 million (approximately €650.7 million) for the 7.20% of Cielo.
The net capital gain generated for Grupo Santander was approximately €245 million.
The closing of the transactions took place in July 2010.
Acquisition of AIG Bank Polska Spolka Akcyina
On June 8, 2010, Santander Consumer Bank S.A. (Poland) increased capital through the issuance of 1,560,000 new shares, fully subscribed by AIG Consumer Finance Group Inc. who made a contribution of 11,177,088 shares of AIG Bank Polska S.A. representing a 99.92% of its share capital. The amount of the capital increase amounted to 452 million Polish zlotys (€109 million approximately as of the date of the transaction).
The capital increase has diluted the Group’s share capital of Santander Consumer Bank S.A. (Poland), which is now 70%.
Acquisition of 24.9% of Banco Santander Mexico
On June 9, 2010, we announced that Banco Santander had reached an agreement with Bank of America to acquire the 24.9% stake held by the latter in Grupo Financiero Santander (“Banco Santander Mexico”) for an amount of US$2.5 billion. Following this transaction, our holding in Banco Santander Mexico will amount to 99.9%.
In 2003, Bank of America acquired this 24.9% stake from Santander for an amount of US$1.6 billion.
The transaction was completed on September 23, 2010.
Agreement to purchase Royal Bank of Scotland branch offices
In August 2010 Santander UK plc announced that it had entered into an agreement to acquire the portion of the banking business carried on by Royal Bank of Scotland (RBS) through its branches in England and Wales and the NatWest network in Scotland, as well as certain SME and corporate banking centers. The acquisition is currently in progress and is expected to be completed in the fourth quarter of 2012, once the necessary approvals have been obtained and certain other conditions have been met.
Acquisition of CitiFinancial Auto’s auto loan portfolio
On June 24, 2010, we announced that we had reached an agreement with Citigroup Inc. (“Citi”) to purchase US$3.2 billion of CitiFinancial Auto’s auto loan portfolio. In addition, Santander and Citi entered into an agreement under which Santander will service a portfolio of US$7.2 billion of auto loans that will be retained by Citi.
Santander purchased the US$ 3.2 billion portion of the portfolio at a price equal to 99% of the value of the gross receivables.
The transaction closed on September 3, 2010.
Acquisition of the commercial banking business of Skandinaviska Enskilda Banken in Germany
On July 12, 2010, we announced that we had reached an agreement with Skandinaviska Enskilda Banken (SEB Group) for the acquisition by our affiliate Santander Consumer Bank AG of SEB’s commercial banking business in Germany for an amount of approximately €494 million (€555 million deducting certain amendments to the purchase price agreed between the parties).
Following the acquisition of SEB’s commercial banking business in Germany, which includes 173 branches and serves one million customers, the number of branches of Santander Consumer Bank’s network in Germany almost doubled.
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The transaction closed on January 31, 2011, once the appropriate regulatory approvals were obtained.
Tender offer for Santander Bancorp shares
On July 23, 2010, we announced the completion of the tender offer by our wholly-owned subsidiary, Administración de Bancos Latinoamericanos Santander, S.L. (“ABLASA”), for all outstanding shares of common stock of Santander BanCorp not owned by ABLASA at US$12.69 per share.
The offer expired at 12:00 midnight, New York City time, on July 22, 2010. Based on information provided by BNY Mellon Shareowner Services, the depositary for the tender offer, 3,644,906 Santander BanCorp shares were validly tendered and not withdrawn. The tendered shares represented approximately 7.8% of Santander BanCorp’s outstanding shares of common stock. Together with the 90.6% of the outstanding shares already held by ABLASA, ABLASA held a total of approximately 45,886,244 shares or 98.4% of the 46,639,104 Santander BanCorp shares outstanding after the expiration of the tender offer. All Santander BanCorp shares that were validly tendered and not withdrawn immediately prior to the expiration of the tender offer were accepted and purchased by ABLASA.
ABLASA acquired the remaining publicly held shares of Santander BanCorp through a short-form merger under Puerto Rico law on July 29, 2010. As a result of the merger, any remaining shares of Santander BanCorp common stock were cancelled pursuant to the merger in consideration for the same offer price of US$12.69 cash paid in the tender offer, without
interest and less any required withholding taxes (other than shares of Santander BanCorp common stock for which appraisal rights were validly exercised under Puerto Rico law). Upon completion of the merger, Santander BanCorp became a wholly owned subsidiary of Banco Santander, its shares ceased to be traded on the New York Stock Exchange, and Santander BanCorp was no longer required to file certain information and periodic reports with the U.S. Securities and Exchange Commission.
Acquisition of auto loan portfolio in the USA from HSBC
On August 27, 2010, we purchased a US$ 4.3 billion auto loan portfolio in the USA from HSBC, for a total consideration of approximately US$ 4 billion. The portfolio amount represents the carrying amount of the loans at June 30, 2010, and the purchase price is subject to final adjustments.
Santander Consumer USA is already servicing the auto loan portfolio that was acquired.
The transaction required only US$ 342 million financing from Grupo Santander, since it carries financing from a third party as well as assumptions of existing securitizations pertaining to part of the portfolio.
Agreement with Qatar Holding by which it will subscribesubscribed a bond issue
On October 18, 2010, Banco Santander announced that it had reached an agreement with Qatar Holding, by which the latter will subscribesubscribed bonds issued by Banco Santander amounting to US$ 2.719 billion, mandatorily exchangeable for existing or for new shares of Banco Santander Brasil, at the choice of Banco Santander.
This transaction represents 5% of the share capital of Banco Santander Brasil.
The bonds will mature on the third anniversary of the issuance date. The conversion or exchange price will be Brazilian reais 23.75 per share and the bonds will pay an annual coupon of 6.75% in U.S. dollars.
In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions that have undertaken to deliver these shares to the holders of the bonds convertible into shares of Banco Santander (Brasil) S.A. issued by Banco Santander, S.A. in October 2010 upon the maturity of the bonds and under the terms laid down therein.
The transaction is part of Banco Santander’s commitment for its Brazilian affiliate to have a free float of 25% by the end of 2014.
Acquisition of Sovereign
On October 13, 2008, we announced that we would acquire Sovereign through a share exchange. At the date of the announcement, we held 24.35% of the outstanding ordinary shares of Sovereign. The capital and finance committee of Sovereign, composed of independent directors, requested that Santander consider acquiring the 75.65% of the company that it did not own. The committee assessed the transaction and recommended it to the company’s board of directors.
Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the executive committee of Santander, Sovereign shareholders received 0.2924 Banco Santander American Depository Shares (“ADSs”) for every 1 ordinary Sovereign share they owned (or 1 Banco Santander ADS for every 3.42 Sovereign shares).
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On January 26, 2009, Banco Santander held an extraordinary general meeting at which its shareholders approved the capital increase for the acquisition of 75.65% of Sovereign Bancorp Inc.
On January 28, 2009, the shareholders at the general meeting of Sovereign approved the acquisition.
On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of Grupo Santander. The transaction involved the issuance of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued by Banco Santander for a cash amount (par value plus share premium) of €1.3 billion.
At the time of the acquisition this transaction gave rise to goodwill of US$2,053 million (€1,601 million at the exchange rate on the date of the acquisition, €1,425 million at the exchange rate on December 31, 2009).
Acquisition of Real Tokio Marine Vida e Previdencia
In March 2009, the Santander Brazil Group acquired the 50% of the insurance company Real Seguros Vida e Previdencia (formerly Real Tokio Marine Vida e Previdencia) that it did not already own from Tokio Marine for BRL 678 million (€225 million).
CEPSA
On March 31, 2009, we announced that we had reached an agreement with the International Petroleum Investment Company (“IPIC”) of the Emirate of Abu Dhabi for the sale of our 32.5% stake in CEPSA to IPIC, at a price of €33 per share, which would be reduced by the amount of any dividends paid, prior to the closing of the transaction, charged to the 2009 fiscal year. With this transaction, our historical annual return derived from our investment in CEPSA was of 13%. The sale had no impact on Grupo Santander’s earnings.
On July 30, 2009, we announced that we had transferred to IPIC our 32.5% stake in CEPSA at the agreed price of €33 per share. The acquirer applied to the CNMV for exemption from the obligation to launch a tender offer, in accordance with the provisions of article 4.2 of Royal Decree 1066/2007, owing to the existence of a shareholder with a higher stake in the share capital, the denial of which would be cause for termination of the contract. On September 15, 2009, the CNMV granted this exemption.
France Telecom España, S.A.(“France Telecom”)
On April 29, 2009, we announced that we had reached an agreement with the company Atlas Services Nederland BV (a 100%-owned affiliate of France Telecom) on the sale of the 5.01% share package held by Grupo Santander in France Telecom España, S.A. for an amount of €378 million. The sale generated a loss for Grupo Santander of €14 million.
Triad Financial Corporation
In June 2008, Banco Santander’s executive committee authorized the acquisition by Santander Consumer USA Inc. of the vehicle purchase loan portfolio and an internet-based direct loan platform (www.roadloans.com) belonging to the US group Triad Financial Corporation. The acquisition price, US$615 million, was determined on the basis of an analysis of each individual loan. In July 2009, Banco Santander’s executive committee authorized Santander Consumer USA Inc. to acquire Triad Financial SM LLC with its remaining portfolio for US$260 million.
Banco de Venezuela
On July 6, 2009, we announced that we had closed the sale of our stake in Banco de Venezuela to Bank for Economic and Social Development of Venezuela (Banco de Desarrollo Económico y Social de Venezuela), a public institution of the Bolivarian Republic of Venezuela for US$1,050 million, of which US$630 million were paid on that date, US$210 million were paid in October 2009 and the remainder was paid in December 2009. This sale did not have a material impact on the Group’s income statement.
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Offers to exchange perpetual issues for other financial instruments
On July 9, 2009, Banco Santander, S.A. and its subsidiary Santander Financial Exchanges Limited launched various offers to exchange 30 issues of securities eligible to be included in capital for a total nominal amount of approximately €9.1 billion for securities to be issued by Santander and its subsidiaries. The exchange envisaged the delivery of new securities that meet the current market standards and regulatory requirements to be classified as equity at the consolidated Group level.
The purpose of these offers was to improve the efficiency of the Group’s capital structure and to strengthen Grupo Santander’s balance sheet. The Group’s annual borrowing costs were not increased as a result of exchange offers.
The acceptance level of the exchange offers reached 49.8% and the nominal amount of the new securities issued was €3,210 million.
The capital gains generated by this transaction amounted to €724 million which were used to strengthen the Group’s balance sheet.
Purchase of securitizations
On August 24, 2009, Banco Santander invited holders of certain securitization bonds for a total nominal amount of €25,273 million to tender any or all of the bonds for purchase by Banco Santander for cash.
The aggregate outstanding nominal amount of securities accepted for purchase was €609 million. The capital gains generated amounted to €97 million which were used to strengthen the Group’s balance sheet.
Initial Public Offering of Banco Santander (Brasil) S.A.
On October 13, 2009, our subsidiary Banco Santander (Brasil) S.A. (Santander Brasil) closed its initial public offering of 525,000,000 units, each unit representing 55 ordinary shares and 50 preference shares, without par value. The offered securities (units) are share deposit certificates. The units were offered in a global offering consisting of an international tranche in the United States and in other countries other than Brazil, in the form of American Depositary Shares (“ADSs”), in which each ADS represented a unit, and a domestic tranche of units in Brazil.
The initial public offering price was BRL 23.50 per unit and $13.4033 per ADS.
Additionally, Santander Brasil granted the international underwriters an option, exercisable before November 6, 2009, to purchase an additional 42,750,000 ADSs to cover any over-allotments in connection with the international tranche. Santander Brasil also granted the domestic underwriters an option, exercisable during the same period, to purchase an additional 32,250,000 units to cover any over-allotments in connection with the Brazilian tranche.
Once the global offering was completed and after the underwriters exercised their options, the capital increase amount was BRL 13,182 million (€5,092 million). The free float of Santander Brasil rose to approximately 16.45% of its share capital, from only 2.0% before the global offering. Santander Brasil undertook to raise the free float to at least 25% of its share capital within three years from the date of the initial public offering in order to maintain its listing on Level 2 of theBolsa de Valores, Mercadorias e Futuros (BM&FBOVESPA). The ADSs are listed on the New York Stock Exchange.
Santander Group’s net gains from the placement amounted to €1,499 million.
Prior to the public offering, on August 14, 2009, the Group transferred to Santander Brasil, through share exchange transactions, all the share capital of certain Brazilian asset management, insurance and banking companies (including Santander Seguros S.A. and Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.) which were owned by Santander Group and certain non-controlling shareholders. The total equity of the transferred businesses was valued at BRL 2.5 billion. The purpose of these transactions was to consolidate in a single entity Santander Group’s investments in Brazil, thus streamlining the current corporate structure and grouping the ownership interests held by Santander Group and by the non-controlling shareholders in those entities in the share capital of Santander Brasil. As a result of these transactions, the share capital of Santander Brasil was increased by approximately BRL 2.5 billion through the issuance of 14,410,886,181 shares, of which 7,710,342,899 were ordinary shares and 6,700,543,282 were preference shares. Additionally, on September 17, 2009, Banco Santander sold to Santander Brasil a loan portfolio consisting of loans to Brazilian companies and their affiliates abroad for US$ 806.3 million.
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Santander Brasil is the third largest private-sector bank in Brazil, the largest bank controlled by an international financial group and the fourth largest bank overall in Brazil in absolute terms, with a market share of 10.5% in terms of loans. Santander Brasil carries on its business activity across the country, although its presence is concentrated in the Southern and South Eastern regions, where it has one of the largest branch networks, according to the Central Bank of Brazil.
In August 2008, Santander Brasil acquired Banco Real, which was then the fourth largest private-sector Brazilian bank in terms of volume of assets. At the time of the purchase, Santander Brasil was the fifth largest private-sector bank in Brazil in terms of volume of assets. The businesses of Banco Real and Santander Brasil were highly complementary before the acquisition. Santander Brasil considered that the acquisition provided considerable opportunities in terms of operational, commercial and technological synergies, building on the best practices of each bank. Banco Real’s strong representation in the states of Rio de Janeiro and Minas Gerais has further enhanced Santander Brasil’s position in the Southern and South Eastern regions of the country, adding to this entity’s already significant presence in those regions, particularly in the State of São Paulo. The acquisition of Banco Real consolidated Santander Brasil’s position as a full-service bank with nationwide coverage, whose size enables it to compete efficiently in its target markets.
In the third quarter of 2010, we sold 2.616% of the share capital of Santander Brasil. The sale price amounted to €867 million, which gave rise to increases of €162 million in Reserves and €790 million in Non-controlling interest, and a decrease of €85 million in Valuation adjustments—Exchange differences.
Sale of 10% of the share capital of Attijariwafa Bank
On December 28, 2009, we announced that we had sold to the Moroccan Société Nationale d’Investissement (SNI) 10% of the share capital of Attijariwafa Bank, at a price of Dirhams 4,149.4 million (approximately €367 million at the exchange rate on such date). The transaction generated for Grupo Santander a capital gain of approximately €218 million, which was recognized under Gains/(losses) on non-current assets held for sale in the consolidated income statement. Following the sale, Grupo Santander holds 4.55% of Attijariwafa Bank.
General Electric Money and Interbanca
The first quarter of 2009 saw the completion of the agreement reached by Banco Santander and General Electric (“GE”) in March 2008 whereby Banco Santander would acquire the units of GE Money in Germany (already acquired in the fourth quarter of 2008), Finland and Austria and its card (Santander Cards UK Limited) and vehicle financing units in the UK, and GE Commercial Finance would acquire Interbanca, an entity specializing in wholesale banking which was assigned to Banco Santander in the distribution of ABN AMRO’s assets. The initial goodwill arising from the acquisition of the GE business amounted to €558 million at December 2009.
Capital Increases
As of December 31, 2009, our capital consisted of 8,228,826,135 fully subscribed and paid shares of €0.50 par value each. In 2009, our capital increased by 234,766,732 shares, or 2.94% of our total capital as of December 31, 2008, as a result of the following transactions:
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Scrip Dividend: On November 2, 2009 we issued 72,962,765 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 0.89% of our share capital. The amount of the capital increase was €36,481,382.50.
As of December 31, 2010, our capital had increased by 100,295,963 shares, or 1.22% of our total capital as of December 31, 2009, to 8,329,122,098 shares as a result of the following transactions:
• | Valores Santander: On October 7, 2010, the Bank issued 11,582,632 new shares in exchange for 33,544Valores Santander. |
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• | Scrip Dividend:On November 2, 2010 we issued 88,713,331 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 1.08% of our share capital. The amount of the capital increase was €44,356,665.50. |
As of December 31, 2011, our capital had increased by 579,921,105 shares, or 6.96% of our total capital as of December 31, 2010, to 8,909,043,203 shares as a result of the following transactions:
• | Valores Santander: On October 6, 2011, 1,223,457 new shares were issued in exchange for 3,458Valores Santander. |
• | Scrip Dividend:On February 1, 2011, we issued 111,152,906 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 1.33% of our share capital. The amount of the capital increase was €55,576,453. Additionally, on November 2, 2011, the Bank issued 125,742,571 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 1.49% of our share capital. The amount of the capital increase was €62,871,285.50. |
• | Repurchase of Series X Preferred Securities and subscription of Banco Santander shares: On December 28, 2011, we announced that the holders of 77,743,969 preference shares had accepted the Repurchase Offer. On December 30, 2011, the holders of these preference shares subscribed 341,802,171 shares. Consequently, the total amount (nominal plus premium) subscribed was €1,944 million and the nominal value was €170.9 million. The New Shares represent 3.84% of our share capital after the Capital Increase. |
Recent Events
Scrip dividend
On JanuaryAs of December 31, 2012, furtherour capital had increased by 1,412,136,547 shares, or 15.85% of our total capital as of December 31, 2011, to the reports on Form 6-K dated December 12, 2011 and January 12, 2012, we announced that the trading period for the free allotment rights corresponding to the free-of-charge capital increase by means of which theSantander Dividendo Elección program was carried out ended on January 30, 2012.
During the period set for that purpose, the holders of 13.35%10,321,179,750 shares as a result of the free allotment rights accepted the irrevocable undertaking to waive their free allotment rights issued by Banco Santander. Consequently, Banco Santander has acquired 1,189,774,111 rights for a total gross consideration of €141,583,119.21. Banco Santander has waived the free allotment rights so acquired.following transactions:
The holders of the remaining 86.65% of the free allotment rights have chosen to receive new shares. Thus, the definitive number of ordinary shares of €0.5 of face value issued in the free-of-charge capital increase is 167,810,197, corresponding to 1.88% of the share capital, and the amount of the capital increase is €83,905,098.50. The value of the remuneration corresponding to the shareholders who have requested new shares amounts to €918,593,018.38.
• | Valores Santander: On March 30, 2012, we informed that the Ordinary General Shareholders’ Meeting held that day had resolved to grant the holders ofValores Santander an option to convert their securities on four occasions before October 4, 2012, the mandatory conversion date for the outstandingValores Santander. As a result on June 7, 2012, July 5, 2012, August 7, 2012, September 6, 2012 and October 9, 2012 we issued 73,927,779, 193,095,393, 37,833,193, 14,333,873 and 200,311,513 new shares related to the conversion requests of 195,923, 511,769, 98,092, 37,160 and 519,300Valores Santander, respectively. |
The authorization for the admission to listing of the new shares in the Spanish Stock Exchanges and in the other stock exchanges where Banco Santander is listed was granted in February 2012.
• | Scrip Dividend:On January 31, 2012, May 2, 2012, July 30, 2012 and November 2, 2012, we issued 167,810,197 shares, 284,326,000 shares, 218,391,102 shares and 222,107,497 shares (1.88%, 3.13%, 2.27%, and 2.20% of the share capital, respectively), giving rise to capital increases of €83,905,098.50, €142,163,000, €109,195,551 and €111,053,748.50, respectively. |
Resignation of Francisco LuzónOther Material Events
On January 23, 2012, we announced that our board of directors resolved at the meeting held that day to leave record of the resignation presented by Francisco Luzón from his positions as director and member of the executive committee of the Bank, with effect from January 23, 2012. Francisco Luzón has taken voluntary pre-retirement, also ceasing to hold office as an executive vice president of the Bank and head of its America division.
Transfer of interest in Banco Santander (Brasil), S.A.
In January and March 2012 the Group transferred shares representing 4.41% and 0.77%, respectively, of the capital stock of Banco Santander (Brasil), S.A. to two leading international financial institutions. These institutions have undertaken to deliver these shares to the holders of bonds issued by Banco Santander in October 2010 which are exchangeable for Banco Santander (Brasil), S.A. shares upon maturity, in accordance with their terms.
Royal Decree-Law 2/2012 and Royal Decree-Law 18/2012
OnIn 2012, the Spanish Government implemented a series of structural reforms including measures aimed at cleaning up the balance sheets of Spanish credit institutions affected by the impairment of their assets relating to the real estate sector.
Among the main actions carried out were the approval on February 3, 2012 the Spanish Ministry of Economy and Competitiveness approved the Royal Decree-Law 2/2012 and on May 18, 2012 of Royal Decree-Law 18/2012 on the clean-up of the financial sector.
This Royal Decree-Law forms partsector, through which a review of the Government’s structural reforms and contains, among others, a seriesminimum provisioning percentages to be taken into consideration in the estimation of measures aimed at cleaning up Spanish credit institutions’ balance sheets, which were adversely affected by the impairment of their assets linkedlosses relating to financing granted to the real estate industry. With this legislation, the Government intends to design an integrated reform strategy that will impact the valuation of these assetssector in Spain and entail the clean-up of Spanish credit institutions’ balance sheets so that financial institutions can once again fulfill their essential function of channeling savings into efficient investment projects that encourage economic activity, growth and employment.
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The balance sheet clean-up measures take the form of two main ideas:
i) A revision of the minimum percentages of the provisions that institutions must recognize in their balance sheets in relation to lending to the real estate industry and to foreclosed assets and assets received in payment of loansdebt arising from financing granted to the real estate industry; and
ii) An increase in the minimum capital required forthat sector was carried out. Spanish credit institutions calculated on the basis of real estate industry related assets recorded on their balance sheet.
The Royal Decree-Law stipulates that credit institutions mustwere required to comply with itsthe provisions of these regulations by December 31, 2012. The provision required is a one-off provision aimed at eliminating
These requirements gave rise to new provisions in addition to those arising from the uncertainty regardingapplication of the value of these assets –particularly land– on Spanish credit institutions’ balance sheets. It should be noted that these minimum percentages are established hitherto by the Bank of Spain amounting to approximately €6.8 billion, of which €1.8 billion were covered in 2011 as a result of the estimate of the impairment losses on a general basisthe aforementioned assets and the legislation does not include sufficient details for the specific featuresrecognition of the assets held by different institutions, orcorresponding provisions. At the end of those held by a single institution to be reflected.
Taking into account the above, and that at 2011 year-end2012, the Group had reviewedfully covered all the recoverable values of its real estate assets pursuant to IFRSs, we do not believe that this is an adjusting event as defined by IAS 10.required provisions.
With respect to the recognition of the impact of those Royal Decree-Law 2/2012Decree-Laws on the Group’sour IFRS-IASB consolidated financial statements for 2012, the Group will continuewe have continued to apply its currentour procedure with regard to Spanish regulatory requirements related to the loan provision and to the valuation of foreclosed assets,, i.e. it will comparewe have compared the amount of the provisions for loans and foreclosed assets to be recognized at each dateyear end calculated pursuant to IFRSs (obtained from internal models for credit loss provisions and from external valuations and other evidence for foreclosed assets and assets received in payment of loans) with the amount of the provisions required by the Spanish regulatory requirementrequirements including Royal Decree-Law 2/2012,Decree-Laws in order to ascertain whether the difference between the two amounts iswas not material in relation to the Group’sour consolidated financial statements as a whole and, accordingly, doesdid not require any adjustment to be made for the preparation of the consolidated financial statements under IFRS-IASB.
AsThe difference between loan loss provisions and provisions for foreclosed assets calculated using internal models and external valuations and those calculated under Spanish regulatory requirements was not material as of December 31, 2012.
Financial assistance to recapitalize the Spanish Banking Sector
1. Assessment of balance sheets
In order to strengthen the credibility and confidence of the date hereof,banks, an expert and independent assessment was conducted on all loans granted to the private resident sector, both to households (including mortgages) as well as to SMEs and all other non-financial companies.
This exercise was carried out on the 14 largest banks (90% of assets), and in two phases.
First phase. A top-down analysis by the consultancies Oliver Wyman and Roland Berger assessed the whole sector’s capacity of resistance in 2012-14 under two scenarios in order to determine the systemwide capital needs. In an extremely adverse scenario, which is defined as being highly unlikely (less than 1% probability) and is tougher than any of the other stress tests carried out in Europe so far, the results showed that, in the worst case, capital requirements would range from €51 billion to €62 billion.
Second phase. A bottom-up analysis. This consisted of analyzing one by one the portfolios of these banks in order to classify provision and measure their credit risks. The results of these audits were used to construct a wider exercise in which, on the basis of the specific data of each bank and applying a stress test, the individual capital needs were calculated under a baseline and an adverse scenario.
The second phase was carried out by Oliver Wyman with the participation of the four main auditing firms in Spain (Deloitte, PwC, Ernst & Young and KPMG), six Spanish and international real estate assessment companies and a project manager, the Boston Consulting Group, which helped the Bank of Spain coordinate the exercise.
The adverse scenario (probability of less than 1%) was based on a 6.5% shrinkage in GDP between 2012 and 2014, a further rise in unemployment (to 27.2% in 2014) and a big fall in real estate prices.
The non-payment probability was multiplied by three in the case of the portfolios of companies and real estate developers (27% and 87%, respectively). In mortgages to individual borrowers, it was not possiblemultiplied by five, to estimate15%, and in foreclosures an expected loss of 64% was considered.
The results of the provisions that will have to be recognizedbottom-up analysis for the banking system, for a three year period (2012-2014) were total systemwide losses on the credit portfolio (operations in Spain) of €270 billion in the consolidated IFRS booksadverse scenario (€183.3 billion in the baseline).
In comparing these losses with the system’s absorption capacity (provisions already made, pre-provision profit, the impact of the protection frameworks, the excess of capital versus the capital required in the adverse scenario), the system’s additional capital needs were estimated to amount to €57.3 billion in the adverse scenario (€53.7 billion after the tax effect) and €24 billion in the baseline scenario (€25.9 billion after the tax effect).
The main results from the analysis were the following:
Seven banking groups, which account for 62% of the credit portfolio analyzed have no capital needs (Group 0). Among those banks is Grupo Santander.
The four groups in which the FROB (Fund for the Orderly Restructuring of the Banking Sector) has a holding (Group 1) account for 86% of the sector’s capital needs.
The rest of banks with capital needs, after presenting their recapitalization plans, form Group 2 if they need state aid and Group 3 if they obtained the funds by themselves.
In the adverse scenario, it was estimated that Banco Santander would be able to raise its capital ratio (from 9.7% to 10.8%) and to have a significant capital surplus (€25.3 billion in 2014).
2. Loan request to European authorities.
On June 9, 2012, the Spanish Government announced that it intended to request a special loan from the European authorities that would be used exclusively to recapitalize the more vulnerable Spanish financial institutions, most of which are former savings banks.
The financial assistance was formally requested on June 25, 2012 and approved on July 20, 2012. The basic conditions are as follows:
Financial conditions: €100 billion credit line to the FROB with the guarantee of the Spanish state, an average maturity of 12.5 years, in preferential conditions and without having preference status over other debts.
Other conditions: (i) individual assistance for banks that require recapitalization with public funds, that have a restructuring plan within the state’s rules and that segregate their problematic assets;(ii) for each single entity the minimum core capital ratio is 9%.
3. Creation of the Spanish Bank Restructuring Asset Management Company (“SAREB”).
The creation of SAREB is intended to increase confidence in the Spanish banking system, which could lead to a lower cost of funding and better ratings.
Its objective is to manage and sell in an orderly way the loans and real estate assets placed in it from banks in Groups 1 and 2 over no more than 15 years.
In December 2012 we, together with other Spanish financial institutions, entered into an agreement to invest in SAREB whereby we undertook to invest of up to €840 million (25% in capital and 75% in subordinated debt), and at December 31, 2012, since the provisions will depend, among others,we had purchased €164 million of capital and €490 million of subordinated debt. Our equity stake is around 17% with two representatives on the rateboard of salesdirectors.
4. Recapitalization and restructuring of the real estate portfolio, the general performance of the economy in the year and, in particular, on the value of real estate assets. However, if the Government’s negative forecasts are borne out, it is possiblebanks that the provision required under IFRSs will converge with the provision required for regulatory purposes calculated pursuant to Royal Decree-Law 2/2012.
Santander and KBC agree to merge Bank Zachodni WBK and Kredyt Bank in Polandneeded state aid.
On February 28, 2012, we announced that Banco Santander, S.A. and KBC Bank NV had entered into an investment agreement to combine their Polish banking subsidiaries, Bank Zachodni WBK S.A. (‘Bank Zachodni WBK’) and Kredyt Bank S.A. (‘Kredyt Bank’).
The transaction will entail a share capital increase in Bank Zachodni WBK, where the newly issued shares in Bank Zachodni WBK will be offered and rendered to KBC and the other shareholders of Kredyt Bank in exchange for their shares in Kredyt Bank. Under the agreements, and subject to independent evaluation and final agreement by Bank Zachodni WBK and Kredyt Bank, as well as to obtaining regulatory approval from the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego) and relevant competition clearance, Bank Zachodni WBK will merge with Kredyt Bank at the ratio of 6.96 Bank Zachodni WBK shares for every 100 Kredyt Bank shares. At current market prices, the transaction values Kredyt Bank at PLN 15.75 a share and BZ WBK at PLN 226.4 a share. The combined bank’s total pro forma value will be PLN 20.8 billion (€5 billion). Both Bank Zachodni WBK and Kredyt Bank are listed on the Warsaw Stock Exchange. The merged bank will continue to be listed on the Warsaw Stock Exchange.
Following the proposed merger, we will hold approximately 76.5%review and approval of the mergedrecapitalization and restructuring plans of banks in need of capital (according to the Oliver Wyman report) by the Spanish and European authorities, the state aid that would be provided to each bank was determined. No state aid was determined to be necessary for Grupo Santander.
The capital to be injected by FROB into Group 1 banks amounted to €36,968 million. In December 2012, this amount was transferred from the European Stability Mechanism to FROB, together with €2,500 million for FROB’s contribution to SAREB, which recapitalized these banks before the end of the year.
In the case of the four banks that comprise Group 2, FROB will inject €1,865 million of capital. Two banks (in Group 3) in need of capital but which showed a capacity to cover their needs themselves will not receive state aid.
The total state aid for banks in need is €38,833 million, significantly below the €54 billion identified by Oliver Wyman for these banks. This lower amount is due to the losses assumed by hybrid instruments, the transfer of assets to SAREB and KBC around 16.4%. capital gains realized by the relevant banks.
The rest will be held by other minority shareholders. We have committed ourselves to help KBC to lower its stakesector is in the merged bank from 16.4%final phases of its recapitalization, which is expected to below 10% immediately afterenable those banks to meet the merger. For this purpose, we will seektargeted capital ratio requirement of 9%.
In addition, and according to placethe aforementioned Memorandum of Understanding, a stake with investors. In this regard, we have also committed ourselvesprofound restructuring was underway in the eight banks receiving state aid, which must reduce their balance sheets before 2017.
The European Commission believes that these business reduction plans, which involve big closures of branches and shedding of employees, strengthen the long-term viability of all these banks.
Recent Events
Scrip dividend
At its meeting of January 11, 2013, the Bank’s executive committee resolved to acquire upapply the “Santander Dividendo Elección” program on the dates on which the third interim dividend is traditionally paid, whereby the shareholders were offered the option of receiving an amount equivalent to 5%said dividend, the gross amount of which was €0.152 per share, in shares or cash.
On January 30, 2013, the holders of 86.40% of the merged bankfree allotment rights have chosen to assist KBC. Furthermore, KBC intendsreceive new shares. Consequently, Banco Santander has acquired 1,403,540,519 rights for a total gross consideration of €213 million.
On January 31, 2013, pursuant to divest its remaining stake, with a view to maximizing its value.
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With this transaction, we will increase our presence in Poland, onetheSantander Dividendo Elección shareholder remuneration program, the Group announced that it would offer shareholders the option of our ten core markets, underlining our long-term commitment to Poland. The proposed merger will consolidate the merged bank’s position as Poland’s third largest bank by all measures, with a market share of 9.6% in deposits, 8.0% in loans and 12.9% in branches (899). With more than 3.5 million retail customers, the merged bank will also be Poland’s third in terms of revenues and profits, significantly closing the gapreceiving an amount equal to the leaders. Including2012 final interim dividend in cash or in new shares. From May 2, 2013, the Santander Consumer finance business, the Group’s total marketBank will pay €0.150 per share in termscash to shareholders who opt for this method of volumereceiving their remuneration. Therefore, the total envisaged shareholder remuneration in respect of the 2012 financial year will amount to around 10%approximately €0.60 per share.
Invitation to tender American Securities for purchase
On March 6, 2013, we announced an invitation to all holders of callable subordinated notes series 22 issued by Santander Issuances, S.A. Unipersonal (the American Securities) to tender such Securities for purchase (the American Invitation). The American Securities are listed in Poland.the London Stock Exchange. The proposed merger will produce business synergiestotal principal amount of the American Securities comprising the American Invitation amounts to approximately US$ 257.5 million.
The amount in additioncash to those announced following the acquisition of Bank Zachodni WBK by Banco Santander. Santander estimates the impact of this transaction on its Group core capital ratio under Basel II criteriabe paid for each American Security will be around 5 basis points.
Under the investment agreement, Santander has also committed to acquire 100% of Zagiel, the consumer finance arm of KBC in Poland, at an adjusted net asset value, also subject to obtaining the relevant competition clearance. Additionally, the existing cooperation between Kredyt Bank and KBC TFI (KBC’s Polish asset management company) will remain in place for the foreseeable future. The merged bank will distribute KBC TFI’s funds under a non-exclusive distribution agreement for a minimum term of two years from the proposed merger transaction.
The transaction is expected to close in the second half of 2012, subjectequal to the registrationsum of the merger between Bank Zachodni WBK and Kredyt Bank and to obtaining regulatory approval from Polish Financial Supervision Authority (Komisdja Nadzoru Finansowego) and relevant competition clearance.
Valores Santander
On March 30, 2012, we informed thatpurchase price (expressed as a percentage of the Ordinary General Shareholders’ Meeting held that day had resolved to grant the holders ofValores Santander an option to convert their securities on four occasions before October 4, 2012, the mandatory conversion date for the outstanding Valores Santander. Specifically, the holders ofValores Santander may request their conversion within the fifteen calendar days prior to each of June 4, July 4, August 4 and September 4, 2012.
Those who opt for the voluntary conversion will receive the number of new shares of Banco Santander that results from the conversion ratio prevailing principal amount as of the settlement date) plus the interest accrued and unpaid from (and including) the last interest payment date to (but excluding) the settlement date of this report pursuant to the prospectustender offers. The purchase price has been established as a fixed amount for each US$100,000 outstanding principal amount as of the issuance (365.76 shares for eachValor Santander). In addition, they will receive, subject tosettlement date of the same cancellation events providedAmerican Securities and is specified in the prospectus,annex hereto.
Banco Santander will obtain the remuneration correspondingfunds needed to theirValores Santander accrued untilfulfill its payment obligations arising from the applicable voluntary conversion date.
Without prejudiceAmerican Invitation from its ordinary available liquidity and reserves its right to such voluntary conversion option,amend the terms and conditions of the issuance remain unchanged. AsAmerican Invitation as well as to extend, reopen, amend, revoke or terminate the American Invitation at any moment.
Banco Santander announced on March 14, 2013 the final aggregate principal amount accepted for purchase (US$ 26.6 million) and the final purchase prices as a result, the holders ofValores Santander who do not opt for the voluntary conversion in anyconsequence of the conversion windows will maintain the rights of their securities, which will mandatorily convert into new shares of Santander on October 4, 2012 pursuant to the termsTender Offers.
The Invitation is being undertaken as a part of the prospectus.Group’s active management of liabilities and capital, and is focused on core capital generation as well as the optimization of the future interest expense.
Invitation to tender certain securitization bondsEuropean Securities for cashpurchase
On April 16, 2012,March 6, 2013, we announced an invitation to all holders of certain securities issued by Santander Issuances, S.A. Unipersonal and Santander Perpetual, S.A. Unipersonal (the European Securities) to tender such Securities for purchase by Banco Santander for cash (the European Invitation). The European Securities are fixed rate securities (securitization bonds)subordinated and perpetual bonds listed onin the AIAF Fixed Rate Market which correspondLuxembourg Stock Exchange, corresponding to 3315 different series issued by specific securitization funds managed by Santander de Titulización, S.G.F.T., S.A. series with an aggregate outstandingseries. The total principal amount of €6 billion. We intendthe series comprising the Invitation amounts to accept offers for upapproximately €6,575 million and GBP 2,243 million.
The European Invitation is only addressed to up to a maximum aggregate principal amount of €750 million. Such amount is indicative only and not binding on Banco Santander.
Suchthose holders of European Securities may remit, or request their corresponding mediators or participating entities (in the case that said owners are not participating entitieslocated in, Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. Unipersonal (Iberclear)) to remit, the corresponding instructionsor are not resident of, the tender offers (the Tender Offers)U.S. and to those holders of European Securities that are not acting in the name of or on behalf of persons that are located in, or are resident of, the U.S.
The amount in cash to be paid for each European Security will be equal to the tender and information agent, Lucid Issuer Services Limited, as from April 16, 2012.
Tender Offers must specifysum of the number of Securities included in each offer, the outstanding principal amount of such Securities and thepurchase price at which such Securities are tendered in the relevant offer. The price shall be specified by each holder(expressed as a percentage of the outstanding principal amount as of the relevantsettlement date) of each series of European Securities tendered for purchase. Regardingplus the senior Securitiesinterest accrued and unpaid from (and including) the last interest payment date to which(but excluding) the Invitation is directed, an indicative minimumsettlement date of the tender offers. The purchase price has been providedestablished as a fixed amount for information purposes only and is not binding on Banco Santander. Banco Santander may, but is not required to accept, Tender Offers made ateach €1 or below this minimum price.
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Tender Offers will be irrevocable unless Banco Santander modifies the termsGBP1 outstanding principal amount as of the Invitation in a manner that makes the Invitation less favorable to holders.
The amount in cash that must be paid for each Security is equal to the sum of (i) the purchase price multiplied by the principal amountsettlement date of the Securities on the date of settlement which are accepted for purchase plus (ii) interest accrued but not paid since the immediately preceding interest payment date (inclusive) until the date of settlement of the Tender Offers (exclusive) in relation to suchEuropean Securities.
The terms of the Tender Offers and the procedure to make the Tender Offers are set forth in the tender offer memorandum dated April 16, 2012 (the Tender Offer Memorandum).
We have absolute discretion whetherwill obtain the funds needed to acceptfulfill our payment obligations arising from the Securities tendered for purchase, in accordance withEuropean Invitation from our ordinary available liquidity and we reserve our right to amend the terms and conditions of the Tender Offer Memorandum.
We will satisfy the payment obligations derived from the Invitation, if any, with funds from our treasury.
We reserve the right to modify the terms and conditions of theEuropean Invitation as well as to extend, re-openreopen, amend, revoke or terminate the Invitation at any moment.
Banco Santander announced on March 14, 2013 the final aggregate principal amount accepted for purchase (€140.2 million and GBP 178.9 million) and the final purchase prices as a consequence of the European Invitation.
The rationale for theEuropean Invitation is to effectively managebeing undertaken as a part of the Group’s outstandingactive management of liabilities and to strengthen our balance sheet.capital, and is focused on core capital generation as well as the optimization of the future interest expense. The Offers areInvitation is also designed to provide liquidity in the market and to Security holders.offer the holders of the European Securities the possibility to exit their investment in the European Securities.
Santander sells up to 5.2% of its Polish unit as KBC places its 16.2% in the market
On April 25, 2012March 18, 2013, KBC and Banco Santander announced a secondary offering of up to 19,978,913 shares in BZ WBK by way of a fully marketed follow-on offering (the “WBK Offering”). Through the WBK Offering, KBC plans to sell 15,125,964 shares (constituting 16.17% of BZ WBK shares outstanding at that date) and Santander is expected to sell not less than 195,216 but up to 4,852,949 shares (constituting between 0.21% and 5.19% of BZ WBK shares outstanding at that date). Assuming the Offering is completed in full, the free float of BZ WBK following the Offering would be 30%.
KBC and Banco Santander, as Selling Shareholders, granted the underwriters a reverse greenshoe option in relation to up to 10% of the final Offering size which was not used. KBC and Santander each committed to be locked-up for a period of 90 days, and BZ WBK for a period of 180 days, following the closing of the WBK Offering.
The WBK Offering was made to eligible institutional investors and within an indicative price range of PLN240 to PLN270. The final sale price was determined through a bookbuilding process that began on March 18, 2013, and ended on March 21, 2013.
On March 22, 2013, we announced that Banco Santander and KBC Bank had completed the aggregate outstanding principal amountplacement of each19,978,913 shares of Bank Zachodni WBK at a final price of 245 zlotys per share, amounting to a total of €1,171 million. Santander sold 4,852,949 shares, equal to 5.2% of BZ WBK’s capital, for €285 million, while KBC obtained €887 million for its 16.17% stake in BZ WBK.
The placement of these shares will enable Banco Santander to meet its commitment to the Polish regulator that the free float of the Securities accepted for purchase which for senior securities amountedPolish unit would be at least 30% by the end of 2014. Moreover, the transaction has allowed KBC to €388,537,762.18 and for mezzanine securities €61,703,163.58. The sale and purchase agreementsdivest the stake in BZ WBK it had obtained as a result of the relevant securities have been agreed.
In respectmerger of each security, the aggregate outstanding principal amount means the outstanding principal amountits Polish subsidiary, Kredyt Bank, with Banco Santander’s unit, Bank Zachodni WBK. The remaining 70% of the relevant security as atcapital will be held by Santander, the settlement date (i.e. following any reduction of its original principal amount by prepayments prior to such date in accordance, only, with the terms of such security). The settlement date was April 27, 2012.controlling shareholder.
At December 31, 2011,2012, we had a market capitalization of €50.3€63.0 billion, stockholders’ equity of €76.4€74.65 billion and total assets of €1,251.5€1,269.6 billion. We had an additional €131.5€118.1 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2011,2012, we had 63,86658,074 employees and 6,6086,437 branch offices in Continental Europe, 26,29526,186 employees and 1,3791,189 branches in the United Kingdom, 91,88790,576 employees and 6,0466,044 branches in Latin America, 8,9689,525 employees and 723722 branches in the United States (Sovereign Bancorp) and 2,3332,402 employees in other geographic regions (for a full breakdown of employees by country, see Item 6 of Part I, “Directors, Senior Management and Employees—D. Employees” herein).
We are a financial group operating principally in Spain, the United Kingdom, other European countries, Brazil and other Latin American countries and the United States, offering a wide range of financial products.
In Latin America, we have majority shareholdings in banks in Argentina, Brazil, Chile, Colombia, Mexico, Peru, Puerto Rico and Uruguay.
Grupo Santander maintained in 2012 the general criteria used in 2011, with the following exceptions:
The geographic areas of Continental Europe, the U.K. and Latin America are maintained and one for the U.S. is created which includes Sovereign Bank and Santander Consumer USA, which exits Continental Europe (and, within this area, Santander Consumer Finance in which it was integrated). As a result, the segment reporting figures for 2011 and 2010 have been restated in order to facilitate their comparison with the figures for 2012.
The consumer business in the U.K. has been consolidated into Santander UK and exits Continental Europe (and, within this area, Santander Consumer Finance in which it was integrated). The figures for 2011 and 2010 have been restated.
The annual adjustment was made to the Global customer relationship Model and resulted in a net increase of 36 new clients. This does not mean any changes in the principal (geographic) segments, but it does affect the figures for retail Banking and Global Wholesale Banking. The figures for 2011 and 2010 have been restated.
None of these changes was significant for the Group as a whole.
The financial statements of each business area have been drawn up by aggregating the Group’s basic operating units. The information relates to both the accounting data of the companies in each area as well as that provided by the management information systems. In all cases, the same general principles as those used in the Group are applied.
In accordance with the criteria established by the IFRS-IASB, the structure of our operating business areas has been segmented into two levels:
First (or geographic) level. The activity of our operating units is segmented by geographical areas. This coincides with our first level of management and reflects our positioning in the world’s main currency areas. The reported segments are:
• | Continental Europe. This covers all retail banking business (including |
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• | United Kingdom. This includes retail and wholesale banking, asset management and insurance conducted by the various units and branches of the Group in the |
• | Latin America. This embraces all the Group’s financial activities conducted via |
• |
|
Second (or business) level. This segments the activity of our operating units by type of business. The reported segments are:
• | Retail Banking. This area covers all customer banking businesses, including private banking (except those of Corporate Banking, |
• | Global Wholesale Banking. This business reflects the |
• | Asset Management and Insurance. This includes our units that design and manage mutual and pension funds and insurance. |
In addition to these operating units, which cover everything by geographic area and business, we continue to maintain a separate Corporate Activities area. This area incorporates the centralized activities relating to equity stakes in financial companies, financial management of the structural exchange rate position and of the Parent bank’s structural interest rate risk, as well as management of liquidity and of stockholders’ equity through issues and securitizations. The Corporate Activities segment also manages all the real state exposure held by the Group in Spain through a corporate area created in 2009 and specialized in this type of property asset. As the Group’s holding entity, it manages all capital and reserves and allocations of capital and liquidity. It also incorporates amortization of goodwill but not the costs related to the Group’s central services except for corporate and institutional expenses related to the Group’s functioning.
In 2011, Grupo Santander maintains the same primary and secondary operating segments as it had in 2010.
In addition, and in line with the criteria established by IFRS-IASB, the results of businesses discontinued in 2009 (Banco de Venezuela) which were consolidated by global integration, were eliminated from various lines of the income statement and included in “net profit from discontinued operations.”
For purposes of our financial statements and this annual report on Form 20-F, we have calculated the results of operations of the various units of the Group listed below using these criteria. As a result, the data set forth herein may not coincide with the data published independently by each unit individually.
First level (or geographic):
Continental Europe
This area covers the banking activities of the different networks and specialized units in Europe, principally with individual clients and Small and Medium Enterprises (“SMES”SMEs”), as well as private and public institutions. During 2011,2012, there were five main units within this area: the Santander Branch Network, Banesto, Santander Consumer Finance, Portugal and Bank Zachodni WBK which was incorporated in April 2011, including retail banking, global2011. It also includes Banif (the specialized private bank), wholesale banking and asset management and insurance.insurance conducted in this region. Santander Consumer USA was removed from Santander Consumer Finance and incorporated in the United States. Similarly, the consumer business in the U.K. has been incorporated into Santander UK and exits Continental Europe (and within it, Santander Consumer Finance in which it was integrated).
Continental Europe is the largest business area of Grupo Santander by assets. At the end of 2011,2012, it accounted for 37.2%37.8% of total customer funds under management, 42.2%39.8% of total loans to customers and credits and 31.0%26.8% of profit attributed to the Parent bank of the Group’s main business areas.
The area had 6,6086,437 branches and 63,86658,074 employees (direct and assigned) at the end of 2011.2012.
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In 2011,2012, this segment obtained attributable profit of €2,305 million, an increase of 0.8% on the Continental Europe segment’s profit attributable toprevious year, heavily affected by the Parent bank decreased 15.1% to €2,849. Profits have been hard hit by deleveraging, the low growth environment and low interest rates, as well as the negative impactbooking of gains17.0% higher impairment losses on financial transactions and fee income.assets than 2011. Return on equity (“ROE”) in 20112012 was 9.3%7.4%, a 311 basis point decrease from 2010.as compared to 7.7% in 2011.
The Santander Branch Network
Our retail banking activity in Spain is carried out mainly through the branch network of Santander, with support from an increasing number of automated cash dispensers, savings books updaters, telephone banking services, electronic and internet banking.
At the end of 2011,2012, we had 2,9152,894 branches and a total of 18,70417,880 employees (direct and assigned), none of which was10 were hired on a temporary basis, dedicated to retail banking in Spain. Compared to 2010, there was a net decrease of 16 branches and 189 employees.
In 2011,2012, profit attributable to the Parent bank from the Santander Branch Network was €660€790 million, 22.1% lower7.4% more than 2010,in 2011, while the ROE reached 9.6%11.0% (as compared to 11.9%9.6% in 2010)2011). AlthoughThis increase was mainly due by an increase in net interest income increasedof 10.2% and effective cost control, which remained flat (+0.1%) in 2012. The increase in operating income was partially offset by 2.4% and administrative and depreciation and amortization expenses declined 1.2% they did not feed though profits because of greater provisions.an increase in credit loss provision due to higher non-performing loans (“NPL”).
These results were obtained in a still difficult environment characterized by contractions of GDP, domestic demand and consumption, rising unemployment rates, interest rates that fell to all-time lows, with insufficient signsthe consequent impact on spreads, non-preforming loans reaching records highs, and the restructuring of an economic recovery, strong competition for liquidity and low demand for loans.the Spanish financial system.
In 2011,2012, the Santander Branch Network lending decreased by approximately 7.8%7.3%, customer funds under management were reducedincreased by 4.5%18.4%, deposits decreased 7.9%increased 21.7%, mutual funds fell 20.6%11.2% and pension funds declined 3.5%increased 3.9%. The activity reflected the scant demand for loans and a strategy which focused on customer funds in funding which combines cost reductionorder to gain market share and volume retention.narrow the commercial gap. The ratio of non-performing loans (“NPL”)NPL for Santander Branch Network and Banco Santander, S.A. grew to 8.5%9.65% and 6.0%7.29%, from 5.5%8.47% and 4.2%5.99%, in 2010, respectively. The evolution2011, respectively, as a result of NPLs was worse than expected because the downturnweak situation in the economy was more severe than envisaged and the fall in lending meant the NPL ratio increased to a greater extent than the volume of NPLs. While the NPL ratio for residential mortgages remained stable, the rise in the NPLs ratio was related to loans with real estate purpose. This reflects a further deterioration in this segment and the Group’s policy to sharply reduce balances in this sector.Spain.
Banesto
At the end of 2011,2012, Banesto had 1,7141,647 branches and 9,5489,136 employees (direct and assigned), of which 1353 employees were temporary, a decrease of 48 branches and an increase of 194 employees as compared to the end of 2010.temporary.
In 2011,2012, profit attributable to the Parent bank from Banesto was €130€94 million, a 68.9%28.1% decrease from 2010,2011, while the ROE reached 2.8%2.0% as compared to 9.4%2.8% in 2010. In the second half2011. These results were produced in a very complicated scenario of 2011, the Spanish market faced continued weak economic growth, strong tensions and high volatility. The sector’s NPLs continued to riserecession, low business volumes and interest rates, were unstable. Liquidity tensionsand the system’s NPLs reaching historic highs.
The balance sheet management and the improved customer spread to a large extent offset the impact of the decrease in business activity and the financial system triggered a riselow interest rates, making it possible to increase Banesto’s net interest income by 7.6% to €1,454 million. Higher credit loss provisions offset the increase in wholesale funding costs.net interest income.
At the end of 2011,2012, the balance of loans was 9.0%10.4% lower than a year earlier, deposits decreased 15.0%4.9%, customer funds under management diminished by 16.2%7.5%, mutual funds fell 22.3%7.0% and pension funds declined 7.5%increased 1.6%. Spain’s recession is pushing up NPL grew to 5.0% in 2011, up 0.9 percentage points from 2010 as a result of the still difficult environment, in particularentries, largely in the real estate segment,sector, although the recoveries and a fallsale of portfolios are containing the rise in lending which meant the balance of bad loans. At the end of 2012, Banesto’s NPL ratio increasedwas 6.28% compared to a greater extent than5.0% in 2011.
For accounting purposes, Banesto was merged by absorption into Banco Santander, S.A. beginning January 1, 2013 (See Item 4 of Part I, “Information on the volume NPL.Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations and Recent events).
Santander Consumer Finance
Our consumer financing activities are conducted through our subsidiary Santander Consumer Finance (SCF) and its group of companies. Most of the activity of Santander Consumer Finance relates to auto financing, personal loans, credit cards, insurance and customer deposits. These consumer financing activities are mainly focused on Germany, Spain, Italy, Norway,
Poland, Finland Sweden, the US (SCUSA began accounted by the equity accounted method at the end of December 2011 without impact on profits) and the UK.Sweden. We also conduct business in Portugal, Austria and the Netherlands, among others. Santander Consumer USA and the consumer business in the U.K. have been incorporated in the United States and Santander UK segments, respectively, as of 2012 and exited SCF in which they were previously integrated.
At the end of 2011,2012, this unit had 647629 branches (as compared to 519 at the end of 2010) and 15,61012,279 employees (direct and assigned) (as compared to 13,852 employees at the end of 2010), of which 1,1051,292 employees were temporary.
The SCF business model is based on portfolio diversification, leadership in core markets, efficiency, control of risks and recoveries and a single pan-European platform.
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In Europe, the focus was on organic growth and cross-selling, backed by brand agreements (37 with 9 manufacturers), which increased the recurrence of profits and boosted new car business, particularly in Germany and the UK. In addition we increased our penetration in the second-hand car sector and in new car sales in central European and Nordic countries. The first steps were also taken in Germany by Santander Retail (former SEB), focusing on mortgages and on capturing customer funds.
In the US, high growth in new loans and the capacity to extract value from a greater presence in the market doubled profits. This attractive performance made it possible for new partners to invest in SCUSA in the fourth quarter which allowed a capital injection of $1,150 million. This operation strengthened the business and increased our future growth capacity.
In 2011,2012, this unit generated €1,228€727 million in profit attributable to the Parent bank, a 51.5%9.0% increase from 2010,2011, while the ROE reached 12.3%6.7% (as compared to 10.3%7.0% in 2010)2011). This improvement was fuelled by anThe increase in total income, an improvementprofit attributable to the Parent bank is mainly explained by a decrease in efficiency and a drop in loancredit loss provisions.provisions due to improved credit quality.
Customer loans amounted to €60stood still at €57 billion, 5% less than in 2010 because of the consolidation of SCUSA by the equity accounted method at the end of December 2011. Excluding this impact, gross lending was 16% higher, due to organic growthdeposits decreased 3.9%, and the integration of businesses in Germany. Additionally, this area has €39 billion in customer funds under management.management fell by 1.8%. The NPL decreased to 3.8%ratio improved for the third year running and ended 2012 at 3.90% (3.97% in 2011 from 4.9% a year earlier supported by recoveries, which increased 38% in 2011.
Customer deposits increased 27.9% during 2011 fuelled by SC Germany and the entry of Santander Retail.2011).
Portugal
Our main Portuguese retail and investment banking operations are conducted by Banco Santander Totta, S.A. (“Santander Totta”).
At the end of 2011,2012, Portugal operated 716667 branches (as compared to 759 branches at the end of 2010) and had 6,0915,709 employees (direct and assigned) (as compared to 6,214 employees at the end of 2010), of which 83158 employees were temporary.
In 2011,2012, profit attributable to the Parent bank was €174€124 million, a 61.8%28.7% decrease from 2010,2011, due to the 18.3% decreaseimpact of the contraction of activity in total incomePortugal and the 87.7%strengthening of the credit loss provisions. Before provisions, the net operating income was up by 20.4%. There was a rise in provisions. This risecredit loss provisions due to the increase in provisions reflectsnon-performing loans as a result of the difficult economic environment, which is also strongly increasing NPLs. Thecycle that was partially offset by the high gains obtained on financial assets and liabilities.
At year end 2012, the NPL ratio increased in 2011stood at 6.56% compared to 4.1% from 2.9%a 4.06% a year earlier. The ROE was 7.0%4.9%, as compared to 20.3%7.0% in 2010.2011.
Business continues to be adversely affected by the adjustment plan and the restructuring of the Portuguese banking system agreed with international institutions. In athis very difficult economic and financial environment, which led to a slowdown in economic activity and a lack of liquidity in the markets, Santander Totta has focused on strengthening its balance sheet. Lending reflected the deterioration of economic conditions and dropped 5.6%8.6% to €28,403€25,960 million. CustomerDeposits increased 2.2%, customer funds under management decreased 8.1% anddeclined 4.2%, mutual funds decreased 17.3% and pension funds decreased 41.8% and 42.2%, respectively.increased 3.5%.
Retail Poland (BZ WBK)
On April 1, 2011, we completed the acquisition of 96% of BZ WBK along with the 50% of BZ WBK Asset Management. The BZ WBK Group is now integrated into Grupo Santander, consolidating its results and business as of the second quarter of 2011. In February 2012, Banco Santander, S.A. and KBC Bank NV (KBC) reached an investment agreement for the merger of their subsidiaries in Poland, Bank Zachodni WBK S.A. and Kredyt Bank S.A., which was put into effect in early 2013, after the necessary approval was received from the Polish financial supervisor (KNF).
At the end of 2012, this unit had 519 branches and 8,849 employees (direct and assigned), of which 641 employees were temporary.
BZ WBK has the third largest branch network in Poland (622 including 96 agencies), 9,383 employees, €2.4 million retail customers and close to €20 billion of loans and customer funds (mostly deposits).
In the nine months of its consolidation in 2011, BZ WBK posted a profit attributable to the Parent bank in its first consolidated year of €232 million. For comparison purposes, the profit for the whole year€330 million, 42.0% more than in 2011 when it consolidated three quarters. On a like-for-like basis (considering four quarters in both 2011 and 2012) and in local criteria growth was €288 million (which represents an21.1% due to higher revenues and lower costs, which comfortably absorbed the increase of 21.6% since 2010).in provisions. The ROE stood at 19.0% an increase of 1.04 percentage points from 17.9%. in 2011.
Others
The restother businesses of our businesses in the Continental Europe segment (Banif, Asset Management, Insurance(Global Banking and Global Wholesale Banking) generatedMarkets, asset management, insurance and Banif) obtained attributable profit attributable to the Parent bank of €424€321 million in 2011, 48.5%2012, which was 24.2% less than in 2010. Of these2011, with the performance of the global businesses Global Wholesale Banking, provided 69% of total income and 90% of profits. Global Wholesale Banking posted a 51.7% decrease in profit attributable to the Parent bank (€382 million), hit by market weakness and tensions in the last few quarters, as well asstrongly affected by the Group’s strategy to give priority to reducing risk and releasing capital and liquidity.economic situation.
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United Kingdom
In 2012, the consumer business in the U.K. was incorporated into the Santander UK segment and exited the Continental Europe segment.
As of December 31, 2011,2012, the United Kingdom accounted for 32.2%32.1% for the total customer funds under management of the Group’s operationoperating areas. Furthermore it also accounted for 33.7%34.9% of total loans to customers and credits and 12.5%13.7% of profit attributed to the Parent bank of the Group’s main business areas.
Our UK businesses include Abbey (since 2004), the deposits and branches of Bradford & Bingley (acquired in September 2008) and Alliance & Leicester (acquired in October 2008). They are referred to as “Santander UK”.
Santander UK isremained firmly focused on the United Kingdom (85% of its balance sheet). More than 80%U.K., around 85% of customer loans are mortgages for homes in the UK.assets consist of prime U.K. residential mortgages. The mortgage portfolio of mortgages is of a highgood quality, with no exposure to self-certified or subprime mortgages and less thanbuy to let loans around 1% of buy-to-let loans.assets.
At the end of 2011,2012, we had 1,3791,189 branches and a total of 26,29526,186 employees (direct and assigned) of which 5561,580 employees were temporary, in the United Kingdom. Compared to 2010, there was a net decrease of 37 branches and an increase of 2,646 employees.
In 2011,2012, Santander UK contributed €1,145€1,175 million profit attributable to the Parent bank (a 41.7%3.9% decrease from 2010)2011). Loans and advances to customers increased by 7.8% and customer funds under management increased 6.4% during the same period. ROE was 9.2%8.2% (as compared to 21.3%9.6% in 2010)2011). This was mainly due to low interest rates and the higher cost of funds, together with the maturity of interest rate hedges made in previous years. Credit loss provisions were higher than in 2011, although growth in provisions slowed down in the second half of the year.
The NPL ratio at the end of 20112012 increased to 1.9%2.05% from 1.8%1.84% at the end of 2010. The income statement was affected2011. Loans and advances to customers decreased by 2.0% and customer funds under management decreased 0.5% during the environment of low activity, low interest rates, regulatory changes, higher funding costs and the PPI provision. On the other hand, costs were almost flat and fewer provisions were made, reflecting the good evolution of non-performing loans.same period.
Latin America
At December 31, 2011,2012, we had 6,0466,044 offices and 91,88790,576 employees (direct and assigned) in Latin America, (as compared to 5,882 offices and 89,526 employees, respectively, at December 31, 2010), of which 1,5501,867 were temporary employees. At that date, Latin America accounted for 26.0%25.6% of the total customer funds under management, 18.7%19.5% of total loans to customers and credits and 50.8%50.6% of profit attributed to the Parent bank of the Group’s main business areas.
Profit attributable to the Parent bank from Latin America was €4,664 million in 2011, a 1.4% decrease from 2010, while the ROE reached 21.8% (as compared to 22.3% in 2010).
Our Latin American banking business is principally conducted by the following banking subsidiaries:
Percentage held at December 31, 2012 | Percentage held at December 31, 2012 | |||||||||||||||||||
Percentage��held at December 31, 2011 | Percentage held at December 31, 2011 | |||||||||||||||||||
Banco Santander (Brasil), S.A. | 81.53 | Banco Santander, S.A. (Uruguay) | 100.00 | 75.21 | Banco Santander, S.A. (Uruguay) | 100.00 | ||||||||||||||
Banco Santander Chile | 67.01 | Banco Santander Colombia, S.A. | 97.85 | 67.01 | Banco Santander Puerto Rico | 100.00 | ||||||||||||||
Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander | 99.86 | Banco Santander Puerto Rico | 100.00 | 75.11 | Banco Santander Perú, S.A. | 100.00 | ||||||||||||||
Banco Santander Río, S.A. (Argentina) | 99.30 | Banco Santander Perú, S.A. | 100.00 | 99.30 |
We engage in a full range of retail banking activities in Latin America, although the range of our activities varies from country to country. We seek to take advantage of whatever particular business opportunities local conditions present.
Our significant position in Latin America is attributable to our financial strength, high degree of diversification (by countries, businesses, products, etc.), and the breadth and depth of our franchise.
TheProfit attributable to the Parent bank from Latin America by Santander Group announced an agreementin 2012 was €4,305 million, a decrease of 7.7%, while the ROE reached 19.4% (as compared to sell its business units21.8% in 2011). Excluding the effect of the changes in the scope of consolidation (the sale in Colombia, the sale of insurance and the increase of non-controlling interests in Brazil, Mexico and Chile), profit attributable to the Chilean group CorpBanca for $1,225 million (estimated capital gains of €615 million). This operation is due to be completed during 2012 and it is subject to obtaining the authorizations from the regulatory bodies and a takeover bid delisting Banco Santander Colombia shares aimed to minority shareholders whoParent would have 2.15% of Santander Colombia. The 2011 results do not yet incorporate these capital gains.risen by 3.7%.
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Detailed below are the performance highlights of the main Latin American countries in which we operate: 1
Brazil. Santander Brazil is one of the three third largest private sector bankbanks in terms of assets, and the leading foreign bank, with a market share of 10.5%10% in loans. At the end of 2011,2012, the institution had 3,7753,788 branches, 54,19753,707 employees and 25.327.3 million customers.
During 2011, lending increased 20% with significant2012, total loans declined 5%. Nevertheless, in local currency total loans rose 6%, mainly backed by growth across allin the major segments.retail segment. Particularly noteworthy was lending to individuals and SMEs and companies, which grew by around 23% and 26%, respectively.companies. Deposits excluding repos fell 4% (in local currency rose 6%, with a good performance in time deposits (+30%3%).
Profit attributable to the Parent bank from Brazil in 20112012 was €2,610€2,212 million, a 7.2%15.2% decrease whenas compared with 2010 (-7.3%to 2011 (-8.8% in local currency). TotalNet interest income rose 11.2%grew soundly by 6.4% (14.5% in local currency, spurred by net interest income and fee income, which coupled with a slight improvement in the efficiency ratio, produced a 10.5% increase in net operating income. This increase enabled the larger provisions to be absorbed, maintaining net operating income after provisions in positive growth rates (+2.9%)currency). This, however, did not feed through to profits mainly because of labor disputes, a higher tax ratecredit loss provisions (due to the growth in lending and minoritythe rise in NPLs) and the increase in non-controlling interests. For 2011, ROE was 17.9% (as compared to 23.3% andin 2011). The NPL ratio stood at 6.86% at the end of 2011, NPL ratio was 5.4%, an increase of 47 percentage points as compared to 4.91%2012 (5.38% in 2010, mainly due to a moderate rise in NPLs of individual borrowers, principally in consumer credits and cards. The NPL coverage ratio was 95%December 2011).
Mexico.Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, is one of the leading financial services companies in Mexico. It leadsSantander is the third largest banking group in Mexico by business volume, with a market share in termsloans of business volume.13.9% and 13.7% in deposits. As of December 31, 2011,2012, we had a network of 1,1251,170 branches, 13,16213,954 employees and 9.310 million customers in Mexico. Banco Santander Mexico acquiredwent to the international markets in November for the first time with a portfolio$1 billion senior bond issue, the largest, with the longest maturity (10 years) and the lowest funding cost of mortgages from GE Capital Corporation for $1,870 milliona Mexican bank in the second quarter of 2011.country’s history.
In 2011,2012, lending rose 22%12.1%, withmainly due to growth in consumer credit and mortgage loans growing 30%, both on a like-for-like basis (excluding GE).loans. In addition, bank savings increased 8%, with demand deposits15.3% and customer funds under management up 14%, time deposits 6% and mutual funds 3%by 15.1%.
Profit attributable to the Parent bank from Mexico in 20112012 increased 40.9%8.5% to €936€1,015 million (45.6%(6.2% in local currency) due to. Disregarding non-controlling interests, which were affected by the sale of 24.9% of the capital in September 2012, there was a 12.2% increase in net profit, in local currency. The growth inwas founded on net interest income and feenet commissions which more than covered the rising costs. The number of branches for Select customers was doubled to over 70 specialized branches to serve the high income lower provisionssegment. There is also an expansion plan for 200 branches over the next three years in order to strengthen the distribution network and benefiting from lower minority interests. take advantage of the growth expected in the market.
For 2011,2012 ROE was 25.1% (as compared to 21.2% in 2011) and at the end of 2011,2012, the NPL ratio remained at 1.8%slightly increased by 12 percentage points to 1.94% and the NPL coverage ratio was 176%157%.
Chile. Banco Santander Chile is the principal component of the largest financial group in Chile in terms of assets and profits. Grupo Santander sold an aggregate of 9.7% of Banco Santander Chile in 2011 for $1,241 million, leaving it with 67%.assets. As of December 31, 2011,2012, we had 499504 branches, 12,20412,355 employees and more than 3.5 million customers and market shares of 19.7%19.1% in loans and 17.3%16.5% in savings.deposits.
In 2011, lending accelerated due to the higher economic growth and the positive impact of reconstruction following the 2010 earthquake. Loans2012 savings rose 7%11%, with cards up 15%, mortgages 10% and consumer credit 8%. Commercial credit grew 4%.
Savings grew 11%. Time deposits increased 29% andwhile mutual funds declined 10%6%. Customer loans increased 15%.
Profit attributable to the Parent bank from Chile decreased 9.0%18.5% in 20112012 to €611€498 million (a 9.3%24.2% decrease as compared to 20102011 in local currency) mainly due to growth. On a like-for- like basis, excluding the effect of the change in operating expenses (10.1%) and in loan loss provisions (17.3%). For 2011, ROE was 25.4%the scope of consolidation as a result of the placement made at the end of 2011, the reduction in local currency was 9.9% and was heavily impacted by the credit loss provisions. For 2012, the ROE was 22.1%, the NPL ratio remained stable at 3.9% comparedincreased to 3.7% in 20105.17% and the NPL coverage ratio was 73%58%.
Argentina. Santander Río is one of the country’s leading banks, with market shares of 8.9%8.6% in lending and 10.1%9.3% in savings. It has 358370 branches, 6,7736,805 employees and 2.52.4 million customers.
The Group focused its strategy in 2011 on maximizing the strengths of the franchise, sustained by a successful transactional banking model resting on low funding costs (demand deposits accounted for 68% of total deposits) and high levels of revenues from services (recurrence ratio of 88%).
During the year, lending (+28%9%) continued to grow strongly. Demand depositsDeposits rose 20%5%, time deposit rose 42% and mutual funds rose 35%were down by 8%.
Profit attributable to the Parent bank was €287€329 million, 2.7% lower (8.0%14.5% higher (16.1% in local currency). At the end of 2011,2012, the ROE was 45.4%, NPL ratio was 1.2%1.7% and the NPL coverage ratio was 207%143%.
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Uruguay.Santander is the largest private sector bank in the country in terms of the number of branches (78)(84) and business (market share of 18.6%18.2% in lending and 16.0%15.6% in deposits). As of December 31, 2011,2012, we had 1,1661,217 employees and 247,000266,000 customers.
Profit attributable to the Parent bank was €20€47 million in 2011, 70.3% lower2012, 134.8% higher than in 20102011 (a 69.9% decrease127.9% increase in local currency) following the purchase of Creditel and the NPL ratio was 0.64%0.88% as of December 31, 2011.2012.
Colombia. As of December 31, 2011, Banco Santander Colombia, S.A. had 80 branches, 1,458 employees and 0.3 million banking customers.
As previously mentioned, the Group announced an agreement to sell its business in Colombia to the Chilean group CorpBanca. The transaction is expected to be completed in the second quarter of 2012, once the regulatory authorizations have been obtained.
Profit attributable to the Parent bank from Colombia was €58 million in 2011, 43.0% higher than in 2010 (a 46.5% increase in local currency). As of December 31, 2011, the NPL ratio was 1.0% and the NPL coverage ratio was 299%.
Puerto Rico. As of December 31, 2011,2012, Banco Santander Puerto Rico had 121118 branches, 1,7531,654 employees and 0.5 million526,000 customers.
Profit attributable to the Parent bank from Puerto Rico in 20112012 was €34€57 million, a 10.1% decrease69.4% increase as compared to 20102011 (a 5.6% decrease56.4% increase in dollars). At the end of 2011,2012, the NPL ratio stood at 8.6%7.14% and the NPL coverage ratio was 51%62%.
PeruPeru.. As of December 31, 2011,2012, Banco Santander Perú, S.A. had 1 branch 60 employees and 100,000 banking customers.52 employees. The unit’s activity is focused on companies and on attending to the Group’s global customers. At the end of 2012, and together with a front rank international partner with wide experience in Latin America, we began to operate a new entity specialized in auto finance that will work with all manufacturers and dealers in the country.
Profit attributable to the Parent bank from Peru was €11€16 million in 2011, 56.4%2012, 48.8% higher than in 2010,2011, (a 60.3%31.7% increase in local currency).
SovereignUnited States
Santander US includes Santander Holdings USA (SHUSA), a bank holding company with two distinct lines of business: retail banking, via its subsidiary Sovereign Bank, and consumer finance business through its stake in Santander Consumer USA Inc. (SCUSA).
Sovereign Bank, with 723722 branches, 2,3032,268 ATMs and more than 1.7 million customers,customer-households, at December 31, 2012, is developing a business model focused on retail customers at December 31, 2011 and companies. At that date, SovereignSantander US had 8,9689,525 employees (direct and assigned), none of which 5 were temporary. SovereignSantander US accounted for 4.6%4.5% of the total customer funds under management, 5.4%5.8% of total loans to customers and credits and 5.7%9.4% of profit attributed to the Parent bank of the Group’s main business areas.
Santander US obtained attributable profit of €811 million in 2012, which was 19.7% less than in 2011 (25.8% less in local currency). For 2012, ROE was 15.5% and the NPL ratio was 2.3%, which represents a 9.2 and 0.6 percentage points reduction from 2011, respectively. At December 31, 2011, SCUSA increased its capital by admitting new shareholders, with the result that the Santander Group stake in the company went from 91.5% to approximately 65%. In 2011,addition, the earnings were affected by the impact in the third quarter of the charge booked for Trust Piers due to the settlement reached in court to remunerate an investment at a higher rate of interest than it was earning.
At Sovereign contributed €526 millionBank the profit attributable to the Parent bank in 2012 was €470 million as compared to a €424€526 million a year earlier. For 2011, ROEThe decrease was 13.0%. Loans and advancesmainly due to customers at December 31, 2011 were €40,194 million and customer funds under management €40,812 million. Rigorous admission and renewal of loans standards, together with their proactive management, were reflecteda 36.0% reduction in a continuous improvementtotal income, which reflects the fall in NPL which decreased 176 basis points to 2.9% and NPL coverage which stood at 96% up from 75% in 2010.
The results show a solid income statement backed bylong-term interest rates, the generation of recurring revenues, a reduction in the costnon-strategic portfolio and the increased regulatory pressure. In addition, a charge was booked after the Trust Piers settlement. Lastly, a strong reduction of deposits and an improvementimpairment losses on financial assets, due to a further reduction in the levelsnon-performing loans, partially offset the above mentioned impacts.
At SCUSA, on a consolidated basis, the contribution to the Group was $436 million, lower than in 2011 for two reasons: the reduction in the stake to 65%, representing an impact of provisions. This wasaround $50 million each quarter, and the resultuse of loan-loss provisions in the first quarter of 2011, due to a better than expected evolution of the improvement inportfolios acquired at the balance sheet structure, which, together withtime of the recovery in volumespurchase. Excluding these factors, the contribution was similar to that of basic loans and control of spending, provides a solid base for 2012.2011.
Second or business level:
Retail Banking
Profit attributable to the Parent bank of the retail banking sectorin 2012 was 5.7%€6,385 million, 7.6% lower than 2010 at €6,893 million. as compared to 2011. This reduction was mainly due to higher loan-loss provisions and the impact of higher minority interests on Latin American units. In comparison with 2011, the performance of earnings was negatively affected by 6 percentage points due to the following changes in the scope of consolidation: (i) SCUSA started consolidating by the equity method in December 2011 after the entry of new partners; (ii) our insurance activities in Latin America started consolidating by the equity method after the agreement with Zurich Financial Services Group in the fourth quarter of 2011 by which we handed over control over our insurance businesses in the five key Latin American markets (Brazil, Chile, Mexico, Argentina and Uruguay); and (iii) increased non-controlling interests. For further details, see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”. The effect of interest rate variations was near zero.
Retail Banking generated 87.4%88% of the operating areas’ total income and 75.1%74.3% of profit attributable to the Parent bank. Total income increased 7.0% to €39,892 million due to the 7.6% rise in net interest income and strongly backed by fee income (+10.8%). However, profits attributable to the Parent were lower due to the Payment Protection Insurance (“PPI”) after tax provision of €620 million in the second quarter for customer remediation in the UK (see “Item 8. Financial Information – A. Consolidated statements and other financial information. – Legal proceedings – ii. Non-tax-related proceedings”). This segment had 187,022176,714 employees as of December 31, 2011,2012, of which 4,1644,360 were temporary.
The performance by geographic areas reflects the varying economic environments with lower growth in developed economies and a better macroeconomic environment in emerging countries.
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• RetailThe attributable profit of retail banking in continentalContinental Europe despite the recovery in revenues androse 1.7% as a result of the positive impactevolution of incorporationsincome thanks to the Group, was conditionedresilience of revenues in the current phase of the cycle (favored by the higher amount assigned to provisionsincorporation of Bank Zachodni WBK in Poland and writedowns.SEB’s business in Germany) and control of costs.
The Profit attributable to the Parent bank declined 3.0%in Retail Banking in U.K. was 10.8% lower, largely due to lower net interest income (higher cost of funding and low interest rates).
• Retail banking in the UK was 42.5% lower in sterling as it was hit by the PPI remediation. Excluding this impact, profitThe Profit attributable to the Parent in Retail Banking in Latin America was almost5.9% lower. The good performance of the same as in 2010. Totalnet interest income declined, affected by regulatory changes, but this was offset by flat costshigher administrative expenses and impairment losses and the higher impact of minority interests following the sale of shares in the banks in Brazil, Mexico and Chile.
Retail Banking earnings in the U.S. were 26.5% lower. This reflects the reduced needsstake in SCUSA and the one-off charge at Sovereign Bank for provisions.
• Retail banking revenues and costs in Latin America continuedthe Trust Piers settlement to grow, compatible with business development.remunerate an investment at a higher rate of interest than it was earning.
Global Private Banking includes institutions that specialize in financial advisory and asset management for high-income clients (mainly Banif in Spain and Santander Private Banking in the UK,U.K., Italy and Latin America), as well as the units of domestic private banking in Portugal and Latin America, jointly managed with local retail banks. Profit before taxAttributable profit was 2.0% higher€209 million, very similar to that registered in 2011 (+4.7% excluding exchange rate impact) at €370 million, due to0.7%).
For accounting purposes, Banif was merged by absorption into Banco Santander, S.A. beginning January 1, 2013 (see Item 4 of Part I, “Information on the rise in net interest income (+9.2%)Company—A. History and reduced needs for provisionsdevelopment of the company—Principal Capital Expenditures and writedowns, which offset the lower gains on financial transactionsDivestitures—Acquisitions, Dispositions, Reorganizations and higher operating expenses (+9.1%Recent events”). The higher tax charge absorbed almost four points of growth in profit attributable to the Parent which at €279 million was 1.5% lower than in 2010 (+1.4% excluding the exchange rate impact).
Global Wholesale Banking
This area covers our corporate banking, treasury and investment banking activities throughout the world.
This segment, managed by Santander Global Banking & Markets, contributed 10.2%10.1% of the operating areas’ total income and 20.4%21.2% of profit attributable to the Parent bank in 2011.2012. Profit attributable to the Parent bank in 20112012 by Global Wholesale Banking amountedwas flat with a variation of -0.7%, when compared to €1,872 million,2011, at €1,827 million. After a 30.6% decrease from 2010.good start, the year experienced significant levels of volatility and uncertainty in the face of the worsening eurozone crisis. This reduction was dueconditioned business activity to the fall in total income from the sharp reduction in gains on financial transactions and in fee income, coupled with higher costs and provisions.a large extent. This segment had 2,7225,890 employees as of December 31, 2011,2012, of which 2 were temporary.
Beginning inSantander Global Banking & Markets maintained the spring, markets were very unstable, and the instability intensifying in the second halfmain drivers of its business model: client-focused, global reach of the year due to the Eurozone’s sovereign debt crisis. This environment had a significant impact on revenues, particularly those derived from equitiesdivision and those not related to customers, whose decreases explain the larger reduction in profits.
interconnection with local units. At the strategic level, and in a very complex year, the divisionarea focused on maintainingstrengthening the results of its client franchise in a very complex year and on reducing exposure tomaintaining active management of risk, (for example, cutting the risk of trading activity), which helped to improve the Group’s capital and liquidity positions, particularlyliquidity. This management intensified in those countriesthe second part of the year, with the greatest tensions.an adjustment of exposures and limits by sectors and clients.
The division also continued to investaccompany the Group in resources to strengthen its operational capacitiesinternational development in Poland and distribution of basic treasury products, with a special focus on foreign exchange and fixed-income businesses. The generation of recurring revenues and strict managementthe northeast of the cost base is enabling Santander Global BankingU.S. in order to absorb these investmentscapture the revenues synergies derived from the new units and improve its efficiency ratio to 35.1%.manage the commercial flows of current and potential clients where the Group has strong retail units.
Santander is present in global transaction banking (which includes cash management, trade finance and basic financing)financing and custody), in corporate finance (comprising mergers and acquisitions and asset andequity capital structuring)markets), in credit markets (which include origination activities, risk management,and distribution of corporate loans or structured productsfinance, bond origination and debt)securitization teams and asset and capital structuring), in rates (comprised of structuring and trading activities in financial markets of interest rate(which covers fixed income and exchange rate instruments)rate) and in global equities (activities relating to the equity markets).
Asset Management and Insurance
This segment comprises all of our companies whose activity is the management of mutual and pension funds and insurance. At December 31, 2011,2012, this segment accounted for 2.4%1.9% of total income and 4.6%4.5% of profit attributable to the Parent bank. Profit attributable to the Parent bank by Asset Management and Insurance was €419€383 million in 20112012 or 9.5%11.5% lower than in 2010.2011. This segment had 1,2721,756 employees at the end of 2011,2012, of which 4221 were temporary.
Total income growthIn July 2012, an agreement was reached with Abbey Life Insurance ltd., a subsidiary of Deustche Bank AG, to reinsure all of the individual life risk portfolio of the insurance companies in 2011 was flat at 0.6%, while net operating income rose 2.2% largely due to the 2.8% fall in operating expenses. The other negativeSpain and Portugal. This transaction generated estimated extraordinary gross results and a higher tax charge caused profit attributable to the Parent bank to be 9.5% lower than in 2010. These results include a negative impact of €64 million in total income and €53 million in net operating income from the global agreement with Zurich in the fourth quarter. Excluding this impact, total income increased in 2011 6.6% and net operating income increased 9.2%.€435 million.
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In 2011, we formedDecember 2012, Santander agreed a strategic alliance with the insurer ZurichAegon to strengthen ourboost its bancassurance business in five key marketsSpain through commercial networks. The operation valued Santander’s insurance business in Latin America: Brazil, Mexico, Chile, Argentinathe transaction at €431 million. The agreement does not affect savings, auto and Uruguay.health insurance, which Santander created a holding company for its insurers in Latin America, which is 49% owned by it and 51% owned by Zurich. This agreement combines Banco Santander’s commercial and distribution capacity with the experience of Zurich in developing and managing products. In each of the five countries, Banco Santander will distribute the strategic alliance’s bancassurance products for 25 years.continues to manage.
Asset Management
Santander Asset Management obtained profit attributable to the Parent bank of €53€69 million, a 34.6% decrease2.9% increase as compared to 2010. 2011. This was mainly due to a decline in income partially offset by reduction in costs and lower needs for provisions.
The revenue reductiontotal volume of managed funds was €153.7 billion, 11% more than at the resultend of a fall2011. This includes the incorporation of the insurance mandate of the Group in managed volumes, acceleratedSpain in the second half, which was partly offset by a better mix of products and, in consequence, in average revenues.
Totalfourth quarter (-1% without it). Of this, around €99 billion were mutual and pension funds, under€8 billion in client portfolios other than mutual funds included institutional mandates and €46 billion of management amounted to €112 billion, 10% less than in December 2010. The preference for liquidity and on-balance sheet funds, together with more unstable markets in the second halfmandates on behalf of the year and the impact on prices, explain the fall in volumes.other Group units.
Insurance
The global area of Santander Insuranceinsurance posted aan profit attributable to the Parent bank of €366€314 million, 3.8% more14.1% less than in 2010. This result was affected2011. Results were impacted by the sale of 51% of the insurance companiesinsurers in Latin America completedand by the reinsurance agreement of its life portfolio in the fourth quarter of 2011 as, without it, growth would have been 4.0%.Spain and Portugal, which reduced their contribution by €131 million. Eliminating these effects, profit was 19.0% higher.
Insurance business generated total revenues for the Group (including fee income paid to the commercial networks) of €3,083€2,784 million (+14.7%).2.3% higher on a like-for-like basis. The total contribution to profitsresults for the Group (income before taxes of insurers and brokers plus fee income received by the networks) increased 15.7%amounted to €2,882€2,653 million, 17.9% higher excluding the impact of the sale of the insurance companies.
The total volume of premium income increased 9% due to the good evolution of protection insurance premiums (+13%) as well as the recovery in the distribution of savings insurance whose premium income rose 7% after falling in 2010.3.0% on a like-for-like basis.
Corporate Activities
At the end of 2011,2012, this area had 2,3332,402 employees (direct and assigned) of which 901 were temporary. At year end of 2010, this area had 2,529 employees, of which 6239 were temporary.
This area is responsible for, on the one hand, a series of centralized activities to manage the structural risks of the Group and of the Parent bank. It executes the necessary activities for managing interest rates, exposure to exchange-rate movements and the required levels of liquidity in the Group. On the other hand, it acts as the Group’s holding entity, managing the Group’s global capital as well as that of each of the business units. The Corporate Activities segment also manages all the real estate exposure held by the Group in Spain through a corporate area created in 2009 and specialized in this type of property asset.
The Corporate Activities area had a loss of €3,833€6,391 million in 2011,2012, a 67.3%66.7% increase as compared to 2010.2011. This was mainly due to pre-taxarea assumed the provisions against the fourth quarter earnings to covercoverage real estate exposure in Spain (€4,110 million net of €1,812taxes) and capital gains of €983 million net of taxes.
After deducting the net figure for capital gains and €601writedowns, the area sustained a loss of €3,263 million compared to a loss of €2,163 million in pre-tax provisions2011. This variation was mainly due to amortize goodwill related to Santander Totta,the decrease in income as a result of the liquidity buffer and
the higher cost of funding. These impacts were partially offset by greater gains on financial transactions, mainly hedging of exchange rates and net capital gains of €1,513 million generated in 2011 (€872 million arising fromfunding, the entry of new partnersdecrease in the capitalshare of SCUSAresults of entities accounted for using the equity method (due to Metrovacesa) and €641 million from the saleincrease in writedowns, which included the impairment of goodwill in Italy, the writedown of the insurance holding in Latin America).value of the real estate investment fund and the results from real estate asset management.
With respect to the area’s activities:
Interest rate management is conducted on a coordinated basis by all the units, but this business only registers the part relative to the balance sheet of the Parent bank via the ALCO portfolios (at the volume levels and duration considered optimum at each moment).
Management of the exposure to exchange-rate movements, both from investments in the shareholders’ equity of units in currencies other than the euro as well as from the results generated for the Group by each of the units, also in various currencies, is also conducted on a centralized basis. This management (dynamic) is carried out by exchange-rate derivative instruments minimizing at each moment the financial cost of hedging.
Management of structural liquidity aims to finance our recurrent activity in optimum conditions of maturity and cost. The decisions whether to go to the wholesale markets to capture funds and cover stable and permanent liquidity needs, the type of instrument used, the maturity date structure and management of the associated risks of interest rates and exchange rates of the various financing sources, are also conducted on a centralized basis.
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Thefinancial management unit uses financial derivatives to cover the interest rate and exchange rate risks from new issuances. The net impact of this hedging is recorded in the gains/losses on financial transactions in corporate activities. The financial management area also analyzes the strategies for structural management of credit risk aiming to reduce concentrations by sectors, which naturally occur as a result of commercial activity. Derivative transactions achieve an effect similar to selling some assets and acquiring others enabling us to diversify the credit portfolio as a whole.
In addition, the area of Corporate Activities acts as theGroup’s holding entity. It manages all capital and reserves and allocations of capital to each of the business units as well as provides liquidity that some of the business units might need (mainly the Santander Branch Network and corporate in Spain). The price at which these operations are carried out is the market rate (Euribor or swap without liquidity premium for their duration) for each of the maturities of repricing operations.
Lastly, theequity stakes that the Group takes within its policy of optimizing investments is reflected in corporate activities.
Total Revenues by Activity and Geographic Location
For a breakdown of our total revenues by category of activity and geographic market, please see Note 52 to our consolidated financial statements.
Selected Statistical Information
The following tables show our selected statistical information.
Average Balance Sheets and Interest Rates
The following tables show, by domicile of customer, our average balances and interest rates for each of the past three years.
You should read the following tables and the tables included under “—Changes in Net Interest Income—Volume and Rate Analysis” and “—Assets—Earning Assets—Yield Spread” in conjunction with the following:
We have included interest received on non-accruing assets in interest income only if we received such interest during the period in which it was due;
We have included loan arrangement fees in interest income;
We have not recalculated tax-exempt income on a tax-equivalent basis because the effect of doing so would not be significant;
We have included income and expenses from interest-rate hedging transactions as a separate line item under interest income and expenses if these transactions qualify for hedge accounting under IFRS-IASB. If these transactions did not qualify for such treatment, we have included income and expenses on these transactions elsewhere in our income statement. See Note 2 to our consolidated financial statements for a discussion of our accounting policies for hedging activities;
qualify for such treatment, we have included income and expenses on these transactions elsewhere in our income statement. See Note 2 to our consolidated financial statements for a discussion of our accounting policies for hedging activities; |
We have stated average balances on a gross basis, before netting our allowances for credit losses, except for the total average asset figures, which includes such netting; and
All average data have been calculated using month-end balances, which is not significantly different from having used daily averages.
As stated above under “Presentation of Financial and Other Information”, we have prepared our financial statements for 2007,2012, 2011, 2010, 2009 and 2008 2009, 2010 and 2011 under IFRS-IASB.
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Average Balance Sheet - Sheet—Assets and Interest Income
Year ended December, 31 | Year ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | 2011 | 2010 | 2009 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance | Interest | Average Rate | Balance | Interest | Average Rate | Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Cash and due from centralbanks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 8,436 | 187 | 2.22 | % | 8,441 | 87 | 1.03 | % | 7,916 | 87 | 1.10 | % | 21,172 | 91 | 0.44 | % | 8,436 | 187 | 2.22 | % | 8,441 | 87 | 1.03 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 73,259 | 3,005 | 4.10 | % | 52,936 | 1,846 | 3.49 | % | 25,933 | 269 | 1.04 | % | 75,572 | 2,602 | 3.44 | % | 73,259 | 3,005 | 4.10 | % | 52,936 | 1,846 | 3.49 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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81,695 | 3,192 | 3.91 | % | 61,377 | 1,933 | 3.15 | % | 33,849 | 356 | 1.05 | % | 96,744 | 2,693 | 2.78 | % | 81,695 | 3,192 | 3.91 | % | 61,377 | 1,933 | 3.15 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Due from credit entities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 22,140 | 190 | 0.86 | % | 29,392 | 206 | 0.70 | % | 20,935 | 366 | 1.75 | % | 25,257 | 136 | 0.54 | % | 22,140 | 190 | 0.86 | % | 29,392 | 206 | 0.70 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 53,123 | 871 | 1.64 | % | 51,382 | 839 | 1.63 | % | 58,290 | 2,156 | 3.70 | % | 45,600 | 898 | 1.97 | % | 53,123 | 871 | 1.64 | % | 51,382 | 839 | 1.63 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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75,263 | 1,061 | 1.41 | % | 80,774 | 1,045 | 1.29 | % | 79,225 | 2,522 | 3.18 | % |
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70,857 | 1,034 | 1.46 | % | 75,263 | 1,061 | 1.41 | % | 80,774 | 1,045 | 1.29 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Domestic | 217,235 | 7,581 | 3.49 | % | 224,642 | 7,312 | 3.25 | % | 230,642 | 10,297 | 4.46 | % | 198,643 | 7,332 | 3.69 | % | 217,235 | 7,581 | 3.49 | % | 224,642 | 7,312 | 3.26 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 513,568 | 39,328 | 7.66 | % | 482,407 | 34,542 | 7.16 | % | 436,857 | 31,784 | 7.28 | % | 552,174 | 39,028 | 7.07 | % | 513,568 | 39,328 | 7.66 | % | 482,407 | 34,542 | 7.16 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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730,803 | 46,909 | 6.42 | % | 707,049 | 41,854 | 5.92 | % | 667,499 | 42,081 | 6.30 | % | 750,817 | 46,360 | 6.17 | % | 730,803 | 46,909 | 6.42 | % | 707,049 | 41,854 | 5.92 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 42,293 | 1,458 | 3.45 | % | 44,784 | 1,136 | 2.54 | % | 40,146 | 1,158 | 2.88 | % | 52,382 | 1,946 | 3.72 | % | 42,293 | 1,458 | 3.45 | % | 44,784 | 1,136 | 2.54 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 106,408 | 5,948 | 5.59 | % | 107,662 | 5,096 | 4.73 | % | 92,777 | 4,428 | 4.77 | % | 96,910 | 5,147 | 5.31 | % | 106,408 | 5,948 | 5.59 | % | 107,662 | 5,096 | 4.73 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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148,701 | 7,406 | 4.98 | % | 152,446 | 6,232 | 4.09 | % | 132,923 | 5,586 | 4.20 | % |
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149,292 | 7,093 | 4.75 | % | 148,701 | 7,406 | 4.98 | % | 152,446 | 6,232 | 4.09 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income from hedging operations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 378 | 169 | 305 | 211 | 378 | 169 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
International | (46 | ) | (76 | ) | 587 | 472 | (46 | ) | (76 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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332 | 93 | 892 | 683 | 332 | 93 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other interest-earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 24,840 | 779 | 3.14 | % | 27,769 | 698 | 2.51 | % | 29,389 | 610 | 2.08 | % | 75,008 | 803 | 1.07 | % | 48,716 | 779 | 1.60 | % | 27,769 | 698 | 2.51 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 63,905 | 1,176 | 1.84 | % | 62,757 | 1,052 | 1.68 | % | 60,209 | 1,126 | 1.87 | % | 47,902 | 357 | 0.75 | % | 40,029 | 1,176 | 2.94 | % | 62,757 | 1,052 | 1.68 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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88,745 | 1,955 | 2.20 | % | 90,526 | 1,750 | 1.93 | % | 89,598 | 1,736 | 1.94 | % |
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122,910 | 1,160 | 0.94 | % | 88,745 | 1,955 | 2.20 | % | 90,526 | 1,750 | 1.93 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 314,944 | 10,573 | 3.36 | % | 335,028 | 9,608 | 2.87 | % | 329,028 | 12,823 | 3.90 | % | 372,462 | 10,520 | 2.82 | % | 338,820 | 10,573 | 3.12 | % | 335,028 | 9,608 | 2.87 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 810,263 | 50,283 | 6.21 | % | 757,144 | 43,299 | 5.72 | % | 674,066 | 40,350 | 5.99 | % | 818,158 | 48,504 | 5.93 | % | 786,387 | 50,283 | 6.39 | % | 757,144 | 43,299 | 5.72 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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1,125,207 | 60,856 | 5.41 | % | 1,092,172 | 52,907 | 4.84 | % | 1,003,094 | 53,173 | 5.30 | % | 1,190,620 | 59,024 | 4.96 | % | 1,125,207 | 60,856 | 5.41 | % | 1,092,172 | 52,907 | 4.84 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Investments in affiliated companies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 443 | — | 0.00 | % | 201 | — | 0.00 | % | 153 | — | 0.00 | % | 1,147 | — | 0.00 | % | 443 | — | 0.00 | % | 201 | — | 0.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 546 | — | 0.00 | % | 52 | — | 0.00 | % | 709 | — | 0.00 | % | 3,459 | — | 0.00 | % | 546 | — | 0.00 | % | 52 | — | 0.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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989 | — | 0.00 | % | 253 | — | 0.00 | % | 862 | — | 0.00 | % |
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4,606 | — | 0.00 | % | 989 | — | 0.00 | % | 253 | — | 0.00 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 315,387 | 10,573 | 3.35 | % | 335,229 | 9,608 | 2.87 | % | 329,181 | 12,823 | 3.90 | % | 373,609 | 10,520 | 2.82 | % | 339,263 | 10,573 | 3.12 | % | 335,229 | 9,608 | 2.87 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 810,809 | 50,283 | 6.20 | % | 757,196 | 43,299 | 5.72 | % | 674,775 | 40,350 | 5.98 | % | 821,617 | 48,504 | 5.90 | % | 786,933 | 50,283 | 6.39 | % | 757,196 | 43,299 | 5.72 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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1,126,196 | 60,856 | 5.40 | % | 1,092,425 | 52,907 | 4.84 | % | 1,003,956 | 53,173 | 5.30 | % | 1,195,226 | 59,024 | 4.94 | % | 1,126,196 | 60,856 | 5.40 | % | 1,092,425 | 52,907 | 4.84 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 102,186 | 97,936 | 90,198 | 91,860 | 102,186 | 97,936 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets from discontinued operations | — | — | 4,981 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total average assets | 1,228,382 | 60,856 | 1,190,361 | 52,907 | 1,099,135 | 53,173 | 1,287,086 | 59,024 | 1,228,382 | 60,856 | 1,190,361 | 52,907 |
47
Average Balance Sheet - Sheet—Liabilities and Interest Expense
Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December, 31 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | 2011 | 2010 | 2009 | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance | Interest | Average Rate | Balance | Interest | Average Rate | Balance | Interest | Average Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Due to credit entities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 33,456 | 756 | 2.26 | % | 28,586 | 389 | 1.36 | % | 21,713 | 424 | 1.95 | % | 55,339 | 761 | 1.38 | % | 33,456 | 756 | 2.26 | % | 28,586 | 389 | 1.36 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 113,182 | 2,119 | 1.87 | % | 105,991 | 1,283 | 1.21 | % | 120,217 | 2,861 | 2.38 | % | 99,347 | 1,729 | 1.74 | % | 113,182 | 2,119 | 1.87 | % | 105,991 | 1,283 | 1.21 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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146,638 | 2,875 | 1.96 | % | 134,577 | 1,672 | 1.24 | % | 141,930 | 3,285 | 2.31 | % |
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154,686 | 2,490 | 1.61 | % | 146,638 | 2,875 | 1.96 | % | 134,577 | 1,672 | 1.24 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Customers deposits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 164,980 | 2,895 | 1.75 | % | 155,244 | 2,839 | 1.83 | % | 130,581 | 2,695 | 2.06 | % | 153,399 | 2,850 | 1.86 | % | 164,980 | 2,895 | 1.75 | % | 155,244 | 2,839 | 1.83 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 451,710 | 13,924 | 3.08 | % | 413,670 | 10,607 | 2.56 | % | 333,021 | 9,116 | 2.74 | % | 482,952 | 13,554 | 2.81 | % | 451,710 | 13,924 | 3.08 | % | 413,670 | 10,607 | 2.56 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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616,690 | 16,819 | 2.73 | % | 568,914 | 13,446 | 2.36 | % | 463,602 | 11,811 | 2.55 | % | 636,351 | 16,404 | 2.58 | % | 616,690 | 16,819 | 2.73 | % | 568,914 | 13,446 | 2.36 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Marketable debt securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 91,358 | 3,142 | 3.44 | % | 105,411 | 2,876 | 2.73 | % | 125,931 | 3,598 | 2.86 | % | 95,054 | 3,175 | 3.34 | % | 91,358 | 3,142 | 3.44 | % | 105,411 | 2,876 | 2.73 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 104,749 | 3,288 | 3.14 | % | 103,595 | 2,083 | 2.01 | % | 95,299 | 2,638 | 2.77 | % | 109,647 | 4,102 | 3.74 | % | 104,749 | 3,288 | 3.14 | % | 103,595 | 2,083 | 2.01 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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196,107 | 6,430 | 3.28 | % | 209,006 | 4,959 | 2.37 | % | 221,230 | 6,236 | 2.82 | % |
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204,701 | 7,277 | 3.55 | % | 196,107 | 6,430 | 3.28 | % | 209,006 | 4,959 | 2.37 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 15,321 | 752 | 4.91 | % | 19,702 | 1,019 | 5.17 | % | 21,704 | 1,029 | 4.74 | % | 10,409 | 637 | 6.12 | % | 15,321 | 752 | 4.91 | % | 19,702 | 1,019 | 5.17 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 11,352 | 1,188 | 10.47 | % | 14,394 | 1,211 | 8.41 | % | 17,304 | 1,325 | 7.66 | % | 10,830 | 1,013 | 9.35 | % | 11,352 | 1,188 | 10.47 | % | 14,394 | 1,211 | 8.41 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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26,673 | 1,940 | 7.27 | % | 34,096 | 2,230 | 6.54 | % | 39,008 | 2,354 | 6.03 | % | 21,239 | 1,650 | 7.77 | % | 26,673 | 1,940 | 7.27 | % | 34,096 | 2,230 | 6.54 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Other interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 37,580 | 1,242 | 3.30 | % | 39,729 | 1,031 | 2.60 | % | 37,348 | 1,129 | 3.02 | % | 91,492 | 1,113 | 1.22 | % | 68,103 | 1,242 | 1.81 | % | 39,728 | 1,031 | 2.60 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 83,876 | 1,166 | 1.39 | % | 81,999 | 1,184 | 1.44 | % | 70,462 | 1,242 | 1.76 | % | 63,062 | 684 | 1.08 | % | 53,353 | 1,166 | 2.19 | % | 81,999 | 1,184 | 1.44 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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121,456 | 2,408 | 1.98 | % | 121,728 | 2,215 | 1.82 | % | 107,810 | 2,371 | 2.20 | % | 154,554 | 1,797 | 1.16 | % | 121,456 | 2,408 | 1.98 | % | 121,727 | 2,215 | 1.82 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Expenses from hedging operations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | (805 | ) | (1,362 | ) | (623 | ) | (974 | ) | (805 | ) | (1,362 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
International | 368 | 522 | 1,440 | 234 | 368 | 522 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(437 | ) | (840 | ) | 817 |
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(740 | ) | (437 | ) | (840 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | 342,695 | 7,982 | 2.33 | % | 348,672 | 6,792 | 1.95 | % | 337,277 | 8,252 | 2.45 | % | 405,693 | 7,561 | 1.86 | % | 373,218 | 7,983 | 2.14 | % | 348,671 | 6,793 | 1.95 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 764,869 | 22,053 | 2.88 | % | 719,649 | 16,891 | 2.35 | % | 636,303 | 18,622 | 2.93 | % | 765,838 | 21,316 | 2.78 | % | 734,346 | 22,053 | 3.00 | % | 719,649 | 16,891 | 2.35 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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1,107,564 | 30,035 | 2.71 | % | 1,068,321 | 23,683 | 2.22 | % | 973,580 | 26,874 | 2.76 | % | 1,171,531 | 28,877 | 2.46 | % | 1,107,564 | 30,036 | 2.71 | % | 1,068,320 | 23,684 | 2.22 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 40,999 | 45,192 | 54,383 | 32,277 | 40,999 | 45,194 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling interest | 5,998 | 5,695 | 3,192 | 8,559 | 5,998 | 5,695 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ Equity | 73,821 | 71,153 | 63,393 | 74,719 | 73,821 | 71,153 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities from discontinued operations | — | — | 4,587 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total average Liabilities and Stockholders’Equity | 1,228,382 | 30,035 | 1,190,361 | 23,682 | 1,099,135 | 26,874 | 1,287,086 | 28,877 | 1,228,382 | 30,036 | 1,190,362 | 23,683 |
48
Changes in Net Interest Income—Volume and Rate Analysis
The following tables allocate, by domicile of customer, changes in our net interest income between changes in average volume and changes in average rate for 2012 compared to 2011 and 2011 compared to 2010 and 2010 compared to 2009.2010. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Volume and rate analysis | IFRS-IASB 2011/2010 | |||||||||||
Increase (Decrease) due to changes in | ||||||||||||
Volume | Rate | Net change | ||||||||||
(in millions of euros) | ||||||||||||
Interest income | ||||||||||||
Cash and due from central banks | ||||||||||||
Domestic | — | 100 | 100 | |||||||||
International | 794 | 364 | 1,158 | |||||||||
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| |||||||
794 | 464 | 1,258 | ||||||||||
Due from credit entities | ||||||||||||
Domestic | (57 | ) | 41 | (16 | ) | |||||||
International | 29 | 3 | 32 | |||||||||
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(28 | ) | 44 | 16 | |||||||||
Loans and credits | ||||||||||||
Domestic | (247 | ) | 516 | 269 | ||||||||
International | 2,306 | 2,480 | 4,786 | |||||||||
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| |||||||
2,059 | 2,996 | 5,055 | ||||||||||
Debt securities | ||||||||||||
Domestic | (66 | ) | 388 | 322 | ||||||||
International | (60 | ) | 913 | 853 | ||||||||
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(126 | ) | 1,301 | 1,175 | |||||||||
Other interest-earning assets | ||||||||||||
Domestic | (79 | ) | 160 | 81 | ||||||||
International | 20 | 104 | 124 | |||||||||
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(59 | ) | 264 | 205 | |||||||||
Total interest-earning assets without hedging operations | ||||||||||||
Domestic | (449 | ) | 1,205 | 756 | ||||||||
International | 3,089 | 3,864 | 6,953 | |||||||||
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2,640 | 5,069 | 7,709 | ||||||||||
Income from hedging operations | ||||||||||||
Domestic | 209 | — | 209 | |||||||||
International | 31 | — | 31 | |||||||||
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| |||||||
240 | — | 240 | ||||||||||
Total interest-earning assets | ||||||||||||
Domestic | (240 | ) | 1,205 | 965 | ||||||||
International | 3,120 | 3,864 | 6,984 | |||||||||
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2,880 | 5,069 | 7,949 | ||||||||||
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|
Cash and due from central banks Domestic International Due from credit entities Domestic International Loans and credits Domestic International Debt securities Domestic International Other interest-earning assets Domestic International Total interest-earning assets without hedging operations Domestic International Income from hedging operations Domestic International Total interest-earning assets Domestic International 49 IFRS-IASB
2012/2011 Increase (Decrease) due to changes in Volume Rate Net change (in millions of euros) Interest income 134 (230 ) (96 ) 92 (496 ) (404 ) 226 (726 ) (500 ) 24 (78 ) (54 ) (134 ) 160 26 (110 ) 82 (28 ) (670 ) 422 (248 ) 2,844 (3,144 ) (300 ) 2,174 (2,722 ) (548 ) 368 120 488 (515 ) (287 ) (802 ) (147 ) (167 ) (314 ) 334 (310 ) 24 195 (1,014 ) (819 ) 529 (1,324 ) (795 ) 190 (76 ) 114 2,482 (4,781 ) (2,299 ) 2,672 (4,857 ) (2,185 ) (167 ) — (167 ) 518 — 518 351 — 351 23 (76 ) (53 ) 3,000 (4,781 ) (1,781 ) 3,023 (4,857 ) (1,834 )
Volume and rate analysis | IFRS-IASB 2010/2009 | |||||||||||
Increase (Decrease) due to changes in | ||||||||||||
Volume | Rate | Net change | ||||||||||
(in millions of euros) | ||||||||||||
Interest income | ||||||||||||
Cash and due from central banks | ||||||||||||
Domestic | 6 | (6 | ) | — | ||||||||
International | 482 | 1,095 | 1,577 | |||||||||
|
|
|
|
|
| |||||||
488 | 1,089 | 1,577 | ||||||||||
Due from credit entities | ||||||||||||
Domestic | 112 | (273 | ) | (161 | ) | |||||||
International | (230 | ) | (1,086 | ) | (1,316 | ) | ||||||
|
|
|
|
|
| |||||||
(118 | ) | (1,359 | ) | (1,477 | ) | |||||||
Loans and credits | ||||||||||||
Domestic | (262 | ) | (2,724 | ) | (2,986 | ) | ||||||
International | 3,268 | (511 | ) | 2,757 | ||||||||
|
|
|
|
|
| |||||||
3,006 | (3,235 | ) | (229 | ) | ||||||||
Debt securities | ||||||||||||
Domestic | 126 | (148 | ) | (22 | ) | |||||||
International | 705 | (38 | ) | 667 | ||||||||
|
|
|
|
|
| |||||||
831 | (186 | ) | 645 | |||||||||
Other interest-earning assets | ||||||||||||
Domestic | (35 | ) | 123 | 88 | ||||||||
International | 46 | (120 | ) | (74 | ) | |||||||
|
|
|
|
|
| |||||||
11 | 3 | 14 | ||||||||||
Total interest-earning assets without hedging operations | ||||||||||||
Domestic | (53 | ) | (3,028 | ) | (3,081 | ) | ||||||
International | 4,271 | (660 | ) | 3,611 | ||||||||
|
|
|
|
|
| |||||||
4,218 | (3,688 | ) | 530 | |||||||||
Income from hedging operations | ||||||||||||
Domestic | (135 | ) | — | (135 | ) | |||||||
International | (663 | ) | — | (663 | ) | |||||||
|
|
|
|
|
| |||||||
(798 | ) | — | (798 | ) | ||||||||
Total interest-earning assets | ||||||||||||
Domestic | (188 | ) | (3,028 | ) | (3,216 | ) | ||||||
International | 3,608 | (660 | ) | 2,948 | ||||||||
|
|
|
|
|
| |||||||
3,420 | (3,688 | ) | (268 | ) | ||||||||
|
|
|
|
|
|
Volume and rate analysis
Cash and due from central banks Domestic International Due from credit entities Domestic International Loans and credits Domestic International Debt securities Domestic International Other interest-earning assets Domestic International Total interest-earning assets without hedging operations Domestic International Income from hedging operations Domestic International Total interest-earning assets Domestic International 50 IFRS-IASB
2011/2010 Increase (Decrease) due to changes in Volume Rate Net change (in millions of euros) Interest income — 100 100 794 364 1,158 794 464 1,258 (57 ) 41 (16 ) 29 3 32 (28 ) 44 16 (247 ) 516 269 2,306 2,480 4,786 2,059 2,996 5,055 (66 ) 388 322 (60 ) 913 853 (126 ) 1,301 1,175 (79 ) 160 81 20 104 124 (59 ) 264 205 (449 ) 1,205 756 3,089 3,864 6,953 2,640 5,069 7,709 209 — 209 31 — 31 240 — 240 (240 ) 1,205 965 3,120 3,864 6,984 2,880 5,069 7,949
IFRS-IASB 2012/2011 | ||||||||||||
Increase (Decrease) due to changes in | ||||||||||||
Volume | Rate | Net change | ||||||||||
(in millions of euros) | ||||||||||||
Interest charges | ||||||||||||
Due to credit entities | ||||||||||||
Domestic | 373 | (368 | ) | 5 | ||||||||
International | (247 | ) | (142 | ) | (389 | ) | ||||||
|
|
|
|
|
| |||||||
126 | (510 | ) | (384 | ) | ||||||||
Customers deposits | ||||||||||||
Domestic | (210 | ) | 165 | (45 | ) | |||||||
International | 925 | (1,296 | ) | (371 | ) | |||||||
|
|
|
|
|
| |||||||
715 | (1,131 | ) | (416 | ) | ||||||||
Marketable debt securities | ||||||||||||
Domestic | 125 | (92 | ) | 33 | ||||||||
International | 160 | 655 | 815 | |||||||||
|
|
|
|
|
| |||||||
285 | 563 | 848 | ||||||||||
Subordinated debt | ||||||||||||
Domestic | (275 | ) | 159 | (116 | ) | |||||||
International | (53 | ) | (122 | ) | (175 | ) | ||||||
|
|
|
|
|
| |||||||
(328 | ) | 37 | (291 | ) | ||||||||
Other interest-bearing liabilities | ||||||||||||
Domestic | 346 | (476 | ) | (130 | ) | |||||||
International | 184 | (667 | ) | (483 | ) | |||||||
|
|
|
|
|
| |||||||
530 | (1,143 | ) | (613 | ) | ||||||||
Total interest-bearing liabilities without hedging operations | ||||||||||||
Domestic | 359 | (612 | ) | (253 | ) | |||||||
International | 969 | (1,572 | ) | (603 | ) | |||||||
|
|
|
|
|
| |||||||
1,328 | (2,184 | ) | (856 | ) | ||||||||
Expenses from hedging operations | ||||||||||||
Domestic | (169 | ) | — | (169 | ) | |||||||
International | (134 | ) | — | (134 | ) | |||||||
|
|
|
|
|
| |||||||
(303 | ) | — | (303 | ) | ||||||||
Total interest-bearing liabilities | ||||||||||||
Domestic | 190 | (612 | ) | (422 | ) | |||||||
International | 835 | (1,572 | ) | (737 | ) | |||||||
|
|
|
|
|
| |||||||
1,025 | (2,184 | ) | (1,159 | ) |
IFRS-IASB 2011/2010 | ||||||||||||
Increase (Decrease) due to changes in | ||||||||||||
Volume | Rate | Net change | ||||||||||
(in millions of euros) | ||||||||||||
Interest charges | ||||||||||||
Due to credit entities | ||||||||||||
Domestic | 75 | 292 | 367 | |||||||||
International | 93 | 743 | 836 | |||||||||
|
|
|
|
|
| |||||||
168 | 1,035 | 1,203 | ||||||||||
Customers deposits | ||||||||||||
Domestic | 174 | (118 | ) | 56 | ||||||||
International | 1,037 | 2,280 | 3,317 | |||||||||
|
|
|
|
|
| |||||||
1,211 | 2,162 | 3,373 | ||||||||||
Marketable debt securities | ||||||||||||
Domestic | (417 | ) | 683 | 266 | ||||||||
International | 23 | 1,181 | 1,204 | |||||||||
|
|
|
|
|
| |||||||
(394 | ) | 1,864 | 1,470 | |||||||||
Subordinated debt | ||||||||||||
Domestic | (217 | ) | (50 | ) | (267 | ) | ||||||
International | (285 | ) | 262 | (23 | ) | |||||||
|
|
|
|
|
| |||||||
(502 | ) | 212 | (290 | ) | ||||||||
Other interest-bearing liabilities | ||||||||||||
Domestic | (58 | ) | 269 | 211 | ||||||||
International | 27 | (44 | ) | (17 | ) | |||||||
|
|
|
|
|
| |||||||
(31 | ) | 225 | 194 | |||||||||
Total interest-bearing liabilities without hedging operations | ||||||||||||
Domestic | (443 | ) | 1,076 | 633 | ||||||||
International | 895 | 4,422 | 5,317 | |||||||||
|
|
|
|
|
| |||||||
452 | 5,498 | 5,950 | ||||||||||
Expenses from hedging operations | ||||||||||||
Domestic | 558 | — | 558 | |||||||||
International | (154 | ) | — | (154 | ) | |||||||
|
|
|
|
|
| |||||||
404 | — | 404 | ||||||||||
Total interest-bearing liabilities | ||||||||||||
Domestic | 115 | 1,076 | 1,191 | |||||||||
International | 741 | 4,422 | 5,163 | |||||||||
|
|
|
|
|
| |||||||
856 | 5,498 | 6,354 |
51
Volume and rate analysis | IFRS-IASB 2010/2009 | |||||||||||
Increase (Decrease) due to changes in | ||||||||||||
Volume | Rate | Net change | ||||||||||
(in millions of euros) | ||||||||||||
Interest charges | ||||||||||||
Due to credit entities | ||||||||||||
Domestic | 113 | (148 | ) | (35 | ) | |||||||
International | (306 | ) | (1,272 | ) | (1,578 | ) | ||||||
|
|
|
|
|
| |||||||
(193 | ) | (1,420 | ) | (1,613 | ) | |||||||
Customers deposits | ||||||||||||
Domestic | 473 | (329 | ) | 144 | ||||||||
International | 2,097 | (606 | ) | 1,491 | ||||||||
|
|
|
|
|
| |||||||
2,570 | (935 | ) | 1,635 | |||||||||
Marketable debt securities | ||||||||||||
Domestic | (566 | ) | (156 | ) | (722 | ) | ||||||
International | 215 | (770 | ) | (555 | ) | |||||||
|
|
|
|
|
| |||||||
(351 | ) | (926 | ) | (1,277 | ) | |||||||
Subordinated debt | ||||||||||||
Domestic | (99 | ) | 90 | (9 | ) | |||||||
International | (237 | ) | 123 | (114 | ) | |||||||
|
|
|
|
|
| |||||||
(336 | ) | 213 | (123 | ) | ||||||||
Other interest-bearing liabilities | ||||||||||||
Domestic | 69 | (167 | ) | (98 | ) | |||||||
International | 186 | (243 | ) | (57 | ) | |||||||
|
|
|
|
|
| |||||||
255 | (410 | ) | (155 | ) | ||||||||
Total interest-bearing liabilities without hedging operations | ||||||||||||
Domestic | (10 | ) | (710 | ) | (720 | ) | ||||||
International | 1,955 | (2,768 | ) | (813 | ) | |||||||
|
|
|
|
|
| |||||||
1,945 | (3,478 | ) | (1,533 | ) | ||||||||
Expenses from hedging operations | ||||||||||||
Domestic | (740 | ) | — | (740 | ) | |||||||
International | (918 | ) | — | (918 | ) | |||||||
|
|
|
|
|
| |||||||
(1,658 | ) | — | (1,658 | ) | ||||||||
Total interest-bearing liabilities | ||||||||||||
Domestic | (750 | ) | (711 | ) | (1,461 | ) | ||||||
International | 1,037 | (2,768 | ) | (1,731 | ) | |||||||
|
|
|
|
|
| |||||||
287 | (3,479 | ) | (3,192 | ) |
52
Assets
Earning Assets—Yield Spread
The following table analyzes, by domicile of customer, our average earning assets, interest income and dividends on equity securities and net interest income and shows gross yields, net yields and yield spread for each of the years indicated. You should read this table and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Earning Assets—Yield Spread
Earning Assets - Yield Spread | IFRS-IASB | |||||||||||
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in millions of euros, except percentages) | ||||||||||||
Average earning assets | ||||||||||||
Domestic | 315,387 | 335,229 | 329,181 | |||||||||
International | 810,809 | 757,196 | 674,775 | |||||||||
|
|
|
|
|
| |||||||
1,126,196 | 1,092,425 | 1,003,956 | ||||||||||
Interest | ||||||||||||
Domestic | 10,573 | 9,608 | 12,823 | |||||||||
International | 50,283 | 43,299 | 40,350 | |||||||||
|
|
|
|
|
| |||||||
60,856 | 52,907 | 53,173 | ||||||||||
Net interest income (1) | ||||||||||||
Domestic | 2,591 | 2,816 | 4,571 | |||||||||
International | 28,230 | 26,408 | 21,727 | |||||||||
|
|
|
|
|
| |||||||
30,821 | 29,224 | 26,298 | ||||||||||
Gross yield (2) | ||||||||||||
Domestic | 3.35 | % | 2.87 | % | 3.90 | % | ||||||
International | 6.20 | % | 5.72 | % | 5.98 | % | ||||||
|
|
|
|
|
| |||||||
5.40 | % | 4.84 | % | 5.30 | % | |||||||
Net yield (3) | ||||||||||||
Domestic | 0.82 | % | 0.84 | % | 1.39 | % | ||||||
International | 3.48 | % | 3.49 | % | 3.22 | % | ||||||
|
|
|
|
|
| |||||||
2.74 | % | 2.68 | % | 2.62 | % | |||||||
Yield spread (4) | ||||||||||||
Domestic | 1.02 | % | 0.92 | % | 1.45 | % | ||||||
International | 3.32 | % | 3.37 | % | 3.05 | % | ||||||
|
|
|
|
|
| |||||||
2.69 | % | 2.62 | % | 2.54 | % |
IFRS-IASB | ||||||||||||
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(in millions of euros, except percentages) | ||||||||||||
Average earning assets | ||||||||||||
Domestic | 373,609 | 315,387 | 335,229 | |||||||||
International | 821,617 | 810,809 | 757,196 | |||||||||
|
|
|
|
|
| |||||||
1,195,226 | 1,126,196 | 1,092,425 | ||||||||||
Interest | ||||||||||||
Domestic | 10,520 | 10,573 | 9,608 | |||||||||
International | 48,504 | 50,283 | 43,299 | |||||||||
|
|
|
|
|
| |||||||
59,024 | 60,856 | 52,907 | ||||||||||
Net interest income (1) | ||||||||||||
Domestic | 2,959 | 2,591 | 2,816 | |||||||||
International | 27,188 | 28,230 | 26,408 | |||||||||
|
|
|
|
|
| |||||||
30,147 | 30,821 | 29,224 | ||||||||||
Gross yield (2) | ||||||||||||
Domestic | 2.82 | % | 3.35 | % | 2.87 | % | ||||||
International | 5.90 | % | 6.20 | % | 5.72 | % | ||||||
|
|
|
|
|
| |||||||
4.94 | % | 5.40 | % | 4.84 | % | |||||||
Net yield (3) | ||||||||||||
Domestic | 0.79 | % | 0.82 | % | 0.84 | % | ||||||
International | 3.31 | % | 3.48 | % | 3.49 | % | ||||||
|
|
|
|
|
| |||||||
2.52 | % | 2.74 | % | 2.68 | % | |||||||
Yield spread (4) | ||||||||||||
Domestic | 0.95 | % | 1.02 | % | 0.92 | % | ||||||
International | 3.12 | % | 3.32 | % | 3.37 | % | ||||||
|
|
|
|
|
| |||||||
2.47 | % | 2.69 | % | 2.62 | % |
(1) | Net interest income is the net amount of interest and similar income and interest expense and similar charges. See “Income Statement” on page 9. |
(2) | Gross yield is the quotient of interest income divided by average earning assets. |
(3) | Net yield is the quotient of net interest income divided by average earning assets. |
(4) | Yield spread is the difference between gross yield on earning assets and the average cost of interest-bearing liabilities. For a discussion of the changes in yield spread over the periods presented, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Interest Income / (Charges)” herein. |
53
Return on Equity and Assets
The following table presents our selected financial ratios for the years indicated.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
ROA: Return on average total assets | 0.50 | % | 0.76 | % | 0.86 | % | ||||||||||||||||||
ROA: Return on average total assets | 0.24 | % | 0.50 | % | 0.76 | % | ||||||||||||||||||
ROE: Return on average stockholders’ equity | 7.14 | % | 11.80 | % | 13.90 | % | 2.80 | % | 7.14 | % | 11.80 | % | ||||||||||||
PAY-OUT: Dividends per average share as a percentage of net attributable income per average share (*) | 34.33 | % | 40.70 | % | 46.09 | % | 48.67 | % | 38.57 | % | 40.70 | % | ||||||||||||
Average stockholders’ equity as a percentage of average total assets | 6.10 | % | 5.82 | % | 5.85 | % | 6.12 | % | 6.10 | % | 5.82 | % |
(*) | The pay-out ratio does not include in the numerator the amounts paid under theSantander Dividendo Elección program (scrip dividends) which are not dividends paid on account of the net attributable income of the period. Such amounts equivalent to dividends |
Interest-Earning Assets
The following table shows, by domicile of customer, the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Interest-earning assets | ||||||||||||
IFRS-IASB | ||||||||||||
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Cash and due from Central Banks | ||||||||||||
Domestic | 0.75 | % | 0.77 | % | 0.79 | % | ||||||
International | 6.51 | % | 4.85 | % | 2.59 | % | ||||||
|
|
|
|
|
| |||||||
7.26 | % | 5.62 | % | 3.38 | % | |||||||
Due from credit entities | ||||||||||||
Domestic | 1.97 | % | 2.69 | % | 2.09 | % | ||||||
International | 4.71 | % | 4.70 | % | 5.81 | % | ||||||
|
|
|
|
|
| |||||||
6.68 | % | 7.39 | % | 7.90 | % | |||||||
Loans and credits | ||||||||||||
Domestic | 19.31 | % | 20.56 | % | 22.99 | % | ||||||
International | 45.64 | % | 44.18 | % | 43.55 | % | ||||||
|
|
|
|
|
| |||||||
64.95 | % | 64.74 | % | 66.54 | % | |||||||
Debt securities | ||||||||||||
Domestic | 3.76 | % | 4.10 | % | 4.00 | % | ||||||
International | 9.46 | % | 9.86 | % | 9.25 | % | ||||||
|
|
|
|
|
| |||||||
13.22 | % | 13.96 | % | 13.25 | % | |||||||
Other interest-earning assets | ||||||||||||
Domestic | 2.21 | % | 2.53 | % | 2.93 | % | ||||||
International | 5.68 | % | 5.76 | % | 6.00 | % | ||||||
|
|
|
|
|
| |||||||
7.89 | % | 8.29 | % | 8.93 | % | |||||||
Total interest-earning assets | ||||||||||||
Domestic | 28.00 | % | 30.65 | % | 32.80 | % | ||||||
International | 72.00 | % | 69.35 | % | 67.20 | % | ||||||
|
|
|
|
|
| |||||||
100.00 | % | 100.00 | % | 100.00 | % |
IFRS-IASB Cash and due from Central Banks Domestic International Due from credit entities Domestic International Loans and credits Domestic International Debt securities Domestic International Other interest-earning assets Domestic International Total interest-earning assets Domestic International 54 Year Ended December 31, 2012 2011 2010 1.78 % 0.75 % 0.77 % 6.35 % 6.51 % 4.85 % 8.13 % 7.26 % 5.62 % 2.12 % 1.97 % 2.69 % 3.83 % 4.71 % 4.70 % 5.95 % 6.68 % 7.39 % 16.68 % 19.31 % 20.56 % 46.38 % 45.64 % 44.18 % 63.06 % 64.95 % 64.74 % 4.40 % 3.76 % 4.10 % 8.14 % 9.46 % 9.86 % 12.54 % 13.22 % 13.96 % 6.30 % 2.21 % 2.53 % 4.02 % 5.68 % 5.76 % 10.32 % 7.89 % 8.29 % 31.28 % 28.00 % 30.65 % 68.72 % 72.00 % 69.35 % 100.00 % 100.00 % 100.00 %
Our financial information included in this annual report on Form 20-F has been prepared since 2008 under IFRS-IASB. There are no material differences between the financial information disclosed in this section of our annual report under IFRS-IASB and the periods prior to 2008 previously presented under EU-IFRS. See “Item 3. Key information – A. Selected Financial Data” in our 2008 Form 20-F for additional information.
The following tables show our short-term funds deposited with other banks at each of the dates indicated.
IFRS-IASB At December 31, | IFRS-IASB At December 31, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||||||||||||||||||
Reciprocal accounts | 2,658 | 1,264 | 713 | 663 | 418 | 1,863 | 2,658 | 1,264 | 713 | 663 | ||||||||||||||||||||||||||||||
Time deposits | 11,419 | 13,548 | 21,382 | 25,456 | 13,569 | 15,669 | 11,419 | 13,548 | 21,382 | 25,456 | ||||||||||||||||||||||||||||||
Reverse repurchase agreements | 10,647 | 36,721 | 29,490 | 18,569 | 30,276 | 25,486 | 10,647 | 36,721 | 29,490 | 18,569 | ||||||||||||||||||||||||||||||
Other accounts | 27,002 | 28,322 | 28,252 | 34,104 | 13,380 | 30,882 | 27,002 | 28,322 | 28,252 | 34,104 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
51,726 | 79,855 | 79,837 | 78,792 | 57,643 | 73,900 | 51,726 | 79,855 | 79,837 | 78,792 | |||||||||||||||||||||||||||||||
Of which impairment allowances | (37 | ) | (17 | ) | (26 | ) | (254 | ) | (18 | ) | (30) | (36) | (17) | (26) | (254) |
Investment Securities
At December 31, 2011,2012, the book value of our investment securities was €154.0€152.1 billion (representing 12.3%12% of our total assets). These investment securities had a yield of 4.61%4.69% in 20112012 compared with a yield of 3.76%4.61% in 2010,2011, and a yield of 3.94%3.76% in 2009.2010. Approximately €39.3€37.1 billion, or 27.3%26.3%, of our investment securities at December 31, 20112012 consisted of Spanish Government and government agency securities. For a discussion of how we value our investment securities, see Note 2 to our consolidated financial statements.
55
The following tables show the book values of our investment securities by type and domicile of counterparty at each of the dates indicated.
IFRS-IASB Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Debt securities | (in millions of euros) | |||||||||||
Domestic- | ||||||||||||
Spanish Government | 37,698 | 35,110 | 37,770 | |||||||||
Other domestic issuer: | ||||||||||||
Public authorities | 1,611 | 553 | 543 | |||||||||
Other domestic issuer | 8,409 | 7,915 | 8,125 | |||||||||
|
|
|
|
|
| |||||||
Total domestic | 47,718 | 43,578 | 46,438 | |||||||||
International- | ||||||||||||
United States: | ||||||||||||
U.S. Treasury and other U.S. Government agencies | 514 | 1,122 | 1,184 | |||||||||
States and political subdivisions | 1,420 | 1,743 | 1,715 | |||||||||
Other securities | 11,115 | 11,598 | 12,965 | |||||||||
|
|
|
|
|
| |||||||
Total United States | 13,049 | 14,463 | 15,864 | |||||||||
Other: | ||||||||||||
Governments | 58,619 | 60,737 | 41,108 | |||||||||
Other securities | 24,647 | 31,961 | 48,291 | |||||||||
|
|
|
|
|
| |||||||
Total Other | 83,266 | 92,698 | 89,399 | |||||||||
|
|
|
|
|
| |||||||
Total International | 96,315 | 107,161 | 105,263 | |||||||||
Less- Allowance for credit losses | (251 | ) | (144 | ) | (167 | ) | ||||||
Less- Price fluctuation allowance | — | — | — | |||||||||
Total Debt Securities | 143,782 | 150,595 | 151,534 | |||||||||
Equity securities | ||||||||||||
Domestic | 3,574 | 5,458 | 6,070 | |||||||||
International- | ||||||||||||
United States | 1,283 | 1,931 | 1,490 | |||||||||
Other | 5,376 | 16,274 | 14,896 | |||||||||
|
|
|
|
|
| |||||||
Total international | 6,659 | 18,205 | 16,386 | |||||||||
Less- Price fluctuation allowance | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total Equity Securities | 10,233 | 23,663 | 22,456 | |||||||||
|
|
|
|
|
| |||||||
Total Investment Securities | 154,015 | 174,258 | 173,990 |
56
IFRS-IASB Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(in millions of euros) | ||||||||||||
Debt securities | ||||||||||||
Domestic- | ||||||||||||
Spanish Government | 35,380 | 37,698 | 35,110 | |||||||||
Other domestic issuer: | ||||||||||||
Public authorities | 1,761 | 1,611 | 553 | |||||||||
Other domestic issuer | 10,046 | 8,409 | 7,915 | |||||||||
|
|
|
|
|
| |||||||
Total domestic | 47,187 | 47,718 | 43,578 | |||||||||
International- | ||||||||||||
United States: | ||||||||||||
U.S. Treasury and other U.S. Government agencies | 132 | 514 | 1,122 | |||||||||
States and political subdivisions | 6,941 | 1,420 | 1,743 | |||||||||
Other securities | 7,648 | 11,115 | 11,598 | |||||||||
|
|
|
|
|
| |||||||
Total United States | 14,721 | 13,049 | 14,463 | |||||||||
Other: | ||||||||||||
Governments | 60,149 | 58,619 | 60,737 | |||||||||
Other securities | 19,431 | 24,647 | 31,961 | |||||||||
|
|
|
|
|
| |||||||
Total Other | 79,580 | 83,266 | 92,698 | |||||||||
|
|
|
|
|
| |||||||
Total International | 94,301 | 96,315 | 107,161 | |||||||||
Less- Allowance for credit losses | (144 | ) | (251 | ) | (144 | ) | ||||||
Less- Price fluctuation allowance | — | — | — | |||||||||
Total Debt Securities | 141,344 | 143,782 | 150,595 | |||||||||
Equity securities | ||||||||||||
Domestic | 3,802 | 3,574 | 5,458 | |||||||||
International- | ||||||||||||
United States | 1,417 | 1,283 | 1,931 | |||||||||
Other | 5,503 | 5,376 | 16,274 | |||||||||
|
|
|
|
|
| |||||||
Total international | 6,920 | 6,659 | 18,205 | |||||||||
Less- Price fluctuation allowance | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total Equity Securities | 10,722 | 10,233 | 23,663 | |||||||||
|
|
|
|
|
| |||||||
Total Investment Securities | 152,066 | 154,015 | 174,258 |
The following table sets out the aggregate book value and aggregate market value of the securities of single issuers, other than the Government of the United States, which exceeded 10% of our stockholders’ equity as of December 31, 20112012 (and other debt securities with aggregate values near to 10% of our stockholders’ equity).
Aggregate as of December 31, 2011 | Aggregate as of December 31, 2012 | |||||||||||||||
Book value | Market value | Book value | Market value | |||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||
Debt securities: | ||||||||||||||||
Debt securities: | ||||||||||||||||
Exceed 10% of stockholders’ equity: | ||||||||||||||||
Spanish Government and public authorities | 39,309 | 39,309 | 37,141 | 37,141 | ||||||||||||
Near 10% of stockholders’ equity: | ||||||||||||||||
Federative Republic of Brazil: | 5,920 | 5,920 | 6,615 | 6,615 |
The following table shows the maturities of our debt investment securities (before impairment allowances) at December 31, 2011.2012.
Year Ended December 31, 2011 | Year Ended December 31, 2012 | |||||||||||||||||||||||||||||||||||||||
Maturing | Maturing | Maturing Within 1 Year | Maturing Between 1 and 5 Years | Maturing Between 5 and 10 Years | Maturing After 10 Years | Total | ||||||||||||||||||||||||||||||||||
Maturing | Between | Between | Maturing | (in millions of euros) | ||||||||||||||||||||||||||||||||||||
Within | 1 and | 5 and | After | |||||||||||||||||||||||||||||||||||||
1 Year | 5 Years | 10 Years | 10 Years | Total | ||||||||||||||||||||||||||||||||||||
Debt Securities | (in millions of euros) | |||||||||||||||||||||||||||||||||||||||
DEBT SECURITIES | ||||||||||||||||||||||||||||||||||||||||
Domestic: | ||||||||||||||||||||||||||||||||||||||||
Spanish Government | 9,387 | 7,287 | 16,875 | 4,149 | 37,698 | 4,591 | 5,664 | 20,115 | 5,010 | 35,380 | ||||||||||||||||||||||||||||||
Other domestic issuer: | ||||||||||||||||||||||||||||||||||||||||
Public authorities | 142 | 1,225 | 243 | 1 | 1,611 | 134 | 1,456 | 171 | — | 1,761 | ||||||||||||||||||||||||||||||
Other domestic issuer | 3,350 | 3,090 | 666 | 1,303 | 8,409 | 3,251 | 4,126 | 1,545 | 1,124 | 10,046 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total domestic | 12,879 | 11,602 | 17,784 | 5,453 | 47,718 | �� | 7,976 | 11,246 | 21,831 | 6,134 | 47,187 | |||||||||||||||||||||||||||||
International: | ||||||||||||||||||||||||||||||||||||||||
United States: | ||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and other U.S. Government agencies | 500 | 8 | 2 | 4 | 514 | 79 | 53 | — | — | 132 | ||||||||||||||||||||||||||||||
States and political subdivisions | 23 | 53 | 17 | 1,327 | 1,420 | 267 | 86 | 75 | 6,513 | 6,941 | ||||||||||||||||||||||||||||||
Other securities | 371 | 2,310 | 722 | 7,712 | 11,115 | 693 | 1,286 | 336 | 5,333 | 7,648 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total United States | 894 | 2,371 | 741 | 9,043 | 13,049 | 1,039 | 1,425 | 411 | 11,846 | 14,721 | ||||||||||||||||||||||||||||||
Other: | ||||||||||||||||||||||||||||||||||||||||
Governments | 20,842 | 26,777 | 8,946 | 2,054 | 58,619 | 23,422 | 25,658 | 6,210 | 4,859 | 60,149 | ||||||||||||||||||||||||||||||
Other securities | 10,787 | 6,422 | 5,106 | 2,332 | 24,647 | 4,255 | 8,811 | 3,746 | 2,619 | 19,431 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total Other | 31,629 | 33,199 | 14,052 | 4,386 | 83,266 | 27,677 | 34,469 | 9,956 | 7,478 | 79,580 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total International | 32,523 | 35,570 | 14,793 | 13,429 | 96,315 | 28,716 | 35,894 | 10,367 | 19,324 | 94,301 | ||||||||||||||||||||||||||||||
Total debt investment securities | 45,402 | 47,172 | 32,577 | 18,882 | 144,033 | 36,692 | 47,140 | 32,198 | 25,458 | 141,488 |
57
Loan Portfolio
At December 31, 2011,2012, our total loans and advances to customers equaled €769.0€746.0 billion (61.45%(58.8% of our total assets). Net of allowances for credit losses, loans and advances to customers equaled €750.1€720.5 billion at December 31, 2011 (59.9%2012 (56.7% of our total assets). In addition to loans, we had outstanding at December 31, 2007,2012, 2011, 2010, 2009 and 2008 2009, 2010 and 2011 €102.2€187.7 billion, €123.3€181.6 billion, €180.0 billion, €150.6 billion €180.0 billion and €181.6€123.3 billion respectively, of undrawn balances available to third parties.
Loans by Geographic Area and Type of Customer
The following tables illustrate our loans and advances to customers (including securities purchased under agreement to resell), by domicile and type of customer, at each of the dates indicated.
IFRS-IASB At December 31, | IFRS-IASB At December 31, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||||||||||||||||||
Loans to borrowers in Spain (**): | ||||||||||||||||||||||||||||||||||||||||
Loans to borrowers in Spain: (**): | ||||||||||||||||||||||||||||||||||||||||
Spanish Government | 12,147 | 12,137 | 9,803 | 7,668 | 5,633 | 16,884 | 12,147 | 12,137 | 9,803 | 7,668 | ||||||||||||||||||||||||||||||
Commercial, financial, agricultural and industrial | 65,935 | 67,940 | 70,137 | 56,290 | 45,170 | 61,527 | 65,935 | 67,940 | 70,137 | 56,290 | ||||||||||||||||||||||||||||||
Real estate and construction (*) | 36,260 | 38,419 | 42,515 | 48,099 | 46,837 | 29,008 | 36,260 | 38,419 | 42,515 | 48,099 | ||||||||||||||||||||||||||||||
Other mortgages | 69,297 | 74,462 | 68,866 | 59,784 | 59,269 | 63,886 | 69,297 | 74,462 | 68,866 | 59,784 | ||||||||||||||||||||||||||||||
Installment loans to individuals | 12,964 | 15,985 | 20,070 | 21,506 | 21,533 | 12,775 | 12,964 | 15,985 | 20,070 | 21,506 | ||||||||||||||||||||||||||||||
Lease financing | 5,043 | 6,195 | 7,534 | 9,253 | 9,644 | 3,857 | 5,043 | 6,195 | 7,534 | 9,253 | ||||||||||||||||||||||||||||||
Other | 12,912 | 12,475 | 11,420 | 37,647 | 49,995 | 12,077 | 12,912 | 12,475 | 11,420 | 37,647 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | 214,558 | 227,613 | 230,345 | 240,247 | 238,081 | 200,014 | 214,558 | 227,613 | 230,345 | 240,247 | ||||||||||||||||||||||||||||||
Loans to borrowers outside Spain (**): | ||||||||||||||||||||||||||||||||||||||||
Loans to borrowers outside Spain: (**): | ||||||||||||||||||||||||||||||||||||||||
Non-Spanish Governments | 4,394 | 3,527 | 2,861 | 3,029 | 2,296 | 4,983 | 4,394 | 3,527 | 2,861 | 3,029 | ||||||||||||||||||||||||||||||
Commercial and industrial | 225,961 | 217,747 | 174,763 | 127,839 | 143,046 | 217,358 | 225,961 | 217,747 | 174,763 | 127,839 | ||||||||||||||||||||||||||||||
Mortgage loans | 296,330 | 269,893 | 249,065 | 201,112 | 179,164 | 290,825 | 296,330 | 269,893 | 249,065 | 201,112 | ||||||||||||||||||||||||||||||
Other | 27,793 | 25,071 | 43,390 | 67,127 | 17,207 | 32,806 | 27,793 | 25,070 | 43,390 | 67,127 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | 554,478 | 516,238 | 470,079 | 399,107 | 341,713 | 545,972 | 554,478 | 516,237 | 470,079 | 399,107 | ||||||||||||||||||||||||||||||
Total loans and leases, gross | 769,036 | 743,851 | 700,424 | 639,354 | 579,794 | 745,986 | 769,036 | 743,850 | 700,424 | 639,354 | ||||||||||||||||||||||||||||||
Allowance for possible loan losses (***) | (18,936 | ) | (19,697 | ) | (17,873 | ) | (12,466 | ) | (8,695 | ) | ||||||||||||||||||||||||||||||
Allowance for loan losses (***) | (25,504 | ) | (18,936 | ) | (19,697 | ) | (17,873 | ) | (12,466 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Loans and leases, net of allowances | 750,100 | 724,154 | 682,551 | 626,888 | 571,099 | 720,482 | 750,100 | 724,153 | 682,551 | 626,888 |
(*) | As of December 31, |
(**) | Credit of any nature granted to credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet. |
(***) | Refers to loan losses of “Loans and Advances to customers”. See “Item 3. Key information—A. Selected Financial Data”. |
At December 31, 2011,2012, our loans and advances to associated companies and jointly controlled entities amounted to €146€544 million (see “Item 7. Major Shareholders and Related Party Transactions—B. Related party transactions”). Excluding government-related loans and advances, the largest outstanding exposure to a single counterparty at December 31, 20112012 was €4.6€4.0 billion (0.6% of total loans and advances, including government-related loans), and the five next largest exposures totaled €7.0€8.1 billion (0.9%(1.1% of total loans, including government-related loans).
58
Maturity
The following table sets forth an analysis by maturity of our loans and advances to customers by domicile and type of customer at December 31, 2011.2012.
Maturity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than | One to five | Over five | Maturity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
one year | years | years | Total | Less than one year | One to five years | Over five years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance | % of Total | Balance | % of Total | Balance | % of Total | Balance | % of Total | Balance | % of Total | Balance | % of Total | Balance | % of Total | Balance | % of Total | |||||||||||||||||||||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans to borrowers in Spain: (*) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Spanish Government | 4,271 | 2.12 | % | 3,630 | 2.03 | % | 4,246 | 1.09 | % | 12,147 | 1.58 | % | 3,161 | 1.69 | % | 8,561 | 4.97 | % | 5,162 | 1.34 | % | 16,884 | 2.26 | % | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial, agriculture and industrial | 30,142 | 14.97 | % | 17,708 | 9.90 | % | 18,085 | 4.65 | % | 65,935 | 8.57 | % | 21,227 | 11.32 | % | 19,109 | 11.10 | % | 21,191 | 5.49 | % | 61,527 | 8.25 | % | ||||||||||||||||||||||||||||||||||||||||
Real estate and construction | 3,645 | 1.81 | % | 3,786 | 2.12 | % | 28,829 | 7.42 | % | 36,260 | 4.72 | % | 2,461 | 1.31 | % | 3,064 | 1.78 | % | 23,483 | 6.08 | % | 29,008 | 3.89 | % | ||||||||||||||||||||||||||||||||||||||||
Other mortgages | 6,582 | 3.27 | % | 5,079 | 2.84 | % | 57,635 | 14.83 | % | 69,296 | 9.01 | % | 10,001 | 5.33 | % | 1,671 | 0.97 | % | 52,214 | 13.52 | % | 63,886 | 8.56 | % | ||||||||||||||||||||||||||||||||||||||||
Installment loans to individuals | 5,537 | 2.75 | % | 4,935 | 2.76 | % | 2,492 | 0.64 | % | 12,964 | 1.69 | % | 5,602 | 2.99 | % | 4,199 | 2.44 | % | 2,974 | 0.77 | % | 12,775 | 1.71 | % | ||||||||||||||||||||||||||||||||||||||||
Lease financing | 881 | 0.44 | % | 2,522 | 1.41 | % | 1,640 | 0.42 | % | 5,043 | 0.66 | % | 551 | 0.29 | % | 1,870 | 1.09 | % | 1,436 | 0.37 | % | 3,857 | 0.52 | % | ||||||||||||||||||||||||||||||||||||||||
Other | 6,335 | 3.15 | % | 3,687 | 2.06 | % | 2,891 | 0.74 | % | 12,913 | 1.68 | % | 7,491 | 3.99 | % | 1,960 | 1.14 | % | 2,626 | 0.68 | % | 12,077 | 1.62 | % | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Total borrowers in Spain | 57,393 | 28.50 | % | 41,347 | 23.11 | % | 115,818 | 29.79 | % | 214,558 | 27.90 | % | 50,494 | 26.93 | % | 40,434 | 23.48 | % | 109,086 | 28.24 | % | 200,014 | 26.81 | % | ||||||||||||||||||||||||||||||||||||||||
Loans to borrowers outside Spain: (*) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-Spanish Governments | 1,678 | 0.83 | % | 1,253 | 0.70 | % | 1,463 | 0.38 | % | 4,394 | 0.57 | % | 1,754 | 0.94 | % | 1,198 | 0.70 | % | 2,031 | 0.53 | % | 4,983 | 0.67 | % | ||||||||||||||||||||||||||||||||||||||||
Commercial and Industrial | 109,338 | 54.30 | % | 91,725 | 51.28 | % | 24,898 | 6.40 | % | 225,961 | 29.38 | % | 97,418 | 51.96 | % | 81,261 | 47.20 | % | 38,679 | 10.01 | % | 217,358 | 29.14 | % | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans | 15,483 | 7.69 | % | 38,318 | 21.42 | % | 242,529 | 62.38 | % | 296,330 | 38.53 | % | 16,531 | 8.82 | % | 41,567 | 24.14 | % | 232,727 | 60.24 | % | 290,825 | 38.99 | % | ||||||||||||||||||||||||||||||||||||||||
Other | 17,456 | 8.67 | % | 6,222 | 3.48 | % | 4,115 | 1.06 | % | 27,793 | 3.61 | % | 21,295 | 11.36 | % | 7,716 | 4.48 | % | 3,795 | 0.98 | % | 32,806 | 4.40 | % | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Total loans to borrowers outside Spain | 143,955 | 71.50 | % | 137,518 | 76.88 | % | 273,005 | 70.21 | % | 554,478 | 72.10 | % | 136,998 | 73.07 | % | 131,742 | 76.52 | % | 277,232 | 71.76 | % | 545,972 | 73.19 | % | ||||||||||||||||||||||||||||||||||||||||
Total loans and leases, gross | 201,348 | 100.00 | % | 178,865 | 100.00 | % | 388,823 | 100.00 | % | 769,036 | 100.00 | % | 187,492 | 100.00 | % | 172,176 | 100.00 | % | 386,318 | 100.00 | % | 745,986 | 100.00 | % |
(*) | Credit of any nature granted to credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet. |
Fixed and Variable Rate Loans
The following table sets forth a breakdown of our fixed and variable rate loans having a maturity of more than one year at December 31, 2011.2012.
Fixed and variable rate loans | Fixed and variable rate loans having a maturity of more than one year | |||||||||||||||||||||||
having a maturity of more than one year | Domestic | International | Total | |||||||||||||||||||||
Domestic | International | Total | (in millions of euros) | |||||||||||||||||||||
(in millions of euros) | ||||||||||||||||||||||||
Fixed rate | 27,749 | 141,669 | 169,418 | 25,965 | 202,460 | 228,425 | ||||||||||||||||||
Variable rate | 129,416 | 268,854 | 398,270 | 122,455 | 354,934 | 477,389 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total | 157,165 | 410,523 | 567,688 | 148,420 | 557,394 | 705,814 |
59
Cross-Border Outstandings
The following table sets forth, as of the end of the years indicated, the aggregate amount of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked) where outstandings in the borrower’s country exceeded 0.75% of our total assets. Cross-border outstandings do not include local currency loans made by subsidiary banks in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the vast majority of the loans by Santander UK or our Latin American subsidiaries.
IFRS-IASB | ||||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||||||||||||
% of | % of | % of | IFRS-IASB | |||||||||||||||||||||||||||||||||||||||||||||
total | total | total | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||||||||
assets | assets | assets | % of total assets | % of total assets | % of total assets | |||||||||||||||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
OECD (1) (2) Countries: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total OECD Countries | 17,736 | 1.12 | % | 13,613 | 1.12 | % | 14,327 | 1.29 | % | 19,325 | 1,52 | % | 17,736 | 1.12 | % | 13,613 | 1.12 | % | ||||||||||||||||||||||||||||||
Non-OECD Countries: | ||||||||||||||||||||||||||||||||||||||||||||||||
Latin American Countries (2) (3) | 5,730 | 0.65 | % | 7,885 | 0.65 | % | 8,298 | 0.75 | % | |||||||||||||||||||||||||||||||||||||||
Non-OECD Countries: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Latin American Countries (2) (3) | 10,861 | 0.86 | % | 11,000 | 0.88 | % | 13,943 | 1.15 | % | |||||||||||||||||||||||||||||||||||||||
Other Non-OECD | 7,418 | 0.58 | % | 6,944 | 0.55 | % | 7,153 | 0.59 | % | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total Non-OECD | 17,944 | 1.73 | % | 21,096 | 1.73 | % | 20,215 | 1.82 | % | 18,279 | 1.44 | % | 17,944 | 1.73 | % | 21,096 | 1.73 | % | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Total | 35,680 | 2.85 | % | 34,709 | 2.85 | % | 34,542 | 3.11 | % | 37,604 | 2.96 | % | 35,680 | 2.85 | % | 34,709 | 2.85 | % |
(1) | The Organization for Economic Cooperation and Development. |
(2) | Aggregate outstandings in any single country in this category do not exceed 0.75% of our total assets. |
(3) | With regards to these cross-border outstandings, at December 31, |
As of December 31, 2012, 2011 2010 and 2009,2010, we did not have any cross-border outstanding to any single borrower that exceeded 0.75% of total assets.
Exposure to sovereign counterparties by credit rating
Our exposure to sovereign counterparties (the exposure is included in the financial statement line items “Financial assets held for trading – trading—Debt instruments”, “Other financial assets at fair value through profit or loss – loss—Debt instruments”, “Available for sale financial assets – assets—Debt instruments” and “Loans and receivables-Debt instruments”) organized by credit rating and our exposure to private and sovereign debt organized by origin of the issuer is included in Note 7 to the Financial Statements.
Additionally, in Note 10 to our consolidated financial statements we present the disclosure by credit rating of our exposure to sovereign counterparties recorded under the caption “loans and advances to customers”.
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The detail of Santander Group’s total risk exposure (excluding the value of any collateral associated with the corresponding balances) to the peripheral countries of the Eurozoneeurozone at December 31, 2011,2012, based on the country of the issuer or borrower in terms of sovereign risk and private sector exposure, is as follows:
Sovereign risk by country of issuer/borrower (**)
12/31/12 | 12/31/12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sovereign risk by country of issuer/borrower (**) | Sovereign risk by country of issuer/borrower (**) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Millions of euros | Millions of euros | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt instruments | Derivatives | Balances with central banks | Debt instruments (Note 7) | Loans and advances to customers (Note 10) (*) | Derivatives (***) | Total on-balance- sheet exposure | Contingent liabilities and commitments (Note 35) | Total exposure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances with central banks | Financial assets held for trading and Other financial assets at fair value through profit or loss | Available- for-sale financial assets | Loans and receivables | Loans and advances to customers (*) | Direct exposure | Indirect exposure (CDSs) | Total on- balance-sheet exposure | Contingent liabilities and commitments (off- balance exposure) | Total exposure | Financial assets held for trading and other financial assets at fair value through profit or loss | Available-for- sale financial assets | Loans and receivables | Other than CDSs | CDSs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Spain | 4,841 | 8,060 | 29,975 | 1,274 | 12,147 | 225 | — | 56,522 | 2,848 | 59,370 | 1,218 | 6,680 | 29,288 | 1,173 | 16,884 | 148 | — | 55,391 | 2,341 | 57,732 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Portugal | 1,359 | 83 | 1,741 | — | 847 | 846 | — | 4,876 | 272 | 5,148 | 1,156 | 94 | 1,998 | 125 | 644 | 1,174 | 1 | 5,192 | 33 | 5,325 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Italy | 9 | 406 | 247 | — | — | 15 | (15 | ) | 662 | — | 662 | 3 | 353 | 267 | — | 40 | — | — | 663 | 204 | 867 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Greece | — | — | 84 | — | — | — | — | �� | 84 | — | 84 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ireland | — | — | — | — | — | 139 | — | 139 | — | 139 | — | — | — | — | — | 277 | — | 277 | — | 277 |
(*) | Presented excluding valuation adjustments and impairment losses recognized (€ |
(**) |
(***) | “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying party. “CDSs” refers to the exposure to CDSs based on the location of the underlying party. |
Private sector exposure by country of issuer/borrower (**)
12/31/12 | 12/31/12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Private sector exposure by country of issuer/borrower (**) | Private sector exposure by country of issuer/borrower (**) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Millions of euros | Reverse repurchase agreements (Note 6) | Millions of euros | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt instruments | Derivatives | Debt instruments (Note 7) | Loans and advances to customers (Note 10) (*) | Derivatives (***) | Total on-balance- sheet exposure | Contingent liabilities and commitments (Note 35) | Total exposure | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to credit institutions | Financial assets held for trading and Other financial assets at fair value through profit or loss | Available- for-sale financial assets | Loans and receivables | Loans and advances to customers (*) | Direct exposure | Indirect exposure (CDSs) | Total on- balance-sheet exposure | Contingent liabilities and commitments (off- balance exposure) | Total exposure | Financial assets held for trading and other financial assets at fair value through profit or loss | Available-for- sale financial assets | Loans and receivables | Other than CDSs | CDSs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Spain | 5,547 | 2,069 | 5,385 | 955 | 202,411 | 3,226 | (46 | ) | 219,547 | 63,025 | 282,572 | 11,471 | 2,391 | 6,525 | 1,130 | 183,130 | 6,798 | (40 | ) | 211,405 | 63,101 | 274,506 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Portugal | — | 862 | 907 | 1,935 | 23,337 | 468 | (8 | ) | 27,501 | 7,706 | 35,207 | — | 903 | 518 | 1,422 | 25,215 | 635 | (4 | ) | 28,689 | 7.397 | 36,086 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Italy | — | 359 | 88 | 98 | 11,705 | (308 | ) | (4 | ) | 11,938 | 3,402 | 15,340 | — | 176 | 116 | 83 | 7,473 | (2 | ) | 8 | 7,854 | 3,234 | 11,088 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Greece | — | — | — | — | 170 | 64 | — | 234 | 138 | 372 | — | — | — | — | 96 | — | — | 96 | 135 | 231 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ireland | — | 211 | 281 | 150 | 491 | 286 | — | 1,419 | 110 | 1,529 | — | 146 | 414 | 179 | 481 | 351 | — | 1,571 | 224 | 1,795 |
(*) | Presented excluding valuation adjustments and impairment losses recognized (€ |
(**) |
(***) | “Other than CDSs” refers to |
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The following information presents the notional amount of theour CDSs at December 31, 20112012 detailed in the foregoing tables:
Millions of euros | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
12/31/12 | 12/31/12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Millions of euros | Millions of euros | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional amount | Fair value | Notional amount | Fair value | |||||||||||||||||||||||||||||||||||||||||||||||||||
Bought | Sold | Net | Bought | Sold | Net | Bought | Sold | Net | Bought | Sold | Net | |||||||||||||||||||||||||||||||||||||||||||
Spain | Sovereign | — | — | — | — | — | — | Sovereign | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Private | 3,288 | 4,122 | (834 | ) | 96 | (142 | ) | (46 | ) | Private | 2,202 | 2,952 | (750 | ) | 3 | (43 | ) | (40 | ) | |||||||||||||||||||||||||||||||||||
Portugal | Sovereign | 211 | 211 | — | 60 | (60 | ) | — | Sovereign | 225 | 207 | 18 | 14 | (13 | ) | 1 | ||||||||||||||||||||||||||||||||||||||
Private | 409 | 448 | (39 | ) | 93 | (101 | ) | (8 | ) | Private | 398 | 418 | (20 | ) | 7 | (11 | ) | (4 | ) | |||||||||||||||||||||||||||||||||||
Italy | Sovereign | 429 | 614 | (185 | ) | 46 | (61 | ) | (15 | ) | Sovereign | 518 | 608 | (90 | ) | 12 | (12 | ) | — | |||||||||||||||||||||||||||||||||||
Private | 1,106 | 1,129 | (23 | ) | 114 | (118 | ) | (4 | ) | Private | 1,077 | 1,025 | 52 | 40 | (32 | ) | 8 | |||||||||||||||||||||||||||||||||||||
Greece | Sovereign | 223 | 223 | — | 158 | (158 | ) | — | Sovereign | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Private | 54 | 44 | 10 | 9 | (9 | ) | — | Private | 20 | 20 | — | 1 | (1 | ) | — | |||||||||||||||||||||||||||||||||||||||
Ireland | Sovereign | 9 | 9 | — | 1 | (1 | ) | — | Sovereign | 9 | 9 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Private | 60 | 60 | — | 5 | (5 | ) | — | Private | 16 | 16 | — | — | — | — |
In addition, our total risk exposure to Cyprus at December 31, 2012 was €12.9 million, mainly secured loans granted in Spain and the U.K. to individuals resident in Cyprus.
Classified Assets
In the following pages, we describe the Bank of Spain’s requirements for classification of non-performing assets. The Group has established a credit loss recognition process that is independent of the process for balance sheet classification and removal of impaired loans from the balance sheet.
The description below sets forth the minimum requirements that are followed and applied by all of our subsidiaries. Nevertheless, if the regulatory authority of the country where a particular subsidiary is located imposes stricter or more conservative requirements for classification of the non-performing balances, the more strict or conservative requirements are followed for classification purposes.
The classification described below applies to all debt instruments not measured at fair value through profit or loss, and to contingent liabilities.
Bank of Spain’s Classification Requirements
a) Standard Assets
Standard assets include loans, fixed-income securities, guarantees and certain other extensions of credit that are not classified in any other category. Under this category, assets that require special watch must be identified, including restructured loans and standard assets with clients that have other outstanding risks classified as Non-Performing Past Due. Standard assets are subdivided as follows:
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(i) Negligible risk | • | All types of credits made to, or guaranteed by, any European Union country or certain other specified public entities of the countries classified in category 1 of the country-risk categories; | ||
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(ii) Low risk | Assets in this category include: | |||
• | assets qualified as collateral for monetary policy transactions in the European System of Central Banks, except those included in (i) above; | |||
• | fully-secured mortgages and financial leases on finished residential properties when outstanding risk is less than 80% of the appraised value of such property; | |||
• | ordinary mortgage backed securities; | |||
• | assets from entities whose long term debt is rated “A” or better by a qualified rating agency; and | |||
• | securities denominated in local currency and issued by government entities in countries other than those classified in category 1 of the country-risk categories, when such securities are registered in the books of the bank’s branch located in the issuer country. | |||
(iii) Medium-low risk | Assets in this category include financial leases and mortgages and pledges on tangible assets that are not included in other categories, provided that the estimated value of the financial leases and the collateral totally covers the outstanding risk. | |||
(iv) Medium risk | Assets in this category include those with Spanish residents or residents of countries classified in categories 1 or 2, provided that such assets are not included in other categories. |
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(v) Medium-high risk | Assets in this category include (unless these assets qualify as “high risk” assets) loans to individuals for the acquisition of durable consumption goods, other goods or current services not for professional use, except those registered in the Registry of Sales of Movable Assets(Registro de Ventas de Bienes | |||
(vi) High risk | Assets in this category include credit card balances; current account overdrafts and excesses in credit accounts (except those included in categories (i) and (ii)). |
b) Sub-standard Assets
This category includes all types of credits and off-balance sheet risks that cannot be classified as non performing or charged-off assets but that have certain weaknesses that may result in losses for the bank higher than those described in the previous category. Credits and off-balance sheet risks with insufficient documentation must also be classified under this category.
c) Non-Performing Past-Due Assets
The Bank of Spain requires Spanish banks to classify as non-performing the entire outstanding principal amount and accrued interest on any loan, fixed-income security, guarantee and certain other extensions of credit on which any payment of principal or interest or agreed cost is 90 days or more past due (“non-performing past-due assets”).
In relation to the aggregate risk exposure (including off-balance sheet risks) to a single obligor, if the amount of non-performing balances exceeds 25% of the total outstanding risks (excluding non-accrued interest on loans to such borrower), then banks must classify all outstanding risks to such borrower as non-performing.
Once any portion of a loan is classified as non-performing, the entire loan is placed on a non-accrual status. Accordingly, even the portion of any such a loan which may still be identified as performing will be recorded on non-accrual status.
d) Other Non-Performing Assets
The Bank of Spain requires Spanish banks to classify any loan, fixed-income security, guarantee and certain other extensions of credit as non-performing if they have a reasonable doubt that these extensions of credit will be collected (“other non-performing assets”), even if any past due payments have been outstanding for less than 90 days or the asset is otherwise performing. When a bank classifies an asset as non-performing on this basis, it must classify the entire principal amount of the asset as non-performing.
Once any such asset is classified as non-performing, it is placed on a non-accrual status.
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e) Charged-off Assets
Credit losses are generally recognized through provisions for allowances for credit losses, well before they are removed from the balance sheet. Under certain unusual circumstances (such as bankruptcy, insolvency, etc.), the loss is directly recognized through write-offs.
The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset, Spanish banks may maintain that non-performing asset, fully provisioned, on their balance sheet for the full four-year period if management believes based on objective factors that there is some possibility of recoverability of that asset.
Because the Bank of Spain does not permit partial write-offs of impaired loans, when a loan is deemed partially uncollectible, the credit loss is charged against earnings through provisions to credit allowances instead of through partial write-offs of the loan. If a loan becomes entirely uncollectible, its allowance is increased until it reaches 100% of the loan balance. The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years. Loans can be written-off earlier depending on our management’s view as to the recoverability of the loan. After that period, the loan balance and its 100% specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income at that time.
f) Country-Risk Outstandings
The Bank of Spain requires Spanish banks to classify as country-risk outstandings all loans, fixed-income securities and other outstandings to any countries, or residents of countries, that the Bank of Spain has identified as being subject to transfer risk or sovereign risk and the remaining risks derived from the international financial activity.
All outstandings must be assigned to the country of residence of the client except in the following cases:
Outstandings guaranteed by residents in other countries in a better category should be classified in the category of the guarantor.
Fully secured loans, when the security covers sufficiently the outstanding risk and can be enforced in Spain or in any other “category 1” country, should be classified as category 1.
Outstanding risks with foreign branches of a bank should be classified according to the residence of the headquarters of those branches.
The Bank of Spain has established six categories to classify such countries, as shown in the following table:
Country-Risk Categories | Description | |
1 | European Union, Norway, Switzerland, Iceland, USA, Canada, Japan, Australia and New Zealand | |
2 | Low risk countries not included in 1 | |
3 | Countries with transitory difficulties | |
4 | Countries with serious difficulties | |
5 | Doubtful countries | |
6 | Bankrupt countries |
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The Bank of Spain allows each bank to decide how to classify the listed countries within this classification scheme, subject to the Bank of Spain’s oversight. The classification is made based on criteria such as the payment record (in particular, compliance with renegotiation agreements), the level of the outstanding debt and of the charges for debt services, the debt quotations in the international secondary markets and other indicators and factors of each country as well as all the criteria indicated by the Bank of Spain. All credit extensions and off-balance sheet risks included in country-risk categories 3 to 6, except the excluded cases described below, will be classified as follows:
Sub-standard assets: All outstandings in categories 3 and 4 except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.
Non-performing assets: All outstandings in category 5 and off-balance sheet risks classified in category 6, except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.
Charged-off assets: All other outstandings in category 6 except when they should be classified as charged-off assets due to credit risk attributable to the client.
Among others, the Bank of Spain excludes from country-risk outstandings:
Regardless of the currency of denomination of the asset, risks with residents in a country registered in subsidiary companies or multigroup companies in the country of residence of the holder.
Any trade credits established by letter of credit or documentary credit with a due date of one year or less after the drawdown date.
Any interbank obligations of branches of foreign banks in the European Union and of the Spanish branches of foreign banks.
Private sector risks in countries included in the monetary zone of a currency issued by a country classified in category 1; and
Any negotiable financial assets purchased at market prices for placement with third parties within the framework of a portfolio separately managed for that purpose, held for less than six months by the company.
Non-Accrual of Interest Requirements
We stop accruing interest on the basis of contractual terms on the principal amount of any asset that is classified as an impaired asset and on category 5 (doubtful) and category 6 (bankrupt) country-risk outstandings. Thereafter, we recognize the passage of time (financial effect) releasing provisions for loan losses by calculating the present value of the estimated future cash flows using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. On the other hand, any collected interest for any assets classified as impaired are accounted for on a cash basis.
The following table shows the amount of non accrued interest owed on impaired assets and the amount of such interest that was received:
IFRS-IASB At December 31, | IFRS-IASB At December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||
Non accrued interest on the basis of contractual terms owed on impaired assets | ||||||||||||||||||||||||
Domestic | 463 | 359 | 382 | 566 | 463 | 359 | ||||||||||||||||||
International | 1,263 | 1,118 | 915 | 1,315 | 1,263 | 1,118 | ||||||||||||||||||
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Total | 1,726 | 1,477 | 1,297 | 1,881 | 1,726 | 1,477 | ||||||||||||||||||
Non accrued interest on the basis of contractual terms received on impaired assets | ||||||||||||||||||||||||
Domestic | 215 | 165 | 151 | 190 | 215 | 165 | ||||||||||||||||||
International | 199 | 180 | 158 | 229 | 199 | 180 | ||||||||||||||||||
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Total | 414 | 345 | 309 | 419 | 414 | 345 |
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The balances of impaired loans as of December 31, 2012, 2011 2010 and 20092010 are as follows:
Millions of Euros | Millions of Euros | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
Other impaired loans (*) | 4,591 | 4,872 | 3,284 | 4,735 | 4,591 | 4,872 | ||||||||||||||||||
Impaired loans more than ninety days past due | 27,445 | 23,650 | 21,270 | 31,365 | 27,445 | 23,650 | ||||||||||||||||||
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Total impaired loans | 32,036 | 28,522 | 24,554 | 36,100 | 32,036 | 28,522 |
(*) | See above “Bank of Spain Classification Requirements-d) Other Non-Performing Assets”for a detailed explanation of assets included under this category. |
The roll-forward of allowances (under IFRS-IASB) is shown in Note 10 to our consolidated financial statements.
Guarantees
The Bank of Spain requires some guarantees to be classified as non-performing in the following amounts:situations:
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in cases involving past-due guaranteed debt: (i) for non-financial guarantees, the amount demanded by the beneficiary and outstanding under the guarantee; and (ii) for financial guarantees, at least the amount classified as non-performing of the guaranteed risk; and
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in all other cases, the entire amount of the guaranteed debt when the debtor has declared bankruptcy or has demonstrated serious solvency problems, even if the guaranteed beneficiary has not reclaimed payment.
Allowances for Credit Losses and Country-Risk Requirements
We calculate simultaneously the allowances required due to credit risk attributable to the client and to country-risk and apply the ones that are more demanding.
The Bank of Spain requires that we develop internal models to manage credit risk and to calculate the allowances for both credit risk and country-risk based on historical experience. As of July 2008,We detail below the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. The Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described below. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain Guidance, was not material for any of the three years ending December 31, 2011.
The global allowances will be the sum of those corresponding to losses in specific transactions (Specific Allowances) and those not specifically assigned (General Allowance for inherent losses) due to credit risk, plus theAllowances for Country-Risk.
Specific and Collectively Assessed Allowances for Credit Losses
Our methodology for calculation of loan loss allowances is summarized as follows:
Assets classified as doubtful due to counterparty arrears: debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.
Assets classified as doubtful for reasons other than counterparty arrears: Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.
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General allowance for inherent losses: We cover our losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.
Our methodology for determining the general allowance for incurred loan losses, intends to identify the amount of incurred losses as of the balance sheet date of loans that have not yet been identified as impaired, but that we estimate based on our past history and specific facts that will manifest within a one year lead time period from the balance sheet date. The above demonstrates those loans were having problems as of the balance sheet date. That is what we call inherent losses in the contextmain characteristics of our internal models in which loan loss allowances are calculated.models.
Since 1993 we have used our internal models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, the result of the Group’s past experience, except for some designated low default portfolios. We have approximately 300 internal rating models for risk admission and monitoring (models for corporate, sovereign, financial institutions; medium and small companies, retail, etc.).
The ratings accorded to customers are regularly reviewed, incorporating new financial information and the experience in the development of the banking relationship with the customer. The regularity of the reviews increases in the case of clients who reach certain levels in the automatic warning systems and for those classified as special watch. The rating tools are also reviewed so that Group’s accuracy can be fine-tuned.
In order to make the internal ratings of the various models comparable and to be able to make comparisons with the ratings of external rating agencies, the Group has a master ratings scale. The comparisons are established via the probability of default associated with each rating.
The process:process of credit rating and parameter estimation
The credit risk associated to each transaction is quantified by means of its incurred loss. Risk measurement quantification requires following two steps; the first one is the estimation, and the second one is the assignment of the parameters that define the credit risk: Probability of Default, Loss Given Default and Exposure at Default.
We cover our losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.
We use the concept of incurred loss to quantify the cost of the credit risk and include it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models.
Incurred loss is the cost of the credit risk of a transaction that will manifest within a one year lead time from the balance sheet date considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.
The loss is calculated using statistical models that consider the following three factors: “exposure at default”, “probability of default” and “loss given default”.
Exposure at default (EaD) is the amount of risk exposure at the date |
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PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes past-dues by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets).
Estimation is based on the Group’s own internal experience, i.e. the historical records of default for each rating as well as the recoveries experience regarding non performing loans:
The LGD calculation is based on the analysis of recoveries of past due transactions, considering not only revenues and costs associated with the collection process, but also the moment when these revenues and costs take place and all indirect costs linked to the collecting activity.
counterparty. The estimation of the exposure at default (“EAD”) comes from comparing the use of the lines committed at the moment of default and a normal situation, in order to identify the real consumption of the lines at the time of default
Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction. PD estimation is based on the Group’s own internal experience, i.e. the historical records of default for each rating as well as the recoveries experience regarding non performing loans:
In portfolios where the internal experience of defaults is scant, such as banks, sovereigns or global wholesale banking, estimates of the parameters come from alternative sources: market prices or studies of outside agencies which draw on the shared experience of a sufficient number of institutions. These portfolios are called low default portfolios.
For the rest of portfolios, estimates are based on the institution’s internal experience.
PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The calculation of PD applies both to loans that are past-due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets).
Loss given default (“LGD”) is the loss arising in the event of default. It depends mainly on the credit enhancements, such as collateral and guarantees associated with the transaction. The LGD calculation is based on the analysis of recoveries of past due transactions, considering not only revenues and loans associated with the collection process, but also the moment when these revenues and costs take place and all direct costs linked to the collecting activity.
Once estimated, the credit risk parameters are assigned to assets that are not past due and play an essential role in the risk management and decision taking processes. These parameters are used by several management tools such as (1) pre-classifications, (2) economic capital, (3) return on risk adjusted capital (“RORAC”), or (4) stress scenarios.
Control of the process
Internal validation is a prerequisite for supervisory validation and consists of a specialized and sufficiently independent unit obtaining a technical opinion on whether the internal model is appropriate for the purposes used (internal and regulatory) and concluding on its usefulness and effectiveness. Moreover, it must evaluate whether the risk management and control procedures are appropriate for the entity’s strategy and risk profile.
Grupo Santander’s corporate framework of internal validation is fully aligned with the criteria for internal validation of advanced models issued by the Bank of Spain. The criterion of separation of functions is maintained between Internal Validation and Internal Auditing which, as the last element of control in the Group, is responsible for reviewing the methodology, tools and work done by Internal Validation and to give its opinion on its degree of effective independence.
Other Non-Performing Assets. If a non-performing asset isThe calculation obtained based on the output from the internal models described above reflects with best estimate of the Group as to probable credit losses and constitute an “other non-performing asset”, see “—appropriate basis for determining loan loss allowances.
As of July 2008, the Bank of Spain Classification Requirements—Other Non-Performing Assets”,approved the amountGroup’s internal models for regulatory capital calculation purposes with respect to the vast majority of the Group’s credit risk net exposure. The Bank of Spain continues to review the models for the purpose of calculating allowances for loan losses.
While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described below:
a. | Specific allowance (individuals): |
The allowance willfor debt instruments not measured at fair value through profit or loss that are classified as doubtful is generally recognized in accordance with the criteria set forth below:
i. | Assets classified as doubtful due to counterparty arrears: |
Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually. The allowances percentages are determined taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors. Loans are identified as impaired and income no longer accrued when it is determined that collection of interest or principal is doubtful or when the interest or principal has been past due for 90 days or more, unless the loan is well secured and in the process of collection. According to Bank of Spain’s requirements, non-performing loans must be fully provisioned (hence all the credit loss recognized) when they are more than 12 months overdue.
ii. | Assets classified as doubtful for reasons other than counterparty arrears: |
Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount outstandingrecognized in assets and the currentpresent value of the cash flows expected collectable cash flows.to be received. The minimum allowance will be 25% and up to 100% of the amounts treated as non-performing, depending on management’s opinion of the loan recovery expectations. When the treatment of such asset as a non-performing asset is due to, in management’s opinion, an inadequate financial or economicaleconomic condition of the borrower, and the amount estimated as non-collectible is less than 25% of the outstanding debt, the amount of the required allowance will be at least 10% of the outstanding debt.
Sub-standard Assets. The necessary allowance for assets classified in this category is determined as the difference between its outstanding balance and the current value of the expected collectable cash flows. Assets—In every case,these cases the amount of the required allowance must be higher than the collectively assessed allowance that would correspond in case of being classified as standard asset and lower than would correspond if classified as non-performing asset.doubtful. When assets are classified as sub-standard due to insufficient documentation and have an outstanding balance higher than €25,000, the applicable allowance is 10%.
b. | General allowance for inherent losses (collective): |
69Based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.
Allowances for Country risk
c. | Country risk allowance: |
Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, we classifythe Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages.percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized in respect of country risk are not material with respect to the credit loss allowances recognized.
The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain Guidance, was not material for any of the three years ending December 31, 2012.
Guarantees
Allowances for non-performing guarantees will be equal to the amount that, using prudent criteria, is considered irrecoverable.
Bank of Spain’s Foreclosed Assets Requirements
If a Spanish bank eventually acquires the properties (residential or not) which secure loans or credits, the Bank of Spain requires that the value of the foreclosed assets should be the lesser of the amount of the debt (net of allowances) and the fair value of the foreclosed assets less the estimated selling costs (which shall be at least 10% of such value).
After the initial registration of a foreclosed assets, the Bank of Spain requiresestablishes that if the valuation considerfair value of the foreclosed asset less the estimated selling cost is lower than the carrying amount, the entity should recognize the corresponding impairment.
The Bank of Spain considers the amount of time acquired assets have been held which is a clear indication of impairment. The entityAccordingly, it determines that Spanish entities will recognize impairment (unless the bids received indicate a higher amount) at least as large as the amount resulting from applying the following discounts to the initial valuation:
Terms from acquisition | % Coverage | |||
Over 12 months | 20 | |||
Over 24 month | 30 | |||
Over 36 month | 40 |
For the purpose of ensuring that the provisions determined in accordance with the abovementioned policy are reasonable under IFRS-IASB we develop an estimation of the fair value of our foreclosed assets using external valuations. The difference between both estimations was not material for any of the three years ending December 31, 2012
Bank of Spain’s Charge-off Requirements
The Bank of Spain does not permit non-performing assets to be partially charged-off.
The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid or that were made to category 6 (“bankrupt”) countries or residents of such category 6 countries. See the above sub-section entitled “—Bank of Spain Classification Requirements—Country-Risk Outstandings”. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset (in accordance with the Bank of Spain criteria discussed above), the Spanish bank may maintain that non-performing asset, fully provisioned, on its balance sheet for the full four year period if management believes based on objective factors that there is some possibility of recoverability of that asset.
70
Movements in Allowances for Credit Losses
The following table analyzes movements in our allowances for credit losses and movements, by domicile of customer, for the years indicated. See “Presentation of Financial and Other Information”. For further discussion of movements in the allowances for credit losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Impairment Losses (net)”.
IFRS-IASB | ||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(in millions of euros) | ||||||||||||||||||||
Allowance for credit losses at beginning of year | ||||||||||||||||||||
Borrowers in Spain | 6,810 | 6,993 | 5,949 | 4,512 | 4,318 | |||||||||||||||
Borrowers outside Spain | 12,929 | 10,906 | 6,771 | 4,284 | 3,970 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 19,739 | 17,899 | 12,720 | 8,796 | 8,288 | |||||||||||||||
Consolidation/deconsolidation of companies’ credit loss allowances (1) | ||||||||||||||||||||
Borrowers in Spain | — | — | — | — | — | |||||||||||||||
Borrowers outside Spain | (1,267 | ) | — | 1,426 | 2,310 | 7 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | (1,267 | ) | — | 1,426 | 2,310 | 7 | ||||||||||||||
Recoveries of loans previously charged off (2) | ||||||||||||||||||||
Borrowers in Spain | 297 | 201 | 115 | 130 | 149 | |||||||||||||||
Borrowers outside Spain | 1,503 | 1,000 | 800 | 570 | 464 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 1,800 | 1,201 | 915 | 700 | 613 | |||||||||||||||
Net provisions for credit losses (2) | ||||||||||||||||||||
Borrowers in Spain | 2,871 | 2,125 | 2,500 | 928 | 659 | |||||||||||||||
Borrowers outside Spain | 8,169 | 8,142 | 8,588 | 4,969 | 2,762 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 11,040 | 10,267 | 11,088 | 5,897 | 3,421 | |||||||||||||||
Charge offs against credit loss allowance | ||||||||||||||||||||
Borrowers in Spain | (2,798 | ) | (2,174 | ) | (1,237 | ) | (732 | ) | (574 | ) | ||||||||||
Borrowers outside Spain | (9,632 | ) | (8,739 | ) | (8,558 | ) | (3,821 | ) | (2,746 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | (12,430 | ) | (10,913 | ) | (9,795 | ) | (4,553 | ) | (3,320 | ) | ||||||||||
Other movements (3) | 106 | 1,285 | 1,545 | (430 | ) | (213 | ) | |||||||||||||
Allowance for credit losses at end of year (4) (5) | ||||||||||||||||||||
Borrowers in Spain | 6,907 | 6,810 | 6,993 | 5,949 | 4,512 | |||||||||||||||
Borrowers outside Spain | 12,081 | 12,929 | 10,906 | 6,771 | 4,284 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 18,988 | 19,739 | 17,899 | 12,720 | 8,796 | |||||||||||||||
Average loans outstanding | ||||||||||||||||||||
Borrowers in Spain | 217,235 | 224,642 | 230,642 | 235,002 | 215,521 | |||||||||||||||
Borrowers outside Spain | 513,568 | 482,407 | 436,857 | 340,939 | 330,253 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 730,803 | 707,049 | 667,499 | 575,941 | 545,774 | |||||||||||||||
Net charge-offs against loan loss allowance to average loans ratio | ||||||||||||||||||||
Borrowers in Spain | 1.15 | % | 0.88 | % | 0.49 | % | 0.26 | % | 0.20 | % | ||||||||||
Borrowers outside Spain | 1.58 | % | 1.60 | % | 1.78 | % | 0.95 | % | 0.69 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 1.45 | % | 1.37 | % | 1.33 | % | 0.67 | % | 0.50 | % |
IFRS-IASB | ||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(in millions of euros) | ||||||||||||||||||||
Allowance for credit losses at beginning of year | ||||||||||||||||||||
Borrowers in Spain | 6,907 | 6,810 | 6,993 | 5,949 | 4,512 | |||||||||||||||
Borrowers outside Spain | 12,081 | 12,929 | 10,906 | 6,771 | 4,284 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 18,988 | 19,739 | 17,899 | 12,720 | 8,796 | |||||||||||||||
Consolidation/deconsolidation of companies’ credit loss allowances (1) | ||||||||||||||||||||
Borrowers in Spain | — | — | — | — | — | |||||||||||||||
Borrowers outside Spain | (266 | ) | (1,267 | ) | — | 1,426 | 2,310 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | (266 | ) | (1,267 | ) | — | 1,426 | 2,310 | |||||||||||||
Net provisions for credit losses charged to income statement (2) | ||||||||||||||||||||
Borrowers in Spain | 8,847 | 3,169 | 2,326 | 2,615 | 1,058 | |||||||||||||||
Borrowers outside Spain | 11,030 | 9,671 | 9,142 | 9,388 | 5,539 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 19,877 | 12,840 | 11,468 | 12,003 | 6,597 | |||||||||||||||
Charge offs against credit loss allowance | ||||||||||||||||||||
Borrowers in Spain | (2,747 | ) | (2,798 | ) | (2,174 | ) | (1,237 | ) | (732 | ) | ||||||||||
Borrowers outside Spain | (8,700 | ) | (9,632 | ) | (8,739 | ) | (8,558 | ) | (3,821 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | (11,447 | ) | (12,430 | ) | (10,913 | ) | (9,795 | ) | (4,553 | ) | ||||||||||
Other movements (3) | (1,603 | ) | 106 | 1,285 | 1,545 | (430 | ) | |||||||||||||
Allowance for credit losses at end of year (4) (5) | ||||||||||||||||||||
Borrowers in Spain | 11,711 | 6,907 | 6,810 | 6,993 | 5,949 | |||||||||||||||
Borrowers outside Spain | 13,838 | 12,081 | 12,929 | 10,906 | 6,771 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 25,549 | 18,988 | 19,739 | 17,899 | 12,720 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Recoveries of loans previously charged off against income statement | ||||||||||||||||||||
Borrowers in Spain | 272 | 297 | 201 | 115 | 130 | |||||||||||||||
Borrowers outside Spain | 1,056 | 1,503 | 1,000 | 800 | 570 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 1,328 | 1,800 | 1,201 | 915 | 700 | |||||||||||||||
Average loans outstanding | ||||||||||||||||||||
Borrowers in Spain | 198,643 | 217,235 | 224,642 | 230,642 | 235,002 | |||||||||||||||
Borrowers outside Spain | 552,174 | 513,568 | 482,407 | 436,857 | 340,939 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 750,817 | 730,803 | 707,049 | 667,499 | 575,941 | |||||||||||||||
Net charge-offs against loan loss allowance to average loans ratio (6) | ||||||||||||||||||||
Borrowers in Spain | 1.25 | % | 1.15 | % | 0.88 | % | 0.49 | % | 0.26 | % | ||||||||||
Borrowers outside Spain | 1.38 | % | 1.58 | % | 1.60 | % | 1.78 | % | 0.95 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 1.35 | % | 1.45 | % | 1.37 | % | 1.33 | % | 0.67 | % |
71
(1) | The line items titled “Consolidation/deconsolidation of companies’ credit loss allowances” refer to the valuation allowance as of the acquisition date for the loans acquired in the business combinations carried out during the period after the acquired receivables have been measured at their acquisition fair values. This disclosure was not applicable in 2010 |
(2) | We have not included a separate line |
(3) | The changes in “Other Movements” from |
(4) | Allowances for the impairment losses on the assets making up the balances of “Loans and receivables—Loans and advances to customers”, “Loans and receivables—Loans and advances to credit institutions” and “Loans and |
(5) | The segregation of the allowance for credit losses between Spain and outside Spain was made by geographical location of the Group’s company that accounts for the risk. |
(6) | For the purpose of calculating the ratio, net charge-offs consist of Charge offs against credit loss allowance less Recoveries of loans previously charged off. |
The net charge-offs against loan loss allowance to average loans ratio was lower in Spain than in foreign jurisdictions as of December 31, 2012, 2011 and 2010 primarily due to the different mix of products of our credit portfolio in the various countries in which we operate (our mortgage portfolio is focused in Spain and United Kingdom while in Latin America (including Brazil) the main products are non-collateral loans (credit cards or consumer loans)). In Spain, the percentage of loans with collateral (secured by mortgages on finished homes, offices and multi-purpose premises and rural properties or by pledges on monetary deposits, listed equity instruments and debt securities of issuers with high credit ratings) as of December 31, 2012 was 62%. The figure outside Spain includes certain countries such as Brazil where mortgages (which are Brazil’s main type of collateral) represent approximately a 5%, which means that the amount of loan write-offs contributed each year by these countries is far higher, since these entities of the Group have fewer possibilities of recovering the loans once they have fallen into arrears.
72
The table below shows a breakdown of recoveries, net provisions and charge-offs against credit loss allowance by type and domicile of borrower for the years indicated.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||||||||||||||||||
Recoveries of loans previously charged off- | ||||||||||||||||||||||||||||||||||||||||
Recoveries of loans previously charged off against income statement | ||||||||||||||||||||||||||||||||||||||||
Domestic: | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial, agricultural, industrial | 135 | 41 | 32 | 30 | 32 | 85 | 135 | 41 | 32 | 30 | ||||||||||||||||||||||||||||||
Real estate and construction | 31 | 32 | 15 | 5 | 11 | 38 | 31 | 32 | 15 | 5 | ||||||||||||||||||||||||||||||
Other mortgages | 37 | 32 | 24 | 11 | 18 | 10 | 37 | 32 | 24 | 11 | ||||||||||||||||||||||||||||||
Installment loans to individuals | 92 | 89 | 43 | 75 | 70 | 137 | 92 | 89 | 43 | 75 | ||||||||||||||||||||||||||||||
Lease finance | 1 | 1 | 1 | 6 | 5 | — | 1 | 1 | 1 | 6 | ||||||||||||||||||||||||||||||
Other | 1 | 6 | — | 3 | 13 | 2 | 1 | 6 | — | 3 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Borrowers in Spain | 297 | 201 | 115 | 130 | 149 | 272 | 297 | 201 | 115 | 130 | ||||||||||||||||||||||||||||||
Borrowers outside Spain | ||||||||||||||||||||||||||||||||||||||||
Government and official institutions | — | 4 | — | — | — | — | — | 4 | — | — | ||||||||||||||||||||||||||||||
Commercial and industrial | 1,208 | 877 | 732 | 484 | 397 | 877 | 1,208 | 877 | 732 | 484 | ||||||||||||||||||||||||||||||
Mortgage loans | 197 | 72 | 35 | 28 | 30 | 79 | 197 | 72 | 35 | 28 | ||||||||||||||||||||||||||||||
Other | 98 | 47 | 33 | 58 | 37 | 100 | 98 | 47 | 33 | 58 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Borrowers outside Spain | 1,503 | 1,000 | 800 | 570 | 464 | 1,056 | 1,503 | 1,000 | 800 | 570 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | 1,800 | 1,201 | 915 | 700 | 613 | 1,328 | 1,800 | 1,201 | 915 | 700 | ||||||||||||||||||||||||||||||
Net provisions for credit losses- | ||||||||||||||||||||||||||||||||||||||||
Net provisions for credit losses charged to income statement | ||||||||||||||||||||||||||||||||||||||||
Domestic: | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial, agricultural, industrial | 935 | 647 | 753 | 265 | (278 | ) | 1,290 | 1,070 | 688 | 785 | 295 | |||||||||||||||||||||||||||||
Real estate and construction | 641 | 674 | 528 | (77 | ) | 240 | 5,378 | 672 | 706 | 543 | (72 | ) | ||||||||||||||||||||||||||||
Other mortgages | 781 | 131 | 264 | 277 | 299 | 1,291 | 818 | 164 | 288 | 288 | ||||||||||||||||||||||||||||||
Installment loans to individuals | 397 | 574 | 848 | 400 | 384 | 709 | 489 | 663 | 891 | 475 | ||||||||||||||||||||||||||||||
Lease finance | 121 | 82 | 73 | 27 | 16 | 57 | 122 | 83 | 74 | 33 | ||||||||||||||||||||||||||||||
Other | (4 | ) | 17 | 34 | 36 | (2 | ) | 122 | (2 | ) | 22 | 34 | 39 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Borrowers in Spain | 2,871 | 2,125 | 2,500 | 928 | 659 | 8,847 | 3,169 | 2,326 | 2,615 | 1,058 | ||||||||||||||||||||||||||||||
Borrowers outside Spain | ||||||||||||||||||||||||||||||||||||||||
Government and official institutions | (4 | ) | 44 | 14 | (8 | ) | (2 | ) | — | (4 | ) | 48 | 14 | (8 | ) | |||||||||||||||||||||||||
Commercial and industrial | 6,754 | 7,257 | 7,668 | 2,710 | 2,016 | 9,673 | 7,962 | 8,134 | 8,400 | 3,194 | ||||||||||||||||||||||||||||||
Mortgage loans | 966 | 453 | 533 | 243 | 238 | 624 | 1,163 | 525 | 568 | 271 | ||||||||||||||||||||||||||||||
Other | 453 | 389 | 373 | 2,024 | 510 | 733 | 550 | 435 | 406 | 2,082 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Borrowers outside Spain | 8,169 | 8,143 | 8,588 | 4,969 | 2,762 | 11,030 | 9,671 | 9,142 | 9,388 | 5,539 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | 11,040 | 10,268 | 11,088 | 5,897 | 3,421 | 19,877 | 12,840 | 11,468 | 12,003 | 6,597 | ||||||||||||||||||||||||||||||
Charge offs against credit loss allowance | ||||||||||||||||||||||||||||||||||||||||
Domestic: | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial, agricultural, industrial | (980 | ) | (704 | ) | (356 | ) | (122 | ) | (141 | ) | (755 | ) | (980 | ) | (704 | ) | (356 | ) | (122 | ) | ||||||||||||||||||||
Real estate and construction | (133 | ) | (191 | ) | (137 | ) | (34 | ) | (29 | ) | (676 | ) | (133 | ) | (191 | ) | (137 | ) | (34 | ) | ||||||||||||||||||||
Other mortgages | (592 | ) | (369 | ) | (236 | ) | (62 | ) | (12 | ) | (400 | ) | (592 | ) | (369 | ) | (236 | ) | (62 | ) | ||||||||||||||||||||
Installment loans to individuals | (870 | ) | (841 | ) | (481 | ) | (503 | ) | (357 | ) | (839 | ) | (870 | ) | (841 | ) | (481 | ) | (503 | ) | ||||||||||||||||||||
Lease finance | (220 | ) | (61 | ) | (26 | ) | (3 | ) | (1 | ) | (27 | ) | (220 | ) | (61 | ) | (26 | ) | (3 | ) | ||||||||||||||||||||
Other | (3 | ) | (8 | ) | (1 | ) | (8 | ) | (34 | ) | (50 | ) | (3 | ) | (8 | ) | (1 | ) | (8 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Borrowers in Spain | (2,798 | ) | (2,174 | ) | (1,237 | ) | (732 | ) | (574 | ) | (2,747 | ) | (2,798 | ) | (2,174 | ) | (1,237 | ) | (732 | ) | ||||||||||||||||||||
Borrowers outside Spain | ||||||||||||||||||||||||||||||||||||||||
Government and official institutions | — | (43 | ) | — | — | — | — | — | (43 | ) | — | — | ||||||||||||||||||||||||||||
Commercial and industrial | (8,445 | ) | (7,994 | ) | (7,827 | ) | (2,807 | ) | (1,970 | ) | (7,402 | ) | (8,445 | ) | (7,994 | ) | (7,827 | ) | (2,807 | ) | ||||||||||||||||||||
Mortgage loans | (791 | ) | (445 | ) | (393 | ) | (2 | ) | (7 | ) | (477 | ) | (791 | ) | (445 | ) | (393 | ) | (2 | ) | ||||||||||||||||||||
Other | (396 | ) | (257 | ) | (338 | ) | (1,012 | ) | (769 | ) | (821 | ) | (396 | ) | (257 | ) | (338 | ) | (1,012 | ) | ||||||||||||||||||||
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Borrowers outside Spain | (9,632 | ) | (8,739 | ) | (8,558 | ) | (3,821 | ) | (2,746 | ) | (8,700 | ) | (9,632 | ) | (8,739 | ) | (8,558 | ) | (3,821 | ) | ||||||||||||||||||||
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Total | (12,430 | ) | (10,913 | ) | (9,795 | ) | (4,553 | ) | (3,320 | ) | (11,447 | ) | (12,430 | ) | (10,913 | ) | (9,795 | ) | (4,553 | ) |
The table below shows a breakdown of allowances for credit losses by type and domicile of borrower for the years indicated.
73
Allowances for Credit Losses
IFRS-IASB Year Ended December 31, | IFRS-IASB Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2011 | % | 2010 | % | 2009 | % | 2008 | % | 2007 | % | 2012 | % | 2011 | % | 2010 | % | 2009 | % | 2008 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowers in Spain: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial, financial, agricultural, industrial | 1,579 | 8.32 | 1,499 | 7.59 | 1,743 | 9.74 | 1,690 | 13.29 | 1,121 | 12.75 | 1,775 | 6.95 | 1,579 | 8.32 | 1,499 | 7.59 | 1,743 | 9.74 | 1,690 | 13.29 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate and construction (*) | 3,210 | 16.91 | 2,723 | 13.80 | 1,896 | 10.59 | 1,490 | 11.72 | 1,413 | 16.06 | 7,511 | 29.40 | 3,210 | 16.91 | 2,723 | 13.80 | 1,896 | 10.59 | 1,490 | 11.72 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other mortgages | 1,325 | 6.98 | 1,329 | 6.73 | 1,375 | 7.68 | 1,272 | 10.00 | 805 | 9.16 | 1,420 | 5.56 | 1,325 | 6.98 | 1,329 | 6.73 | 1,375 | 7.68 | 1,272 | 10.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Installment loans to individuals | 690 | 3.63 | 1,065 | 5.40 | 1,674 | 9.35 | 1,182 | 9.29 | 927 | 10.53 | 823 | 3.22 | 690 | 3.63 | 1,065 | 5.40 | 1,674 | 9.35 | 1,182 | 9.29 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lease finance | 101 | 0.53 | 169 | 0.85 | 216 | 1.21 | 113 | 0.89 | 162 | 1.85 | 103 | 0.40 | 101 | 0.53 | 169 | 0.85 | 216 | 1.21 | 113 | 0.89 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 2 | 0.01 | 25 | 0.13 | 89 | 0.50 | 202 | 1.59 | 84 | 0.95 | 79 | 0.31 | 2 | 0.01 | 25 | 0.13 | 89 | 0.50 | 202 | 1.59 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Borrowers in Spain | 6,907 | 36.37 | 6,810 | 34.50 | 6,993 | 39.07 | 5,949 | 46.77 | 4,512 | 51.30 | 11,711 | 45.84 | 6,907 | 36.37 | 6,810 | 34.50 | 6,993 | 39.07 | 5,949 | 46.77 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowers outside Spain: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government and official institutions | 31 | 0.17 | 31 | 0.16 | 19 | 0.11 | 14 | 0.11 | 26 | 0.29 | 30 | 0.12 | 31 | 0.17 | 31 | 0.16 | 19 | 0.11 | 14 | 0.11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 9,334 | 49.16 | 9,811 | 49.70 | 8,529 | 47.65 | 4,518 | 35.52 | 2,762 | 31.40 | 10,628 | 41.60 | 9,334 | 49.16 | 9,811 | 49.70 | 8,529 | 47.65 | 4,518 | 35.52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | 1,791 | 9.43 | 1,876 | 9.50 | 1,555 | 8.69 | 1,615 | 12.70 | 1,355 | 15.40 | 2,054 | 8.04 | 1,791 | 9.43 | 1,876 | 9.50 | 1,555 | 8.69 | 1,615 | 12.70 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 925 | 4.87 | 1,211 | 6.14 | 803 | 4.48 | 624 | 4.91 | 141 | 1.61 | 1,126 | 4.41 | 925 | 4.87 | 1,211 | 6.14 | 803 | 4.48 | 624 | 4.91 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Borrowers outside Spain | 12,081 | 63.63 | 12,929 | 65.50 | 10,906 | 60.93 | 6,771 | 53.23 | 4,284 | 48.70 | 13,838 | 54.16 | 12,081 | 63.63 | 12,929 | 65.50 | 10,906 | 60.93 | 6,771 | 53.23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total | 18,988 | 100.00 | 19,739 | 100.00 | 17,899 | 100.00 | 12,720 | 100.00 | 8,796 | 100.00 | 25,549 | 100.00 | 18,988 | 100.00 | 19,739 | 100.00 | 17,899 | 100.00 | 12,720 | 100.00 |
(*) | As of December 31, |
Impaired Balances
The following tables show our impaired assets (loans, securities and other assets to collect) and contingent liabilities, excluding country-risk. We do not keep records classifying balances as non-accrual, past due, restructured or potential problem loans, as those terms are defined by the SEC. However, we have estimated the amount of our balances that would have been so classified, to the extent possible, below.
IFRS At December 31, | IFRS At December 31, | |||||||||||||||||||||||||||||||||||||||
Non-performing balances | 2011 | 2010 | 2009 | 2008 | 2007 | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||||||||||||||||||
Past-due and other non-performing balances (1) (2) (3): | ||||||||||||||||||||||||||||||||||||||||
Domestic | 15,340 | 12,474 | 10,406 | 6,406 | 1,887 | 16,623 | 15,340 | 12,474 | 10,406 | 6,406 | ||||||||||||||||||||||||||||||
International | 16,696 | 16,048 | 14,148 | 7,785 | 4,291 | 19,477 | 16,696 | 16,048 | 14,148 | 7,785 | ||||||||||||||||||||||||||||||
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Total | 32,036 | 28,522 | 24,554 | 14,191 | 6,178 | 36,100 | 32,036 | 28,522 | 24,554 | 14,191 |
(1) | We estimate that the total amount of our non-performing balances fully provisioned under IFRS and which under U.S. GAAP would have been charged-off from the balance sheet was |
(2) | Non-performing balances due to country risk were |
(3) | We estimate that at December 31, 2012, 2011, 2010, 2009 |
74
We do not believe that there is a material amount of assets not included in the foregoing table where known information about credit risk at December 31, 20112012 (not related to transfer risk inherent in cross-border lending activities) gave rise to serious doubts as to the ability of the borrowers to comply with the loan repayment terms at such date.
The following table shows our financial assets classified as loans and receivables which are considered to be impaired due to credit risk at December 31, 2011,2012, classified by geographical location of risk and by age of the oldest past-due amount (see Note 10.d, to our consolidated financial statements):
Millions of euros | ||||||||||||||||||||||||||||||||||||||||||||||||
Millions of euros | With no past-due balances or less than 3 months past due | With balances past due by | ||||||||||||||||||||||||||||||||||||||||||||||
With no past-due balances or less | With balances past due by | 3 to 6 months | 6 to 9 months | 9 to 12 months | More than 12 months | Total | ||||||||||||||||||||||||||||||||||||||||||
than 3 months past due | 3 to 6 months | 6 to 9 months | 9 to 12 months | More than 12 months | Total | |||||||||||||||||||||||||||||||||||||||||||
Spain | 2,962 | 3,574 | 1,589 | 1,956 | 4,902 | 14,983 | 3,268 | 3,364 | 2,058 | 1,263 | 6,372 | 16,325 | ||||||||||||||||||||||||||||||||||||
European Union (excluding Spain) | 474 | 3,360 | 1,018 | 703 | 2,752 | 8,307 | 233 | 3,821 | 1,232 | 821 | 3,280 | 9,387 | ||||||||||||||||||||||||||||||||||||
United States and Puerto Rico | 406 | 282 | 137 | 118 | 533 | 1,476 | 327 | 216 | 111 | 83 | 484 | 1,221 | ||||||||||||||||||||||||||||||||||||
Other OECD countries | 9 | 34 | 37 | 43 | 1 | 124 | 12 | 42 | 40 | 43 | — | 137 | ||||||||||||||||||||||||||||||||||||
Latin America | 440 | 2,438 | 1,339 | 1,075 | 1,103 | 6,395 | 535 | 3,263 | 1,641 | 1,282 | 1,548 | 8,269 | ||||||||||||||||||||||||||||||||||||
Rest of the world | — | 2 | — | — | — | 2 | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||||
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4,291 | 9,690 | 4,120 | 3,895 | 9,291 | 31,287 | |||||||||||||||||||||||||||||||||||||||||||
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The financial assets classified under the caption “loans and receivables” of our balance sheet as of December 31, 20112012 that are considered to be impaired due to credit risk and bear past-due amounts of more than 12 months amounted to €9,291€11,685 million (29.7%(33.1% of total impaired loans).
Evolution of Impaired Balances
The following tables show the movement in our impaired assets and contingent liabilities (excluding country risk, see “—Country risk Outstandings” herein).
IFRS | IFRS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions of euros) | Quarter ended | Year ended Dec. 31, | Year ended Dec. 31, | Year ended Dec. 31, | Year ended Dec. 31, | Year ended Dec. 31, | Quarter ended | Year ended Dec. 31, | Year ended Dec. 31, | Year ended Dec. 31, | Year ended Dec. 31, | Year ended Dec. 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mar. 31, 2011 | Jun. 30, 2011 | Sep. 30, 2011 | Dec. 31, 2011 | 2011 | 2010 | 2009 | 2008 | 2007 | Mar. 31, 2012 | Jun. 30, 2012 | Sep. 30, 2012 | Dec. 31, 2012 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Opening balance | 28,522 | 28,494 | 30,186 | 30,910 | 28,522 | 24,554 | 14,191 | 6,179 | 4,608 | 32,036 | 32,560 | 34,365 | 35,826 | 32,036 | 28,522 | 24,554 | 14,191 | 6,179 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net additions | 3,112 | 4,015 | 4,206 | 4,048 | 15,381 | 13,478 | 18,234 | 11,346 | 5,014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increase in scope of consolidation | 186 | 739 | — | — | 925 | 257 | 1,033 | 2,089 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increases | 8,334 | 10,024 | 8,152 | 8,594 | 35,103 | 35,252 | 31,764 | 36,067 | 23,545 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash recoveries | (3,994 | ) | (4,088 | ) | (3,741 | ) | (4,486 | ) | (16,309 | ) | (16,316 | ) | (15,802 | ) | (15,951 | ) | (11,133 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreclosed assets | (701 | ) | (483 | ) | (574 | ) | (388 | ) | (2,146 | ) | (2,699 | ) | (2,484 | ) | (1,882 | ) | (1,066 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in scope of consolidation | (602 | ) | (25 | ) | (1 | ) | — | (628 | ) | 69 | 257 | 1,033 | 2,089 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (558 | ) | (31 | ) | (444 | ) | 672 | (362 | ) | 1,147 | 890 | (871 | ) | (124 | ) | 37 | (71 | ) | (40 | ) | (435 | ) | (509 | ) | (362 | ) | 1,147 | 890 | (871 | ) | ||||||||||||||||||||||||||||||||||||||||||
Writeoffs | (2,767 | ) | (3,031 | ) | (3,037 | ) | (3,594 | ) | (12,430 | ) | (10,914 | ) | (9,794 | ) | (4,552 | ) | (3,320 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Write-offs | (2,550 | ) | (3,552 | ) | (2,335 | ) | (3,011 | ) | (11,447 | ) | (12,430 | ) | (10,914 | ) | (9,794 | ) | (4,552 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Closing balance | 28,495 | 30,186 | 30,911 | 32,036 | 32,036 | 28,522 | 24,554 | 14,191 | 6,179 | 32,560 | 34,365 | 35,826 | 36,100 | 36,100 | 32,036 | 28,522 | 24,554 | 14,191 |
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NPL balances increased in 2011 by €3,514 million to €32,036 million (an increase of 12.3% as compared to 2010). NPL balances were €28,522 million in 2010, a 16% increase as compared to €24,554 million in 2009. These variations reflect the impact of continued weak economic environments in some markets, mitigated in part by risk management activities. In 2011, NPLs fell at Santander Consumer Finance and Sovereign, but rose in both of the economies most affected by the crisis, namely Spain and Portugal, and, to a lesser extent, in the countries better placed in the economic cycle, such as the UK. In Latin America as a whole, the increase in NPLs tracked lending growth.
In 2011, net additions to non-performing balances increased by a total amount of €1,903 million as compared to a decrease of €4,756 million in 2010, mainly due to the deterioration in the economy in Spain that was more severe than foreseen.
The €925 million increase in the scope of consolidation in 2011 mainly reflects the impact from the consolidation of Bank Zachodni WBK in Poland during the year.
Charge-offs increased from 2010 to 2011 by €1,517 million as compared to a €1,119 million increase from 2009 to 2010. The increase during 2011 was of €624 million in Spain (+€937 million in 2010) and of €893 million outside Spain (+€182 million in 2010). The chargeoffs in Spain reflect the still weak Spanish economy. Outside Spain charge-offs increased more than the previous year mainly due to the growth of the credit portfolio in Latin America.
Charge-offs increased from 2009 to 2010 by €1,119 million as compared to a €5,243 million increase from 2008 to 2009. The increase during 2010 was more significant in Spain (+€936.9 million) while charge-offs outside Spain increased to a significantly lesser degree (+€181.7 million). This was due to the still weak Spanish economy which ended 2010 with a negative growth of -0.1% while the main foreign economies either grew strongly or were showing signs of recovery.
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Impaired Balances Ratios
The following table shows the total amount of our computable credit risk, our non-performing assets and contingent liabilities by category, our allowances for credit losses, the ratio of our impaired balances to total computable credit risk and our coverage ratio at the dates indicated.
IFRS At December 31, | IFRS At December 31, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||
Computable credit risk (1) | 822,657 | 804,036 | 758,347 | 697,200 | 649,342 | 794,901 | 822,657 | 804,036 | 758,347 | 697,200 | ||||||||||||||||||||||||||||||
Non-performing balances by segments: | ||||||||||||||||||||||||||||||||||||||||
Non-performing balances by category: | ||||||||||||||||||||||||||||||||||||||||
Individuals | 15,981 | 15,606 | 14,590 | 10,114 | 4,775 | 16,867 | 15,981 | 15,606 | 14,590 | 10,114 | ||||||||||||||||||||||||||||||
Mortgages | 6,872 | 6,304 | 6,111 | 3,239 | 1,585 | 7,281 | 6,872 | 6,304 | 6,111 | 3,239 | ||||||||||||||||||||||||||||||
Consumer loans | 6,254 | 6,487 | 6,164 | 5,711 | 2,696 | 5,961 | 6,254 | 6,487 | 6,164 | 5,711 | ||||||||||||||||||||||||||||||
Credit cards and others | 2,855 | 2,815 | 2,315 | 1,164 | 494 | 3,625 | 2,855 | 2,815 | 2,315 | 1,164 | ||||||||||||||||||||||||||||||
Enterprises | 14,995 | 11,321 | 7,812 | 2,860 | 1,310 | 18,155 | 14,995 | 11,321 | 7,812 | 2,860 | ||||||||||||||||||||||||||||||
Corporate Banking | 954 | 1,550 | 2,127 | 1,130 | 62 | 991 | 954 | 1,550 | 2,127 | 1,130 | ||||||||||||||||||||||||||||||
Public sector | 106 | 45 | 25 | 87 | 32 | 87 | 106 | 45 | 25 | 87 | ||||||||||||||||||||||||||||||
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Total non performing balances | 32,036 | 28,522 | 24,554 | 14,191 | 6,179 | 36,100 | 32,036 | 28,522 | 24,554 | 14,191 | ||||||||||||||||||||||||||||||
Allowances for non-performing balances | 19,661 | 20,748 | 18,497 | 12,863 | 9,302 | 26,194 | 19,661 | 20,748 | 18,497 | 12,863 | ||||||||||||||||||||||||||||||
Ratios | ||||||||||||||||||||||||||||||||||||||||
Non-performing balances to computable credit risk | 3.89 | % | 3.55 | % | 3.24 | % | 2.04 | % | 0.95 | % | ||||||||||||||||||||||||||||||
Non-performing balances (2) to computable credit risk | 4.54 | % | 3.89 | % | 3.55 | % | 3.24 | % | 2.04 | % | ||||||||||||||||||||||||||||||
Coverage ratio | 61.37 | % | 72.74 | % | 75.33 | % | 90.64 | % | 150.55 | % | 72.56 | % | 61.37 | % | 72.74 | % | 75.33 | % | 90.64 | % | ||||||||||||||||||||
Balances charged-off to total loans and contingent liabilities | 1.29 | % | 1.21 | % | 1.17 | % | 0.55 | % | 0.41 | % | 1.27 | % | 1.29 | % | 1.21 | % | 1.17 | % | 0.55 | % |
(1) | Computable credit risk is the sum of the face amounts of loans and leases (including non-performing assets but excluding country risk loans), guarantees and documentary credits. |
(2) | Impaired or non-performing loans and contingent liabilities, securities and other assets to collect. |
(3) | Allowances for non-performing balances as a percentage of non-performing balances. |
Non-performing loan (NPL) balances were €36,100 million at December 31, 2012, a €4,064 million increase as compared to €32,036 million at December 31, 2011. The Group’s NPL ratio of non-performing balances to computable credit risk was 3.89%, 3.55%, 3.24%, 2.04%, and 0.95%, and for the Group as a whole as of December 31, 2011, 2010, 2009, 2008 and 2007, respectively. 2012 was 4.54%, as compared to 3.89% as of December 31, 2011.
The 34 basis point increaseNPL coverage ratio as of December 31, 2012 was 72.6%, as compared to a coverage ratio of 61.4% at the end of 2011. This ratio is calculated as allowances for non-performing balances as a percentage of non-performing balances.
The main reasons for the increases in 2011 reflects the impact ofNPL ratio are the deterioration of the economic environment. This continued weakness increased thefollowing:
The still weak situation in some markets continues to push up NPLs ratio, due both to the rise in bad and doubtful loans (the numerator) as well as theand slower growth in lending, (denominator).or reductions in lending volumes in some cases.
The increase in non-performing balances is also aggravated through the classification as non-performing of the entire outstanding principal amount and accrued interest on any loan on which any payment of principal, interest or agreed cost is 90 days or more past due. We refer to this effect as the “individual loan drag effect”. An additional impact occurs by the so-called “client drag effect”, through which Spanish banking groups classify as non-performing the aggregate risk exposure (including off-balance sheet risks) to a single obligor, whenever the amount of non-performing balances of such obligor exceeds 25% of its total outstanding risks (excluding non-accrued interest on loans to such borrower). Both drag effects have a larger impact in the case of mortgages and corporate loans due to the greater average amount of these loans. For
The NPL ratios by country as of December 31, 2012 are set out below.
The NPL ratio in Spain was 6.74% (+125 basis points more detailed information on credit risk, particularlythan at December 2011). Spain’s recession is pushing up NPL entries, largely in the real estate risksector, although the recoveries and sale of portfolios is containing the rise in Spain, please see “Item 11. Quantitative And Qualitative Disclosures About Market Risk. Part 4. Credit Risk”.
the balance of bad loans. The NPLprovisions made for the real estate sector brought the coverage ratio was 61.4% in 2011, as comparedlevel to a coverage ratio of 72.7%70.6% up from 45.5% at the end of 2010. This2011. Excluding the portfolio with real estate purpose, the NPL ratio is calculated as allowances for non-performing balances as a percentage of non-performing balances.
77
In 2009, the Group’s non-performing balances increasedwas 4.0% (+65 basis points more than December 2011) mainly due to (1) the rapidworsening of Spain’s macroeconomic situation as a result of economic slowdown, falling consumer spending and job market deterioration and also due to the reduction in lending. The NPL ratio of the global macroeconomic environmentportfolio with mortgage guarantee was slightly lower than in 2011 and (2) the increase in the Bank’s scope of consolidation (due to the acquisitions of Alliance & Leicester, Sovereign, Banco Real, GE Money and RBS Europe). Other factors leading to the increase in the Group’s non-performing balances were the higher volumes of lending in recent years and the change of mix (principally in Latin America) toward more profitable but higher risk products. The principal geographic drivers of the increase in non-performing balances, other than through acquisitions, were Spain, the United Kingdom and Brazil.
We establish our expectations of credit loss (and our corresponding allowances) for our entire loan portfolio, not just for our non-performing balances. Our expectations of credit loss for our entire portfolio typically increaseended 2012 at a slower rate than the rate at which our non-performing balances increase, particularly during an economic downturn, when non-performing loans grow quickly but the performing loan portfolio grows at a slower pace and with lower-risk loans, reflecting caution due to macroeconomic conditions. As a result, the ratio of our non-performing balances to computable credit risk typically increases since the numerator (non-performing balances) increases faster than the denominator (computable credit risk). Similarly, our coverage ratio typically decreases since,2.6%, well below that for the reasons discussed above,rest of businesses in Spain. See Item 4. Information on the numerator (allowances for credit losses) does not increase as quickly asCompany—Other Material Events.
In Portugal, the denominator (non-performing balances).
We are currently highly exposedNPL ratio increased again in December 2012 to real estate markets, especially in Spain and the United Kingdom. The mortgage portfolio of the commercial network in Spain accounted for a 34% of the total loan portfolio of this segment and in the United Kingdom it comprised more than 80%. Mortgage loans are one of our principal assets, comprising 52% of our loan portfolio6.56%, compared to 4.06% as of December 31, 2011) due to the difficult economic environment and mainly concentrated in loans to enterprises. Coverage was 53% as of December 31, 2012.
Santander Consumer Finance’s NPL ratio was 3.90%, below that at the end of December 2011 (3.97%). Coverage ratio remained virtually unchanged in December 2012 (110%) compared to December 31, 2011.
Poland’s Bank Zachodni WBK has a NPL ratio of 4.72%, less than at the end of December 2011 (4.9%) and well below the 6.4% recorded in June 2011 when it was consolidated into the Group. Coverage ratio was 68% as of December 31, 2012.
In the U.K., the NPL ratio was 2.05% (1.86% in December 2011). Coverage ratio was 45% as of December 31, 2012. Loan-loss provisions rose 22.8%, although the rate of growth slowed. Both the stock of residential properties in possession (0.06%) as well as the NPL ratio of residential mortgages (1.74%) remained low with underlying performance stable and both better than the sector average, according to the Council of Mortgage Lenders (CML).
The NPL for Latin America ratio increased from 4.32% to 5.42%, while coverage decreased from 97% to 88%. Brazil’s NPL ratio is 6.86%, up 148 basis points since December 2011. Provisions for loan losses were 46.2% higher, due to worsening of credit quality in the system, given the environment of low economic growth. However, they started to decline in the third and fourth quarters. Coverage ratio was 90% as of December 31, 2012. The increase in NPL was mainly driven by the commercial, financial and industrial loan portfolios due to unfavorable economic conditions resulting from a slowdown in Brazilian economic activity in 2012 and 2011 and we are focused onby the installment loans to individuals lending portfolio due to a high level of household debt of Brazilian families combined with inflation.
Sovereign’s NPL ratio was 2.29% and coverage 106%. The evolution of both in the first home mortgages. From 2002half of 2012 was good and the NPL ratio has declined and coverage increased in every quarter since the end of 2009 due to 2007, demandthe improved composition of the portfolio and strict management of risk.
Allowances for housing and mortgage financingnon performing balances were €26,194 million at December 31, 2012, a €6,533 million increase as compared to €19,661 million at December 31, 2011. The Group has significantly increased provisions in 2012, mainly in the real estate sector in Spain (see Item 4 “Information of the Company. B-Business Overview-Other Material Events”) and in Latin America largely influenced by increased significantly driven by, among other things, economic growth, declining unemployment rates, demographiclending, collective provisions and social trends, and historically low interest ratesa worsening of non-performing loans in some markets.
In Spain, the increase in provisions recognized in 2012 was the result of the downturn in the Eurozone. The United Kingdom experiencedSpanish economy. During 2012, the Spanish economy contracted, provoking a similar increasedeterioration in housing and mortgage demand, driven by, among other things, economic growth, decliningthe unemployment rates, demographic trends andrate; this situation has affected the increasing prominence of London as an international financial center. In this favorable environment, we maintained prudent risk management with a mortgage portfolio focused on first homes with low average loanamounts expected to value. Asbe recovered (as a result of the general macroeconomic deteriorationworsening economic situation of borrowers) and has resulted in a decrease in the second halfvalue of 2008, a percentagecollateral. The impact of these assets became non-performingfactors was felt in the portfolios of financing to the real estate sector. The real estate sector is being particularly impacted by the Spanish economy and as a resultthe restructuring of the qualitysector itself, prompted by a drastic reduction in business volume, which is leading to a substantial reduction in installed capacity. Partially offsetting the effect on the market of the collateral,decline in construction activity are the inexistencevolumes of both option adjustable rate mortgage (“ARM”) loans andproperties foreclosed by financial institutions in the last few years. The excess supply derived from the stock of monthly payments below accrued interest,unsold properties continues to push down the requirementsprices of the real estate assets.
In addition to the real estate provisions in Spain explained above, the main increases in the allowances for non performing balances are the following:
In Brazil the allowances for non performing balances increased during 2012 in €852 million due to worsening credit quality in the banking system given the environment of low economic growth. This increase in allowances is concentrated in installment loans to individuals.
In the U.K. the allowances for non performing balances increased during 2012 in €383 million (or 21%) due to an increase of 96.5% in provisions during the year. This increase in provisions mainly relates to the review and full re-assessment of the assets held in the non-core corporate and legacy portfolios in run-off. The provisions relate to assets acquired from Alliance & Leicester plc (particularly the shipping portfolio) as well as certain assets within the old Abbey Commercial Mortgages book. The amount of the provision reflects the increasing losses experienced in these non-performing assets have remained low.portfolios.
In Portugal the allowances for non performing balances increased during 2012 in €306 million due to the difficult economic environment and mainly concentrated in loans to enterprises.
Other non-accruing balances
As described previously herein under “Bank of Spain Classification Requirements”, we do not classify our loans and contingent liabilities to borrowers in countries with transitory difficulties (category 3) and countries in serious difficulties (category 4) as impaired balances. Loans and contingent liabilities in these categories do not stop accruing interest. However, we treat category 5 (doubtful countries) country-risk outstandings as both a non-accruing and impaired balance.
Summary of non-accrual balances | IFRS-IASB Year Ended December 31, | |||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(in millions of euros) | ||||||||||||||||||||
Balances classified as non-performing balances | 32,036.0 | 28,522.4 | 24,553.6 | 14,190.8 | 6,178.7 | |||||||||||||||
Non-performing balances due to country risk | 7.0 | 7.9 | 7.8 | 2.6 | 6.7 | |||||||||||||||
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Total non-accruing balances | 32,043.0 | 28,530.3 | 24,561.4 | 14,193.4 | 6,185.4 |
As of December 31, 2011, 2010, 2009, 2008 and 2007, the amounts of refinanced loans were €10,167 million, €5,956 million, €3,829 million, €648.7 million and €465.2 million, respectively. A definition of refinanced loans and a detailed explanation of the corporate policy of restructurings can be found under “Item 11. Quantitative and Qualitative Disclosures About Market Risk – Part 4. Credit risk – Credit exposure in Spain – Restructuring and Payment Agreements” herein. The strong increase in 2009 and 2010 was directly related to the increase in non-performing loans. In 2011, the main increases were in the commercial business and individual segments.
Summary of non-accrual balances | IFRS-IASB Year Ended December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(in millions of euros) | ||||||||||||||||||||
Balances classified as non-performing balances | 36,100 | 32,036 | 28,522 | 24,554 | 14,191 | |||||||||||||||
Non-performing balances due to country risk | 6 | 7 | 8 | 7 | 2 | |||||||||||||||
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| |||||||||||
Total non-accruing balances | 36,106 | 32,043 | 28,530 | 24,561 | 14,193 |
78
Foreclosed Assets and Assets Received in Payment of Customer Debts
The tables below set forth the movements in our foreclosed assets and assets acquired in payment of customer debts for the periods shown.
IFRS-IASB | IFRS-IASB | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Quarterly movements | Year Ended December 31, | Quarterly movements | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Mar. 31, 2011 | Jun. 30, 2011 | Sep. 30, 2011 | Dec. 31, 2011 | 2011 | 2010 | 2009 | Mar. 31, 2012 | Jun. 30, 2012 | Sep. 30, 2012 | Dec. 31, 2012 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Opening balance | 4,046 | 4,469 | 5,051 | 5,325 | 4,046 | 2,716 | 1,310 | 9,624 | 9,316 | 9,115 | 8,998 | 9,624 | 8,376 | 7,034 | ||||||||||||||||||||||||||||||||||||||||||
Foreclosures | 878 | 1,078 | 613 | 806 | 3,375 | 3,164 | 3,384 | 672 | 695 | 675 | 561 | 2,603 | 2,699 | 3,353 | ||||||||||||||||||||||||||||||||||||||||||
Sales | (455 | ) | (496 | ) | (339 | ) | (678 | ) | (1,968 | ) | (1,834 | ) | (1,978 | ) | (649 | ) | (989 | ) | (655 | ) | (955 | ) | (3,248 | ) | (1,591 | ) | (2,182 | ) | ||||||||||||||||||||||||||||
Other movements | (331 | ) | 93 | (137 | ) | 7 | (368 | ) | 140 | 171 | ||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Gross foreclosed assets | 4,469 | 5,051 | 5,325 | 5,453 | 5,453 | 4,046 | 2,716 | |||||||||||||||||||||||||||||||||||||||||||||||||
Gross foreclosed assets and assets acquired in payment of customer debts | 9,316 | 9,115 | 8,998 | 8,611 | 8,611 | 9,624 | 8,376 | |||||||||||||||||||||||||||||||||||||||||||||||||
Of which: in Spain | 8,603 | 8,400 | 8,286 | 7,846 | 7,846 | 8,552 | 7,509 | |||||||||||||||||||||||||||||||||||||||||||||||||
Allowances established | 1,257 | 1,403 | 1,503 | 1,683 | 1,683 | 1,138 | 713 | 4,368 | 4,388 | 4,315 | 4,416 | 4,416 | 4,512 | 2,512 | ||||||||||||||||||||||||||||||||||||||||||
Of which: in Spain | 4,158 | 4,180 | 4,189 | 4,170 | 4,170 | 4,278 | 2,313 | |||||||||||||||||||||||||||||||||||||||||||||||||
Closing balance (net) (*) | 4,948 | 4,727 | 4,683 | 4,195 | 4,195 | 5,112 | 5,864 | |||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Closing balance (net) | 3,212 | 3,648 | 3,822 | 3,770 | 3,770 | 2,908 | 2,003 | |||||||||||||||||||||||||||||||||||||||||||||||||
Allowance as a percentage of foreclosed assets | 28.13 | % | 27.78 | % | 28.22 | % | 30.86 | % | 30.86 | % | 28.14 | % | 26.27 | % | ||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||
Of which: in Spain | 4,445 | 4,220 | 4,097 | 3,676 | 3,676 | 4,274 | 5,196 | |||||||||||||||||||||||||||||||||||||||||||||||||
Allowance as a percentage of foreclosed assets and assets acquired in payment of customer debts | 46.9 | % | 48.1 | % | 47.9 | % | 51.3 | % | 51.3 | % | 46.9 | % | 30.0 | % | ||||||||||||||||||||||||||||||||||||||||||
Of which: in Spain | 48.3 | % | 49.8 | % | 50.6 | % | 53.2 | % | 53.1 | % | 50.0 | % | 30.8 | % |
Additionally, the measures adopted in Spain to achieve more efficient risk management included the acquisition and foreclosure of real estate assets in payment of customer’s debts. At December 31, 2011 the net balance of these assets amounted to €4,274 million, as compared to €5,196 million in 2010. The allowances covering the value of these foreclosed and acquired assets were approximately €4,278 million in 2011 and €2,313 million in 2010 (coverage of 50% and 31%, respectively).
(*) | The gross balance of foreclosed assets as of December 31, 2012 amounted to €8,611 million. Of this amount, €5,275 million were assets acquired through foreclosure and €3,336 million were assets acquired in payment of customer debts. |
Liabilities
Deposits
The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits. For an analysis, by domicile of customer, of average domestic and international deposits by type for 2009,2012, 2011 and 2010 and 2011 see “—Average Balance Sheets and Interest Rates—Liabilities and Interest Expense”.
We compete actively with other commercial banks and with savings banks for domestic deposits. Our share of customer deposits in the Spanish banking system (includingCajas de Ahorros) was 18.0%19.7% at December 31, 2011,2012, according to figures published by the Spanish Banking Association (“AEB”) and the Confederación Española de Cajas de Ahorros (“CECA”). See “—Competition” herein.
The following tables analyze our year-end deposits.
Deposits (from central banks and credit institutions and customers) by type of deposit
IFRS-IASB At December 31, | ||||||||||||
Deposits from central banks and credit institutions- | 2011 | 2010 | 2009 | |||||||||
(in millions of euros) | ||||||||||||
Reciprocal accounts | 604 | 423 | 948 | |||||||||
Time deposits | 82,817 | 57,233 | 78,325 | |||||||||
Other demand accounts | 3,396 | 2,678 | 3,341 | |||||||||
Repurchase agreements | 51,316 | 78,197 | 56,818 | |||||||||
Central bank credit account drawdowns | 5,005 | 1,580 | 2,659 | |||||||||
Other financial liabilities associated with transferred financial assets | — | — | — | |||||||||
Hybrid financial liabilities | — | 1 | — | |||||||||
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|
|
| |||||||
Total | 143,138 | 140,112 | 142,091 | |||||||||
Customer deposits- |
79
IFRS-IASB At December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
(in millions of euros) | ||||||||||||||||||||||||
Deposits from central banks and credit institutions- | ||||||||||||||||||||||||
Reciprocal accounts | 508 | 604 | 423 | |||||||||||||||||||||
Time deposits | 92,491 | 82,817 | 57,233 | |||||||||||||||||||||
Other demand accounts | 3,225 | 3,396 | 2,678 | |||||||||||||||||||||
Repurchase agreements | 50,742 | 51,316 | 78,197 | |||||||||||||||||||||
Central bank credit account drawdowns | 6,000 | 5,005 | 1,580 | |||||||||||||||||||||
Other financial liabilities associated with transferred financial assets | — | — | — | |||||||||||||||||||||
Hybrid financial liabilities | — | — | 1 | |||||||||||||||||||||
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| ||||||||||||||||||||||
Total | 152,966 | 143,138 | 140,112 | |||||||||||||||||||||
Customer deposits- | ||||||||||||||||||||||||
Demand deposits- | ||||||||||||||||||||||||
Current accounts | 155,455 | 148,066 | 135,895 | 144,305 | 155,455 | 148,066 | ||||||||||||||||||
Savings accounts | 140,583 | 136,694 | 127,941 | 167,389 | 140,583 | 136,694 | ||||||||||||||||||
Other demand deposits | 3,179 | 3,431 | 3,570 | 3,443 | 3,179 | 3,431 | ||||||||||||||||||
Time deposits- | — | — | — | — | — | — | ||||||||||||||||||
Fixed-term deposits | 257,498 | 275,629 | 192,245 | 257,583 | 257,498 | 275,629 | ||||||||||||||||||
Home-purchase savings accounts | 174 | 231 | 316 | 132 | 174 | 231 | ||||||||||||||||||
Discount deposits | 732 | 448 | 448 | 1,345 | 732 | 448 | ||||||||||||||||||
Funds received under financial asset transfers | — | — | — | — | — | — | ||||||||||||||||||
Hybrid financial liabilities | 4,594 | 4,754 | 5,447 | 3,128 | 4,594 | 4,754 | ||||||||||||||||||
Other financial liabilities associated with transferred financial assets | — | — | — | — | — | — | ||||||||||||||||||
Other time deposits | 139 | 154 | 212 | 590 | 139 | 154 | ||||||||||||||||||
Notice deposits | 1,338 | 1,316 | 2,208 | 969 | 1,338 | 1,316 | ||||||||||||||||||
Repurchase agreements | 68,841 | 45,653 | 38,693 | 47,755 | 68,841 | 45,653 | ||||||||||||||||||
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|
|
| |||||||||||||||||||
Total | 632,533 | 616,376 | 506,975 | 626,639 | 632,533 | 616,376 | ||||||||||||||||||
Total deposits | 775,671 | 756,488 | 649,066 | 779,605 | 775,671 | 756,488 |
80
Deposits (from central banks and credit institutions and customers) by office location.
IFRS-IASB At December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
IFRS-IASB At December 31, | (in millions of euros) | |||||||||||||||||||||||
Deposits from central banks and credit institutions- | 2011 | 2010 | 2009 | |||||||||||||||||||||
(in millions of euros) | ||||||||||||||||||||||||
Due to credit institutions | ||||||||||||||||||||||||
Offices in Spain | 69,411 | 43,998 | 68,500 | 87,053 | 69,411 | 43,998 | ||||||||||||||||||
Offices outside Spain: | ||||||||||||||||||||||||
Other EU countries | 33,989 | 60,145 | 56,157 | 34,894 | 33,989 | 60,145 | ||||||||||||||||||
United States | 10,652 | 11,529 | 1,002 | 12,648 | 10,652 | 11,529 | ||||||||||||||||||
Other OECD countries (1) | 82 | 26 | 39 | 55 | 82 | 26 | ||||||||||||||||||
Central and South America (1) | 29,003 | 24,414 | 16,371 | 18,313 | 29,003 | 24,414 | ||||||||||||||||||
Other | 1 | — | 22 | 3 | 1 | — | ||||||||||||||||||
Total offices outside Spain | 73,727 | 96,114 | 73,591 | 65,913 | 73,727 | 96,114 | ||||||||||||||||||
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| |||||||||||||||||||
Total | 143,138 | 140,112 | 142,091 | 152,966 | 143,138 | 140,112 | ||||||||||||||||||
Customer deposits | ||||||||||||||||||||||||
Offices in Spain | 202,022 | 218,788 | 170,760 | 192,588 | 202,022 | 218,788 | ||||||||||||||||||
Offices outside Spain: | ||||||||||||||||||||||||
Other EU countries | 260,529 | 230,929 | 199,169 | 261,135 | 260,529 | 230,929 | ||||||||||||||||||
United States and Puerto Rico | 43,437 | 40,855 | 37,851 | 45,129 | 43,437 | 40,855 | ||||||||||||||||||
Other OECD countries (1) | 939 | 998 | 1,101 | 788 | 939 | 998 | ||||||||||||||||||
Central and South America (1) | 125,343 | 124,334 | 96,805 | 126,842 | 125,343 | 124,334 | ||||||||||||||||||
Other | 263 | 472 | 1,289 | 157 | 263 | 472 | ||||||||||||||||||
Total offices outside Spain | 430,511 | 397,588 | 336,215 | 434,051 | 430,511 | 397,588 | ||||||||||||||||||
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Total | 632,533 | 616,376 | 506,975 | 626,639 | 632,533 | 616,376 | ||||||||||||||||||
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| |||||||||||||||||||
Total deposits | 775,671 | 756,488 | 649,066 | 779,605 | 775,671 | 756,488 |
(1) | In this schedule Mexico is classified under “Central and South America”. |
The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of $100,000 or more for the year ended December 31, 2011.2012. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.
Year Ended December 31, 2012 | ||||||||||||||||||||||||
Year Ended December 31, 2011 | Domestic | International | Total | |||||||||||||||||||||
Domestic | International | Total | (in millions of euros) | |||||||||||||||||||||
(in millions of euros) | ||||||||||||||||||||||||
Under 3 months | 16,019 | 36,276 | 52,295 | 6,247 | 32,139 | 38,386 | ||||||||||||||||||
3 to 6 months | 4,486 | 7,735 | 12,221 | 3,432 | 9,643 | 13,075 | ||||||||||||||||||
6 to 12 months | 8,149 | 16,917 | 25,066 | 14,991 | 17,619 | 32,610 | ||||||||||||||||||
Over 12 months | 9,726 | 36,610 | 46,336 | 19,843 | 31,274 | 51,117 | ||||||||||||||||||
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Total | 38,380 | 97,538 | 135,918 | 44,513 | 90,675 | 135,188 |
81
The aggregate amount of deposits held by non-resident depositors (banks and customers) in our domestic branch network was €56.9 million, €64.0 million,€55 billion, €57 billion and €87.1 million,€64 billion, at December 31, 2012, 2011 2010 and 2009,2010, respectively.
Short-Term Borrowings
Short-Term Borrowings | IFRS-IASB At December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||||||||||
Securities sold under agreements to repurchase (principally Spanish Treasury notes and bills): | ||||||||||||||||||||||||
At December 31 | 120,156 | 3.60 | % | 123,859 | 2.38 | % | 95,512 | 1.85 | % | |||||||||||||||
Average during year | 124,788 | 3.46 | % | 98,171 | 3.01 | % | 90,542 | 2.24 | % | |||||||||||||||
Maximum month-end balance | 129,570 | 123,859 | 101,312 | |||||||||||||||||||||
Other short-term borrowings: | ||||||||||||||||||||||||
At December 31 | 11,774 | 1.78 | % | 6,871 | 4.48 | % | 28,678 | 3.75 | % | |||||||||||||||
Average during year | 7,761 | 2.69 | % | 20,384 | 1.51 | % | 34,033 | 2.65 | % | |||||||||||||||
Maximum month-end balance | 11,774 | 29,273 | 41,760 | |||||||||||||||||||||
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Total short-term borrowings at year-end | 131,930 | 3.43 | % | 130,730 | 2.49 | % | 124,190 | 2.29 | % |
IFRS-IASB At December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
Amount | Average Rate | Amount | Average Rate | Amount | Average Rate | |||||||||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||||||||||
Securities sold under agreements to repurchase (principally Spanish Treasury notes and bills): | ||||||||||||||||||||||||
At December 31 | 98,497 | 3.27 | % | 120,156 | 3.60 | % | 123,859 | 2.38 | % | |||||||||||||||
Average during year | 115,755 | 3.34 | % | 124,788 | 3.46 | % | 98,171 | 3.01 | % | |||||||||||||||
Maximum month-end balance | 133,725 | 129,570 | 123,859 | |||||||||||||||||||||
Other short-term borrowings: | ||||||||||||||||||||||||
At December 31 | 21,984 | 3.01 | % | 11,774 | 1.78 | % | 6,871 | 4.48 | % | |||||||||||||||
Average during year | 19,403 | 2.74 | % | 7,761 | 2.69 | % | 20,384 | 1.51 | % | |||||||||||||||
Maximum month-end balance | 22,304 | 11,774 | 29,273 | |||||||||||||||||||||
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Total short-term borrowings at year-end | 120,481 | 3.22 | % | 131,930 | 3.43 | % | 130,730 | 2.49 | % |
Competition
We face strong competition in all of our principal areas of operation from other banks, savings banks, credit co-operatives, brokerage services, on-line banks, insurance companies and other financial services firms.
Banks
At the end of December 2011,2012, Banco Bilbao Vizcaya Argentaria, S.A. and Banco Santander, S.A. accounted for approximately 58.9%50.4% of loans and 64.6%55.7% of deposits of all Spanish banks, which in turn represented 30.1%31.0% of loans and 31.2%33.1% of deposits of the financial system, according to figures published by the AEB and the CECA.
Foreign banks also have a presence in the Spanish banking system as a result of liberalization measures adopted by the Bank of Spain in 1978. At December 31, 2011,2012, there were 8785 foreign banks (of which 7977 were from European Union countries) with branches in Spain. In addition, there were 20 Spanish subsidiary banks of foreign banks (of which 15 were from European Union countries).
Spanish law provides that any financial institution organized and licensed in another Member State of the European Union may conduct business in Spain from an office outside Spain. They do not need prior authorization from the Spanish authorities to do so. Once the Bank of Spain receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain, the institution is automatically registered and the proposed activities are automatically authorized.
The opening of a branch of any financial institution authorized in another Member State of the European Union does not need prior authorization or specific allocation of resources. The opening is subject to the reception by the Bank of Spain of a notice from the institution’s home country supervisory authority containing, at least, the following information:
Program of activities detailing the transactions to be made and the corporate structure of the branch;
Address in Spain of the branch;
Name and curriculum vitae of the branch’s managers;
Shareholders’ equity and solvency ratio of the financial institution and its consolidated group; and
Detailed information about any deposit guarantee scheme that assures the protection of the branch’s depositors.
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Once the Bank of Spain receives the notice, it notifies the financial institution, thereby permitting the branch to be registered in the Mercantile Register and, then, in the Special Register of the Bank of Spain.
Spanish law requires prior approval by the Bank of Spain for a Spanish bank to acquire a significant interest in a bank organized outside the European Union, create a new bank outside the European Union or open a branch outside the European Union. Spanish banks must provide prior notice to the Bank of Spain to conduct any other business outside of Spain.
When a new bank is created by a Spanish bank outside of Spain, the following information has to be provided to the Bank of Spain:
amount of the investment;
percentage of the share capital and of the total voting rights;
name of the companies through which the investment will be made;
draft of the by-laws;
program of activities, setting out the types of business envisaged, the administrative and accounting organization and the internal control procedures, including those established to prevent money laundering transactions;
list of the persons who will be members of the first board of directors and of the senior management;
list of partners with significant holdings; and
detailed description of the banking, tax and anti-money laundering regulations of the country where it will be located.
The opening of branches outside Spain requires prior application to the Bank of Spain, including information about the country where the branch will be located, the address, program of activities and names and résumésresumes of the branch’s managers. The opening of representative offices requires prior notice to the Bank of Spain detailing the activities to be performed.
In addition, we face strong competition outside Spain, particularly in Argentina, Brazil, Chile, Mexico, Portugal, the United Kingdom, Germany, Poland, and the United States. In these corporate and institutional banking markets, we compete with the large domestic banks active in these markets and with the major international banks.
The global banking crisis has reduced the capacity of many institutions to lend and has resulted in the withdrawal or disappearance of a number of market participants and significant consolidation of competitors, particularly in the USU.S. and UK.U.K. Competition for retail deposits has intensified significantly reflecting the difficulties in the wholesale money markets.
In a number of these markets there are regulatory barriers to entry or expansion, and the state ownership of banks. Competition is generally intensifying as more players enter markets that are perceived to be de-regulating and offer significant growth potential.
Competition for corporate and institutional customers in the UKU.K. is from UKU.K. banks and from large foreign financial institutions that are also active and offer combined investment and commercial banking capabilities. Santander UK’sU.K.’s main competitors are established UKU.K. banks, building societies and insurance companies and other financial services providers (such as supermarket chains and large retailers).
In the UKU.K. credit card market large retailers and specialist card issuers, including major USU.S. operators, are active in addition to the UKU.K. banks. In addition to physical distribution channels, providers compete through direct marketing activity and the Internet.
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In the United States, Sovereign competes in the Northeastern, New England and New York retail and mid-corporate banking markets with local and regional banks and other financial institutions. Sovereign also competes in the USU.S. in large corporate lending and specialized finance markets, and in fixed-income trading and sales. Competition is principally with the large USU.S. commercial and investment banks and international banks active in the US.
Savings Banks
Spanish savings banks (“Cajas de Ahorros”) are mutual organizations which engage in the same activities as banks, but primarily take deposits and make loans, principally to individual customers and small to medium-sized companies. The Spanish savings banks provided strong competition for the demand and savings deposits through a vast network of offices in Spain. Royal Decree-Law 2/2011, of February 18, was designed to reinforce the Spanish financial system and opened up a new stage in the process of restructuring and strengthening the Spanish savings banks. The focus was set on recapitalizing institutions that needed more capital and encouraging the savings banks to transfer their financial activity to a bank to ease their access to capital markets and wholesale funding. As of December 31, 2011,2012, the downsizing of the savings sector within this framework is nearlyhas been finalized and mostthe savings banks have completed their conversion into commercial banks. The Spanish savings banks’ share of domestic loans and deposits is no longer significant.
Credit Co-operatives
Credit co-operatives are active principally in rural areas. They provide savings and loan services including financing of agricultural machinery and supplies. They are also a source of competition.
Brokerage Services
We face competition in our brokerage activities in Spain from brokerage houses of other financial institutions.
Spanish law provides that any investment services company authorized to operate in another Member State of the European Union may conduct business in Spain from an office outside Spain, once the CNMV receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain.
Spanish law provides that credit entities have access, as members, to the Spanish stock exchanges, in accordance with the provisions established by the Investment Services Directive.
We also face strong competition in our mutual funds, pension funds and insurance activities from other banks, savings banks, insurance companies and other financial services firms.
On-line Banks and Insurance Companies
The entry of on-line banks into the Spanish banking system has increased competition, mainly in customer funds businesses such as deposits. Insurance companies and other financial service firms also compete for customer funds.
SUPERVISION AND REGULATION
Bank of Spain and the European Central Bank
The Bank of Spain, which operates as Spain’s autonomous central bank, supervises all Spanish financial institutions, including us. Until January 1, 1999, the Bank of Spain was also the entity responsible for implementing Spanish monetary policy. As of that date, the start of Stage III of the European Monetary Union, the European System of Central Banks and the European Central Bank became jointly responsible for Spain’s monetary policy. The European System of Central Banks consists of the national central banks of the twenty seven Member States belonging to the European Union, whether they have adopted the euro or not, and the European Central Bank. The “Eurosystem” is the term used to refer to the European Central Bank and the national central banks of the Member States which have adopted the euro. The European Central Bank is responsible for the monetary policy of the European Union. The Bank of Spain, as a member of the European System of Central Banks, takes part in the development of the European System of Central Banks’ powers including the design of the European Union’s monetary policy.
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The European System of Central Banks is made up of three decision-making bodies:
the Governing Council, comprised of the members of the Executive Board of the European Central Bank and the governors of the national central banks of the 17 Member States which have adopted the euro;
the Executive Board, comprised of the president, vice-president and four other members; and
the General Council of the European Central Bank, comprised of the president and vice-president of the European Central Bank and the governors of the national central banks of the 27 European Union Member States.
The Governing Council is the body in charge of formulating monetary policy for the euro area and adopting the guidelines and decisions necessary to performensure the Euro system’s tasks.performance of the tasks entrusted to the Eurosystem. The Executive Board is the body in charge of implementing the monetary policy for the euro area laid out by the Governing Council and providing the instructions necessary to carry out monetary policy to the euro area’s national central banks. The General Council is the transitional body which carries out the tasks taken over from the European Monetary Institute which the ECB is required to perform in Stage III of the European Monetary Union on account of the fact that not all EU Member States have adopted the euro yet.
The European Central Bank has delegated the authority to issue the euro to the central banks of each country participating in Stage III. These central banks are also in charge of executing the European Union’s monetary policy in their respective countries. The countries that have not adopted the euro will have a seat in the European System of Central Banks, but will not have a say in the monetary policy or instructions laid out by the governing council to the national central banks.
Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the European System of Central Banks:
defining and executing the European Union monetary policy;
conducting currency exchange operations consistent with the provisions of Article 109 of the Treaty on European Union, and holding and managing the States’ official currency reserves;
promoting the sound working of payment systems in the euro area; and
issuing legal tender bank notes.
Notwithstanding the European Monetary Union, the Bank of Spain, as the Spanish national central bank, continues to be responsible for:
maintaining, administering and managing the foreign exchange and precious metal reserves;
promoting the sound working and stability of the financial system and, without prejudice to the functions of the European System of Central Banks, of national payment systems;
supervising and compliance with the specific rules of credit institutions, other entities and financial markets, for which it has been assigned supervisory responsibility;
placing coins in circulation and the performance, on behalf of the State, of all such other functions entrusted to it in this connection;
preparing and publishing statistics relating to its functions, and assisting the European Central Bank in the compilation of the necessary statistical information;
rendering treasury services to the Spanish Treasury and to the regional governments, although the granting of loans or overdrafts in favor of the State, the regional governments or other bodies referred to in Article 104 of the European Union Treaty, is generally prohibited;
rendering services related to public debt to the State and regional governments; and
advising the Spanish Government and preparing the appropriate reports and studies.
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The Bank of Spain has the following supervisory powers over Spanish banks, subject to applicable laws, rules and regulations issued by the Spanish Government and its Ministry of Economy and Competitiveness:
to conduct periodic inspections of Spanish banks to test compliance with current regulations concerning, among other matters, preparation of financial statements, account structure, credit policies and provisions and capital adequacy;
to advise a bank’s board of directors and management when its dividend policy is deemed inconsistent with the bank’s financial results;
to undertake extraordinary inspections of banks concerning any matters relating to their banking activities;
to participate with, as the case may be, other authorities in appropriate cases in the imposition of penalties to banks for infringement or violation of applicable regulations; and
to take control of credit entities and to replace directors of credit entities when a Spanish credit entity faces an exceptional situation that poses a risk to the financial status of the relevant entity.
Liquidity Ratio
European Central Bank regulations require credit institutions in each Member State that participates in the European Monetary Union, including us, to place a specific percentage of their “Qualifying Liabilities” with their respective central banks in the form of interest bearing deposits as specified below (the “Liquidity Ratio”).
The European Central Bank requires the maintenance of a minimum liquidity ratio by all credit institutions established in the Member States of the European Monetary Union. Branches located in the Eurozoneeurozone of institutions not registered in this area are also subject to this ratio, while the branches located outside the Eurozoneeurozone of institutions registered in the Eurozoneeurozone are not subject to this ratio.
“Qualifying Liabilities” are broadly defined as deposits and debt securities issued. The Liquidity Ratio is 1% over Qualifying Liabilities except in relation to deposits with stated maturity greater than two years, deposits redeemable at notice after two years, repos and debt securities with a stated maturity greater than two years, for which the ratio is 0%.
Liabilities of institutions subject to the Liquidity Ratio and liabilities of the European Central Bank and national central banks of a participating Member State of the European Monetary Union are not included in the base of “Qualifying Liabilities”.
Investment Ratio
The Spanish Government has the power to require credit institutions to invest a portion of certain “Qualifying Liabilities” in certain kinds of public sector debt or public-interest financing (the “Investment Ratio”), and has exercised this power in the past. Although the Investment Ratio has been 0% since December 31, 1992, the law which authorizes it has not been abolished, and the Spanish Government could reimpose the Ratio, subject to EU requirements.
Capital Adequacy Requirements
Spain forms part of the Basel Committee on Banking Regulations and Supervisory Practices. We calculate our capital requirements under this Committee’s criteria. In June 2006 the European Union adopted a new regulatory framework (recast of Directives 2006/48/EC and 2006/49/EC, amended by Directives 2009/111/EC and 2010/76/EU) that promotes more risk sensitive approaches to the determination of minimum regulatory capital requirements in accordance with the New Basel Accord (“Basel II” or “BIS II”). The Law 36/2007 amending Law 13/1985, the Royal Decree 216/2008 published on February 16, 2008, and Bank of Spain’s Circular 3/2008 published on June 10, 2008, partially amended by Circular 9/2010 and Circular 4/2011, introduced these European Directives into the Spanish regulatory framework, and
BIS II was incorporated into the Spanish regulations, following its adoption by the European Union. This is the current capital regulation in effect. New capital regulation by the European Union (which will be in accordance with Basel III or “BIS III”) is pending implementation, and will be introduced on a gradual basis from 2013 to 2019, when the new European Capital Directive and Regulation are developed.
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The Spanish capital adequacy requirements distinguish between “basic” and “complementary” capital and require certain ratios of basic and total capital to risk-weighted assets. Basic capital generally includes ordinary shares, non-cumulative preferred securities and most reserves, less interim dividends, goodwill and intangible assets, treasury stock and financing for the acquisition (by persons other than the issuer’s employees) of the issuer’s shares. Complementary capital generally includes cumulative preferred securities, revaluation and similar reserves, dated and perpetual subordinated debt, general credit allowances and capital gains. The Group’s total capital is reduced by certain deductions that need to be made with respect to its investments in other financial institutions, insurance and securitization companies.
The computation of both basic and complementary capital is subject to provisions limiting the type of stockholding and the level of control which these stockholdings grant to a banking group. The level of dated subordinated debt taken into account for the calculation of complementary capital may not exceed 50% of basic capital, the level of non-cumulative preferred securities may not exceed 30% of basic capital, the level of step-up preferred securities may not exceed 15% of basic capital and the total amount of complementary capital admissible for computing total capital may not exceed the total amount of basic capital.
The consolidated total capital of a banking group calculated in the manner described above may not be less than 8% of the group’s risk-weighted assets net of specified provisions and amortizations.
As a result of the Basel capital accord issued by the Basel Committee (Basel II), we calculate our capital requirements based on the exposure to credit and counterparty risk, market risk and operational risk. Basel II allows two main methods to perform these calculations: standardized or advanced internal models.
The credit risk requirements calculated with standardized models are based on the risk weighted assets calculated on the basis of the quality of the Group’s assets, which mainly depend on their counterparties and guarantees, and the available external agency ratings for those counterparties. Moreover, we have been using, from the outset, advanced internal models to calculate the capital requirements for credit risk of the units with the largest credit risk exposure
The Group intends to adopt, over the next few years, the Basel II advanced internal ratings-based (“AIRB”) approach for substantially all its banks, until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%.
Accordingly, the Group continued in 20112012 with the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches. In 2012 we obtained approval for the SMEs portfolio of Santander Totta, S.A. and the integration of Santander UK’s advanced approaches for mortgages. During 2011, in the course of the year the Group obtained regulatory authorization for various units, most notably Santander Consumer España, Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander and the global corporate customer portfolios in Brazil and Chile. In addition, in 2008 the Group obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent bank and the main subsidiaries in Spain, the United Kingdom and Portugal. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and at consumer banking entities in Europe.
As regards the other risks explicitly addressed in the Basel Capital Accord, the Grupo Santander was authorized to use its internal model for market risk with respect to the treasury area’streasury’s trading activities of units in Madrid and theSpain, Mexico, Chile and Portugal, units, thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other units.
With regard to operational risk, the Group considers that the internal model should be developed primarily on the basis of the experience accumulated in managing the entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature of Grupo Santander. The Group has made numerous acquisitions in recent years and, as a result, a longer maturity period will be required to develop the internal model based on its own management experience of the various acquired entities. However, although the Group has decided to use the standardized approach for regulatory capital calculation purposes, it is considering the possibility of adopting Advance Measurement Approach (AMA) approaches once it has collected sufficient data using its own management model in order to make full use of the positive qualities that are characteristic of the Group.
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Also, Royal Decree-Law 2/2011, approved on February 18, 2011, established the implementing regulations of the plan to strengthen the financial sector published in January 2011 by the Spanish Ministry of Economy and Competiviveness,Competitiveness, which aimed, among others, to establish certain minimum requirements for core capital, in advance of those established by Basel III, to be met before autumn 2011. At the reporting date, the Group had complied with these minimum core capital requirements.
Furthermore, in December 2011 the European Banking Authority (“EBA”) published the new capital requirements for the main European credit institutions. These requirements are part of a package of measures adopted by the European Council in the second half of 2011 with the aim of restoring stability and confidence in the European markets.
At June 30, 2012, the institutions selected for the EBA sample must have a Tier 1 core capital ratio, determined on the basis of EBA rules of at least 9%. These capital requirements are expected to be of an exceptional and temporary nature.
The EBA published the capital requirements of each credit institution and required them to submit, on January 20, 2012, their capital plans to reach the required ratio by June 30, 2012.
The EBA estimated a €15,302 million capital shortfall for the Santander Group. In January 2012, the Group reported the measures it had taken -detailed in its capital plan submitted to the Bank of Spain- and which had enabled it to attain the required 9% ratio. These capital raising measures are summarized as follows: i) €6,829 million relating toValores Santander -securities that are mandatorily convertible before the end of October 2012; ii) the exchange of €1,943 million of preference shares for new shares in December 2011; iii) €1,660 million from application of theSantander Dividendo Elección program at the date of the final dividend for 2011; and iv) €4,890 million obtained through the organic generation of capital, write-downs and the transfer of various ownership interests, most notably those held in Chile and Brazil.
At December 31, 2011,2012, our eligible capital exceeded the minimum required by the Bank of Spain by over €22.8€21.2 billion. Our Spanish subsidiary banks were, at December 31, 2011,2012, each in compliance with these capital adequacy requirements, and all our foreign subsidiary banks were in compliance with their local regulations.
The calculation of the minimum capital requirements under the new regulations, referred to as Pillar I, is supplemented by an internal capital adequacy assessment process (“ICAAP”) and supervisory review, referred to as Pillar II. In the case of the Group, the ICAAP is based on an internal model which is used to quantify the economic capital required, given the Group’s global risk profile, to maintain a target AA rating. Lastly, Basel II regulations establish, through Pillar III, strict standards of transparency in the disclosure of risk information to the market.
Concentration of Risk
Spanish banks may not have exposure to a single person or group in excess of 25% of the bank’s own funds. Where that customer is a credit institution or investment firm, or where the economic group includes one or more credit institutions or investment firms, the value of all exposures may not exceed 25% of the bank’s own funds or €150 million, whichever the higher, provided that the sum of exposure values to all customers in the economic group that are not credit institutions or investment firms does not exceed 25% of the bank’s own funds. Any exposure to a person or group exceeding 10% of a bank’s own funds is deemed a concentration (excluding exposures to the Spanish government,Government, the Bank of Spain, the European Union and certain other exceptions).
Legal Reserve and Other Reserves
Spanish banks are subject to legal and other restricted reserves requirements. In addition, we must allocate profits to certain other reserves as described in Note 33 to our consolidated financial statements.
Allowances for Credit Losses and Country-Risk
For a discussion relating to allowances for credit losses and country-risk, see “—Classified Assets—Bank of Spain Classification Requirements” herein.
Employee Pension Plans
At December 31, 2011,2012, our pension plans were all funded according to the criteria disclosed in Note 25 to our consolidated financial statements.
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Restrictions on Dividends
We may only pay dividends (including interim dividends) if such payment is in compliance with the Bank of Spain’s minimum capital requirement (described under “—Capital Adequacy Requirements” herein) and other requirements or, as described below, under certain circumstances when we have capital that is 20% or less below the Bank of Spain’s minimum capital requirements.
If a banking group meets this capital requirement, it may dedicate all of its net profits to the payment of dividends, although in practice Spanish banks normally consult with the Bank of Spain before declaring a dividend. Even if a banking group meets the capital requirement as a group, any consolidated Spanish credit entity that is a subsidiary that does not meet the capital requirement on its own will be subject to the limitations on dividends described below. If a banking group or any Spanish credit entity subsidiary of the group has capital that is 20% or less below the Bank of Spain’s minimum capital requirement, it must devote an amount of net profits determined by the Bank of Spain to reserves, and dividends may be paid out of the remainder only with the prior approval of the Bank of Spain. If the capital is 20% or more, or its basic capital is 50% or more, below the minimum requirement, it may not pay any dividends and must allocate all profits to reserves unless otherwise authorized by the Bank of Spain. In the case of a banking group failing to meet the capital requirement, however, the Bank of Spain can authorize that the consolidated subsidiaries in the group pay dividends without restriction, so long as they are at least 50% owned by group companies and, if they are credit entities, independently comply with the capital requirement.
If a bank has no net profits, its board of directors may propose at the general meeting of shareholders that a dividend be declared out of retained earnings. However, once the board of directors has proposed the dividend to be paid, it must submit the proposal to the Minister of Economy and Competitiveness who, in consultation with the Bank of Spain, may in his discretion authorize or reject the proposal of the board.
Compliance with such requirements notwithstanding, the Bank of Spain is empowered to advise a bank against the payment of dividends on solvency and soundness grounds. If such advice is not followed, the Bank of Spain may require that notice of such advice be included in the bank’s annual report registered before the Mercantile Register. In no event may dividends be paid from certain legal reserves.
Interim dividends of any given year may not exceed the net profits for the period from the closing of the previous fiscal year to the date on which interim dividends are declared. In addition, the Bank of Spain recommends that interim dividends not exceed an amount equal to one-half of all net income from the beginning of the corresponding fiscal year. Although banks are not legally required to seek prior approval from the Bank of Spain before declaring interim dividends, the Bank of Spain has asked that banks consult with it on a voluntary basis before declaring interim dividends.
Limitations On Types Of Business
Spanish banks generally are not subject to any prohibitions on the types of businesses that they may conduct, although they are subject to certain limitations on the types of businesses they may conduct directly.
The activities that credit institutions authorized in another Member State of the European Union may conduct and which benefit from the mutual recognition within the European Union are detailed in article 52 of Law 26/1988 (July 29, 1988).
Deposit Guarantee Fund
The Deposit Guarantee Fund on Credit Institutions (“Fondo de Garantía de Depósitos”, or the “FGD”), which operates under the guidance of the Bank of Spain, guarantees in the case of the Bank and our Spanish banking subsidiaries: (i) bank deposits up to €100,000 per depositor; and (ii) securities and financial instruments which have been assigned to a credit institution for its deposit, register or for other such services, up to €100,000 per investor. The FGD may also take actions aimed at strengthening the solvencyLaw 9/2012, of 14 November, on restructuring and the functioningdissolution of credit institutions. Thus,entities (which enacts all the provisions of the Royal Decree-
law 24/2012, of 31 August), which has strengthened the position of the Fund for the Orderly Restructuring of the Banking Sector (Fondo de Restructuración Ordenada Bancaria or FROB) giving it a prominent role within the restructuring and resolution processes of credit entities, clarified the role of the FGD, being now limited to guaranteeing deposits. However, taking into account the principle of minimal capital impact, the FGD may take preventive and consolidation measuresparticipate in the following cases: (i) when the situation of a credit institution is such that the FGD is expected to have to pay, (ii) in the case of the restructuring of a credit institution, or (iii) to fulfillresolution proceedings by granting financial support measures in order to strengthen own funds of the entity, all in accordance with the plan of action approved by the Bank of Spain, if any.
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The actions contained in the corresponding plan of action can be: (1) financial support, which may include non-refundable funds, loans granted on favorable terms by the FGD for the acquisition of damaged assets, and any other financial support; (2) capital restructuring of the entity, which may involve, among others, facilitiating mergers with other entities of recognized solvency or transfer of its business to another credit institution and the subscription by the FGD of capital increases; and (3) management measures which may result in improving the organization and internal control systems of the entity.exceptional cases.
The FGD is funded by annual contributions from member banks. The amount of such bank’s contributions will not exceed 3 per thousand of the year-end amount of deposits to which the guarantee extends depending of the kind of credit institution. Nevertheless, further contributions will be suspended when the FGD’s funds exceed the requirement by 1% or more of the calculation basis.
As of December 31, 2011,2012, the Bank and its domestic bank subsidiaries were members of the FGD and thus were obligated to make annual contributions to it.
Data Protection
Law 15/1999, dated December 13, 1999, establishes the requirements relating to the treatment of customers’ personal data by credit entities. This law requires credit entities to notify the Spanish Data Protection Agency prior to creating files with a customer’s personal information. Furthermore, this law requires the credit entity to identify the persons who will be responsible for the files and the measures that will be taken to preserve the security of those files. The files must then be recorded in the Spanish Data Protection General Registry, once compliance with the relevant requirements has been confirmed. Credit entities that breach this law may be subject to claims by the interested parties before the Spanish Data Protection Agency. The Data Protection Agency, which has investigatory and sanctioning capabilities, is the Spanish Authority responsible for the control and supervision of the enforcement of this law.
Recent Legislation
Law 3/2009 of April 3 on structural modifications of commercial companies (Ley sobre modificaciones estructurales de las sociedades mercantiles), entails a profound reform of our legal system in various areas of Spanish corporate law:
(i) cross-border mergers and international transfers of a corporation’s registered office are regulated;
(ii) rules applicable to corporate restructuring transactions of the different types of commercial companies are unified;
(iii) the quantitative limitations for the acquisition of treasury stock by public limited companies are extended (10% for listed companies and 20% for unlisted companies); and
(iv) preemptive rights are abolished in the case of non-monetary contributions, preemptive rights of the holders of convertible debentures are eliminated, and the ability to exclude preemptive rights of the shareholders for the issuance of convertible debentures is expressly provided.
Law 2/2010 of March 1 transposes certain European Union Directives in the field of indirect taxation and amends the Non-residents Income Tax Law, mainly with respect to taxation of residents in the European Union.
Law 39/2010 of December 22 on the 2011 General State Budget has introduced some reforms in the tax system. The most significant changes are an increase in the maximum marginal rate from 43% to 45% in the Personal Income Tax and the establishment of additional limitations on the deduction for investment in housing, the elimination in the Corporate Income Tax of the deductibility of goodwill amortization in the acquisition of shares in companies resident in the European Union with effect from December 21, 2007, and the amendment of the applicable tax regime to capital reductions made by SICAVs.
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Law 10/2010 of April 28 on prevention of money laundering and financing of terrorism, which transposes into Spanish Law Directive 2005/60/EC of the European Parliament and of the Council of October 26, 2005, repeals Law 19/1993 of December 28 on certain measures to prevent money laundering and amends Law 12/2003 of May 21 on prevention of financing of terrorism and Law 19/2003 of July 4 on the legal regime governing capital movements and cross-border transactions and on certain measures to prevent money laundering.
Royal Decree 712/2010 of May 28, 2010, on the legal regime governing payment services and payment institutions implements Law 16/2009 of November 13, 2009 on payment services and the general obligations in this area and Ministerial Order EHA/1608/2010 of June 14, 2010 on transparency in the terms of transactions and other information requirements applicable to payment services.
Royal Decree 749/2010 of June 7, which came into force on June 9, 2010, amended the implementation of Law 35/2003 of November 4, 2003, on Collective Investment Schemes approved by Royal Decree 1309/2005 of November 4, 2005, and other regulations in the tax field. The Royal Decree 749/2010 makes more flexible the legal regime governing exchange-traded funds and real estate collective investment schemes, introduces the concept of special-purpose collective investment schemes and implements amended regulations on non-resident income tax, corporate income tax and personal income tax, including an exemption from the obligation to made withholdings from or prepayments on account of income derived from the transfer or redemption of shares or equity holdings in exchange-traded funds or exchange-traded index open-end investment companies.
Law 12/2010 of June 30, amends Law 19/1988 of July 12 on auditing, Law 24/1988 of July 28 on the securities market and Royal Decree 1564/1989 of December 22 and revises the Corporations Act to adapt it to the European Directive 2006/43 EC. This law is aimed to modify certain aspects of previous regulations in order to adapt it to changes in business law and to include technical improvements recommended by the recent auditing experience and practice.
Legislative Royal Decree 1/2010 of July 2 enacted the consolidated text of the Spanish Corporate Enterprises Act and came into force on September 1, 2010. The Spanish Corporate Enterprises Act replaces Private Limited Companies Law 2/1995 of March 23, Legislative Royal Decree 1564/1989 of December 22 enacting the consolidated text of the Public Limited Companies Law, Title X of Securities Markets Law 24/1988 of July 28 on listed companies and Book II, Title I, Section 4 of the Commercial Code enacted by decree of August 22, 1985. This consolidated text contains the whole legislation which has been recast and came into force on September 1, 2010, except for its article 515 on clauses limiting voting rights which applies since July 1, 2011.
Law 15/2010 of July 5 amending Law 3/2004 of December 29 on measures to avoid late payment in commercial transactions and Law 30/2007 of October 30 on public sector contracts, aims to foster competitiveness and achieve balanced growth of the Spanish economy, in line with a strategic view of a sustainable economy.
Royal Decree 1282/2010 of October 15 on the regulation of official secondary markets in futures, options and other financial derivatives, aims to improve competitiveness, and to reduce the systemic risk associated with the settlement and clearance of financial derivative contracts, and repeals the prior regulation seeking an increase in the number of products that can be traded and registered on these markets. This new regime also allows the governing company of the respective market to offer central counterparty services and establishes a new system for the contribution of guarantees by market members.
Organic Act 5/2010 of June 22 on reform of the Penal Code entered into force on December 23, 2010. The main reform introduced is that a legal entity is criminally liable: i) for crimes committed in the name or on behalf of the legal entity, and for the benefit thereof, by its legal and administrative representatives in fact or under law; and ii) for crimes committed in the conduct of corporate activities and on behalf and for the benefit thereof by those who, while subject to the authority of the legal and administrative representatives in fact or under law, have been able to perform such acts due to a failure to exercise due control over them, taking into account the specific circumstances of the case.
Law 6/2011 of April 11, 2011 amended Law 13/1985 of May 25, 1985 on investment ratios, own funds and reporting requirements for financial intermediaries, Law 24/1988 of July 28, 1988 on the securities market and Legislative Royal Decree 1298/1986 of June 28, 1986 on the adaptation of current regulatory credit institutions law to EU legislation. The purpose of this Law is to commence transposition of Directive 2009/111/EC of the European Parliament and of the Council of September 16, 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements and crisis management. In connection with this, Royal Decree 771/2011 of June 3, 2011 amended Royal Decree 216/2008 of February 15, 2008 on financial institutions’ own funds and Royal Decree 2606/1996 of December 20, 1996 on credit institutions deposit guarantee funds. The most noteworthy developments from this financial regulation are (i) that it makes it compulsory for credit institutions and investment firms to meet certain requirements to allow them to assume exposures to securitization positions and to initiate such securitization; (ii) adapts the legal regime governing credit institution preference shares to conform international requirements ensuring accordingly that they are an effective instrument for meeting solvency requirements; (iii) changes the limit on large exposures of credit institutions generally maintaining it such that the value of that exposures of a credit institution to a customer (entity or economic group) may not exceed 25% of its own funds; (iv) changes the risk management policy of credit institutions, especially that regarding liquidity risk, and sets up new credit institution remuneration policies; (v) strengths the competence and cooperation between supervisors; and (vi) amends the legislation on credit institution deposit guarantee funds, introducing a new regime for additional contributions to these funds based on the remuneration of the deposits in them. Circular 4/2011, of 30 November 2011, of the Bank of Spain, which amended Circular 3/2008, of 22 May 2008, on the determination and control of minimum own funds, completed the transposition of EU legislation on own funds in force at that time. This transposition was initiated with Sustainable Economy Law 2/2011 of 4 March 2011 and followed up by Law 6/2011 of 11 April 2011, which amended Law 13/1985 of 25 May 1985 on investment ratios, own funds and reporting requirements for financial intermediaries, Law 24/1988 of 28 July 1988 on the securities market and Legislative Royal Decree 1298/1986 of 28 June 1986 on the adaptation of current credit institution law to EU legislation, and, finally, by Royal Decree 771/2011 of 3 June 2011 amending Royal Decree 216/2008 of 15 February 2008 on the own funds of financial institutions.
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Law 7/2011 of April 11, 2011 amended Law 41/2009 of November 12, 1999 on payment and securities settlement systems and Royal Decree-Law 5/2005 of March 11, 2005 on urgent reforms to boost productivity and improve public procurement. The purpose of this Law is to transpose Directive 2009/44/EC of the European Parliament and of the Council of May 6, 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and
Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims. More specifically, this Law is intended to recognize so-called interoperable systems and extend to them the legislation on settlement finality of credit transfer orders given through these systems. The main changes introduced by this law are (i) updates to the definition of “credit transfer order” and (ii) an extension to interoperable systems the rules on the irrevocability and finality of settlement of transfer orders given through such systems and to extend to these interoperable systems the legal regime under Law 41/2009 for insolvency of a system participant the procedures establishes and the effects on transfer orders and on collateral.
Law 15/2011 of June 16, 2011, which came into force last June 18, 2011, amended certain financial legislation applying to the Spanish legal system Regulation 1060/2009 of the European Parliament and of the Council of September 16, 2009 on credit rating agencies, and was aiming at establishing the obligation for certain financial institutions (specifically, credit institutions, investment firms, mortgage securitization special purposes entities and collective investment institution custodians) to use the ratings issued by credit ratings agencies, which, from the standpoint of solvency, shall require that these have been issued or endorsed by an ESMA established in the European Union and registered according to Regulation 1060/2009.
Law 16/2011 of June 24, 2011 on credit agreements for consumers, which transposed into Spanish Law Directive 2008/48/EC of the European Parliament and of the Council of April 23, 2008 on credit agreements for consumers and repealed Law 7/1995 of March 23, 1995 on consumer credit, and came into force on September 25, 2011, is basically intended to improve consumer information and applies to those contracts whereby a creditor grants to a consumer credit in the form of a deferred payment, loan, credit line or other similar financial accommodation.
Law 21/2011 of July 26, 2011 on electronic money establishes a new regulatory framework for electronic money institutions and for the issuance of electronic money, which partially transposed Directive 2009/110/EC of September 16, 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directive 200/46/EC of September 18, 2000.
Law 25/2011 of August 1, 2011, which entered into force on October 2, 2011, partially amends the Spanish Corporate Enterprises Act and transposes Directive 2007/36/EC of the European Parliament and of the Council dated July 11, 2007. The most important novelties of the law are (i) the recognition of the company’s electronic corporate address or corporate website for legal corporate purposes; (ii) the introduction of appraisal rights for dissenting shareholders in the event a substantial amendment to the corporate purposes and in the event of non-listed companies not distributing a third of distributable profits “derived from activities within their core corporate purpose” from their fifth year of the existence; (iii) the possibility for companies to introduce additional circumstances in the articles of association which would grant the company the right to forcibly redeem the shares of such shareholders; and (iv) other amendments of the Spanish Corporate Enterprises Act in relation to the winding-up and liquidation of all form of companies and the general shareholders meeting.
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Royal Decree Law 16/2011 of October 14, 2011, as amended by Royal Decree Law 19/2011 of December 2, 2011, which came into force on October 15, 2011, establishes the Deposit Guarantee Fund for Credit Institutions, which replaces the three existing funds up to then and consolidates the existing funds in into the Single Deposit Guarantee Fund for Credit Institutions; and (ii) increases the possibility of improving the solvency of the affected institutions, expanding the situations in which the Fund may act.
Royal Decree-Law 9/2011 of August 19, provides certain temporary measures which affect corporate income tax, increasing the rate applied to determine the interim payments to be filed by certain large companies from October 2011 to December 2013; limiting for tax years 2011 to 2013 the maximum amount of carried forward tax losses that can be offset to 75% of the taxable base for companies whose turnover within the 12 months preceding the beginning of the tax year is between 20 and 60 million euros, and to 50% if such turnover is over 60 million euros; and reducing in those years the deduction for financial goodwill to a maximum annual limit of 1%. In addition, effective for tax periods beginning as of January 1 2012, the maximum period for offsetting tax losses from previous years is extended from 15 to 18 years.
Royal Decree-Law 13/2011, of September 16, temporarily restores the wealth tax for 2011 and 2012, abolishing the existing 100% tax rebate, and increases the value of the exemption for dwelling houses to €300,000 and the general tax-free amount to €700,000, extending this general tax-free amount to non-residents in Spain.
Law 31/2011, of October 4, 2011, amended Collective Investment Institutions Law 35/2003 of November 4 in order to adapt it to recent EU legislation. It introduced certain technical improvements and various qualifications in respect of the requirements for taking up and pursuing the activity of Collective Investment Institutions and also the “Community passport” for the cross-border management of investment funds, as envisaged by Directive 2009/65/EC.
Law 32/2011, of October 4, 2011, which came into force on 6 October 2011, amended Law 24/1988, of July 28, on the Securities Market, and is intended, among other aspects, to reform securities clearing, settlement and registration arrangements. The Law 32/2011 imposed the obligation to carry out all equity transactions traded, in both, official secondary markets and multilateral trading systems through a central counterparty. Likewise, it removed the references to the mechanism for ensuring delivery allowing, ultimately, for cash settlement when securities cannot be obtained. In addition, Law 32/2011 sets up the basis of the regulatory regime of the central counterparty, establishing, among others: (i) the obligation to take the form of public limited company; (ii) the need to be authorized by the Ministry of Economy and Finance; (iii) that it will be subject to the supervisory regime of Spanish Securities Commission (CNMV) and Bank of Spain; (iv) that it will be subject to the significant shareholding regime of Law 24/1988, of July 28, on the Securities Market; (v) regulation of the committees that will form part of the central counterparty; and (vi) regulation of the insolvency of the central counterparty, any of its members or any client of a member. The Law 32/1001 also amended IBERCLEAR’s regulatory regime in connection with: (i) new corporate law rules that will facilitate the relationship between IBERCLEAR and the other agents of the trading and post-trading system and (ii) the regulation on the agreements that IBERCLEAR may carry out is completed to provide a better coverage to the TARGET2-Securities project.
Royal Decree 1360/2011 of October 7, 2011, amending Royal Decree 1816/1991 of 20 December 1991, on cross-border economic transactions, and Ministerial Order EHA 2670/2011 of 7 October 2011, amending the Order dated December 27, 1991, which implemented Royal Decree 1816/1991, was aimed at aligning Spanish regulations in this area to those in force in practically all the Member States, and at acting in anticipation of the forthcoming reform of Regulation 924/2009, of the European Parliament and of the Council of September 16, 2009 on cross-border payments in the Community. Apart from certain improvements in aspects relating to the accreditation of resident and non-resident status, the main content of the recent regulations amended the reporting system for statistical purposes of cross-border economic transactions. Under the previous system, entities had to identify transactions entailing a cross-border payment, demanding data of customers to complete the information on the transactions in which they were taking part, and to submit such information to the Bank of Spain. The new regulations eliminated the obligation to submit that information which is not immediately available to them and automatable. Furthermore, for those making cross-border transactions, the obligation is included to furnish the information that the Bank of Spain may require of them. The Royal Decree and the Order became effective on June 1, 2012.
Law 38/2011, of October 10, 2011, reforming Insolvency Law 22/2003 of July 9, which became effective on January 1, 2012, introduces a series of amendments in order to correct errors of approach detected in practice and to update the attendant regulations on the basis of the experience and the application thereof. It also affords insolvency proceedings greater legal certainty; the opening up of alternatives which seek to strike a balance between the firm’s viability and the necessary legal guarantees; the promotion of electronic media, and simplified and more flexible proceedings.
Royal Decree-Law 9/2012, of March 16, 2012, on simplification of reporting and documentation requirements in the case of mergers and divisions of share capital companies amended the consolidated text of the Share Capital Companies Law enacted by Legislative Royal Decree 1/2010 of July 2, 2010 and Law 3/2009 of April 3, 2009 on structural changes to companies, aiming at transposing into Spanish law Directive 2009/109/EC of the European Parliament and of the Council of September 16, 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC regarding reporting and documentation requirements in the case of mergers and divisions. The Royal Decree-Law 9/2012 became effective on March 18, 2012. Law 1/2012, of June 22, 2012, on simplification of reporting and documentation requirements in the case of mergers and divisions of share capital companies, repealed Royal Decree-Law 9/2012 of March 16, 2012.
Royal Decree 778/2012 of May 4, 2012, on the legal regime for electronic money institutions (ELMIs), implementing Law 21/2011 of July 26, 2011 on electronic money, established a new regulatory framework for ELMIs and the issuance of electronic money. This Royal Decree completed the transposition of Directive 2009/110/EC of September 16, 2009 on the taking up, pursuit and prudential supervision of the business of ELMIs amending Directives 2005/60/EC of October 26, 2005 and 2006/48/EC of June 14, 2006 and repealing Directive 2000/46/EC of September 18, 2000. The Royal Decree became effective on May 6, 2012.
Royal Decree 1336/2012, of September 21, 2012 amended certain royal decrees relating to the powers of European Services Authorities. This Royal Decree, which completes the transposition of Directive 2010/78/EU of the European Parliament and of the Council of November 24, 2010, incorporates into Spanish law the obligation of the competent authorities (Bank of Spain and CNMV) to cooperate with, inform and communicate with their European counterparts (the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA)) on certain matters, some of which were initially regulated in Royal Decree-Law 10/2012 of March 23, 2012 amending certain financial legal provisions relating to the powers of the ESAs, and which are now addressed in their respective implementing provisions.
Royal Decree 1082/2012 of July 13, 2012, approved the implementing Regulations of Collective Investment Institutions (CIIs) Law 35/2003 of November 4, 2012, ended by Law 31/2011 of October 4, 2012. It also repealed the previous regulations in Royal Decree 1309/2005 of November 4, 2005. Among other things, the Royal Decree includes the amendments recently made by Law 31/2011 to Law 35/2003 and advances the transposition of EU legislation. The Royal Decree became effective on July 21, 2012.
Royal Decree-Law 20/2012 of July 13, 2012 on measures to ensure budgetary stability and the promotion of competitiveness which, among other reforms, amended Law 24/1988 of July 28, 1988 on the Securities Market (and Law 44/2002 of November 22, 2002 on financial system reform measures) to include a new financial instrument in the Spanish legal system, the so-called “internationalization covered bonds” (“cédulas de internacionalización”). These bonds are similar to “territorial covered bonds” (“cédulas territoriales”), introduced by Law 44/2002 and are fixed-income securities that may be issued by credit institutions, whose capital and interest are especially secured by loans and credits granted for the internationalization of companies. The total amount of internationalization covered bonds issued by a credit institution may not exceed 70% of the amount of the unrepaid “eligible” loans and credits.
The Royal Decree-Law 20/2012 also introduces new tax measures on a range of taxes which, in some cases, amends or expands the reforms previously introduced by the Royal Decree-Law 9/2011, 20/2011 and 12/2012. The following are the most important tax measures in the Corporate Income Tax: (i) In 2012 and 2013 the offsetting of negative tax bases generated in previous years will be restricted to 50% for those entities whose turnover during the previous year was between €20 million and €60 million (the figure was previously 75%) and to 25% if the turnover exceeds €60 million (previously 50%). Over this same period, the deduction for goodwill arising from acquisitions of businesses will be subject to the maximum annual limit of 1% of the related amount (5% previously) (ii) Likewise, for fiscal years 2012 and 2013, the ceiling on the tax deduction for intangible fixed assets with an indefinite useful life is reduced from 10% to 2%. Regarding indirect taxation, as from September 1, 2012, the Royal Decree-Law also sets up that the standard rate of VAT increases from 18% to 21%, the reduced rate from 8% to 10%, and the super-reduced rate is held at 4%, which is applicable to staple goods and services. Certain goods and services hitherto taxed at the reduced rate (8%) will now be taxed at the standard rate (21%). Finally, the tax rate applicable to the delivery of housing units is maintained at 4% until December 31, 2012.
Law 16/2012, of December 27, by which different tax measures are adopted in the aim of consolidating public finances and the impulse of the economic activity (the Tax Measures Act). The following are the most significant measures in the Corporate Income Tax: the legal and tax regime of Real Estate Investment Trusts (SOCIMI) has been modified; the tax neutrality regime has been broadened to cover certain transactions of restructuring and winding-up of credit institutions; and, only with effect for fiscal years starting in 2013 and 2014, the tax depreciation of fixed tangible and intangible assets and real estate properties has been limited for large sized companies to 70% of the amount that would have been tax deductible before the limitation. The Law also creates the “tax on deposits at credit institutions”, aimed to tax deposits of all types placed at credit institutions throughout the country, though an initial tax rate of 0% has been established. Additionally, this Law has extended the enforcement of Wealth Tax for tax year 2013.
Law 7/2012, of October 29, which amends taxation and budgetary regulations and adapts financial regulation to permit increased action to prevent and combat fraud. Among other measures, it introduces the obligation for Spanish tax residents (whether they are private people or companies located in Spain) to make a tax declaration informing of all the assets they might have abroad, and limits to €2,500 the amount for cash transactions involving a professional or a business. In the VAT, new cases of reverse VAT charge are included in the supply of real estate where certain exemptions are waived, or the supply derives from the execution of a guarantee imposed on that property. In addition, article 108 of the Stock Exchange Law (Law 24/1988), regarding indirect taxation in the transfer of securities of companies that hold real estate assets, has been modified and simplified reducing its scope and being characterized as an anti-abuse provision.
Organic Law 7/2012, of December 27, on the amendment of the Criminal Code with respect to transparency and fighting tax and social security fraud. The reform includes an increase of the penalties and an extension to ten years in the statute of limitations for those who commit tax fraud when the quota exceeds €600,000 defrauded, fraud is done through a criminal group or organization, or the tax fraud is committed by the interposition of entities, business, tax havens or tax-free jurisdictions. The reform also contemplates the possibility of mitigating a penalty where the alleged tax offender admits the commission of the offence and pays the tax liability due.
On June 29, 2012, Argentina unilaterally terminated the Tax Treaty signed with Spain with effects from January 1, 2013. Nevertheless, on March 13, 2013, a new Tax Treaty and protocol was signed between both countries, which still needs to be ratified, but that will take effect retroactively from January 1, 2013. Among the most significant changes included in the new Tax Treaty was the elimination of the exclusive taxation in the country of residence of assets consisting of shares in a company and theMost Favorable Nation clause (affecting interest, royalties and capital gains) of the previous protocol.
On January 14, 2013 the U.S. and the Kingdom of Spain signed a protocol amending the Tax Treaty, which needs to be ratified by both countries and will enter into force three months following the later of the dates on which any of the countries give notice that their internal procedures for entry into force have been fulfilled. Among the most significant changes included in the Tax Treaty was the elimination of the taxation at source for interest, royalties and for dividends if the beneficial owner is a company that has owned shares in the last year representing 80% of the voting capital (withholding will be 5% if the recipient does not reach that percentage, but at least 10%). Capital gains will not be subject to taxation at source, unless they derive from the sale of real estate or companies whose assets consist mainly of real estate.
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In an attempt to deal with the international financial crisis, due to the exceptional circumstances notably beginning in the second half of 2008, the following laws were approved in Spain:
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Royal Decree-Law 1642/2008 of December 10 increased consumer deposit and investment guarantees up to €100,000 for each depositor or investor and Spanish entity.
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Royal Decree-Law 6/2008 of October 10 creates the Spanish Financial Asset Acquisition Fund, and Order EHA/3118/2008, dated October 31, enacts this Royal Decree. The purpose of the fund, which is managed by Spain’s Ministry of Economy and Competitiveness and has an initial endowment of €30 billion that can be increased to €50 billion, is to acquire, with public financing and based on market criteria via auctions, financial instruments issued by credit institutions and securitization funds (which are backed by loans granted to individuals, companies and non-financial entities) as a measure to increase liquidity.
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Royal Decree-Law 7/2008 of October 13 on Emergency Economic Measures in connection with the Concerted Euro Area Action Plan (“RD 7/2008”), and Order EHA/3364/2008, dated November 21, as amended by Order EHA/3748/2008 of December 23, enacting article 1 of the aforementioned Royal Decree, include the following measures:
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Article 1 of RD 7/2008, authorizes the granting of state guarantees for certain new financing transactions carried out by credit entities resident in Spain up to a maximum amount of €100 billion. The purpose of Order EHA/3364/2008, as amended by Order EHA/3748/2008 is to implement the provisions of RD 7/2008 and to specify certain essential aspects of the system for granting guarantees to credit entities, such as: (i) the characteristics of the guarantees to be granted; (ii) the requirements that the beneficiary entities and the transactions must fulfill; and (iii) the process to be followed in order to grant the guarantees. Debt issued under this state guarantee must form part of individual operations or issuance programs; not be subordinated or secured by any other class of guarantee; be traded on official Spanish secondary markets; mature within three months and three years (although this maturity can be extended to five years subject to prior notification to the Bank of Spain); be fixed or floating rate (subject to special conditions for floating-rate debt); be repaid in a single installment at maturity; not have any options or other derivatives attached to it; and, not be less than €10 million per issue. The deadline for issuing debt eligible for state guarantees was December 31, 2009 and the total amount of guarantees is €100 billion.
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Authorization, on an exceptional basis, until December 31, 2009, for the Spanish Ministry of Economy and Competitiveness to acquire regulatory capital (including preferred securities and quotas) issued by credit entities resident in Spain that need to reinforce their capital and request such action. These acquisitions will require a report from the Bank of Spain.
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• Royal Decree-Law 9/2009 of June 26 on bank restructuring and credit institutions equity reinforcement, which also aims at maintaining confidence in the financial system and enhancing its strength and solvency so that the surviving institutions are sound and able to provide credit normally, proposes a bank restructuring model based on the three Credit Institution Deposit Guarantee Funds and the use of the “Fund for the Orderly Bank Restructuring”, which has three different stages: (i) the search of a private solution by the credit institution itself; (ii) the adoption of measures aimed at dealing with any weakness that affect the viability of credit institutions, with the participation of the Credit Institution Deposit Guarantee Funds and (iii) restructuring processes with the intervention of the Fund for Orderly Bank Restructuring.
This recapitalization scheme for credit institutions was approved by the European Commission until December 31, 2010, concluding the scheme is compatible with article 107.3.b of the Treaty on the Functioning of the European Union (“TFEU”).
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Royal Decree-Law 6/2010 of April 9 and Royal Decree-Law 13/2010, of December 3, have introduced different measures with the aim of promoting economic recovery and employment. Among the tax measures included, the most significant ones are the expansion and extension of the accelerated depreciation of new assets, the expansion of the small-and medium-sized businesses tax regime, which includes a reduction of taxation for those companies, and the exemption from stamp tax of the incorporation of companies or contributions to them.
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Royal Decree-Law 628/2010 of May 14, 2010, amending Royal Decree-Law 2606/1996 of December 20, 1996 on credit institution deposit guarantee funds and Royal Decree 948/2001 of August 3, 2001, on investor compensation schemes. The Royal Decree 628/2010, which was enacted in order to complete the transposition of Directive 2009/14/EC of the European Parliament and of the Council of March 11, 2009, came into force on June 4, 2010, and introduces a series of reforms in the regulation of deposit guarantee schemes, such as the obligation of credit institutions to inform depositors of the coverage of their deposits by foreign or domestic schemes and the reduction of the time period for the Bank of Spain to check that a credit institution is unable to repay deposits which are due and payable to five days.
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Royal Decree-Law 11/2010 of July 9 on governing bodies and other aspects of the legal regime of savings banks amending Law 13/1985 of May 25 on the investment ratios, ownership of funds and reporting obligations of financial intermediaries in respect of equity units and Law 31/1985 of August 2 on regulation of the basic rules on governing bodies of savings banks, is intended to improve savings banks’ possibilities of raising capital by reforming the legal regime for equity units, to promote the professionalization of their governing bodies, adapt certain aspects of institutional protection schemes formed by savings banks and design a new organizational model of savings banks financial activity. This Royal Decree-Law also modifies some aspects of the Royal Decree-Law 9/2009 on bank restructuring and credit institution equity strengthening.
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On February 15, 2011, the Spanish Parliament approved Law 2/2011 on sustainable economy, which is aimed to promote the sustainability of the Spanish economy and to improve the competitiveness of the Spanish economic model by eliminating administrative and tributary burdens through a series of reforms that affect the central areas of the model.
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Royal Decree-Law 2/2011 of February 18 on the strengthening of the banking system, which came into force on February 20, 2011, is aimed to dissipate the fears that have arisen regarding the capacity of the Spanish banking system to absorb the potential losses associated with the deterioration of assets and proposes to strengthen the solvency of Spanish banking entities and to accelerate the restructuring process of the Spanish savings banks. The Royal Decree-Law provides incentives for institutions to raise private capital to boost their solvency, which can be done through direct funds from third parties, public issuances or a combination of both.
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Royal Decree-Law 20/2011, of December 30, on urgent budgetary, tax and financial measures to correct the public deficit, introduces different temporary amendments in the tax system. The most significant of these are:
a) Individual Income Tax: effective for tax years 2012 and 2013, an additional tax (increase on the tax rate) ranging from 0.75% to 7% has been established on the general tax base, bringing the total tax rate to a range between 24.75% and 52%. Similarly, an additional tax ranging from 2% to 6% would be applicable on the “savings” tax base, bringing the total tax rate to a range between 21% and 27%. Withholdings rates have been modified accordingly.
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b) Non-resident Income Tax: Effective on January 1, 2012 until December 31, 2013, the applicable tax rate to income obtained by non-resident taxpayers without a permanent establishment is increased from 24% to 24.75%. Over the same period, the tax rate applicable to dividends, branch profits distributions, interest payments and capital gains obtained from the transfer of assets is increased from 19% to 21%. These changes are mirrored in the withholding rates applicable.
c) VAT: the reduced 4% VAT rate for deliveries of buildings (or part of them) suitable to be used as dwellings introduced by Royal Decree-Law 9/2011 has been extended until December 31, 2012.
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Royal Decree-Law 12/2012 of March 30, which introduces several tax and administrative measures designed to reduce the public deficit. The most significant measures approved refer to the Corporate Income Tax, some of them with a permanent nature, such as the limitation of the deductibility of financial expenses, the non-deductibility of certain intragroup financial expenses, and the elimination of the accelerated depreciation regime for large sized companies; and others temporary which will only affect tax years beginning within 2012 and 2013, such as the limitation of the deductibility of goodwill, and the introduction of a minimum advanced staged payment for larger companies.
Royal Decree-Law 2/2012 of February 3, which came into force on February 4, is primarily aimed at strengthening and rationalizing the balance sheets of Spanish financial institutions and consolidated group of credit institutions in relation to the large exposures to real estate assets through loans to real estate developers and repossessed assets, by increased provisioning combined with a requirement for an additional capital buffer on impaired assets. This Royal Decree-Law is also aimed at promoting consolidation of the financial sector, giving incentives to new integration processes among the Spanish financial institutions and introducing operational changes to the Fund for Orderly Bank Restructuring (“FROB”) and reinforcing new corporate governance rules for financial institutions which have received financial support from the FROB. (See Item 4. Information on the Company—A. History and development of the company – company—Recent Events’ herein)
Royal Decree-Law 10/2012, of March 23, 2012, amended certain financial legislation in relation to the powers of the European Supervisory Authorities, aiming at adapting national supervisory arrangements to the new European supervisory framework so that Spain acts in coordination with the new European Supervisory Authorities, as well as with other Member States. In general, this Royal Decree-Law introduces the obligation for the Spanish supervisory authorities of the different financial institutions (Bank of Spain, CNMV and Directorate General of Insurance and Pension Funds) to cooperate with their European counterparts (European Banking Authority, European Securities and Markets Authority, and European Insurance and Occupational Pensions Authority, respectively), as well as with the European Systemic Risk Board. Furthermore, they shall provide these authorities with all the information that they need in order to perform their functions as conferred under European regulations.
Royal Decree-Law 3/2012, of February 10, 2012, on urgent labour reform measures was enacted. From the standpoint of financial regulation, the seventh additional provision of Royal Decree-Law 3/2012 complements Royal Decree-Law 2/2012 of February 3, 2012 on clean-up of the financial sector balance sheet in respect to the establishment of a specific remuneration regime applicable to the directors and managers of credit institutions that receive government financial support for balance sheet clean-up and restructuring, as regards limitations on severance payments. Additionally, it sets certain rules on the termination of credit institution directors’ or managers’ contracts due to the imposition of sanctions and on the suspension of those contracts due to suspension of the directors or managers or certain cases of provisional replacement thereof. Credit institutions majority owned or financially supported by the FROB may in no case make severance payments for contract termination exceeding the lower of the following amounts: (i) twice the maximum bases set in Royal Decree-Law 2/2012 of February 3, 2012 on clean-up of the financial sector balance sheet; or (ii) two years of stipulated fixed remuneration.
Royal Decree-Law 6/2012, of March 9, 2012, which became effective on March 11, 2012, on urgent measures to protect mortgagors without funds established measures to foster the restructuring of the mortgage debt of persons suffering extraordinary difficulty in meeting payments, and to set in place mechanisms to make mortgage foreclosure procedures more flexible. The protection model designed is based on a code of good practices for the viable restructuring of mortgage debts on the principle residence, which is supplemented by tax measures. It shall apply to debtors within the exclusion threshold who hold loans for the purchase of houses the purchase price of which does not exceed certain levels applicable at the date of its entry into force.
Royal Decree-Law 4/2012, of February 24, 2012, set out information obligations and procedures necessary to establish a financing mechanism for payments to local government suppliers, and Royal Decree-Law 7/201, both of March 9, 2012, amended by Royal Decree-Law 10/2012 of March 23, 2012 and set up the Fund for Financing Payments to Suppliers. Royal Decree-Law 4/2012 is aimed to provide the conditions necessary for local governments to meet their outstanding payment obligations to suppliers stemming from the tendering out of works, supplies or services. For this purpose it sets in place an extraordinary financing mechanism, of which regional governments can also avail themselves. Royal Decree-Law 7/2012 sets up the Fondo para la Financiación de los Pagos a Proveedores (Fund for Financing Payments to Suppliers, hereafter “the Fund”) and regulates the terms and conditions of transactions for paying the outstanding obligations of local governments and, where applicable, of the regional governments that have availed themselves of this financing mechanism.
Royal Decree-Law 18/2012, of May 11, 2012, on write-downs and sales of the financial sector’s real estate assets, which builds on Royal Decree-Law 2/2012 of February 3, 2012, and which became effective on May 12, 2012, required credit institutions to create new provisions for their portfolio of loans and assets foreclosed or received in payment of debts relating to development land and to real estate construction or development. The new requirements must be complied with before December 31, 2012, except in the case of institutions that carry out integration processes during 2012, which will have 12 months from when such processes are authorized. These processes must involve a significant transformation of the institutions concerned, involve institutions that do not belong to the same group and comply with the following conditions: (i) They must be carried out through operations that entail structural modifications or the acquisition of institutions in which the Fund for the Orderly Restructuring of the Banking Sector (FROB) has a majority holding, or for which the latter has been appointed provisional administrator; (ii) they will include measures tending to improve their corporate governance; and (iii) they must incorporate a plan for the divestment of assets related to real estate exposures, as well as commitments to increase lending to households and small and medium-sized enterprises. For this purpose, credit institutions and consolidable groups of credit institutions had to submit a plan to the Bank of Spain, by June 11, 2012, detailing the measures they intended to adopt to comply with the new requirements.
Those institutions that, as a consequence of these write-downs, have a capital or core capital shortfall according to the rules in effect will have to capitalize themselves in the market or, failing that, request financial support from the FROB. This might consist in subscription for instruments convertible into shares (contingent convertible bonds, known as “CoCos”) or contributions to share capital, irrespective of whether they participate in integration processes. Institutions that seek this support must submit a restructuring plan which, inter alia, must set out the support measures that the envisaged FROB intervention would include.
In order for real estate assets to be identified and sold, the Royal Decree-Law 18/2012 envisages the creation of share capital companies to which credit institutions must transfer all the real estate assets foreclosed or received in payment of debts relating to land or real estate construction or development, and other real estate assets foreclosed or received in payment of debts since December 31, 2011.
The transfers must be made at fair value and by the end of the period for setting aside the new provisions established in Royal Decree-Laws 2/2012 and 18/2012 (i.e. before December 31, 2012, unless integration processes are carried out). In the event of absence of and difficulty estimating a fair value, the value in the accounts of the institution contributing the asset may be used instead, taking into account the provisions that must be created for the assets pursuant to Royal Decree-Laws 2/2012 and 18/2012.
Where credit institutions have received financial support from the FROB, the exclusive corporate objects of the companies to which they transfer their assets will be the management and disposal, directly or indirectly, of such assets. In addition, they will be obliged to dispose each year of at least 5% of their assets to a third party other than the transferor credit institution or any other company in the same group. The directors of such companies must have proven experience in the management of real estate assets.
Finally, these credit institutions will have a period of three years, from the effective date of this Royal Decree-Law, to adopt and implement the necessary measures to ensure that the link of the asset management company to the institution is, at most, that of an associate.
Law 8/2012 of October 30, 2012 on write-downs and sales of the financial sector’s real estate assets, which became effective on October 31, 2012, gives the provisions of Royal Decree-Law 18/2012, May 11, 2012 the status of a law. Among other things, it required additional provisions to those already established in Royal Decree-Law 2/2012 of February 3, 2012, consolidating the financial sector in the wake of the impairment of its loans to the property business. These new requirements must have been complied with by the credit institutions by December 31, 2012. It also clarified a number of points regarding Royal Decree-Law 2/2012 to ensure consistency with Royal Decree-Law 18/2012, and the opportunity was taken to modify a number of financial regulations.
The Law 8/2012 also introduced special treatment for preference shares under the terms of Royal Decree-Law 18/2012. Thus, credit institutions facing equity capital difficulties as a result of applying the new provisions may include in their consolidation plan an application to defer for up to 12 months the envisaged remuneration on preference shares or mandatory convertible debt instruments in circulation before May 12, 2012 (date of entry into force of Royal Decree-Law 18/2012) or on instruments exchanged for the foregoing. Once this period has expired, deferred remuneration may only be paid if sufficient distributable profits or reserves are available and there is no capital shortfall at the parent credit institution. The Law also empowers the government to stipulate under what circumstances institutions issuing preferred shares or subordinate bonds are to offer to exchange them for shares or subordinate bonds in the issuing institution or a member of its group, and the criteria for determining the percentage of the nominal value of the instruments to be exchanged.
Royal Decree-Law 21/2012 of July 13, 2012 on liquidity measures for general government and in the financial field, which became effective on July 15, 2012, introduced certain amendments to the Spanish regulation from the financial regulation standpoint. Among others, it authorized the FROB to subscribe to the agreements and contracts necessary to formalize and place at the disposal of the State and the FROB itself the financial assistance that it may receive, directly or indirectly through the State, in cash or in debt securities, not being this assistance subject to the limits envisaged in article 2.5 of Royal Decree-Law 9/2009 of June 26, 2009 on bank restructuring and the strengthening of credit institutions’ own funds. As part of the recapitalization processes envisaged in Royal Decree-Law 9/2009, the FROB may advance in the form of a loan, in cash, or in debt securities the amount of the financial support that the institutions participating in these processes had requested. The decision to grant these advances will be conditional upon a series of circumstances which, in the opinion of the Bank of Spain, may determine that the institution in question is subject to liquidity tensions that may affect its stability during the period needed for the effective subscription and disbursement of the support from the FROB.
The Royal Decree-Law also envisaged the institution of a territorial financing mechanism which involves the creation of a Regional Government Liquidity Fund that will be funded with a charge to the State budget with an extraordinary budgetary appropriation for an amount of €18 billion. The Fund was assigned to the Ministry of Economy and General Government through the Secretariat of State for General Government, and it will be managed by the Official Credit Institute (OCI). It will extend loans to the Regional Governments, in order to cover their financial liquidity needs.
The Royal Decree-Law also exempted the Bank of Spain from the duty of professional secrecy so it may provide the European Commission, the European Central Bank, the European Banking Authority, the IMF, the European Financial Stability Facility and, where appropriate, the European Stability Mechanism with the information needed for the proper performance of their functions in respect of financial assistance for the recapitalization of Spanish financial institutions.
Royal Decree-Law 24/2012 of August 31, 2012, on restructuring and resolution of credit institutions, which repeals Royal Decree-Law 9/2009 of June 26, 2009 on bank restructuring and strengthening of the capital of credit
institutions, as well as certain sections of Royal Decree-Law 2/2011 of February 18, 2011 on the strengthening of the Spanish financial system, and of Royal Decree-Law 2/2012 of February 3, 2012 on restructuring of the financial sector, also, introduced various amendments to a large number of provisions with the status of Law. The Royal Decree-Law included the following measures: (i) a new enhanced framework for the management of credit institution crises, which will allow such institutions to be effectively restructured and, where necessary, resolved (wound up) in an orderly manner; (ii) new regulation of the FROB, which delimits its powers and significantly enhances the tools for intervention in all phases of the management of credit institution crises; (iii) a system of burden sharing to distribute the costs of credit institution restructuring and resolution between the public and private sectors; (iv) the legal framework for the incorporation of an Asset Management Company; (v) greater protection for retail investors; (vi) a new regime of “capital principal” requirements that must be complied with by institutions, which covers both the definition and level of such capital; (vii) the transfer of certain powers to the Bank of Spain; (viii) new functions of the Deposit Guarantee Fund for Credit Institutions, and (ix) new limits on the remuneration of executives of credit institutions that receive financial support. |
The Royal Decree-Law, besides modifying the definition of “capital principal” (core capital) to adapt it to the one used by the European Banking Authority, also modified with effect from January 1, 2013, the “capital principal” (core capital) requirements established by Royal Decree-Law 2/2011 of February 18 on the strengthening of the financial system that institutions and consolidable groups must comply with. Specifically, the requirements of 8% (general) and 10% (for institutions that have not sold at least 20% of the securities representing their capital to third parties, and that have a wholesale funding ratio of more than 20%) were converted into a single 9% requirement. The Royal Decree-Law became effective on August 31, 2012. Law 9/2012, of November 14, 2012 on restructuring and resolution of credit institution was published on November 15, 2012, and raised the content of Royal Decree-Law 24/2012 of August 31, 2012 on restructuring and resolution of credit institutions (which it repeals) to the status of a Law, and introduces some significant new provisions on the regulation of asset management companies (AMCs), and the segregated assets of AMCs’, which the Law terms “bank asset funds” (FABs). The Law also makes a number of changes of relevance to the financial sphere.
Law 9/2012 of November 14, 2012 (discussed above) sets out the general framework for asset management companies (AMCs) established in Royal Decree-Law 24/2012 of August 31, 2012, which are envisaged as tools for credit institution restructuring and resolution, and introduces some significant changes. The general legal framework applicable to AMCs, the regulations governing them, and other additional details were recently enacted in Royal Decree 1559/2012 of November 15, 2012. AMCs’ purpose is to concentrate those assets considered problematic or which might be detrimental to credit institutions’ balance sheets or jeopardize their viability, by removing them from the balance sheet and allowing them to be independently managed. The objectives AMCs are to pursue through their operations are: (i) to help consolidate the financial system by acquiring the relevant assets, such that simultaneous with their change of ownership there is an effective transfer of the risks associated with them; (ii) to minimize public financial support; (iii) to pay the debts and obligations incurred in the course of conducting their activities; (iv) to minimize possible market distortions resulting from their activities; and (v) to dispose of the assets acquired in a way that optimizes their value within the timescale for which they have been constituted. The FROB may oblige a credit institution to transfer certain classes of assets on its balance sheet to an AMC, including those on the balance sheet of any entity over which the credit institution exercises control. Asset management companies regulated under Royal Decree Law 18/2012 of May 11, 2012, on the writing down and sale of the real estate assets of the financial sector, the regulations for which were given the status of law by Law 8/2012 of October 30, 2012, are not considered AMCs.
Royal Decree-Law 27/2012 of November 15, 2012, on urgent measures to strengthen the protection of mortgage debtors was approved and has two main objectives: to put in place a two year moratorium on evictions of vulnerable families from their primary residence, and to create a stock of social housing. For a period of two years from the effective date of the law, evictions of families considered to be particularly vulnerable for any of the reasons enumerated below will not be permitted. Moreover, for this purpose, the home must have been awarded to the creditor, or person acting on the latter’s behalf, during the mortgage foreclosure proceedings, and other financial circumstances must also apply. The Royal Decree came into force on November 16, 2012.
United Kingdom Regulation
FSA
Both Santander UK and our London branch are regulated by the Financial Services Authority (“FSA”). The FSA is the single statutory regulator responsible for regulating deposit taking, mortgages, insurance and investment business
pursuant to the Financial Services and Markets Act 2000 (“FSMA”). It is a criminal offenseoffence for any person to carry on any of the activities regulated under the FSMA in the United Kingdom by way of business unless that person is authorized by the FSA or falls under an exemption.
The FSA has authorized Santander UK, as well as some of its subsidiaries, to carry on certain regulated activities. The regulated activities they are authorized to engage in depend upon permissions granted by the FSA. The main permitted activities of Santander UK and its authorized subsidiaries are described below.
The U.K. Government has announced a new regulatory framework, with effect from April 1, 2013, upon implementation of the Financial Services Act 2012 (the “Act”). Under the Act, the FSA has been replaced by two regulatory bodies, the Prudential Regulatory Authority (the “PRA”), which has responsibility for the prudential regulation of deposit takers and insurance companies, and the Financial Conduct Authority (the ‘FCA’), which supervises conduct of business, and maintain orderly financial markets for consumers.
Mortgages
Lending secured on land, at least 40% of which is used as a dwelling by an individual borrower or relative, has been regulated by the FSA since October 31, 2004. Santander UK is authorized to enter into, advise and arrange regulated mortgage contracts.
Banking
Deposit taking is a regulated activity that requires a firm to be authorized and supervised by the FSA. Santander UK has permission to carry on deposit taking as do several of its subsidiaries, including Abbey National Treasury Services plc and Cater Allen Limited.
Insurance
United Kingdom banking groups may provide insurance services through other group companies. Insurance business in the United Kingdom is divided between two main categories: Long-term Assurance (such as whole of life, endowments, life insurance investment bonds) and General Insurance (such as buildings and contents coverage, annually renewable life, health and travel protection coverage and motor insurance).
Under the FSMA, effecting or carrying out any contract of insurance, whether general or long-term, is a regulated activity requiring authorization. Life insurance mediation has been subject to regulation for many years. General insurance mediation has been subject to regulation by the FSA since January 14, 2005.
Santander UK is authorized by the FSA to sell both Long-term Assurance and General Insurance and receives commissions for the policies arranged.
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Investment business
Investment business such as dealing in, arranging deals in, managing and giving investment advice in respect of most types of securities and other investments, including options, futures and contracts for differences (which would include interest rate and currency swaps) and long-term assurance contracts are all regulated activities under the FSMA and require authorization by the FSA.
Santander UK and some of its subsidiaries have permission to engage in a wide range of wholesale and retail investment businesses including selling investment-backed life assurance and pension products, unit trust products and individual savings accounts (tax exempt saving products) and providing certain retail equity products and services.
New regulatory structureU.K. Bank Levy
HM Treasury introduced an annual U.K. bank levy (the ‘U.K. Bank Levy’) via legislation in the Finance Act 2011. The UKU.K. Bank Levy is imposed on (amongst other entities) U.K. banking groups and subsidiaries, and therefore applies to Santander UK. The amount of the U.K. Bank Levy is based on a bank’s total liabilities, excluding (amongst other things)
Tier 1 Capital, insured retail deposits and repos secured on sovereign debt. A reduced rate is applied to longer-term liabilities. The U.K. Government has announced a new regulatory framework which is due to begin taking effect at the end of 2012. The UK Financial Services Authority will be replaced by two regulatory bodies: (i) the Prudential Regulatory Authority, regulation of financial institutions that manage significant risks on their balance sheets, such as banks and insurance companies, and (ii) the Financial Conduct Authority, which will supervise the conduct of business and maintain orderly financial markets. We expectintends that the regulatory approach underU.K. Bank Levy should raise at least £2.5 billion each year. To offset the new regime will be more intrusive than the existing regimeshortfall in U.K. Bank Levy receipts, and will challenge business models and governance culture in particular. In orderalso to prepare for this change, the FSA is adopting a twin peaks model internally, and therefore will have two supervisors: one focusing on prudential matters and the other focusing on conduct.
Substantial reorganizationtake account of the regulatory framework has the potential to cause administrative and operational disruption for the regulatory authorities concerned. This disruption could impact on the resources which the FSA or the successor authorities are able to devotebenefit to the supervisionbanking sector of regulated financial services firms, the nature of their approach to supervision and accordingly, the ability of regulated financial sector firms (including members of the Group) to deal effectively with their supervisors and to anticipate and respond appropriately to developments in regulatory policy. No assurance can be given that further changes will not be made to the regulatory regimereductions in the UK generally, the Group’s particular business sectorsrate of corporation tax, there was an increase in the market or specifically in relation to the Group.rates of U.K. Bank Levy from January 1, 2012 with a further increase from January 1, 2013.
United States Supervision and Regulation
Our operations are subject to extensive federal and state banking and securities regulation and supervision in the United States. We engage in U.S. banking activities directly through our New York branch and indirectly through Banesto’s branch in New York, Santander UK’s branch in Connecticut, our subsidiary Edge Act corporation, Banco Santander International, in Miami, Banco Santander Puerto Rico (“Santander Puerto Rico”) in Puerto Rico, Sovereign Bank, a national bank that has branches throughout the Northeast US,U.S., and Santander Consumer USA, an auto financing company. We engage in securities activities in the United States directly through our broker-dealer subsidiaries, Santander Securities Corporation, Santander Investment Securities Inc., and BanestoSantander International Securities, Inc.
Disclosure pursuant to Section 219 of the Iran threat reduction and Syria human rights act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
The following activities are disclosed in response to Section 13(r) with respect to affiliates of Santander UK within the Banco Santander Group:
During the period covered by this annual report an Iranian national, resident in the U.K., who is currently designated by the U.S. and the U.K. under the Iran Sanctions regime held a mortgage with Santander UK plc that was issued prior to any such designation. No further drawdown has been made (or would be allowed) under this mortgage although we continue to receive repayment installments. In 2012, total revenue in connection with the mortgage was £10,768.38 whilst net profits were negligible relative to the overall profits of Santander UK. Santander UK does not intend to enter into any new relationships with this customer, and any disbursements will only be made in accordance with applicable sanctions.
The same Iranian national referred to above also holds two investment accounts with Santander Asset Management UK Limited, part of the Banco Santander group. The accounts have remained frozen throughout 2012. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue in connection with the investment accounts was £208.15 whilst net profits were negligible in 2012 relative to the overall profits of Banco Santander, S.A.
In addition, the Group has certain legacy export credits and performance guarantees with Bank Sepah and Bank Mellat, which are included in the U.S. Department of the Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List.
With respect to Bank Sepah, the Bank entered into bilateral credit facilities in May 1996 and in February 2004 of US$ 95.7 million and US$ 4.2 million, respectively. The former matured on May 29, 2012 and the latter matures on September 11, 2013. As of December 31, 2012, €0.5 million remained outstanding under the 2004 bilateral credit facility.
With respect to Bank Mellat, the Bank entered into two bilateral credit facilities in February 2000 in an aggregate principal amount of €25.9 million. Both credit facilities matured in 2012. In addition, in 2005 Banco Santander participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matures on July 6, 2015. As of December 31, 2012, the Group was owed €6.5 million under this credit facility.
Both Bank Sepah and Bank Mellat have been in default under all of these agreements in recent years and Banco Santander has been and expects to continue to be repaid any amounts due by official export credit agencies, which insure between 95% and 99% of the outstanding amounts under these credit facilities. No funds have been extended by Santander under these facilities since they were granted.
The Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007. However, should any of the contractors default in their obligations under the public bids, the Group would not be able to pay any amounts due to Bank Sepah or Bank Mellat because any such payments would be frozen pursuant to Council Regulation (EU) No. 961/2010.
In the aggregate, all of the transactions described above resulted in approximately €120,000 gross revenues and approximately €15,000 net loss to the Group in 2012, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount – which payment would be frozen as explained above (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
Dodd-Frank Act
On July 21, 2010, the United States enacted the Dodd-Frank Act, which provides a broad framework for significant regulatory changes that will extend to almost every area of U.S. financial regulation. Implementation of the Dodd-Frank Act requires further detailed rulemaking over several years by different U.S. regulators, including the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Securities and Exchange Commission (the “SEC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Commodity Futures Trading Commission (the “CFTC”) and the newly created Financial Stability Oversight Council (the “Council”) and Consumer Financial Protection Bureau (“the CFPB”), although uncertainty remains about the final details, timing and impact of the rules.
Among other things, the Dodd-Frank Act will, pursuant to its so-called “Volcker Rule”, limit the ability of banking entities to sponsor or invest in private equity or hedge funds or to engage in certain types of proprietary trading in the United States unrelated to serving clients, although certain non-U.S. banking organizations, such as the Bank, will not be prohibited by the Dodd-Frank Act from engaging in such activities solely outside the United States. The Dodd-Frank Act also provides regulators with tools to impose greater capital, leverage and liquidity requirements and other prudential standards, particularly for financial institutions that pose significant systemic risk. However, in imposing heightened capital, leverage, liquidity and other prudential standards on non-U.S. banks such as us, the Federal Reserve Board is directed to take into account the principle of national treatment and equality of competitive opportunity, and the extent to which the foreign bank is subject to comparable home country standards (although certain of our activities will be subject to the U.S. standards).
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U.S. regulators will also be able to restrict the size and growth of systemically significant non-bank financial companies and large interconnected bank holding companies and will be required to impose bright-line debt-to-equity ratio limits on financial companies that the Council determines pose a grave threat to financial stability.
Furthermore, the Dodd-Frank Act provides for an extensive framework for the regulation of over-the-counter (OTC) derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants will be required to register with the SEC or the CFTC, or both, and will become subject to capital, margin, business conduct, recordkeeping, reporting and other requirements. We may register one or more entities as swap dealers.
Regulations that the FDIC or the Consumer Financial Protection BureauCFPB may adopt could affect the nature of the activities that a bank, such as Sovereign Bank and Santander Puerto Rico, may conduct, and may impose restrictions and limitations on the conduct of such activities.
The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.
Regulatory Authorities
We are a bank holding company under the U.S. Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), by virtue of our ownership of Santander Holdings USA and Santander BanCorp. As a result, we and our U.S. operations are subject to regulation, supervision and examination by the Federal Reserve Board.
Santander Puerto Rico is a Puerto Rico-chartered bank, and its deposits are insured by the FDIC. As such, Santander Puerto Rico is subject to regulation, supervision and examination by the Puerto Rico Office of Financial Institutions and the FDIC. Sovereign Bank is a federally-chartered national bank, the deposits of which are also insured by the FDIC. Sovereign Bank is subject to regulation, supervision and examination by the OCC and the FDIC. Our New York branch is supervised by the Federal Reserve Bank of New York and the New York State Department of Financial Services, but its deposits are not insured (or eligible to be insured) by the FDIC. Banesto’s branch in New York is supervised by the Federal Reserve Bank of New York and the New York State Department of Financial Services. Santander UK’s branch in Connecticut is supervised by the Federal Reserve Bank of New York and the Connecticut Department of Banking. Banco Santander International is supervised by the Federal Reserve Bank of Atlanta. Santander Consumer USA is regulated and supervised by the Federal Reserve Bank of New YorkBoston and various state regulators.
Restrictions on Activities
As described below, federal and state banking laws and regulations restrict our ability to engage, directly or indirectly through subsidiaries, in activities in the United States.
We are required to obtain the prior approval of the Federal Reserve Board before directly or indirectly acquiring the ownership or control of more than 5% of any class of voting shares of U.S. banks, certain other depository institutions, and bank or depository institution holding companies. Under the Bank Holding Company Act and Federal Reserve Board regulations, our U.S. banking operations (including our New York branch and Santander Puerto Rico) are also restricted from engaging in certain “tying” arrangements involving products and services.
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Santander Puerto Rico and Sovereign Bank are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of these subsidiaries.
Under U.S. law, our activities and those of our subsidiaries in the United States are generally limited to the business of banking, and managing or controlling banks. So long as we are a financial holding company under U.S. law, we may also engage in nonbanking activities in the United States that are financial in nature, or incidental or complementary to such financial activity, including securities, merchant banking, insurance and other financial activities, subject to certain limitations on the conduct of such activities and to prior regulatory approval in some cases.
In addition, under U.S. federal banking laws, state-chartered banks (such as Santander Puerto Rico) and state-licensed branches and agencies of foreign banks (such as our New York branch) may not, as a general matter, engage as a principal in any type of activity not permissible for their federally chartered or licensed counterparts, unless (i) in the case of state-chartered banks (such as Santander Puerto Rico), the FDIC determines that the additional activity would pose no significant risk to the FDIC’s Deposit Insurance Fund and is consistent with sound banking practices, and (ii) in the case of state licensed branches and agencies (such as our New York branch), the Federal Reserve Board determines that the additional activity is consistent with sound banking practices. United States federal banking laws also subject state branches and agencies to the same single-borrower lending limits that apply to federal branches or agencies, which are substantially similar to the lending limits applicable to national banks. For our U.S. branches, these single-borrower lending limits are based on the worldwide capital of the entire foreign bank (e.g., Banco Santander, S.A. in the case of our New York branch).
Under the International Banking Act of 1978, as amended, the Federal Reserve Board may terminate the activities of any U.S. office of a foreign bank if it determines (i) that the foreign bank is not subject to comprehensive supervision on a consolidated basis in its home country (unless the home country is making demonstrable progress toward establishing such supervision), (ii) that there is reasonable cause to believe that such foreign bank or its affiliate has violated the law or engaged in an unsafe or unsound banking practice in the United States and, as a result of such violation or practice, the continued operation of the U.S. office would be inconsistent with the public interest or with the purposes of federal banking laws or, (iii) for a foreign bank that presents a risk to the stability of the United States financial system, the home country of the foreign bank has not adopted, or made demonstrable progress toward adopting, an appropriate system of financial regulation to mitigate such risk.
The Dodd-Frank Act removed, effective in July 2011, a longstanding prohibition on the payment of interest on demand deposits by our FDIC-insured bank subsidiaries and our New York branch. In addition, theThe Dodd-Frank Act will requirealso requires that the lending limits applicable to Sovereign Bank, Santander Puerto Rico, and our New York branch take into account (effective July 2012) credit exposure arising from derivative transactions, and that those applicable to Sovereign Bank and our New York branch also take into account securities borrowing and lending transactions and repurchase and reverse repurchase agreements with counterparties. The OCC has issued an interim final rule to implement the Dodd-Frank Act’s provisions relating to lending limits. Also, under the so-called swap “push-out” provisions of the Dodd-Frank Act, the derivatives activities of FDIC-insured banks and U.S. branch offices of foreign banks will be restricted or prohibited, which may necessitate a restructuring of how we conduct our derivatives activities.
There are various qualitative and quantitative restrictions on the extent to which we and our nonbank subsidiaries can borrow or otherwise obtain credit from our U.S. banking subsidiaries or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities must be secured by designated amounts of specified collateral and are subject to volume limitations. These restrictions also apply to certain transactions of our New York branch with certain of our U.S. affiliates. Effective in July 2012, the Dodd-Frank Act subjects credit exposure arising from derivative transactions, securities borrowing and lending transactions, and repurchase/reverse repurchase agreements to these collateral and volume limitations. The Federal Reserve Bank has not yet issued regulations to implement these changes made by the Dodd-Frank Act.
A major focus of U.S. governmental policy relating to financial institutions is aimed at preventing money laundering and terrorist financing and compliance with economic sanctions in respect of designated countries or activities. Failure of an institution to have policies and procedures and controls in place to prevent, detect and report money laundering and terrorist financing could in some cases have serious legal, financial and reputational consequences for the institution.
In December 2012, pursuant to the Dodd-Frank Act’s systemic risk regulation provisions, the Federal Reserve Board proposed to apply enhanced prudential standards to the U.S. operations of large foreign banking organizations, including us. Under the Federal Reserve Board’s proposal, a number of large foreign banking organizations, including Banco Santander, S.A., would be required to establish a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that would hold all of the large foreign banking organization’s U.S. bank and nonbank subsidiaries. Under the proposal, an IHC would be subject to U.S. capital, liquidity, single counterparty credit limits, risk management, stress testing and other enhanced prudential standards on a consolidated basis, and the Federal Reserve Board would have the authority to examine any IHC and any subsidiary of an IHC. Although U.S. branches and agencies of foreign banks would not be required to be held beneath an IHC, such branches and agencies would be subject to liquidity, single counterparty credit limits, and, in certain circumstances, asset maintenance requirements. The rules have a proposed effective date of July 1, 2015. The Federal Reserve Board is currently accepting comments on its proposal.
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Our New York branch
Our New York branch is licensed by the New York Superintendent of Financial Services to conduct a commercial banking business. Its activity is mainly focused on wholesale and investment banking, providing a full range of lending, investment banking, transactional banking and brokerage services to corporate and institutional investors. Under the New York State Banking Law and regulations, our New York branch is required to maintain eligible high-quality assets with banks in the State of New York, as security for the protection of depositors and certain other creditors.
The New York State Banking Law also empowers the Superintendent of Banks to establish asset maintenance requirements for branches of foreign banks, expressed as a percentage of each branch’s liabilities. The presently designated percentage is 0%, although the Superintendent may impose additional asset maintenance requirements upon individual branches on a case-by-case basis. No such requirement has been imposed upon our New York branch.
The New York State Banking Law authorizes the Superintendent of Financial Services to take possession of the business and property of a New York branch of a foreign bank under certain circumstances, generally involving violation of law, conduct of business in an unsafe manner, impairment of capital, suspension of payment of obligations, or initiation of liquidation proceedings against the foreign bank at its domicile or elsewhere. In liquidating or dealing with a branch’s business after taking possession of a branch, only the claims of depositors and other creditors that arose out of transactions with a branch are to be accepted by the Superintendent of Financial Services for payment out of the business and property of the foreign bank in the State of New York, without prejudice to the rights of the holders of such claims to be satisfied out of other assets of the foreign bank. After such claims are paid, the Superintendent of Financial Services will turn over the remaining assets, if any, to the foreign bank or its duly appointed liquidator or receiver.
Our U.S. Depository Institution Subsidiaries
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”) provides for extensive regulation of depository institutions (such as Santander Puerto Rico and Sovereign Bank), including requiring federal banking regulators to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. For this purpose, FDICIA establishes five tiers of institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” As an insured depository institution’s capital level declines and the depository institution falls into lower categories (or if it is placed in a lower category by the discretionary action of its supervisor), greater limits are placed on its activities and federal banking regulators are authorized (and, in many cases, required) to take increasingly more stringent supervisory actions, which could ultimately include the appointment of a conservator or receiver for the depository institution (even if it is solvent). In addition, FDICIA generally prohibits an FDIC-insured bank from making any capital distribution (including payment of a dividend) or payment of a management fee to its holding company if the bank would thereafter be undercapitalized. If an insured depository institution becomes “undercapitalized,” it is required to submit to federal regulators a capital restoration plan guaranteed by the depository institution’s holding company. If an undercapitalized depository institution fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Significantly undercapitalized depository institutions may be subject to a number of restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and restrictions on accepting deposits from correspondent banks. “Critically undercapitalized” depository institutions are subject to appointment of a receiver or conservator.
In June 2012, U.S. bank regulators proposed a broad revision of the regulatory capital rules applicable to U.S. banks, bank holding companies and other U.S. banking organizations. The proposals would, among other things, implement the Basel III capital standards in the United States, revise the capital categories under the “prompt corrective action” framework to reflect the higher minimum capital ratios under Basel III, and modify existing standardized risk weights for certain types of asset classes, including residential mortgages and securitization exposures. The proposals are intended to comply with the Dodd-Frank Act’s minimum risk-based capital requirements and would be phased in over a multi-year period. Once fully implemented, the new rules would generally increase both the quality and quantity of regulatory capital that U.S. banking organizations are required to maintain. It was originally contemplated that the revised capital rules would be phased in beginning in January 2013. In November 2012, however, U.S. bank regulators announced that the proposals would not become effective in January 2013. The announcement did not specify new implementation or phase-in dates. U.S. bank regulators are working to finalize the proposals.
Monetary Policy and Exchange Controls
The decisions of the European System of Central Banks influence conditions in the money and credit markets, thereby affecting interest rates, the growth in lending, the distribution of lending among various industry sectors and the growth of deposits. Monetary policy has had a significant effect on the operations and profitability of Spanish banks in the past and this effect is expected to continue in the future. Similarly, the monetary policies of governments in other countries in which we have operations, particularly in Latin America, the United States and the United Kingdom, affect our operations and profitability in those countries. We cannot predict the effect which any changes in such policies may have upon our operations in the future, but we do not expect it to be material.
The European Monetary Union has had a significant effect upon foreign exchange and bond markets and has involved modification of the internal operations and systems of banks and of inter-bank payments systems. Since January 1, 1999, the start of Stage III, see “—Supervision and Regulation—Bank of Spain and the European Central Bank,” Spanish monetary policy has been affected in several ways. The euro has become the national currency of the fifteen participating countries and the exchange rates between the currencies of these countries were fixed to the euro. Additionally, the European System of Central Banks became the entity in charge of the European Union’s monetary policy.
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C.OrganizationalC. Organizational structure.
Banco Santander, S.A. is the parent company of the Group which was comprised at December 31, 20112012 of 739740 companies that consolidate by the global integration method. In addition, there are 156131 companies that are accounted for by the equity method.
See Exhibits I, II and III to our consolidated financial statements included in this Form 20-F for details of our consolidated and non-consolidated companies.
D.Property,D. Property, plant and equipment.
During 2011,2012, the Bank and its banking subsidiaries either leased or owned premises in Spain and abroad, which at December 31, 20112012 included 4,7814,683 branch offices in Spain and 9,9759,709 abroad. These figures include traditional branches and banking services points but do not include electronic service points. See Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations and Recent events” herein and Note 16 to our consolidated financial statements.
Item 4A. Unresolved4A.Unresolved Staff Comments
None.
Item 5. Operating5.Operating and Financial Review and Prospects
Critical Accounting Policies
The preparation of the Group’s consolidated financial statements requires a significant amount of judgment involving estimates and assumptions which can be inherently uncertain at the time they are made (see Note 1-c1.c to our consolidated financial statements). Changes in assumptions may have a significant impact on the financial statements in the periods in which they are changed. Judgments or changes in assumptions are submitted to the audit and compliance committee of the board of directors and/or to our regulatory authorities and are disclosed in the notes to our consolidated financial statements.
Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.
We believe that of our significant accounting policies, the following may involve a high degree of judgment:
Fair value of financial instruments
Trading assets or liabilities, financial instruments that are classified at fair value through profit or loss, available for sale securities, and all derivatives are recorded at fair value on the balance sheet. The fair value of a financial instrument is the value at which it could be bought or sold in a current transaction between willing parties. If a quoted price in an active market is available for an instrument, the fair value is calculated based on that price.
If there is no market price available for a financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving the same or similar instruments and, in the absence thereof, on the basis of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.
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We use derivative financial instruments for both trading and non-trading activities. The principal types of derivatives used are interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The fair value of standard derivatives is calculated based on published price quotations. The fair value of over-the-counter (“OTC”) derivatives is taken to be the sum of the expected future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly usedused.
The following subsections set forth the most important financial instruments and families of derivatives, and the related valuation techniques and inputs, by the financial markets as follows:asset class.
• | Fixed income and inflation |
In the valuation of financialThe fixed income asset class includes basic instruments permitting static hedging (principallysuch as interest rate forwards, interest rate swaps and cross-currency swaps)cross currency swaps, which are valued using forward estimation of flows and calculating net present value by discounting those flows taking into account basis swap and cross currency spreads, depending on the payment frequency and currency of each leg of the derivative. Vanilla products, including regular and digital cap and floor options as well as swaptions, are priced using benchmark industry models. More exotic derivatives are priced using more complex models which are generally accepted as standard across institutions.
These pricing models are fed with observable market data such as deposits, futures, cross currency swap and constant maturity swap rates as well as basis swap spreads. These data allow us to calculate different interest rate yield curves depending on the payment frequency and discounting curves for each currency. For derivative instruments, implied volatilities are also used as model inputs. These volatilities are observable in the valuationmarket for cap and floor options and swaptions. Interpolation and extrapolation of loansvolatilities from the quoted ranges are carried out using well-accepted industry models. More exotic instruments may involve the use of non-observable data or model parameters, such as correlation (among interest rates and advances to customers classified as Other financial assets at fair valuecross-asset), mean reversion rates and prepayment rates. These internal parameters are usually defined from historical data or through profitcalibration.
The inflation asset class includes inflation-linked bonds and zero-coupon or loss,year-on-year inflation-linked swaps, valued with the net present value method is used. Estimated future cash flowsusing forward estimation and discounting. Some derivatives on inflation indexes are discountedalso available and are priced using standard and more complex bespoke models, as appropriate. Valuation inputs of these models consider inflation-linked swap spreads observable in the market and estimations of inflation seasonality. These data allow us to calculate a forward inflation curve. Implied volatilities taken from zero-coupon and year-on-year inflation options are also inputs for the pricing of more complex derivatives.
• | Equity and foreign exchange |
The most important products in these asset classes are forward and futures contracts, which include vanilla, listed and OTC (over-the-counter) derivatives on single underlying assets and baskets of assets. Vanilla options are priced using the yield curves of the related currencies. The yield curvesstandard Black-Scholes model and more exotic derivatives involving forward returns, average performance, or digital, barrier or callable features are generally observable market datapriced using well-accepted industry models and are constructedbespoke models, as appropriate. For derivatives on illiquid stocks, hedging is facilitated by taking into account the so-called “basis risk” for various terms on the curve and for various currencies.liquidity constraints inside models.
In the valuationThe inputs of certain financial instruments exposed toequity models consider interest rate curves, spot prices, dividends, asset borrowing costs (repo margin spreads), implied volatilities, correlation among equity stocks and indexes, and cross-asset correlation. Implied volatilities are obtained from market quotes of European and American vanilla call and put options. Interpolation and extrapolation techniques allow us to obtain continuous volatility surfaces for illiquid stocks. Dividends are usually estimated for the mid and long term. Correlations are obtained from historical data or, inflationwhen possible, are implied from market quotes of correlation-dependent products.
The inputs of foreign exchange models include the interest rate curve for each currency, the spot foreign exchange price and the implied volatilities and correlation among assets of this type. Volatilities are obtained from European vanilla call and put options which are quoted in markets as at-the-money, risk reversal or butterfly options. Illiquid currency pairs are usually handled by using the data of the liquid pairs from which require dynamic hedging, such as swaptions, caps and floors, the Black-76 model is used; in the case ofilliquid currency can be derived. For more exotic interest rate derivatives, more complex models ofproducts, unobservable model parameters may be estimated by fitting to reference prices provided by other non-quoted market sources.
• | Credit |
The most common instrument in this asset class is the evolution of the yield curve are used, such as the Heath-Jarrow-Morton, Hull-White and Markov Functional models. The main inputs used in these models are observable market data, including the related yield curves, volatilities and correlations. In certain very specific cases, unobservable market inputs can be used, such as reversion to the mean or the prepayment rate.
In the valuation of financial instruments exposed to equity or foreign currency riskcredit default swap (CDS), which require dynamic hedging (basically structured options and other structured instruments), the Black-Scholes model is normally used; for more complex instruments, models that are a generalization of the Black-Scholes model are used, such as the Dupire (local volatility) and Heston (stochastic volatility) models or a combination of both (mixed volatility) are used. Where appropriate, observable market inputs are used to obtain factors such as spot levels, yield curves, dividends, volatilitieshedge credit exposure to third parties. In addition, models for first-to-default (FTD), n-to-default (NTD) and the correlation between indices and shares.
In the casesingle-tranche collateralized debt obligation (CDO) products are also available. These products are valued with standard industry models, which estimate probability of swaps designed to hedge againstdefault of a credit event (Credit Default Swaps (CDS)) credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case of non-linear instruments, if the portfolio is exposed to credit risk (e.g. credit derivatives),single issuer (for CDSs) or the joint probability of default is determined usingof more than one issuer for FTDs, NTDs and CDOs.
Valuation inputs are the Standard Gaussian Copula model. The main inputs used to determineinterest rate curve, the underlying cost of these derivatives are quoted credit risk premiumsCDS spread curve and the recovery rate. The CDS spread curve is obtained in the market for indexes and important individual issuers. For less liquid issuers, this spread curve is estimated using proxies (quoted instruments similar to the instrument to be valued) or other credit-dependent instruments. Recovery rates are usually set to standard values. For listed single-tranche CDOs, the correlation betweenof joint default of several issuers is implied from the quoted credit derivatives of various issuers.market. For FTDs, NTDs and bespoke CDOs, the correlation is estimated from proxies or historical data when no other option is available.
The determination of fair value requires the use of estimates and certain assumptions. If quoted market prices are not available, fair value is calculated using widely accepted pricing models that consider contractual prices of the underlying financial instruments, yield curves, contract terms, observable market data, and other relevant factors. The use of different estimates or assumptions in these pricing models could lead to a different valuation being recorded in our consolidated financial statements.
In Note 2. d) iii. to our consolidated financial statements additional information can be found regarding valuation techniques used by the Group, along with details of the principal assumptions and estimates used in these models and the sensitivity of the valuation of financial instruments to changes in the principal assumptions used.
Allowance for credit losses for financial instruments accounted for at amortized cost
Financial assets accounted for at amortized cost and contingent liabilities are assessed for objective evidence of impairment and any resulting allowances for credit losses are recognized and measured in accordance with IAS 39. Credit losses exist if the carrying amount of an asset or claim or a portfolio of assets or claims exceeds the present value of the estimated future cash flows.
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For the purpose of determining impairment losses, we monitor our debtors as described below:
The amount of an impairment loss incurred on a debt instrument carried at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows, and is presented as a reduction of the balance of the asset adjusted.
In estimating the future cash flows of debt instruments the following factors are taken into account:
These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).
Credit losses are generally recognized through allowances for credit losses. As a result of certain unusual circumstances (for example, bankruptcy or insolvency), the loss can be directly recognized through write-offs. With respect to the coverage of loss arising from credit risk, we make the following distinction:
Country risk allowance:
Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, we classify all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses.
However, due to the size of the Group and to the proactive management of our country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized.
Specific credit risk coverage:
a. Specific allowance: The allowance for debt instruments not measured at fair value through profit or loss that are classified as doubtful is generally recognised in accordance with the criteria, established by Bank of Spain, set forth below:
i. Assets classified as doubtful due to counterparty arrears:
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Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually. The allowances percentages are determined taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors. Loans are identified as impaired and income no longer accrued when it is determined that collection of interest or principal is doubtful or when the interest or principal has been past due for 90 days or more, unless the loan is well secured and in the process of collection. According to Bank of Spain’s requirements, non-performing loans must be fully provisioned (hence all the credit loss recognized) when they are more than 12 months overdue
ii. Assets classified as doubtful for reasons other than counterparty arrears:
Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognised in assets and the present value of the cash flows expected to be received.
When a loan is deemed partially uncollectible, a provision is recorded (charged against earnings) as opposed to a partial write-off (removal from the balance sheet), since a partial write-off of the loan is not permitted by the Bank of Spain. If a loan becomes entirely uncollectible, the provision is increased to 100% of the loan balance. Accordingly, we recognize a credit loss on any loan at the time it is deemed to be impaired.
The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The balances relating to impaired transactions continue to be recognized on the balance sheet, for their full amounts, until we consider that the recovery of those amounts is remote.
We consider recovery to be remote when there has been a substantial and irreversible deterioration of the borrower’s solvency, when commencement of the liquidation phase of insolvency proceedings has been ordered or when more than four years have elapsed since the borrower’s transaction was classified as doubtful due to arrears (the maximum period established by the Bank of Spain).
When the recovery of a financial asset is considered remote, it is written-off, together with the related allowance, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause.
b. General allowance
For the purpose of determining impairment losses, we monitor our debtors as described below:
Individually for inherent losses: Additionally, we recognize ansignificant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics, which are classified by the Group as “individualized”. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises.
Collectively, in all other cases, which are classified by the Group as “standardized” by grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the assets are, inter alia, instrument type, debtor’s industry and geographical location, type of guarantee or collateral, age of past-due amounts and any other relevant factor for the estimation of future cash flows. This category includes exposures to individuals, individual entrepreneurs and retail banking enterprises not classified as individualized customers.
As regards impairment allowance for credit losses whenresulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency:
When there is evidence of a deterioration of the obligor’s ability to pay, either because it is probable thatin arrears or for other reasons, and/or
When country risk materializes: country risk is considered to be the risk associated with debtors resident in a loss has been incurred, taking into account the historical loss experience andgiven country due to circumstances other circumstances known at the time of assessment. For this type of allowance, credit losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactionsthan normal commercial risk.
We have implemented a methodology which complies withcertain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk. These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments and contingent liabilities and commitments, and in the identification of their impairment and the calculation of the amounts required to cover the related credit risk.
With respect to the coverage of loss arising from credit risk, we must meet the Bank of Spain requirements, which establish that, until the Spanish regulatory authority has verified and as is explained below, is consistent with IFRS-IASBapproved the internal models for the determinationcalculation of the level of provisions requiredallowance for losses arising from credit risk (to date it has only approved the internal models to cover inherent losses. This methodology initially classifies portfolios considered normalbe used to calculate regulatory capital), entities must calculate their credit risk (debtcoverage as set forth below:
a. Specific allowance (individuals):
The allowance for debt instruments not classifiedmeasured at fair value through profit or loss contingent risksthat are classified as doubtful is generally recognized in accordance with the criteria set forth below:
i.Assets classified as doubtful due to counterparty arrears:
Debt instruments, whoever the obligor and contingent commitments)whatever the guarantee or collateral, with amounts more than three months past due are assessed individually. The allowances percentages are determined taking into account the following groups, accordingage of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors. Loans are identified as impaired and income no longer accrued when it is determined that collection of interest or principal is doubtful or when the interest or principal has been past due for 90 days or more, unless the loan is well secured and in the process of collection. According to Bank of Spain’s requirements, non-performing loans must be fully provisioned (hence all the associated levelcredit loss recognized) when they are more than 12 months overdue
ii. Assets classified as doubtful for reasons other than counterparty arrears:
Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of risk: no appreciable risk, low risk, medium-low risk, medium risk, medium-high riskthe cash flows expected to be received.
b. General allowance for inherent losses (collective):
Additionally, based on its experience and high risk.
Once these portfolios have been classified,on the information available to it on the Spanish banking industry, the Bank of Spain basedhas established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on experiencebehalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and information availablehas applied a range of required allowances to iteach category.
c. Country risk allowance:
Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, we classify all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of our country risk exposure, the allowances recognized in this connection are not material with respect to the Spanish banking sector, has determined the methodology and parameters that entities should apply in the calculation of the provisions for inherent losses in debt instruments and contingent risks and commitments classified as normal risk.
The calculation establishes that the charge for inherent losses to be made in each period will be equal to: (i) the sum of multiplying the value, positive or negative, of the variation in the period of the balance of each class of risk by the constanta corresponding to that class, plus (ii) the sum of multiplying the total amount of the operations included in each class at the end of the period by the relevant ß, minus (iii) the amount of the net charge for the specific allowance made in the period.
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The parametersa and ß as determined by the Bank of Spain’s guidance take into account historic inherent losses and adjustments to reflect the current economic circumstances.credit loss allowances recognized.
The allowancesallowance for impaired balancescredit losses for financial instruments accounted for at amortized cost recorded by Grupo Santander as at December 31, 2011,2012, using the methodology outlined above, was €19,661€26,166 million.
Additionally, withHowever, the coverage of the Group’s losses arising from credit risk must also meet the regulatory requirements of IFRS-IASB. With the objective of ensuring that the provisions resulting from the application of the above explained criteria required by the Bank of Spain are reasonable under IFRS-IASB, we estimate the allowances for credit losses using our internal models based on our own credit loss experience and management’s estimate of future credit losses. We have developedlosses in order to confirm that there are no material differences.
Our internal risk models based on historical information available for each country and type of risk (homogenous portfolios); a(a full description of our credit risk management system is included in Item 3 Information on the Company. B Business Overview- Allowance for Credit Losses and Country Risk Requirements and in Item 11. Quantitative and Qualitative Disclosures about Market Risk Part 4. Credit Risk. These internal models may be applied inRisk) determine the impairment losses on debt instruments not measured at fair value through profit or loss and on contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses on loans are losses incurred at the reporting date, calculated using statistical methods.
The amount of an impairment loss incurred on a debt instrument carried at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future periods,cash flows, and although approved for regulatory capital calculations, theyis presented as a reduction of the balance of the asset adjusted.
In estimating the future cash flows of debt instruments the following factors are currently subject to local regulatory approval bytaken into account:
All the Bank of Spain for purposes of loan loss provisions. In order for each internal modelamounts that are expected to be considered valid byobtained over the local regulatorremaining life of the instrument, including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued past-due interest receivable;
The various types of risk to which each instrument is subject; and
The circumstances in which collections will foreseeably be made.
These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).
We use the calculation should be methodologically correct, and be supported by historical information which covers at least one complete economic cycle and is stored in databases which are consistent with information that has been audited by bothconcept of incurred loss to quantify the group internal auditing function and external auditors.
Since 1993, we have employed our own models for assigning solvency and internal ratings, which aim to measure the degree of risk associated with a client or transaction. Each rating corresponds to a certain probability of default or non-payment, based on the Group’s past experience. A more detail description is included in “Item 4. Informationcost of the Company. B. Business Overview. The process: credit ratingrisk and parameter estimation”. The development of the internal models has led to the introduction of databases that can be used to estimate the risk parameters requiredinclude it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models.
The incurred loss is the expected loss, following market best practicescost, which will be disclosed in the one-year period after the reporting date, of the credit risk of a transaction, considering the characteristics of the counterparty and the guidelinesguarantees and collateral associated with the transaction.
The loss incurred is calculated by multiplying three factors: exposure at default, probability of default and loss given default.
Exposure at default (EaD) is the amount of risk exposure at the date of default by the counterparty.
Probability of default (PD) is the probability of the New Capital Accord (Basel II)counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction.
PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes amounts past due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets).
Loss given default (LGD) is the loss arising in the event of default. It depends mainly on discounting of the guarantees associated with the transaction and the future flows that are expected to be recovered.
The methodology for determining the allowance for losses arising from credit risk seeks to identify the amounts of losses incurred at the reporting date which, regardless of whether they have been disclosed, we know, on the basis of historical experience and other specific information, will arise in the one-year period following the reporting date.
These internal models produce a result that is substantially the same as the level of provisions at which we arrive using the parameters established by the Bank of Spain. Therefore, there is no substantialmaterial difference in the calculation of loan allowances between the EU-IFRS required to be applied under the Bank of Spain´sSpain’s Circular 4/2004 (as explained above) and IFRS-IASB.
Impairment
Certain assets, including goodwill, other intangible assets, non-current assets held for sale, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review. We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable. Assessment of what constitutes impairment is a matter of significant judgment.
Goodwill and other intangible assets are tested for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate or observable market data, indicate that these assets may be impaired. An impairment loss recognized for goodwill may not be reversed in a subsequent period. The fair value determination used in the impairment assessment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, requiring management to make subjective judgments and assumptions. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions.
In relation to goodwill, the first step of the impairment review process requires the identification of the cash-generating units (“CGU”). These are the smallest identifiable group of assets that, as a result of continuing operations, generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill is then allocated to these CGUs; this allocation is reviewed following a business reorganization.
The amount to be recovered of each cash-generating unit is determined taking into consideration the carrying amount (including any fair value adjustments arising on the business combination) of all the assets and liabilities of all the independent legal entities comprising the cash-generating unit, together with the related goodwill.
The amount to be recovered of the cash-generating unit is compared with its recoverable amount in order to determine whether there is any impairment.
The carrying value of the CGU, including the allocated goodwill, is compared to its fair value to determine whether an impairment exists. To calculate these fair values, management may use quoted prices, if available, appraisals made by independent external experts or internal estimations. Assumptions about expected future cash flows require management to make estimations and judgments. For this purpose, management analyzeswe analyze the following: (i) certain macroeconomic variables that might affect its investments (including population data, the political and economic environment, as well as the banking system’s penetration level); (ii) various microeconomic variables comparing our investments with the financial industry of the country in which we carry on most of our business activities (breakdown of the balance sheet, total funds under management, results, efficiency ratio, capital ratio and return on equity, among others); and (iii) the price earnings (“P/E”) ratio of the investments as compared with the P/E ratio of the stock market in the country in which the investments are located and those of comparable local financial institutions.
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To supplement this, we perform estimates of the recoverable amounts of certain cash-generating units using discounted cash flow projections. In order to perform this calculation, the most significant assumptions used are: (i) cash flow projections, which are based on the five-year financial budgets approved by the directors; (ii) discount rates, which are determined as the cost of capital consisting of the risk-free rate plus a risk premium in line with the market and the business in which the units operate; and (iii) a constant growth rate used to extrapolate the cash flows in perpetuity which is determined considering the evolution of GDP of the market in which the cash-generating unit in question operates.
Given the degree of uncertainty related to these assumptions, the directors carry out sensitivity analysis using reasonably possible changes in the key assumptions on which the recoverable amounts of the cash-generating units are based in order to confirm that the recoverable amounts still continue to exceed the carrying amounts and therefore no impairment would be recorded through the income statement. As of December 31, 2012, 2011 2010 and 2009,2010, none of our other cash-generating units with significant goodwill had a recoverable amount below or near its carrying amount, except as for the cases described below. We consider that a cash-generating unit is “near” its carrying amount when reasonably possible changes in the key assumptions on which management has based the determination of the cash generation unit’s recoverable amount would cause such cash generation unit’s carrying amount to exceed its recoverable amount.
Each cash-generating unit corresponds to separate entities for which all of their assets and liabilities are included in the carrying amount at their consolidated book value, which includes any fair value adjustments that may have arisen as a consequence of the corresponding business combinations. For the purpose of impairment testing, goodwill acquired in business combinations is allocated to each cash-generating unit that is expected to benefit from the synergies of the combination. Apart from goodwill, the Group carries no other significant corporate assets or liabilities that contribute to the future cash flows of the different cash generating units, so no further allocation is necessary to determine their carrying amount.
In 2012, in accordance with the estimates, projections and sensitivity analysis available to the Bank’s directors, we recognized impairment charges of €156 million related to goodwill of our subsidiaries in Italy.
In 2011, our impairment reviews resulted in impairment charges of €660 million related to goodwill of our subsidiaries in Portugal and €501 million due to the review of the useful lives of our intangible assets.
Non-current assets held for sale are measured at the lower of fair value less costs to sell and the carrying amount. Therefore, we annually conduct a review of the recoverable values of these assets, taking into account the features of our assets and using specialist external appraisals. After performing this assessment at December 31, 2012, 2011 2010 and 20092010 the allowance that covers the value of our non-current assets held for sale amounted to €4,416 million, €4,512 million and €2,500 million, €2,081 million, respectively.
Equity method investments are evaluated for impairment on an annual basis or more frequently if events or changes in circumstances indicate that these assets are impaired. An equity method investment is impaired if its fair value is deemed to be less than its cost. Accordingly, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. After performing this analysis, an impairment loss of €100 million on the investment in Metrovacesa was recorded in 2011. In 2012 and 2010 there was no evidence of material impairment on the Group’s equity method investments.
In relation to the available for sale securities (debt and equity instruments) at the end of each year, we make an assessment of whether there is any objective evidence that any our available for sale securities of is impaired. This assessment includes but is not limited to an analysis of the following information: (i) the issuer’s economic and financial position, the existence of default or late payment, analysis of the issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; (ii) market-related information, such as changes in the general economic situation or changes in the issuer’s sector which might affect its ability to pay; (iii) changes in the fair value of the security analyzed and the reason for such changes-whether they are intrinsic or the result of the general uncertainty concerning the economy or the country-; and (iv) independent analysts’ reports and forecasts and other independent market information.
In the case of equity instruments, when the changes in the fair value of the instrument under analysis are assessed, the duration and significance of the fall in its market price below cost for us is taken into account. As a general rule, for these purposes we consider a significant fall to be a 40% drop in the value of the asset and/or a continued fall over a period of 18 months. Nevertheless, it should be noted that we assess, on a case-by-case basis each of the securities that have suffered losses, and monitors the performance of their prices, recognizing an impairment loss as soon as it is considered that the recoverable amount could be affected, even though the price may not have fallen by the percentage or for the duration mentioned above.
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If, after the above assessment has been carried out, we consider that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the income statement for the amount of the loss in equity under Valuationvaluation adjustments. Also, where we do not intend and/or are not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down to its fair value.
Upon impairment, the full difference between amortized cost and fair value is removed from equity and recognized in net profit or loss. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities may not be reversed.
At the end of 20112012 we performed the assessment described above and recognized in the consolidated income statement impairment losses of €125€13 million in respect of debt instruments (€14125 million in 20102011 and €42€14 million in 2009), which2010). The impairment losses recognised in 2011 included €106 million relating to Greek sovereign debt. At 2012, 2011 2010 and 20092010 year-end, we analyzed the additional unrealized revaluation losses related to debt instruments and we concluded that they were temporary and, therefore, there was no evidence of impairment since the interest payment schedules for all the securities had been complied with and there was no evidence that the issuers would not continue to meet their payment obligations or that the future payments (both principal and interest) would not be sufficient to recover the cost.
At the end of 2011,2012, most of the losses on government debt securities recognized in the Group’s equity (approximately 96.9%97% of the total) related to the decline in value of the Spanish and Portuguese government debt securities. This decline in value was not prompted by interest rate changes but rather by an increase in the credit risk spreads due to Eurozone debt market tensions exacerbated by the interventions in recent years of Ireland, Greece and Portugal. There had not been any default on payments of interest nor was there any evidence that the issuers would fail to continue to meet their payments obligations in the future, with respect both to principal and interest, and thus prevent recovery of the carrying amount of such securities.
During 2012, 2011 2010 and 20092010 we completed the analysis described above for equity securities and we recognized impairments amounting to €704€344 million (€319704 million in 20102011 and €494€319 million in 2009), which2010). The impairment losses recognized in 2011 included €592 million relating to the impairment of the ownership interests in Iberdrola, S.A. and Assicurazioni Generali SpA. These equity instruments had suffered a significant and prolonged fall in price as of December 31, 2011. No additional significant impairments were recorded in 20112012 for the remainder of the equity securities that showed unrealized losses as of December 31, 20112012 because, after carrying out the abovementioned analysis, we concluded that their carrying value was still recoverable.
Retirement Benefit Obligations
We provide pension plans in most parts of the world. For defined contribution plans, the pension cost recognized in the consolidated income statement represents the contribution payable to the scheme. For defined benefit plans, the pension cost is assessed in accordance with the advice of a qualified external actuary using the projected unit credit method. This cost is annually charged to the consolidated income statement.
The actuarial valuation is dependent upon a series of assumptions; the principal ones are set forth below:
assumed interest rates;annual discount rate-determined, when available, by reference to high-quality corporate bonds;
mortality tables;
annual social security pension revision rate;
price inflation;
annual salary growth rate; and
the method used to calculate vested commitments to current employees.
The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date, adjusted for any historic unrecognized actuarial gains or losses and past service cost, is recognized as a liability in the balance sheet.
On January 1, 2013 Amendments to IAS 19, Employee Benefits came into force—these amendments eliminate the “corridor” under which entities are currently able to opt for deferred recognition of a given portion of actuarial gains and losses, establishing that when the amendments come into effect, all actuarial gains and losses must be recognized immediately. The amendments include significant changes in the presentation of cost components, as a result of which the service cost relating to post-employment benefit obligations (past service cost and plan curtailments and settlements) and net interest cost will be recognized in profit or loss and the remeasurement component (comprising basically actuarial gains and losses) will be recognized in Equity—Valuation adjustments and may not be reclassified to profit or loss. The Bank’s directors consider that, had this standard been applied at December 31, 2012, equity would have been reduced by €3,051 million due mainly to the elimination of the “corridor”. In accordance with IAS 8, these amendments entail a change of accounting policy and, accordingly, they must be applied retrospectively from January 1, 2013, by adjusting the beginning balances of equity for the earliest period presented as though the new accounting policy had always been applied.
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Further information on retirement benefit obligations is set out in Notes 2 and 25 to our consolidated financial statements.
Business combinations and goodwill
Goodwill and intangible assets include the cost of acquired subsidiaries in excess of the fair value of the tangible net assets recorded in connection with acquisitions as well as acquired intangible assets which include core deposits, customer lists, brands and assets under management. Accounting for goodwill and acquired intangible assets requires management’s estimates regarding: (1) the fair value of the acquired intangible assets and the initial amount of goodwill to be recorded, (2) the amortization period (for identified intangible assets other than goodwill) and (3) the recoverability of the carrying value of acquired intangible assets.
To determine the initial amount of goodwill to be recognized on an acquisition, we have to determine the fair value of the consideration and the fair value of the net assets acquired. We use independent appraisers and our internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid. The actual fair value of net assets acquired could differ from the fair value determined, resulting in an under- or over-statement of goodwill.
We test goodwill for impairment at the reporting unit level. We identify our reporting units as one level below our business segments, based on our management structure. We keep those reporting units unchanged unless business segment reorganization occurs. We disclose our goodwill impairment assessment methodology in “Critical Accounting Policies – Policies—Impairment”.
The useful lives of acquired intangible assets are estimated based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the acquired entity.
For acquired intangible assets, the amortization period is reviewed annually. In making these assumptions, we consider historical results, adjusted to reflect current and anticipated operating conditions. Because a change in these assumptions can result in a significant change in the recorded amount of acquired intangible assets, we believe the accounting for business combinations is one of our critical accounting estimates.
As a result of the first consolidation of the acquired subsidiaries, Banco Real (2008), Sovereign (2009), Santander Cards UK (2009), Skandinaviska Enskilda Banken (SEB) Group’s commercial banking business in Germany (2011) and Bank Zachodni WBK, S.A. (2011), a significant amount of goodwill was recorded (see Note 3 and Note 17 to our consolidated financial statements). Management made this determination, based in part upon independent appraisals of intangible assets, which is initially estimated and subsequently revised within the one year time period allowed by IFRS-IASB.
Recent Accounting Pronouncements
See Note 1.b to our consolidated financial statements for the detail of standards and interpretations that came into force in 20112012 and those with effective dates subsequent to December 31, 2011.2012.
We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.
In a number of places in this report, in order to analyze changes in our business from period to period, we have isolated the effects of foreign exchange rates on our results of operations and financial position. In particular, we have isolated the effects of depreciation/appreciation of local currencies against the euro because we believe that doing so is useful in understanding the development of our business. For these purposes, we calculate the effect of movements in the exchange rates by multiplying the previous period balances in local currencies by the difference between the exchange rate to the euro of the current and the previous period.
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General
We are a financial group whose main business focus is retail banking, complemented by global wholesale banking, asset management and insurance businesses.
Our main source of income is the interest that we earn from our lending activities, by borrowing funds from customers and money markets at certain rates and lending them to other customers at different rates. We also derive income from the interest and dividends that we receive from our investments in fixed/variable income and equity securities and from our trading activities in such securities and derivatives, by buying and selling them to take advantage of current and/or expected differences between purchase and sale prices.
Another source of income are the commissions that we earn from the different banking and other financial services that we provide (credit and debit cards, insurance, account management, bill discounting, guarantees and other contingent liabilities, advisory and custody services, etc.) and from our mutual and pension funds management services.
In addition, from time to time, we derive income from the capital gains we make from the sale of our holdings in Group companies.
20112012 Overview
In 2011,2012 the global economy experienced a slowdown in growth as a result of the worsening of the Europeanremained weak due to Europe’s sovereign debt crisis and the corresponding decrease in confidence, with various episodes of uncertainty in the second halfslow recovery of the year, which gave riseU.S. economy. Emerging economies continued to be more positive, although some of them were also affected by the international environment. The eurozone’s crisis reached a tightening of financing conditions. This scenario was partially offset by a general easing of monetary policy: injections of liquidityturning point at the European Council in June and the financial aid mechanisms presented by the European Central Bank (ECB) in September, which reduced significantly the probability of a break-up of the zone accorded by the market.
In the US, the fourth quarter GDP figure showed an annualized decline of 0.1% because of the sharp cut in public spending in the face of the threat of the “fiscal cliff” and the negative contribution of stocks. Consumption and investment were positive and confirmed the continued lowexpansion, albeit a moderate one. Growth for the whole of 2012 is 2.2% and the underlying inflation rate was within the Fed’s target range (close to 1.5%).
The lack of inflationary pressures suggested that a rise in interest rates was unlikely until the middle of 2015. Democrats and Republicans reached a temporary agreement to avoid the “fiscal cliff”, which had it happened would have pushed the economy back into recession. The agreement gives two months to negotiate a new debt ceiling and agree specific structural spending cuts.
Latin America’s growth eased in 2012, with a varied performance by country. Growth was stronger than expected in Chile and less so in Brazil. Inflation remained controlled in the USshort term, interest rates softened and cutscurrencies tended to appreciate, except for the Brazilian real, in official ratesthe last part of 2012.
Brazil’s GDP rose 0.9% in Latin America.
2012, with a weaker than expected recovery in the second half. Despite the strengthening of consumption (thanks to job creation), the fall in investment is eroding economic growth. The United States looks set for year-on-yearcentral bank focused on growth as one of the priorities of its strategy and continued to cut interest rates. With the selic reaching a record low of 7.25%. Inflation was 5.8% at the end of 2012 (6.5% in GDP of 1.7% in 2011, after a fourth quarter in which annualized quarterly growth was 3%, which helped2011). The real traded against the economy to partly offset the slump in growthdollar at below BRL 2 in the first half of 2011. This growth, basically underpinned through the year, by investmentthough lower than expected growth in capital goods and foreign trade, is gradually giving way to an increase in both consumption and investment in non-residential construction, whichthe last part of the year modified the trend so that the currency ended 2012 at BRL 2.05/US$.
Mexico is expected to continue ingrow by almost 4%, backed by industrial exports, the coming quarters, taking growth close to its potential.
The impact of crude oil pricesresidential sector and a greater useparticipation of the installed capacity took the general inflation rate to an annual average of over 3%. However, underlying inflation was kept under control at around 1.5%, enabling the Fed to pursue a monetary policy in favor of growth and the re-establishment of the interbank market.
Latin America kept up a good pace of growth in its economies in the year overall, albeit slower than in 2010. The second half of 2011 reflected the effects of the slowdown in the global economy and the decrease in commodities prices. To counteract these negative effects on growth, some central banks embarked on a cycle of monetary easing which is not yet complete, applying a strategy that is likely to be replicated by others in the course of 2012.
Brazil’s GDP increased 3.0% in 2011, after a strong start (4.2% year-on-year in the first quarter) which then slowed, touching bottom in the third quarter. The decrease in growth ledservices sector. Inflation remained within the Central Bank of Brazil to begin a gradual reduction of the official Selic rate from 12.50% in September 2011 to 10.50% in January 2012, a trend which is expected to continueMexico’s target range (3% ± 1%) in the coming months.
Monetary easing and robust domestic demand, underpinned by a sound labor market (unemployment at a record low rate: below 5%), will continue to drive growth. Also inflation remained high (6.5% in December) and occasionally topped the Central Bank target (4.5±2%). With regard to the Brazilian real, the variation in interest rates in the secondfirst half of the year and rose in the government’s measuressecond half to control excess appreciation led to3.6% in December. Underlying inflation remained at around 3.5%, a depreciationcomfortable level for the Central Bank of Mexico, which kept its key rate at 4.5% for the currency over thethird year as a whole, ending 2011running. The peso was relatively stable at BRL 1.87 = USD 1 (compared to BRL 1.66 = USD 1around MXN 13/US$ (MXN 13.02/US$ at the end of 2010).
Mexico displayed great resistance in 2011 to the international financial turmoil and the weakening of global activity. Its GDP growth for 2011 was 3.9%year). Performance was supported by industrial output, investment and the recovery of bank lending to the private sector, particularly consumer lending, which is expected to remain strong over the coming quarters despite the external uncertainties.
The positive trend in activity, moderate inflation (an average rate of 3.4% in 2011) within the target bandsgrowth of the Bank of Mexico (2%-4%)Chilean economy was 5.6%, driven by buoyant domestic demand, mainly consumption (benefiting from growth in wages and a position in foreign trade favored by the rise in oil prices, have enabled the central bank to keep the interest rate stable at 4.5%lending) and preserve its room for manoeuvre. The Mexican peso fell during the year after closing at a high of MXN 13.9 = USD 1 (compared to MXN 12.4 = USD 1investment. Inflation, which deteriorated at the end of 2010), as a result2011 and the beginning of the international financial tensions2012, improved in the second half and ended the year at 1.5% (4.4% in 2011). The benchmark interest rate remained stable at 5% after a cut of 25 basis points in January. The peso traded at CLP 479/US$ (after remaining for almost all the year below CLP 500/US$).
The eurozone economy shrank by 0.5% in 2012. The region returned to recession in the second half, reflecting public sector austerity measures and deleveraging of the private sector, and for a while a deterioration in the financial conditions related to the sovereign debt crisis and doubts on the future of the Monetary Union (only dispelled after the summit in June and the European Central Bank’s measures).
Inflation remained above the ECB’s target of 2% throughout the year, with an average rate of 2.5%, due to higher oil prices at the start of the year and higher indirect taxes in some countries. Even so, inflation was lower than in 2011 and remains on a downward path that could see it at around the target in 2013.
The ECB again played a key role in seeking to resolve the crisis. It began 2012 with two long-term financing operations to guarantee the financial system’s liquidity. In July, greater uncertainty led the ECB to cut its refinancing rate by 25 basis points to 0.75% and the deposit rate (the reference rate for current money markets) to 0%.
In September, the ECB unveiled Outright Monetary Transactions (OMT). The objective is to restore the transmission mechanism of monetary policy, affected by the financial fragmentation of the area associated with the perception of the risk of break-up of the eurozone. With them, the ECB can buy sovereign bonds with maturities of between one and three years provided the government requests a bail-out by the European Financial Stability facility or the European Stability Mechanism. Although the triggering of the OMTs is in the hands of national governments, the announcement helped to ease financial tensions.
Regarding the exchange rate, tensions in the eurozone caused the single currency to depreciate against the dollar since august and end the year at €1/US$1.32. The economic situation and prospects varied from country to country. The peripheral European economies suffered the impact of a tougher fiscal adjustment and deleveraging in the private sector, coupled with higher funding costs. The core countries, on the other hand, continued to be more resilient. Germany continued lowering its unemployment rate to 5.4%. GDP growth was 0.9%.
The Spanish economy shrank by 1.4% in 2012, due to the strong adjustments in both the public (fiscal consolidation) and private sectors (deleveraging).
Domestic demand reflected the sharp fall in household consumption (higher VAT, rise in withholding income tax, wage reductions and uncertainty); the significant effort to contain spending and public investment (chiefly in the last part of the year) and the adjustment in the real estate sector. The positive feature was higher than expected exports, which contributed to a current account surplus in the last part of the year.
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Chile recorded growth of 5.9%Inflation was 2.9%, affected by higher VAT, medical products and the rise in GDP foradministered prices. The underlying inflation rate ended the year as a whole, assisted partlyat 2.1%, in line with the evolution of prices in the eurozone.
The U.K. economy rose slightly (0.3%) in 2012. Excluding the third quarter, heavily influenced by the weak start to 2010 as a resultOlympic Games, underlying activity was weak. The factors were weaker external demand and the impact of the earthquake. A trend of slowdown can be seen, however, accentuated ineurozone’s sovereign debt crisis, on the second halfone hand, and weak domestic demand, on the other, affected by the international tensions, which is expectedfiscal adjustment, the need for households to reduce their debts and tighter borrowing conditions to the private sector.
Inflation was still high compared to other European economies and clearly above the Bank of England’s target, though it dropped in 2012 to 2.8% on average from 4.5% in 2011 and will probably continue over the coming quartersto do so in response2013. The Bank of England held its base rate at 0.5%, increased its quantitative easing program to a weaker external environmenttotal of £375 billion and less impetus from private spending.
Inflation remained under control throughout 2011 (at an average rate of 3.3%), which enabled the central bankintroduced a funding for lending scheme to halt the upward trend infoster credit to households and companies by providing long-term liquidity at interest rates below the market’s. The Sterling appreciated to €1 / £0.82.
Poland’s economy grew at a slower pace in 2012 +2.2% as compared to +4.4% in 2011. However, the second half (after a rise of 200 basis points fromgrowth was above the beginning ofEuropean average, due to Europe’s lower growth, less buoyant domestic consumption and measures to control the year to 5.25% in June). The upturn in inflation towards the end of the year (4.4%budget deficit. Inflation was more moderate (2.2% in December) is expected to be temporary and therefore the central bank is expected to maintain current positions to ease monetary policy and boost growth, as reflected by the reduction in January of 25 basis points to 5%. Like the region’s other main currencies, the Chilean peso fell during the year, ending at CLP 519 = USD 1 (compared to CLP 468 = 1 USD at the end of 2010).
The Eurozone registered growth of 1.5% in 2011. In the second half of the year there was a marked slowdown in activity with the materialization of threats to recovery (the rise in commodities prices and the earthquake in Japan, which had a greater impact than expected), combined with the unconvincing handling of the sovereign debt crisis. GDP for the fourth quarter contracted by 0.3% (annualized quarterly rate) and this downward trend is expected to continue into the beginning of 2012.
Inflation, which remained higher than the ECB target throughout the year (an average rate of 2.7% compared to the target of 2%), began a downward trend in December when it fell from 3.0% to 2.8%, which is expected to continue, taking it back to the target level.
Against this background of sharp slowdown and uncertainty, in the fourth quarter the ECB reversed the twocentral bank cut its key rate increases it had made50 basis points to 4.25%, a trend that continued in the first half of 2011 (from 1.0% to 1.5%) to end December with the official interest rate at 1%. It also re-established unconventional liquidity transactions and in December held another long-term auction (three-year financing with no limit on volume) which was repeated2013 (-50 basis points in February 2012. As for the exchange rate, the increasing tension in the Eurozone and the deterioration of activity led to a progressive depreciation of the euro against the dollar which ended December at €1 = USD 1.29 (compared3.75%). The zloty appreciated to €1 = USD 1.34 at the end of 2010)./ PLN 4.07.
There continue to be differences between the countries in terms of economic situation and outlook. Most disadvantaged are the so-called peripheral economies that are facing a greater loss of confidence and higher financing costs, combined with the contractive effect of the fiscal adjustment policies. Conversely, Germany’s underlying situation is more favorable. With GDP growth of 3.1% in 2011, the unemployment rate fell to 6.8%, the lowest since 1991. However, as in the Eurozone as a whole, activity in the fourth quarter shrank by 0.3% (annualized quarterly rate), bringing the Eurozone GDP growth to 1.5% for the whole of 2011.
Spain’s GDP growth of 0.7% for the year as a whole was based on a strong foreign sector that has made up for the weak domestic demand. However, the clear trend of slowdown experienced since the summer (0.0% in the third quarter), points to a fall of 0.3% in GDP in the fourth quarter due to the reduction in consumption. The continuation of these trends combined with the impact of the substantial effort for budgetary consolidation indicates a likely return to recession for the Spanish economy in 2012 according to all the forecasts. Against this background, inflation, which remained very high throughout the year (3.2% on average) mainly due to the increase in energy prices, fell significantly towards the end of the year (2.4% in December).
The United Kingdom obtained similar levels and profiles of growth: +0.8% for the whole of 2011 as a result of a fall in the fourth quarter. The worsening of the international financial situation and trade and weak domestic demand explain the downturn in activity, which is expected to continue in the coming quarters, albeit partially offset by a more stable labor market. Inflation, which was very high throughout the year (4.5% average rate), is on a clearly downward path (4.2% in December compared with 5.2% in September) that is expected to continue in 2012. The Bank of England, which kept its official rate unchanged at 0.5%, increased the bond purchase program by GBP 75 billion in October to add to the GBP 200 billion acquired previously. All in all, the pound sterling rose during the year against the euro, affected by the sovereign debt crisis in Europe, to €1.20 = GBP 1 (€1.16 = GBP 1 at the end of 2010).
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Results of Operations for Santander
Summary
Profit attributable to the Parent bank as reported in our consolidated financial statements for the year ended December 31, 20112012 was €2,205 million, a 58.8% or €3,146 million decrease from €5,351 million in 2011, which represented a 34.6% or €2,830 million decrease from €8,181 million in 2010, which represented an 8.5% or €761 million decrease from €8,942 million in 2009. The 2011 decrease2010.
This was mainly due to increases in impairment losses, losses on non-current assets held for sale and administrative expenses, which were partially offset by an increase in interest income/ (charges) and a decrease inseveral factors that negatively affected the income taxes.
The following aspects had an impact on the Group’s results:2012 as compared to 2011:
The profit reflects a one-off chargemost important one was provisions for real estate risk in the second quarterSpain of €620€4,110 million net of taxtax. These provisions were covered by: (i) €1,064 million which came from the capital gains generated from the sale of the subsidiary in Colombia and the insurance operation in Spain and Portugal, and, (ii) €3,047 million which were charged to the year’s earnings.
A negative perimeter effect on attributable profit of 11 percentage points resulting from the difference between:
a provision madepositive effect from the entry in April 2011 of Poland’s Bank Zachodni WBK and to a lesser extent the second quarter related to Payment Protection Insurance (PPI) remediationbusiness acquired from SEB in Germany as of February 2011
a negative effect from: (i) the UK. See “Item 8. Financial Information – A. Consolidated statementssale of the subsidiary in Colombia, (ii) the entry of new partners in Santander Consumer USA (SCUSA) and other financial information. – Legal proceedings – ii. Non-tax-related proceedings”.the partial sale of insurance business in Latin America, (iii) the reinsurance of the portfolio of individual life risk of Santander’s insurers in Spain and Portugal, and (iv) the rise in minority interests in Brazil, Mexico and Chile, which was only partially offset by
The impact of the exchange rates ofon various currencies against the euro was not very significant at aroundnegative by one percentage point negativefor the whole Group in comparingyear-to-year comparisons for revenues and costs with 2011. Incosts. The impact on the UKU.K. and the U.S. income statements was positive by 6 percentage points and 8 percentage points, respectively. Latin America thehad a total negative impact was one percentage point negative and in Sovereign fiveof 4 percentage points negative.
There is a positive impact of approximately three or four(-8 percentage points in revenuesfor Brazil and costs from+5 percentage points for the change in perimeter. This impact is the net effectrest of the entry into consolidation of Bank Zachodni WBK and AIG in Poland and SEB in Germany (Santander Retail) and lower revenues from insurance business, as the transaction with Zurich Financial Services closed in the fourth quarter.
The results are impacted by an €1,812 million provision to cover real estate exposure in Spain and by net capital gains of €1,513 million arising from the entry of new partners in the capital of Santander Consumer USA and from the sale of the insurance business in Latin America.
Lastly, we recognized impairment losses of €1,161 million in goodwill and other intangible assets relating to our subsidiaries in Portugal (€660 million) and other intangible assets (€501 million)America).
Interest Income / (Charges)
InterestNet interest income was €30,147 million in 2012, a 2.2% or €674 million decrease from €30,821 million in 2011, which represented a 5.5% or €1,597 million increase from €29,224 million in 2010,2010.
2012 compared to 2011
The €674 million decrease in interest income compared to 2011 was mainly due to the change in consolidation method of SCUSA, which representedstarted consolidating by the equity accounted method in December 2011. On a like for like basis (mainly deducting the change in consolidation method of SCUSA) net interest income increased 3.6%. This increase was mainly attributable to:
The positive effect of the improvement in the loan spreads for the Group as a whole from 3.69% in 2011 to 3.95% in 2012. This was due, on the one hand, to the growth in volumes and the appropriate management of prices in emerging markets and, on the other, to the higher return on new lending in countries such as Spain, Portugal and the United Kingdom that are currently in a situation of lower volumes and low interest rates.
The negative effect of the higher funding costs triggered by the increased cost of credit and a conservative liquidity strategy.
The reduction of the deposit spread from 0.31% in 2011 to 0.10% in 2012 as a result of the increased financial cost in countries where there was strong competition for deposits at certain times in the year.
On a like for like basis our net interest income by geographic areas was as follows:
Increase of 8.5% in Spain, within an 11.1%environment of lower balances of loans due to deleveraging, and with appropriate management of prices and higher volumes of deposits.
Latin America also did well 9.4% (+14.7% excluding the perimeter and the exchange rate impact), with Brazil and Mexico up 6.4% and 20.6%, respectively. This growth reflected strong activity, with sustained rises in loans and deposits (in all countries), and management of spreads in an environment of stable or €2,925lower interest rates.
Santander UK registered a fall of 18.3%, due to the higher cost of funding and low interest, and Santander US experienced a small decrease of 0.4%.
Average total earning assets were €1,195,226 million for 2012, a 6.1% or €69,030 million increase from €26,299€1,126,196 million in 2009.2011. This increase was divided among the international and domestic sectors, which grew €34,345 million and €34,684 million, respectively. By line items the growth in average total earning assets was due to: (i) an increase of €34,166 million in the average balances of our other interest earning assets (mainly hedging derivatives), (ii) a rise of €20,014 million in average loans and credits, and (iii) a growth of €15,047 million in average cash and due from central banks. Although average loans increased during 2012, by year end gross loans declined 3% as compared to 2011. Eliminating the exchange rate and perimeter effects, lending was 2% lower.
The geographic distribution (principal segments) of customer loans was very different by market.
In Continental Europe, Spain’s and Portugal’s net customer lending continued to be affected by low demand (-8% and -9%, respectively), while Santander Consumer Finance’s balances remained stable (-1%) and Bank Zachodni WBK increased its lending by 5% in local currency.
Gross customer loans in Spain stood at €205,520 million, 6% lower. Most of the drop was due to the reduction in real estate exposure (-32%) coupled with the necessary process of deleveraging of households. On the other hand, total financing to companies, direct and indirect, remained stable.
In Portugal, lending dropped 9%, with most segments decreasing. In addition, loans to the construction and real estate sectors, which represent only 2.9% of lending, declined 22% in 2012.
Santander Consumer Finance’s balances remained virtually unchanged (-1%). Germany, which accounts for 52% of the area’s credit, increased its lending by 1%. Nordic countries also increased, while that of other countries, more affected by the environment and deleveraging, declined.
New loans in 2012 rose 1%, notably those for used cars and durable goods. Financing of new cars rose more quickly than car sales in Europe.
In Poland, Bank Zachodni WBK’s lending rose 5% (+9% to individuals and +3% to companies).
In the United Kingdom, the balance of customer loans was 4% lower. In local criteria, the balance of residential mortgages dropped 5% due to the strategy followed to improve the risk profile, while personal loans declined 19%, due to the continuation of the reduction policy. Loans to SMEs increased 18%, gaining further market share.
Customer loans in Latin America remained flat with a 0.2% increase.
Lastly, customer loans in the U.S. increased 2.8%.
At the end of 2012, Continental Europe accounted for 40% of lending of the Group’s total operating areas (Spain 28%), the U.K. 34%, Latin America 20% (Brazil 11%) and the U.S.6%. These shares in 2011 were: Continental Europe 42% (Spain 29%), the U.K. 34%, Latin America 19% (Brazil 11%) and the U.S.5%.
2011 compared to 2010
The €1,597 million increase in interest income in 2011 was due to a rise in business volumes of €2,025 million partially offset by a decrease of €428 million relating to customer rates. The increase in business volumes was mainly obtained from the international sector while the decrease in rates was mainly affected by: (i) spreads on deposits, which compared negatively in the first half of 2011 although they ended 2011 at the same levels (0.28% in 2010 and 0.29% in 2011); and (ii) the negative impact from the higher cost of wholesale funding and the greater regulatory requirements for liquidity in some countries, mainly the UK.U.K.
Our overall net yield spread increased from 2.62% in 2010 to 2.69% in 2011. Domestic net yield spread increased from 0.92% in 2010 to 1.02% in 2011. International net yield spreads decreased from 3.37% in 2010 to 3.32% in 2011.
Average total earning assets were €1,126,196 million for 2011, a 3.1% or €33,771 million increase from €1,092,425 million in 2010. This was due to an increase of €53,612 million in the average balances of our international total earning assets (mainly due to an increase of €31,161 million in the average balances of loans and credits and an increase of €20,323 million in the average balances due from central banks). This increase in international total earning assets was partially offset by a decrease of €19,841 million in the domestic sector. This decrease was mainly due to a fall of €7,406 million in average loans and credits and €7,252 million in the average of due from credits entities. The Group’s customer loans amounted to €769,036 million, 3.4% higher than in 2010. In local currencies and excluding the perimeter effects, customer loans were 3.0% higher.
110
Spain and Portugal’s lending fell by 4.6% and 5.6%, respectively, due to deleveraging. Santander Consumer Finance’s lending dropped 4.8%, due to the impact of the consolidation by the equity accounted method of Santander Consumer USA in December 2011 (+16.1% before this impact). The consolidation of Bank Zachodni WBK increased the Group’s net lending by €8,479 million.
Gross customer loans in Spain amounted to €225,288 million, of which loans to the public sector amounted to €12,147 million (+0.1%) and lending to individuals amounted to €84,816 million, of which €58,535 million were mortgages for homes. Loans to SMEs and companies without real estate purpose, the most relevant part of the lending portfolio, amounted to €104,883 million and accounted for 47% of the total while loanstotal. Loans for real estate purposes (with the greatest risk) stood at €23,442 million, after falling in every quarter of 2011. The total reduction for the year was €3,892 million (-14.2%).
In Portugal, the fall in lending (5.6%) came from all segments: -11.8% to SMEs, -13.9% to companies and -3.1% to individuals. In addition, balances in construction and real estate, which represent only 3.6% of lending in the country, declined 12.1% in 2011.
Santander Consumer Finance’s lending, after the deconsolidation of Santander Consumer USA, dropped 4.8%. Excluding this impact, growth was 16.1% due to organic growth plus SEB’s integration in Germany. New lending rose 11.1%.
In the United Kingdom, the balance of customer loans was 4.6% higher.and advances to customers increased 7.8%. In local criteria, the stock of residential mortgages, in a still depressed market, were very stable, while loans to SMEs increased, 25.4%, gaining further market share. Personal loans declined reflecting the reduction policy in the last few years of reducing them, declined 12.7%.years.
Lending in Latin America increased 17.9%, excluding the exchange rate impact, due to organic growth and the incorporation of GE Capital Corporation’s mortgage portfolio in Mexico and of Creditel in Uruguay. Loans in local currency rose 20.3% in Brazil, 7.3% in Chile and 30.9% in Mexico (+22.4% excluding the perimeter impact).
In the United States, loans and advances to customers decreased by 16.5% due to the change in consolidation method of SCUSA. Sovereign’s loans rose 6.0% in dollars, due to the 4.5% increase in the most attractive mortgage segments (residential and multifamily), and the acquisition of a consumer credit portfolio from GE. Both effects comfortably offset the exit from higher risk segments and from those not considered strategic for the Group.
Continental Europe accounted for 42% of the Group’s total lending (29% Spain)of the Group’s operating areas (Spain 29%), the UKU.K. 34%, Latin America 19% (11% Brazil)(Brazil 11%) and SovereignUnited States 5%. These percentages in 2010 were 45%43% for Continental Europe (32% Spain),(Spain 32% the UK, 18% Latin America (10% Brazil) and 5% Sovereign.
2010 compared to 2009
The €2,925 million increase in interest income in 2010 was due to an increase of €3,133 million in business volumes partially offset by a decrease of customer rates by €208 million. International net interest income grew by €4,681 million while domestic net interest income decreased by €1,755 million. The spreads on loans for the Group as a whole increased from 3.1% to 3.4% mainly due to the UK and Sovereign units as well as consumer businesses and wholesale banking. Spreads on deposits were affected by the lower interest rates in the commercial units and the Group’s policy of giving priority to capturing deposits and liquidity, particularly in the European units, and the higher cost of wholesale financing. Spreads in Latin America were much more stable.
Our overall net yield spread increased from 2.54% in 2009 to 2.62% in 2010. Domestic net yield spread decreased from 1.45% in 2009 to 0.92% in 2010. International net yield spreads increased from 3.05% in 2009 to 3.37% in 2010.
Average total earning assets were €1,092,425 million for the year ended December 31, 2010, an 8.8% or €88,469 million increase from €1,003,956 million for the same period in 2009. This was due to an increase of €6,047 million in the average balances of our domestic total earning assets (mainly due to an increase of €4,637 million in the average balances of debt securities and an increase of €8,458 million in the average balances due from credit entities partially offset by a decrease of €6 billion in the average balances of our domestic loan and credit portfolio) and an increase of €82,421 million in the average balance of our international total earning assets (mainly due to an increase of €45,550 million in the average balances of our international loan and credit portfolio, an increase of €27,003 million in the average balances of cash and due from central banks and an increase of €14,886 million in the average balances of our debt securities portfolio partially offset by a decrease of €6,908 million in the average balances due from credit entities).
111
Our net lending amounted to €724,154 million, 6% higher than in 2009. In local currencies and excluding the perimeter effects there was an increase in net lending of 1%. Lending to the public sector increased 24% in 2010 and lending to other resident sectors dropped 2%. Secured loans, which represent the lowest risk portion of the portfolio and constitute its largest share (59%), increased 2%, the commercial portfolio was similar to 2009, and other loans declined 8%. Lending to the non-resident sector grew 10% due to the favorable impact of the increase in the scope of consolidation and foreign exchange effects.
Spain and Portugal’s lending fell by 4% and 7%, respectively, due to deleveraging and the selective growth policy followed by the Group in these countries. Santander Consumer Finance’s lending increased 11%.
Gross lending in Spain amounted to €236 billion, of which €61,387 million were household mortgages. Loans to SMEs and companies not related to the construction and real estate sectors amounted to €94,406 million, virtually the same as in 2009.
In Portugal, the fall in lending was mainly due to lower lending to large companies, where there was a shift from loans to capital markets. In addition, balances in construction and real estate, which represent only 3% of lending, declined 10% in 2010.
Santander Consumer Finance’s balance increased 11% due to organic growth and the integration of the portfolios acquired in the US and Poland. New loans increased 9%, a significant positive trend.
In the United Kingdom, the balance of lending was very similar to 2009. Locally, residential mortgages in a still-depressed market grew 3% and loans to SMEs decreased by 26%, while personal loans dropped 24%, which is consistent with the policy of reducing this type of loans.
Lending in Latin America gradually accelerated through the year and ended 2010 with growth of 15%, excluding the exchange rate effect. Specifically, growth rates in Brazil, Mexico and Chile were 16%, 15% and 14%, respectively (versus negative rates in 2009).
Sovereign’s loans declined 2% in dollars, affected by the reduction of the portfolio in run-off (-32% in 2010 and -62% since Sovereign joined the Group). This resulted in a reduction from $9.7 billion to $4 billion. In addition, the focus during 2010 was on new loans and renewals, concentrating on the most attractive mortgage segments (residential and multifamily), which grew 17%.
These changes are reflected in the lesser share of lending in Europe and the increase in Latin America. At the end of 2010, Continental Europe accounted for 45% of the Group’s total lending (32% for Spain), the UK 32%U.K. 33%, Latin America 18% (10% for Brazil)(Brazil 10%) and Sovereign 5%United States 7%. The respective figures a year earlier were 47% for Continental Europe, 33% for the UK, 15% for Latin America and 5% for Sovereign.
Income from Equity Instruments
Income from equity instruments was €423 million in 2012, a 7.4% or €29 million increase from €394 million in 2011, which was an 8.8% or €32 million increase from €362 million in 2010, which2010.
The €29 million increase in 2012 was a 17.0% or €74 million decreasemainly due to increased dividends from €436 million in 2009.our equity portfolio (mainly Spanish blue chips).
The €32 million increase in 2011 was mainly explained by increased dividends from Telefónica and Repsol-YPF partially offset by a further reduction from Iberdrola.
The €74 million decrease in 2010 was mainly explained by the reduction in our share capital in Iberdrola and Repsol-YPF and the sale of Unicredit Capitalia SPA and Cielo, S.A.equity portfolio (mainly Spanish blue chips).
112
Income from Companies Accounted for usingby the Equity Method
Income from companies accounted for by the equity method was €427 million in 2012, a €370 million increase from €57 million in 2011, which was a €40 million increase from €17 million in 2010, which2010. This was a €18 million increase from €-1 million in 2009. This is mainly due to the results obtained from ZS Insurance América, S.L. In December 2011,in a full year by Santander Consumer USA was consolidatedwhich were accounted for by the equity method. The impact of this change will be reflectedmethod in this line item in 2012.December 2011.
Fee and Commission Income (net)
Fee and commission income was €10,308 million in 2012, a 1.6% or €164 million decrease from €10,472 million in 2011, a 7.6% or €737 million increase from €9,735 million in 2010.2011. During 2010,2011, fee and commission income increased by 7.2%7.6% as compared to €9,080€9,735 million obtained in 2009.2010.
2012 compared to 2011
Fee and commission income for 2012 and 2011 was as follows:
2012 | 2011 | Amount Change | % Change | |||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||
Mutual and pension funds | 1,178 | 1,236 | (58 | ) | (4.7 | %) | ||||||||||
Insurance | 2,339 | 2,397 | (58 | ) | (2.4 | %) | ||||||||||
Securities services | 702 | 668 | 34 | 5.1 | % | |||||||||||
Commissions for services | 6,089 | 6,171 | (82 | ) | (1.3 | %) | ||||||||||
Credit and debit cards | 1,542 | 1,313 | 229 | 17.4 | % | |||||||||||
Account management | 1,209 | 1,028 | 181 | 17.6 | % | |||||||||||
Bill discounting | 327 | 309 | 18 | 5.9 | % | |||||||||||
Contingent liabilities | 398 | 425 | (27 | ) | (6.4 | %) | ||||||||||
Other operations | 2,613 | 3,096 | (483 | ) | 15.6 | % | ||||||||||
|
|
|
|
|
|
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| |||||||||
Total fee and commission income (net) | 10,308 | 10,472 | (164 | ) | (1.6 | %) |
Fee and commission income decreased 1.6% to €10,308 million in 2012 compared to 2011 mainly due to lesser commissions for services, as well as mutual and pension funds and insurance.
The average balances of mutual funds under management decreased 9.6% from €109.9 billion in 2011 to €99.3 billion in 2012. Although this decrease was mainly concentrated in Brazil (-16.2% or €7.1 billion to €37.0 billion in 2012) and Spain (-17.8% or €5.4 billion to €25.1 billion in 2012). As of year-end 2012 mutual funds decreased 13% with falls in almost all countries, except in Poland, Mexico and Argentina, affected by the greater focus on capturing on-balance sheet funds.
The average balances of pension funds decreased 7.7% from €10.5 billion in 2011 to €9.7 billion in 2012. Spain experienced a 4.3% decrease from €9.3 billion in 2011 to €8.9 billion in 2012. Our only remaining pension business abroad is in Portugal. The average balances of pension funds in Portugal decreased 33.9% from €1.2 billion in 2011 to €0.8 billion in 2012.
2011 compared to 2010
Fee and commission income for 2011 and 2010 was as follows:
2011 | 2010 | Amount Change | % Change | 2011 | 2010 | Amount Change | % Change | |||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||
Mutual and pension funds | 1,236 | 1,267 | (31 | ) | (2.4 | %) | 1,236 | 1,267 | (31 | ) | (2.4 | %) | ||||||||||||||||||||
Insurance | 2,397 | 2,051 | 346 | 16.9 | % | 2,397 | 2,051 | 346 | 16.9 | % | ||||||||||||||||||||||
Securities services | 668 | 784 | (116 | ) | (14.8 | %) | 668 | 784 | (116 | ) | (14.8 | %) | ||||||||||||||||||||
Commissions for services | 6,171 | 5,633 | 538 | 9.5 | % | 6,171 | 5,633 | 538 | 9.5 | % | ||||||||||||||||||||||
Credit and debit cards | 1,313 | 1,138 | 175 | 15.4 | % | 1,313 | 1,138 | 175 | 15.4 | % | ||||||||||||||||||||||
Account management | 1,028 | 995 | 33 | 3.3 | % | 1,028 | 995 | 33 | 3.3 | % | ||||||||||||||||||||||
Bill discounting | 309 | 301 | 8 | 2.7 | % | 309 | 301 | 8 | 2.7 | % | ||||||||||||||||||||||
Contingent liabilities | 425 | 439 | (14 | ) | (3.2 | %) | 425 | 439 | (14 | ) | (3.2 | %) | ||||||||||||||||||||
Other operations | 3,096 | 2,760 | 336 | 12.2 | % | 3,096 | 2,760 | 336 | 12.2 | % | ||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total fee and commission income (net) | 10,472 | 9,735 | 737 | 7.6 | % | 10,472 | 9,735 | 737 | 7.6 | % |
Fee and commission income rose 7.6% to €10,472 million in 2011 compared to 2010 mainly due to the performance of insurance and services. The latter showed rises in almost all lines. On the other hand, income from securities and custody was lower, and income from mutual and pension funds waswere slightly lower.
Average balances of mutual funds under management in Spain decreased 16.6% from €32.7 billion in 2010 to €27.3 billion in 2011. This decrease was due to the Bank’s strategy of emphasis on balance sheet funds to the detriment of mutual funds. However, average balances of mutual funds abroad increased by 6.0% from €77.9 billion in 2010 to €82.6 billion in 2011, mainly due to increased activity in Brazil, the United Kingdom and Mexico, partially offset by a decrease in Chile and Portugal.
Average balances of pension funds in Spain decreased by 3.0% from €9.6 billion in 2010 to €9.3 billion in 2011. Since we sold our pension funds businesses in Latin America, our only remaining pension business abroad is in Portugal. Average balances of pension funds in Portugal decreased 12.2% from €1.3 billion in 2010 to €1.2 billion in 2011.
113
2010 compared to 2009
Fee and commission income for 2010 and 2009 was as follows:
2010 | 2009 | Amount Change | % Change | |||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||
Mutual and pension funds | 1,267 | 1,178 | 89 | 7.6 | % | |||||||||||
Insurance | 2,051 | 1,861 | 190 | 10.2 | % | |||||||||||
Securities services | 784 | 774 | 10 | 1.3 | % | |||||||||||
Commissions for services | 5,633 | 5,267 | 366 | 6.9 | % | |||||||||||
Credit and debit cards | 1,138 | 1,033 | 105 | 10.2 | % | |||||||||||
Account management | 995 | 859 | 136 | 15.8 | % | |||||||||||
Bill discounting | 301 | 319 | (18 | ) | (5.6 | %) | ||||||||||
Contingent liabilities | 439 | 422 | 17 | 4.0 | % | |||||||||||
Other operations | 2,760 | 2,634 | 126 | 4.8 | % | |||||||||||
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| |||||||||
Total fee and commission income (net) | 9,735 | 9,080 | 655 | 7.2 | % |
Fee and commission income rose 7.2% to €9,735 million in 2010 compared to 2009. The increase is mainly due to higher revenues from fee income from insurance, credit cards, account management and pension funds.
Average balances of mutual funds under management in Spain decreased 10.3% from €36.5 billion in 2009 to €32.7 billion in 2010. This decrease was due to the Bank’s strategy of promoting growth in deposits and the customer preference for this type of product to the detriment of mutual funds. However, average balances of mutual funds abroad increased by 29.8% from €60.0 billion in 2009 to €77.9 billion in 2010, mainly due to increased activity in Brazil, the United Kingdom, Mexico and Chile, which offset the decrease in Spain.
Average balances of pension funds in Spain increased by 0.4% from €9.58 billion in 2009 to €9.62 billion in 2010. Since we sold our pension funds businesses in Latin America, our only remaining pension business abroad is in Portugal. Average balances of pension funds in Portugal decreased 0.4% from €1.33 billion in 2009 to €1.32 billion in 2010.
Gains (Losses) on Financial Assets and Liabilities (net)
Net gains on financial assets and liabilities in 20112012 were €2,838€3,329 million, a 31.1%17.3% or €674€491 million increase as compared to €2,838 million in 2011, which represented a 31.1% increase from €2,164 million in 2010, which represented a 43.1% decrease from €3,802 million in 2009.2010. Gains (losses) on financial assets and liabilities include gains and losses arising from the following: marking to market our trading portfolio and derivative instruments, including spot market foreign exchange transactions, sales of investment securities and liquidation of our corresponding hedge or other derivative positions. For further details, see Note 44 to our consolidated financial statements.
2012 compared to 2011
Net gains on financial assets and liabilities increased 17.3% in 2012. In 2012 the Group performed several securities exchange and repurchase transactions for which €870 million were credited to income. For further details, see Note 44 to our consolidated financial statements.
2011 compared to 2010
Net gains on financial assets and liabilities increased 31.1% in 2011. We registered profits in Corporate Activities’ hedges of exchange rates in 2011 as against losses in 2010 and in marking to market our trading portfolio of derivative instruments. These profits were partially offset by reduced revenues from the operating areas, mostly GBM (Global Banking and Markets), which were weak in the last three quarters of 2011 due to the economic environment, compared to strong results in 2010, mainly in the first half of the year.
2010 compared to 2009
Net gains on financial assets and liabilities decreased 43.1% in 2010 mainly due to Corporate Activities, where the cost of hedging exchange rates is recorded, and to lower results in some Latin American countries (due to the sale of portfolios in 2009). These negative effects were partially offset by revenues from wholesale businesses in Europe derived mainly from customer operations.
Other operating income / expenses (net)
Net other operating income in 20112012 was €108 million, a €90 million increase from €18 million in 2011, which was a €88 million decrease from €106 million in 2010, which was a €38 million decrease from €144 million in 2009.2010. Under this line item we include income and expenses from insurance activity, from non-financial services, other commissions and charges to theFondo de Garantía de Depósitos.
2012 | 2011 | Amount Change | % Change | |||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||
Insurance activity | ||||||||||||||||
Income from insurance and reinsurance contracts issued | 593 | 392 | 201 | 51.3 | % | |||||||||||
Of which: | 5,541 | 6,748 | (1,207 | ) | (17.9 | %) | ||||||||||
Insurance and reinsurance premium income | 4,667 | 6,547 | (1,880 | ) | (28.7 | %) | ||||||||||
Reinsurance income | 874 | 201 | 673 | 334.8 | % | |||||||||||
Expenses of insurance and reinsurance contracts | (4,948 | ) | (6,356 | ) | 1,408 | (22.2 | %) | |||||||||
Of which: | ||||||||||||||||
Claims paid and other insurance-related expenses | (4,440 | ) | (4,852 | ) | 412 | (8.5 | %) | |||||||||
Net provisions for insurance contract liabilities | (323 | ) | (1,202 | ) | 879 | (73.1 | %) | |||||||||
Reinsurance premiums paid | (185 | ) | (302 | ) | 117 | (38.7 | %) | |||||||||
Non-financial services | 137 | 151 | (14 | ) | (9.3 | %) | ||||||||||
Sales and income from the provision of non-financial services | 369 | 400 | (31 | ) | (7.8 | %) | ||||||||||
Cost of sales | (232 | ) | (249 | ) | 17 | (6.8 | %) | |||||||||
Other operating income and expenses | (622 | ) | (525 | ) | (97 | ) | 18.5 | % | ||||||||
Other operating income | 783 | 902 | (119 | ) | (13.2 | %) | ||||||||||
Of which, fees and commissions offsetting direct costs | 130 | 119 | 11 | 9.2 | % | |||||||||||
Other operating expenses | (1,405 | ) | (1,427 | ) | 22 | (1.5 | %) | |||||||||
Of which, Deposit Guarantee Fund | (530 | ) | (346 | ) | (184 | ) | 53.2 | % | ||||||||
108 | 18 | 90 | 500.0 | % |
114The €90 million increase in net other operating income in 2012 was mainly due to an increase in insurance activity of €201 million partially offset by an increase of €97 million in other operating income and expenses.
2011 | 2010 | 2009 | 2011 | 2010 | Amount Change | % Change | ||||||||||||||||||||||
(in millions of euros) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||
Insurance activity income | 392 | 378 | 339 | |||||||||||||||||||||||||
Insurance activity | 392 | 378 | 14 | 3.7 | % | |||||||||||||||||||||||
Income from insurance and reinsurance contracts issued | 6,748 | 7,162 | 7,113 | 6,748 | 7,162 | (414 | ) | (5.8 | %) | |||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
Insurance and reinsurance premium income | 6,547 | 6,845 | 6,950 | 6,547 | 6,845 | (298 | ) | (4.4 | %) | |||||||||||||||||||
Reinsurance income | 201 | 317 | 163 | 201 | 317 | (116 | ) | (36.6 | %) | |||||||||||||||||||
Expenses of insurance and reinsurance contracts | (6,356 | ) | (6,784 | ) | (6,774 | ) | (6,356 | ) | (6,784 | ) | 428 | (6.3 | %) | |||||||||||||||
Of which: | ||||||||||||||||||||||||||||
Claims paid and other insurance-related expenses | (4,852 | ) | (5,816 | ) | (3,016 | ) | (4,852 | ) | (5,816 | ) | 964 | (16.6 | %) | |||||||||||||||
Net provisions for insurance contract liabilities | (1,202 | ) | (689 | ) | (3,540 | ) | (1,202 | ) | (689 | ) | (513 | ) | 74.5 | % | ||||||||||||||
Reinsurance premiums paid | (302 | ) | (279 | ) | (218 | ) | (302 | ) | (279 | ) | (23 | ) | 8.2 | % | ||||||||||||||
Non-financial services | 151 | 135 | 140 | 151 | 135 | 16 | 11.9 | % | ||||||||||||||||||||
Sales and income from the provision of non-financial services | 400 | 340 | 378 | 400 | 340 | 60 | 17.6 | % | ||||||||||||||||||||
Cost of sales | (249 | ) | (205 | ) | (238 | ) | (249 | ) | (205 | ) | (44 | ) | 21.5 | % | ||||||||||||||
Other operating income and expenses | (525 | ) | (407 | ) | (335 | ) | (525 | ) | (407 | ) | (118 | ) | 29.0 | % | ||||||||||||||
Other operating income | 902 | 693 | 438 | 902 | 693 | 209 | 30.2 | % | ||||||||||||||||||||
Of which, fees and commissions offsetting direct costs | 119 | 70 | 117 | 119 | 70 | 49 | 70.0 | % | ||||||||||||||||||||
Other operating expenses | (1,427 | ) | (1,100 | ) | (773 | ) | (1,427 | ) | (1,100 | ) | (327 | ) | 29.7 | % | ||||||||||||||
Of which, Deposit Guarantee Fund | (346 | ) | (307 | ) | (318 | ) | (346 | ) | (307 | ) | (39 | ) | 12.7 | % | ||||||||||||||
Other operating income/expenses, net | 18 | 106 | 144 | 18 | 106 | (88 | ) | (83.0 | %) |
In 2011, a 3.7% increase in insurance activity and an 11.9% increase in non-financial services were offset by an increase in other charges.
In 2010, an 11.5% increase in insurance activity was offset by an increase of other charges. Income from non-financial services remained flat.operating income and expenses.
Administrative Expenses
Administrative expenses were flat at €17,928 million in 2012 from €17,781 million in 2011, which was a 9.4% or €1,526 million increase from €16,255 million in 2010, which was2010.
2012 compared to 2011
Administrative expenses for 2012 and 2011 were as follows:
2012 | 2011 | Amount Change | % Change | |||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||
Personnel expenses | 10,323 | 10,326 | (3 | ) | 0.0 | % | ||||||||||
Other general administrative expenses | 7,605 | 7,455 | 150 | 2.0 | % | |||||||||||
Building and premises and supplies | 1,918 | 1,845 | 73 | 4.0 | % | |||||||||||
Other expenses | 1,742 | 1,723 | 19 | 1.1 | % | |||||||||||
Information technology | 938 | 875 | 63 | 7.2 | % | |||||||||||
Advertising | 665 | 695 | (30 | ) | (4.3 | %) | ||||||||||
Communications | 642 | 659 | (17 | ) | (2.6 | %) | ||||||||||
Technical reports | 492 | 467 | 25 | 5.4 | % | |||||||||||
Per diems and travel expenses | 298 | 313 | (15 | ) | 4.8 | % | ||||||||||
Taxes (other than income tax) | 417 | 401 | 16 | 4.0 | % | |||||||||||
Guard and cash courier services | 432 | 412 | 20 | 4.9 | % | |||||||||||
Insurance premiums | 61 | 65 | (4 | ) | (6.2 | %) | ||||||||||
Total administrative expenses | 17,928 | 17,781 | 147 | 0.8 | % |
In 2012, administrative expenses experienced a 9.6% or €1,430 millionslight increase from €14,825 millionof 0.8%. This reflects a flat personnel expenses and a 2.0% increase in 2009.other general administrative expenses.
In Europe, both the large retail units (Spain and Portugal) registered negative growth in cost in real terms, continuing the trend begun in 2011. United States also experienced a reduction in administrative expenses of 11.4%. In Latin America expenses rose due to the increase in business capacity and the revision of wage agreements in an environment of higher inflation.
2011 compared to 2010
Administrative expenses for 2011 and 2010 were as follows:
2011 | 2010 | Amount Change | % Change | 2011 | 2010 | Amount Change | % Change | |||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||
Personnel expenses | 10,326 | 9,329 | 997 | 10.7 | % | 10,326 | 9,329 | 997 | 10.7 | % | ||||||||||||||||||||||
Other general administrative expenses | 7,455 | 6,926 | 529 | 7.6 | % | 7,455 | 6,926 | 529 | 7.6 | % | ||||||||||||||||||||||
Building and premises | 1,845 | 1,731 | 114 | 6.6 | % | |||||||||||||||||||||||||||
Building and premises and supplies | 1,845 | 1,731 | 114 | 6.6 | % | |||||||||||||||||||||||||||
Other expenses | 1,723 | 1,555 | 168 | 10.8 | % | 1,723 | 1,555 | 168 | 10.8 | % | ||||||||||||||||||||||
Information technology | 875 | 798 | 77 | 9.6 | % | 875 | 798 | 77 | 9.6 | % | ||||||||||||||||||||||
Advertising | 695 | 634 | 61 | 9.6 | % | 695 | 634 | 61 | 9.6 | % | ||||||||||||||||||||||
Communications | 659 | 670 | (11 | ) | (1.6 | %) | 659 | 670 | (11 | ) | (1.6 | %) | ||||||||||||||||||||
Technical reports | 467 | 428 | 39 | 9.1 | % | 467 | 428 | 39 | 9.1 | % | ||||||||||||||||||||||
Per diems and travel expenses | 313 | 276 | 37 | 13.4 | % | 313 | 276 | 37 | 13.4 | % | ||||||||||||||||||||||
Taxes (other than income tax) | 401 | 376 | 25 | 6.6 | % | 401 | 376 | 25 | 6.6 | % | ||||||||||||||||||||||
Guard and cash courier services | 412 | 401 | 11 | 2.7 | % | 412 | 401 | 11 | 2.7 | % | ||||||||||||||||||||||
Insurance premiums | 65 | 57 | 8 | 14.0 | % | 65 | 57 | 8 | 14.0 | % | ||||||||||||||||||||||
Total administrative expenses | 17,781 | 16,255 | 1,526 | 9.4 | % | 17,781 | 16,255 | 1,526 | 9.4 | % |
115
The 9.4% increase in administrative expenses in 2011 reflected a 10.7% increase in personnel expenses and a 7.6% increase in other general administrative expenses.
In Europe, both the large retail units (Santander Branch Network, Banesto and Portugal) and the UKU.K. recorded slight falls in expenses in real terms while the global units (GBM and Asset Management and Insurance) registered increased expenses because of investments in equipment and technology with the double purpose of strengthening the positions attained in key markets and businesses in previous years and developing new initiatives. Moreover, there is also an increase in expenses resulting from the incorporation of new entities, mainly Bank Zachodni WBK in Poland and SEB in Germany. In Latin America, costs also rose due to the drive in new commercial projects, the increase in installed capacity, the restructuring of points of attention, particularly in Brazil, and the revision of collective bargaining agreements in an environment of higher inflation. Sovereign also registered single digit growth in costs.
2010 compared to 2009
Administrative expenses for 2010 and 2009 were as follows:
2010 | 2009 | Amount Change | % Change | |||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||
Personnel expenses | 9,329 | 8,451 | 878 | 10.4 | % | |||||||||||
Other general administrative expenses | 6,926 | 6,374 | 552 | 8.7 | % | |||||||||||
Building and premises | 1,731 | 1,614 | 117 | 7.2 | % | |||||||||||
Other expenses | 1,555 | 1,436 | 119 | 8.3 | % | |||||||||||
Information technology | 798 | 785 | 13 | 1.7 | % | |||||||||||
Advertising | 634 | 594 | 40 | 6.7 | % | |||||||||||
Communications | 670 | 632 | 38 | 6.0 | % | |||||||||||
Technical reports | 428 | 360 | 68 | 18.9 | % | |||||||||||
Per diems and travel expenses | 276 | 262 | 14 | 5.3 | % | |||||||||||
Taxes (other than income tax) | 376 | 313 | 63 | 20.1 | % | |||||||||||
Guard and cash courier services | 401 | 331 | 70 | 21.1 | % | |||||||||||
Insurance premiums | 57 | 47 | 10 | 21.3 | % | |||||||||||
Total administrative expenses | 16,255 | 14,825 | 1,430 | 9.6 | % |
The 9.6% increase in administrative expenses in 2010 reflected a 10.4% increase in personnel expenses and an 8.7% increase in Other general administrative expenses.
All units in continental Europe and the UK slightly reduced their costs. Sovereign experienced a more significant reduction because of synergies, while Brazil’s and Mexico’s costs increased at a slower pace than the inflation rate. The only noteworthy rises were in Chile because of the impact of the earthquake, the signing of a collective bargaining agreement and business dynamics, Argentina with costs at 23% because of a collective bargaining agreement and Global Banking and Markets because of investments made in 2010 to consolidate positions reached in 2009 in its main markets.
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Depreciation and Amortization
Depreciation and amortization was €2,189 million in 2012, a 3.8% or €80 million increase from €2,109 million in 2011, which was an 8.7% or €169 million increase from €1,940 million in 2010, which2010. This increase was a 21.5% or €344 million increase from €1,596 millionmainly focused in 2009. Both in 2010 and 2011, the depreciation and amortization of intangible assets in Latin America, mainly Brazil, explain most of the increase.Continental Europe.
Provisions (net)
Net provisions were €1,622 million in 2012, a 37.6% or €979 million decrease from €2,601 million in 2011, which was a 129.6% or €1,468 million increase from €1,133 million in 2010, which was a 36.8% or €659 million decrease from €1,792 million in 2009.2010. This item includes additions charged to the income statement in relation to provisions for pensions and similar obligations, provisions for contingent liabilities and commitments and other provisions (mainly provisions for restructuring costs and tax and legal litigation). The variation in 2012 is due to: (i) a €955 million decrease in other provisions, mainly due to the one-off charge in the second quarter of 2011 isof €842 million from a provision made related to PPI remediation in Santander UK (€620 million net of tax) (see Item 8 of Part I, “Financial information—Legal proceedings, ii. Non-tax-related proceedings); (ii) a €245 million decrease in provisions for pensions and; (iii) a €221 million increase in contingent liabilities and commitments provisions.
The variation in 2011 was due to: (i) a €1,680 million increase in other provisions, mainly due to the above mentioned one-off charge in U.K. the second quarter of €842 million from a provision made related to PPI remediation (see Item 8 of Part I, “Financial information— Legal proceedings, ii. Non-tax-related proceedings);million; (ii) a €10 million increase in provisions for pensions and;pensions; and (iii) a €222 million decrease in contingent liabilities and commitments provisions.
The variation in 2010 is due to a €151 million decrease in provisions for pensions together with a €531 million decrease in other provisions partially offset by a €23 million increase in contingent liabilities and commitments provisions.
SeeFor further details, see Note 25 to our consolidated financial statements.
Impairment Losses (net)
Impairment losses (net) were €19,414 million in 2012, a 45.0% or €6,029 million increase from €13,385 million in 2011, awhich was 24.8% or €2,656 million increase from €10,729 million in 2010, which was an 8.6% or €1,014 million decrease from €11,743 million in 2009.2010.
Impairment losses are divided in the income statement as follows:
2011 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||
Impairment losses on financial assets (net): | 11,868 | 10,443 | 11,578 | 18,906 | 11,868 | 10,443 | ||||||||||||||||||
Loans and receivables | 11,040 | 10,267 | 11,088 | 18,549 | 11,040 | 10,267 | ||||||||||||||||||
Other financial assets not measured at fair value through profit and loss | 828 | 176 | 490 | 357 | 828 | 176 | ||||||||||||||||||
Impairment losses on other assets (net): | 1,517 | 286 | 165 | 508 | 1,517 | 286 | ||||||||||||||||||
Goodwill and other intangible assets | 1,161 | 69 | 31 | 151 | 1,161 | 69 | ||||||||||||||||||
Other assets | 356 | 217 | 134 | 357 | 356 | 217 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total impairment losses (net) | 13,385 | 10,729 | 11,743 | 19,414 | 13,385 | 10,729 |
2012 compared to 2011
The €7,509 million or 68.0% increase in net impairment losses for loans and receivables in 2012 compared to 2011 reflected a €7,028 million increase in provisions, a €472 million decrease in recoveries of loans previously charged-off and a €9 million increase in impairment losses of other assets.
The increase in credit loss provisions recorded in 2012 was mainly due to two factors: (i) a rise in non-performing loans in certain sectors in Spain, which increased 125 basis points to 6.74%. This rise was caused by the worsening of Spain’s macroeconomic situation as a result of an economic slowdown, falling consumer spending and job market deterioration. Particularly significant in this context was the increase in non-performing loan ratios in the real estate sector to 47.7% at December 31, 2012, compared to 28.6% in 2011 (for further details refer to Note 54 to our consolidated financial statements); and (ii) the upward shift in non-performing loan ratios in certain financial systems, including Brazil, Chile, and Portugal. For further details see Item 4 of Part I, “Information on the Company—B. Business Overview” and Item 11 of Part I. “Quantitative and Qualitative Disclosures About Risk—Part 4. Credit Risk”.
Our total allowances for credit losses (excluding country-risk) increased by €6,533 million to €26,194 million at December 31, 2012, from €19,661 million at December 31, 2011.
The €1,009 million decrease in 2012 in net impairment losses on other assets was mainly attributable to two impairments which occurred in 2011: (i) €601 million in goodwill related to Santander Totta and (ii) €491 million in other intangible assets.
The impairment losses of other financial assets not measured at fair value through profit and loss in 2012 of €357 million were mainly due to equity instruments that had suffered a significant and prolonged fall in price.
Non-performing balances (excluding country-risk) increased by €4,064 million to €36,100 million at December 31, 2011, compared to €32,036 million at December 31, 2011. Our coverage ratio was 73% at December 31, 2012 and 61% at December 31, 2011. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.
2011 compared to 2010
The €773 million or 7.5% increase in net impairment losses for loans and receivables in 2011 compared to 2010 reflected a €821 million increase in allowances, a €598 million increase in recoveries of loans previously charged-off and an €11 million decrease in impairment losses of other assets.
There was a strong increase in impairment losses in Spain and Portugal due to the economic environment and significant reductions in the UK, SovereignU.K., Santander US and Santander Consumer Finance (even with the incorporation of new units).Finance. Provisions in Latin America excluding Brazil also dropped. However, they rose strongly in Brazil because of the growth in lending of around 20%10.4% and a moderate increase in NPLs of individual borrowers, principally in consumer credits and cards.
Our total allowances for credit losses (excluding country-risk) decreased by €1,087 million to €19,661 million at December 31, 2011, from €20,748 million at December 31, 2010.
117
The €1,231 million increase in 2011 in net impairment losses on other assets was mainly attributabledue to €601 million in pre-tax provisions to amortize goodwill related to Santander Totta and €491 million in amortization of other intangible assets.
The impairment losses of other financial assets not measured at fair value through profit and loss in 2011 of €826 million were mainly due to: (i) €125 million in debt instruments of which €106 million related to the Greek sovereign debt; and (ii) €592 million in equity instruments relating to the impairment of the ownership interests in Iberdrola, S.A. and Assicurazioni Generali SpA. These equity instruments had suffered a significant and prolonged fall in price at December 31, 2011.
Non-performing balances (excluding country-risk) increased by €3,514 million to €32,036 million at December 31, 2011, compared to €28,522 million at December 31, 2010. Our coverage ratio was 61% at December 31, 2011 and 73% at December 31, 2010. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.
2010 compared to 2009
The €821 million or 7.4% decrease in net impairment losses for loans and receivables in 2010 compared to 2009 reflected a €460 million net decrease in allowances, a €287 million increase in recoveries of loans previously charged-off and a €74 million decrease in impairment losses of other assets.
This reduction was due to improved trends in the UK and for Sovereign, and lower provisions in Latin America, which is beginning to benefit from the improvement in the economic cycle and a change in the mix of products.
Spain and Portugal, on the other hand, required higher provisions in 2010 because of the increase in bad loans and the review carried out by the Bank of Spain of the references established in the Circular 4/2004 to determine the provisions for credit risk after taking into account the experience from recent years and the current economic situation.
Our total allowances for credit losses (excluding country-risk) increased by €2,251 million to €20,748 million at December 31, 2010, from €18,497 million at December 31, 2009.
Non-performing balances (excluding country-risk) increased by €3,969 million to €28,522 million at December 31, 2010, compared to €24,554 million at December 31, 2009. Our coverage ratio was 72.7% at December 31, 2010, and 75.3% at December 31, 2009. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.
Net gains / (losses) on other assets
Net lossesgains on other assets were €149 million in 2012, a €412 million increase from losses of €263 million in 2011, which was a €323 million decrease from gains of €60 million in 2010, which was a €280 million decrease from gains of €340 million in 2009.2010.
In 2011, Gains2012, the €906 million gains on disposal of assets not classified as non-current assets held for sale increased to €1,846 millionwere mainly due to the sale of a minorityour stake in Banco Santander Consumer USA and the sale of our Latin American insurance companies (€872Colombia which generated €619 million and €908 million, respectively).in gains. See Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.
Losses on non-current assets held for sale not classified as discontinued operations increased to €2,109 millionin 2012 totaled €757 million. This was mainly due to impairment of foreclosed and acquired assets recorded during the year.year and the sale of properties. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Foreclosed assets”.
2012 compared to 2011
118
2012 | 2011 | Amount Change | % Change | |||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||
Gains / (losses) on disposal of assets not classified as non-current assets held for sale | 906 | 1,846 | (940 | ) | (50.9 | ) | ||||||||||
Of which: | ||||||||||||||||
Disposal of investments | 774 | 1,794 | (1,020 | ) | (56.9 | ) | ||||||||||
Gains / (losses) on non-current assets held for sale not classified as discontinued operations | (757 | ) | (2,109 | ) | 1,352 | (64.1 | ) | |||||||||
Of which: | ||||||||||||||||
Impairment of non-current assets held for sale | (449 | ) | (2,037 | ) | 1,588 | (78.0 | ) | |||||||||
Losses on sale of non-current assets held for sale | (308 | ) | (72 | ) | (236 | ) | 327.8 |
2011 compared to 2010
2011 | 2010 | Amount Change | % Change | |||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||
Gains / (losses) on disposal of assets not classified as non-current assets held for sale | 1,846 | 350 | 1,496 | 427.4 | ||||||||||||
Of which: | ||||||||||||||||
Disposal of investments | 1,794 | 153 | 1,641 | 1,072.5 | ||||||||||||
Gains / (losses) on non-current assets held for sale not classified as discontinued operations | (2,109 | ) | (290 | ) | (1,819 | ) | (627.2 | ) | ||||||||
Of which: | ||||||||||||||||
Impairment of non-current assets held for sale | (2,037 | ) | (298 | ) | (1,739 | ) | (583.6 | ) |
2010 compared to 2009
2010 | 2009 | Amount Change | % Change | 2011 | 2010 | Amount Change | % Change | |||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||
Gains / (losses) on disposal of assets not classified as non-current assets held for sale | 350 | 1,565 | (1,215 | ) | (77.6 | ) | 1,846 | 350 | 1,496 | 427.4 | ||||||||||||||||||||||
Of which: | �� | |||||||||||||||||||||||||||||||
Disposal of investments | 153 | 1,528 | (1,375 | ) | (90.0 | ) | 1,794 | 153 | 1,641 | 1,072.5 | ||||||||||||||||||||||
Gains / (losses) on non-current assets held for sale not classified as discontinued operations | (290 | ) | (1,225 | ) | 935 | (76.3 | ) | (2,109 | ) | (290 | ) | (1,819 | ) | 627.2 | ||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||
Sale of Attijariwafa Bank | — | 218 | (218 | ) | — | |||||||||||||||||||||||||||
Impairment of non-current assets held for sale and other assets | (298 | ) | (1,350 | ) | 1,052 | (77.9 | ) | |||||||||||||||||||||||||
Impairment of non-current assets held for sale | (2,037 | ) | (298 | ) | (1,739 | ) | 583.6 |
Income Tax
The provision for corporate income tax was €575 million in 2012, a 67.6% or €1,201 million decrease from €1,776 million in 2011, which represented a 39.2% or €1,147 million decrease from €2,923 million in 2010, which represented a 142.3% or €1,716 million increase from €1,207 million in 2009.2010. The effective tax rate was 16.26% in 2012, 22.5% in 2011 and 24.3% in 2010 and 11.5% in 2009.2010.
The reduction in the effective tax rate in 20112012 compared to the prior year is primarily due to the €4,373 million reduction in consolidated operating profit before tax, exempt transactions occurred during 2011 (described in note 27.c). The increasetogether with the fact that there is no significant variation in the effective incomenet adjustments to profit before tax ratethat applied in 20102012 as compared to 2009 is primarily due2011 (see the reconciliation in Note 27.c, to various tax exempt transactions that took place during 2009. Had these transactions been taxable, the effective tax rate for the fiscal year 2009 would have been 19.9%. The increase between the mentioned 19.9% and the effective rate for the fiscal year 2010 (24.3%) is due to a higher proportion of our income being derived from our businesses in Latin America, and the USA, which have higher tax rates than other countries, principally Spain, in which the Group operates.consolidated financial statements).
For more information about factors affecting effective tax rates, see Note 27 to our consolidated financial statements.
Profit / (losses) from discontinued operations
Losses from discontinued operations were €7 million in 2012, a €17 million decrease from €24 million in 2011, which represented a €3 million decrease from €27 million in 2010, which represented a €57.8 million decrease from €31 million profits in 2009.2010. During 20112012 and 2010,2011, we did not discontinue any significant operation.
119
Profit attributable to non-controlling interest
Profit attributable to non-controlling interest was €762 million in 2012, a 3.3% or €26 million decrease from €788 million in 2011, which represented a 14.4% or €133 million decrease from €921 million in 2010, which represented a 96.0% or €451 million increase from €470 million in 2009.2010. For further details, see Note 28 to our consolidated financial statements.
2012 compared to 2011
The main developments in 2012 regarding non-controlling interest were: (i) in January and March 2012 the Group transferred shares accounting for 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions, and (ii) in 2012 the Group sold 24.9% of its ownership interest in Grupo Financiero Santander México, S.A.B. de C.V. The related increase in profits attributable to non-controlling interest in these units was offset by losses registered to non-controlling interest in Banesto.
2011 compared to 2010
The €133 million decrease in 2011 is mainly attributable to the purchase in September 2010 of 25% of Santander Mexico. Non-controlling interest in Banco Santander Mexico was €2 million in 2011 as compared to €130 million in 2010.
2010 compared to 2009
The €451 million increase in profit attributable to minority shareholders in 2010 was principally due to Grupo Santander Brazil. Non-controlling interest in Banco Santander (Brasil) S.A. was in 2010 €539 million, a €425 million increase from €114 million in 2009 due to the global offering of Banco Santander (Brasil), which closed in October 2009. This effect was partially offset by the purchase of 25% of Santander Mexico in 2010.
Results of Operations by Business Areas
For internal information, Grupo Santander maintained in 20112012 the general criteria used in 20102011 for geographical and business segmentation, with the following exception:
The financial statements of each operating segment are prepared by aggregating the figures for the Group’s various business units. The basic information used for segment reporting comprises the accounting data of the legal units composing each segment and the data available from the management information systems. All segment financial statements have been prepared on a basis consistent with the accounting policies used by the Group. When calculatingIn 2012, the net interest income of eachconsumer credit business internal transfer prices are applied both to assets and liabilities. Having observed that the actual cost of liquidity during the ongoing financial and liquidity crisis the actual cost of liquidity deviated from the benchmark curve used for the units, in 2011 the Group decided to revise the system for measuring net interest income and modified the internal transfer price applied by the corporate centrerelating to the units, addingUnited Kingdom was incorporated in the United Kingdom and that relating to the base curveUnited States was incorporated in the US, in both cases after an exit from Continental Europe. As a liquidity spread based onresult, the duration of each transaction. Thesegment reporting figures for 20102011 and 2009 relating to segment reporting presented below2010 have been recalculatedrestated in order to facilitate their comparison with the figures for 2011.2012.
Our results of operations by business areas can be summarized as follows (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”):.
First level (geographic):
Continental Europe
Variations | Variations | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | |||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||
INTEREST INCOME / CHARGES | 10,666 | 9,872 | 10,966 | 8.0 | % | (10.0 | %) | |||||||||||||||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 9,470 | 8,875 | 8,320 | 6.7 | % | 6.7 | % | |||||||||||||||||||||||||||||||||
Income from equity instruments | 264 | 217 | 218 | 21.7 | % | (0.5 | %) | 289 | 264 | 217 | 9.5 | % | 21.7 | % | ||||||||||||||||||||||||||
Income from companies accounted for by the equity method | 14 | 9 | 7 | 55.6 | % | 28.6 | % | 27 | 14 | 9 | 92.9 | % | 55.6 | % | ||||||||||||||||||||||||||
Net fees and commissions | 4,051 | 3,679 | 3,697 | 10.1 | % | (0.5 | %) | 3,626 | 3,774 | 3,483 | (3.9 | %) | 8.4 | % | ||||||||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) | 233 | 846 | 687 | (72.5 | %) | 23.1 | % | |||||||||||||||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) * | 461 | 232 | 837 | 98.7 | % | (72.3 | %) | |||||||||||||||||||||||||||||||||
Other operating income/(expenses) (net) | 119 | 170 | 138 | (30.0 | %) | 23.2 | % | (17 | ) | 119 | 170 | (114.3 | %) | (30.0 | %) | |||||||||||||||||||||||||
TOTAL INCOME | 15,347 | 14,793 | 15,713 | 3.7 | % | (5.9 | %) | 13,856 | 13,278 | 13,036 | 4.4 | % | 1.9 | % | ||||||||||||||||||||||||||
Administrative expenses | (5,998 | ) | (5,301 | ) | (5,116 | ) | 13.1 | % | 3.6 | % | (5,640 | ) | (5,660 | ) | (5,030 | ) | (0.4 | %) | 12.5 | % | ||||||||||||||||||||
Personnel expenses | (3,725 | ) | (3,343 | ) | (3,220 | ) | 11.4 | % | 3.8 | % | (3,496 | ) | (3,531 | ) | (3,194 | ) | (1.0 | %) | 10.6 | % | ||||||||||||||||||||
Other general expenses | (2,273 | ) | (1,958 | ) | (1,896 | ) | 16.1 | % | 3.3 | % | (2,144 | ) | (2,129 | ) | (1,836 | ) | 0.7 | % | 16.0 | % | ||||||||||||||||||||
Depreciation and amortization | (614 | ) | (616 | ) | (548 | ) | (0.3 | %) | 12.4 | % | (662 | ) | (600 | ) | (601 | ) | 10.3 | % | (0.2 | %) | ||||||||||||||||||||
Provisions (net) | (38 | ) | (142 | ) | (15 | ) | (73.2 | %) | 846.7 | % | ||||||||||||||||||||||||||||||
Impairment losses on financial assets (net) | (4,206 | ) | (4,048 | ) | (3,286 | ) | 3.9 | % | 23.2 | % | (4,127 | ) | (3,528 | ) | (3,134 | ) | 17.0 | % | 12.6 | % | ||||||||||||||||||||
Provisions (net) | (138 | ) | (40 | ) | (99 | ) | 245.0 | % | (59.6 | %) | ||||||||||||||||||||||||||||||
Impairment losses on other assets (net) | (48 | ) | (48 | ) | (42 | ) | 0.0 | % | 14.3 | % | (131 | ) | 53 | (48 | ) | (347.2 | %) | (210.4 | %) | |||||||||||||||||||||
Gains/(losses) on other assets (net) | (304 | ) | (56 | ) | (73 | ) | 442.9 | % | (23.3 | %) | (153 | ) | (303 | ) | (55 | ) | (49.5 | %) | 450.9 | % | ||||||||||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 4,039 | 4,684 | 6,549 | (13.8 | %) | (28.5 | %) | 3,105 | 3,098 | 4,153 | 0.2 | % | (25.4 | %) | ||||||||||||||||||||||||||
Income tax | (1,049 | ) | (1,219 | ) | (1,770 | ) | (13.9 | %) | (31.1 | %) | (736 | ) | (718 | ) | (1,023 | ) | 2.5 | % | (29.8 | %) | ||||||||||||||||||||
PROFIT FROM CONTINUING OPERATIONS | 2,990 | 3,465 | 4,779 | (13.7 | %) | (27.5 | %) | 2,369 | 2,380 | 3,130 | (0.5 | %) | (24.0 | %) | ||||||||||||||||||||||||||
Profit/(loss) from discontinued operations (net) | (24 | ) | (14 | ) | (45 | ) | 71.4 | % | (68.9 | %,) | (7 | ) | (24 | ) | (14 | ) | (70.8 | %) | 71.4 | % | ||||||||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 2,966 | 3,451 | 4,734 | (14.1 | %) | (27.1 | %) | 2,362 | 2,356 | 3,116 | 0.3 | % | (24.4 | %) | ||||||||||||||||||||||||||
Profit attributable to non-controlling interest | 117 | 96 | 66 | 21.9 | % | 45.5 | % | 57 | 69 | 74 | (17.4 | %) | (6.8 | %) | ||||||||||||||||||||||||||
Profit attributable to the Parent | 2,849 | 3,355 | 4,668 | (15.1 | %) | (28.1 | %) | 2,305 | 2,287 | 3,042 | 0.8 | % | (24.8 | %) |
* | Includes exchange differences (net) |
2012 compared to 20111
In 2012, Continental Europe contributed 26.8% of the profit attributable to the Group’s operating areas. This segment obtained attributable profit of €2,305 million in 2012, an increase of 0.8% to the previous year, which was heavily affected by the booking of higher credit loss provisions during the year. The earnings reflect the positive effect of the change in the scope of consolidation due to the inclusion in the Group of Bank Zachodni WBK and the SEB branches in Germany for the full year, and a slight negative effect from the agreement with Abbey Life Assurance for the reinsurance of the portfolio of individual life risk in Spain and Portugal.
Interest income was €9,470 million in 2012, which is a 6.7% or €595 million increase from the €8,875 million obtained in 2011. This increase was mainly due to the inclusion of SEB in Germany and the entry of Bank Zachodni WBK. Without this effect, the increase would have been 5.0% year to year.
Net fees and commissions were €3,626 million in 2012, a 3.9% decrease from €3,774 million in 2011, due to lower activity.
Gains/(losses) on financial assets and liabilities were €461 million in 2012, a 98.7% increase from €232 million in 2011. Most of this growth came from the results generated in the repurchase of preferred shares in Banesto and the repurchase of debt in Portugal.
120
1 | For a summary by countries see “Item 4. Information of the Company. B. Business Overview—Latin America” |
Administrative expenses in 2012 were €5,640 million, a 0.4% decrease from €5,660 million in 2011.Depreciation and amortization expenses were €662 million in 2012, a 10.3% increase from €600 million in 2011. As a result, cost (administrative expenses plus depreciation and amortization) rose by 0.7% year to year due to the impact of the changes in the scope of consolidation; eliminating this effect, they continued to fall (-1.5%), with all of the units flat or decreasing. Noteworthy, however, was the 4.8% reduction in Portugal.
Impairment losses on financial assets were €4,127 million in 2012, a 17.0% increase from €3,528 million in 2011. Spain’s recession is pushing up NPL entries, although the recoveries and sale of portfolios is containing the rise in the balance of bad loans. Portugal experienced a rise in credit loss provisions also due to the increase in non-performing loans as a result of the economic cycle. A decrease of 11.7% in credit loss provisions in Santander Consumer Finance partially mitigated the increases in Spain and Portugal. The NPL ratio in Continental Europe increased from 5.18% in 2011 to 6.25% in 2012, while NPL coverage increased from 56% in 2011 to 73% in 2012.
Profit attributable to the Parent remained stable in 2012 at €2,305 million up from €2,287 million in 2011, a 0.8% increase. These results were obtained in a difficult environment, characterized by shrinking GDP, domestic demand and consumption, rising unemployment and declining interest rates, at historic lows, with their impact on spreads.
2011 compared to 2010
In 2011, Continental Europe contributed 31.0%24.9% of the profit attributable to the Group’s operating areas. The profit includes the effect of the consolidation of Bank Zachodni WBK in April and SEB’s branches in Germany in the first quarter. Overall, the positive impact of these acquisitions (perimeter effect) on the Group’s profits was around 6 percentage points.
Interest income was €10,666€8,875 million in 2011, which is an 8.0%a 6.7% or €794€555 million increase from the €9,872€8,320 million obtained in 2010.Net fees and commissions were €4,051€3,774 million in 2011, a 10.1%an 8.4% increase from €3,679€3,483 million in 2010. These increases were due to the improvements in commercial units and the consolidation of Bank Zachodni WBK in the second quarter. Excluding the perimeter impact, net interest income and fee and commission income increased 1.1%.
Gains/(losses) on financial assets and liabilities were €233€232 million in 2011, a 72.5%72.3% decrease from €846€837 million in 2010. The decrease was mainly due to the tensions in the markets in the second half of the year which impacted gains on financial transactions, due, on the one hand, to lower asset valuations and, on the other, to reduced customer activity.
Total income increased 3.7% to €15,347 million in 2011 from €14,793 million in 2010. This increase was mainly pushed by the performance of Santander Consumer Finance which increased 14.0%, backed by the most basic revenues: (i) net interest income (+13.6%), due to the rise in the average portfolio and to better spreads and (ii) fee income (+18.0%), basically due to servicing in the US and greater presence in key European countries (Germany, Poland and Norway).
Administrative expenses were €5,998€5,660 million in 2011, a 13.1%12.5% increase from €5,301€5,030 million in 2010 due to the impact of the changes in the scope of consolidation. On a like-for-like basis the increase was only 0.9%. The larger units of the segment experienced, in real terms, reductions of 2.5% at Banesto, 2.1% in Portugal, and 1.2% in the Santander Branch Network.
Impairment losses on financial assets were €4,206€3,528 million in 2011, a 3.9%12.6% increase from €4,048€3,134 million in 2010, mainly due to the perimeter effect. Additionally, the evolution of NPLs in Spain was worse than expected because the downturn in the economy was more severe than envisaged and the fall in lending meant the NPL ratio increased to a greater extent than the volume of non-performing. The NPL ratio in Continental Europe increased from 4.3%4.35% in 2010 to 5.2%5.18% in 2011, while NPL coverage decreased from 71%65% in 2010 to 56% in 2011. The decrease in total lending in Spain caused the NPL ratio to increase to a greater extent than the volume of NPLs.
Profit attributable to the Parent was 15.1%24.8% lower at €2,849€2,287 million from €3,355€3,042 million in 2011. Profits have been hard hit by the low growth environment, deleveraging and low interest rates, as well as the negative impact of gains on financial transactions and the increase in impairment losses mentioned above. Profits fell at the three commercial networks (Santander, Banesto and Portugal) and at wholesale businesses, while Santander Consumer Finance performed well (+51.5%33.7% in profit attributable to the parent bank) and Poland’s BZ WBK was incorporated to the Group in April.
121
2010 compared to 2009
In 2010, Continental Europe contributed 32.0% of the profit attributable to the Group’s operating areas. The contribution decreased from 45.8% in 2009 due to both the reduction in profits in Continental Europe and the strong growth in emerging markets, primarily in Brazil and the rest of Latin America.
Interest income was €9,872 million in 2010, which is a 10.0% or €1,094 million decrease from the €10,966 million obtained in 2009. Effective management of spreads and of the balance sheet was largely offset by the impact of slower business growth due to lower demand for loans, the repricing of mortgages and the higher cost of funds resulting from the strong competition for deposits.
Net fees and commissions were €3,679 million in 2010, a 0.5% decrease from €3,697 million in 2009 because of lower activity and lower demand for some products, especially mutual funds.
Gains/(losses) on financial assets and liabilities were €846 million in 2010, a 23.1% increase from €687 million in 2009. The impact of lower activity due to the weak economic environment was offset by the improvement in gains from the distribution of treasury products to customers, especially in Banesto.
Total income decreased 5.9% in 2010 due to the negative performance of most areas. Only Santander Consumer Finance experienced an increase backed by the most basic revenues: interest income due to a rise in the average portfolio and management of spreads and fee income due to greater activity and servicing in the US.
Administrative expenses were €5,301 million in 2010, a 3.6% increase from €5,116 million in 2009. This growth was mainly due to the increase in the scope of consolidation in Santander Consumer Finance and the increase in costs at Global Banking & Markets, as the Santander Branch Network, Banesto and Portugal reduced their costs.
Impairment losses on financial assets were €4,048 million in 2010, a 23.2% increase from €3,286 million in 2009. This strong increase resulted mainly from the review carried out by the Bank of Spain of the parameters established in the Circular 4/2004 to determine the provisions for credit risk. These parameters are based on its experience and information on the historical rates of impairment in the banking sector and are periodically updated. The review, carried out in 2010, consistent with the results shown by our internal model, reflected the worsening in Spanish debtors’ conditions taking into account both records of default and experience of the recoveries of non performing loans. The NPL ratio increased from 3.6% in 2009 to 4.3% in 2010, while NPL coverage decreased from 77% in 2009 to 71% in 2010.
Profit attributable to the Parent was €3,335 million in 2010, a 28.1% or €1,313 million decrease from €4,668 million in 2009. The main reasons for this decrease were weak revenues affected by the economic environment and the increase in impairment losses mentioned above.
United Kingdom
Variations | ||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | ||||||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 4,176 | 4,766 | 4,298 | (12.4 | %) | 10.9 | % | |||||||||||||
Income from equity instruments | 1 | — | — | n/a | n/a | |||||||||||||||
Income from companies accounted for by the equity method | 1 | — | — | n/a | n/a | |||||||||||||||
Net fees and commissions | 1,070 | 1,027 | 1,083 | 4.2 | % | (5.2 | %) | |||||||||||||
Gains/losses on financial assets and liabilities (net) | 405 | 462 | 506 | (12.3 | %) | (8.7 | %) | |||||||||||||
Other operating income/(expenses) (net) | 25 | 29 | 28 | (13.8 | %) | 3.6 | % | |||||||||||||
TOTAL INCOME | 5,678 | 6,284 | 5,915 | (9.6 | %) | 6.2 | % | |||||||||||||
Administrative expenses | (2,203 | ) | (2,241 | ) | (2,216 | ) | (1.7 | %) | 1.1 | % | ||||||||||
Personnel expenses | (1,391 | ) | (1,295 | ) | (1,257 | ) | 7.4 | % | 3.0 | % | ||||||||||
Other general expenses | (812 | ) | (946 | ) | (959 | ) | (14.2 | %) | (1.4 | %) | ||||||||||
Depreciation and amortization | (351 | ) | (309 | ) | (253 | ) | 13.6 | % | 22.1 | % | ||||||||||
Impairment losses on financial assets (net) | (585 | ) | (930 | ) | (881 | ) | (37.1 | %) | 5.6 | % | ||||||||||
Provisions (net) | (969 | ) | (151 | ) | (195 | ) | 541.7 | % | (22.6 | %) | ||||||||||
Impairment losses on other assets (net) | — | — | — | n/a | n/a | |||||||||||||||
Gains/(losses) on other assets (net) | (3 | ) | 47 | (7 | ) | n/a | n/a | |||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 1,567 | 2,700 | 2,363 | (42.0 | %) | 14.3 | % | |||||||||||||
Income tax | (422 | ) | (735 | ) | (639 | ) | (42.6 | %) | 15.0 | % | ||||||||||
PROFIT FROM CONTINUING OPERATIONS | 1,145 | 1,965 | 1,724 | (41.7 | %) | 14.0 | % | |||||||||||||
Profit/(loss) from discontinued operations (net) | — | — | — | n/a | n/a | |||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 1,145 | 1,965 | 1,724 | (41.7 | %) | 14.0 | % | |||||||||||||
Profit attributable to non-controlling interest | — | — | — | n/a | n/a | |||||||||||||||
Profit attributable to the Parent | 1,145 | 1,965 | 1,724 | (41.7 | %) | 14.0 | % |
Variations | ||||||||||||||||||||
2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 3,559 | 4,356 | 4,941 | (18.3 | %) | (11.8 | %) | |||||||||||||
Income from equity instruments | 1 | 1 | - | 0.0 | % | n/a | ||||||||||||||
Income from companies accounted for by the equity method | (5 | ) | 1 | - | (600.0 | %) | n/a | |||||||||||||
Net fees and commissions | 1,238 | 1,079 | 1,035 | 14.7 | % | 4.3 | % | |||||||||||||
Gains/losses on financial assets and liabilities (net) * | 1,231 | 405 | 462 | 204.0 | % | (12.3 | %) | |||||||||||||
Other operating income/(expenses) (net) | 22 | 25 | 29 | (12.0 | %) | (13.8 | %) | |||||||||||||
TOTAL INCOME | 6,046 | 5,867 | 6,467 | 3.1 | % | (9.3 | %) | |||||||||||||
Administrative expenses | (2,356 | ) | (2,243 | ) | (2,280 | ) | 5.0 | % | (1.6 | %) | ||||||||||
Personnel expenses | (1,475 | ) | (1,415 | ) | (1,314 | ) | 4.2 | % | 7.7 | % | ||||||||||
Other general expenses | (881 | ) | (828 | ) | (966 | ) | 6.4 | % | (14.3 | %) | ||||||||||
Depreciation and amortization | (385 | ) | (352 | ) | (311 | ) | 9.4 | % | 13.2 | % | ||||||||||
Provisions (net) | (522 | ) | (964 | ) | (157 | ) | (45.9 | %) | 514.0 | % | ||||||||||
Impairment losses on financial assets (net) | (1,246 | ) | (634 | ) | (986 | ) | 96.5 | % | (35.7 | %) | ||||||||||
Impairment losses on other assets (net) | - | - | - | n/a | n/a | |||||||||||||||
Gains/(losses) on other assets (net) | (1 | ) | (3 | ) | 46 | (66.7 | %) | (106.5 | %) | |||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 1,536 | 1,671 | 2,779 | (8.1 | %) | (39.9 | %) | |||||||||||||
Income tax | (361 | ) | (448 | ) | (756 | ) | (19.4 | %) | (40.7 | %) | ||||||||||
PROFIT FROM CONTINUING OPERATIONS | 1,175 | 1,223 | 2,023 | (3.9 | %) | (39.5 | %) | |||||||||||||
Profit/(loss) from discontinued operations (net) | - | - | - | n/a | n/a | |||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 1,175 | 1,223 | 2,023 | (3.9 | %) | (39.5 | %) | |||||||||||||
Profit attributable to non-controlling interest | - | - | - | n/a | n/a | |||||||||||||||
Profit attributable to the Parent | 1,175 | 1,223 | 2,023 | (3.9 | %) | (39.5 | %) |
* | Includes exchange differences (net) |
1222012 compared to 2011
Interest income was €3,559 million in 2012, an 18.3% or €797 million decrease from €4,356 million in 2011. This decrease reflects the negative impacts of the higher cost of funding (of both deposits and wholesale financing) and the low interest rates. These impacts were partially offset by improved volumes and higher spreads on new lending to SMEs and businesses.
Net fees and commissions were €1,238 million in 2012, a 14.7% or €159 million increase from €1,079 million in 2011 due to increased fees and ancillary income from SME and large corporates.
Gains / losses on financial assets and liabilities were €1.231 million in 2012, a 204.0% or €826 million increase from €405 million in 2011 mainly due to the repurchase of debt capital instruments previously mentioned.
Administrative expenses were €2,356 million in 2012, a 5.0% or €113 million increase from €2,243 million in 2011. Nevertheless, in local currency administrative expenses decreased 1.8% despite the impact of inflation and continued investment in business.
Provisions were €522 million in 2012, a 45.9% or €442 million decrease from of €964 million in 2011. In 2011 we made an one-off charge provision related to PPI remediation of €842 million (€620 million net of tax) (see Item 8 of Part I, “Financial information—Legal proceedings, ii. Non-tax-related proceedings”).
Impairment losses on financial assets were €1,246 million in 2012, a 96.5% or €612 million increase from €634 million in 2011. The NPL ratio was 2.05%, 0.21 percentage points higher than that of 2011. Both the stock of residential properties in possession (0.06%) as well as the NPL ratio of residential mortgages (1.74%) remained low with underlying performance stable and both were better than the sector average, according to the Council of Mortgage Lenders. This increase mainly relates to the review and full re-assessment of the assets held in the non-core corporate and legacy portfolios in run-off. The provisions relate to assets acquired from Alliance & Leicester plc (particularly the shipping portfolio) as well as certain assets within the old Abbey Commercial Mortgages book. The amount of the provision reflects the increasing losses experienced in these portfolios. For further details see Item 11 of Part I. “Quantitative and Qualitative Disclosures About Risk—Part 4. Credit Risk”.
Profit attributable to the Parent was €1,175 million in 2012, a 3.9% or €48 million decrease from €1,223 million in 2011. In summary, the income statement was affected by an environment of weak economic growth, low interest rates and higher funding costs. This environment negatively affected the net interest income. Gains on financial transactions were offset by provisions related to the non-core corporate and potential conduct remediation. On the other hand, in local currency cost experienced a decline.
2011 compared to 2010
In 2011, the United Kingdom contributed 12.5%13.3% of the profit attributable to the Parent bank’s total operating areas. This included the impact, net of tax, of a provision of €620 million in the second quarter, related to the payment protection insurance (PPI) remediation, in line with what has been done by other British banks. In addition, there were higher costs derived from regulatory changes affecting increased liquidity requirements and higher wholesale funding costs. All of this was in the context of weak growth and low interest rates.
Interest income was €4,176€4,356 million in 2011, a 12.4%an 11.8% or €590€585 million decrease from €4,766€4,941 million in 2010 reflecting the higher cost of liquid assets. The total commercial spread was lower at 1.85% (in local currency),declined with higher spreads on loans more than offset by the greater cost of liquidity and funding. Increases in the proportion of customers on standard variable rate mortgages helped to partly mitigate the impact of low interest rates. Higher net interest income in SMEs and corporations reflected growth in deposits and loans, with spreads on new loans continuing to increase.
Net fees and commissions were €1,070€1,079 million in 2011, a 4.2%4.3% or €43€44 million increase from €1,027€1,035 million in 2010. This increase was mainly due to a new pricing structure for current accounts where overdraft interest charges have been replaced with a flat fee.
Gains / losses on financial assets and liabilities were €405 million in 2011, a 12.3% or €57 million decrease from €462 million in 2010 due to the impact of lower market activity.
Administrative expenses were €2,203€2,243 million in 2011, a 1.7%1.6% or €38€37 million decrease from €2,241€2,280 million in 2010. This decrease was mainly achieved by continued operational and integration cost efficiencies in the back office functions, marketing and property costs. This was partially offset by the addition of 1,100 employees to improve customer service in the first half of 2011, which enabled Santander UK to repatriate the call centers that were abroad.
Provisions were €964 million in 2011, a 514.0% or €807 million increase from €157 million in 2010, mainly due to the one-off charge in the second quarter of €842 million from a provision made related to PPI remediation (€620 million net of tax) (see Item 8 of Part I, “Financial information—Legal proceedings, ii. Non-tax-related proceedings”).
Impairment losses on financial assets were €585€634 million in 2011, a 37.1%35.7% or €345€352 million decrease from €930€986 million in 2010, due to the improved evolution of retail products and to a better than expected performance in the current environment.
TheIn 2011, the NPL ratio was 1.86%and the coverage ratio stood at 1.84% and 40%, 0.10 percentage points higher than that of 2010.respectively. There was a better performance in all retail products, particularly mortgages and unsecured personal loans, and a slight deterioration in the fourth quarter
in corporate loans, including real estate. The stock of foreclosed properties remained very low (0.06% of the total portfolio compared to 0.05% at the end of 2010). In general, the trends were better than the sector’s, according to the data from the Council of Mortgage Lenders (CML). The NPL coverage ratio stood at 38% at the end of 2011, an 8.0 percentage point decrease compared to 46% at the end of 2010.
Provisions were €969 million in 2011, a 541.7% or €818 million increase from of €151 million in 2010, mainly due to the one-off charge in the second quarter of €842 million from a provision made related to PPI remediation (see Item 8 of Part I, “Financial information— Legal proceedings, ii. Non-tax-related proceedings).
123
Profit attributable to the Parent was €1,145€1,223 million in 2011, a 41.7%39.5% or €820€800 million decrease from €1,965€2,023 million in 2010. The income statement was very affected by the environment of low activity, low interest rates, regulatory changes, higher funding costs and the PPI provision. On the other hand, costs were almost flat and fewer provisions were made, reflecting the good evolution of non-performing loans.
2010 compared to 2009
In 2010, the United Kingdom contributed 18.8% of the profit attributable to the Parent bank’s total operating areas. The 2010 results were driven by strong income growth, strict control of costs and lower provisions.
Interest income was €4,766 million in 2010, a 10.9% or €468 million increase from €4,298 million in 2009. The increase in interest income reflects the balanced growth of loans and deposits. The higher spread on loans was partly offset by the higher cost of the deposit capturing campaign. Moreover, the increased cost of funds and liquid assets, mainly in the second half of 2010, partly offset the strength of the core activity adding pressure on net interest income. There was a positive impact from greater retention of mortgages and customers’ preference for variable rate mortgages in Retail Banking. In addition, growth in bank account liability balances and hedging strategies helped to reduce the impact of lower interest rates on deposits. Prudent management of spreads and growth in loans and deposits in SMEs and corporations also helped to increase interest income.
Net fees and commissions were €1,027 million in 2010, a 5.2% or €56 million decrease from €1,083 million in 2009. This decrease was in line with the market trend in the UK. In retail business, revenue was reduced by the lower cancellation of mortgages and the policy of reducing uncollateralized loans. The change in the mix from structured products to managed customer funds also continued, reducing current revenues but we expect it will produce higher fees in the future.
Gains / losses on financial assets and liabilities were €462 million in 2010, an 8.7% or €44 million decrease from €506 million in 2009 as the favorable market situation in 2009 was not repeated in 2010 and there were losses in the sale of the portfolio of Alliance & Leicester, which has been discontinued.
Administrative expenses were €2,241 million in 2010, an 1.1% or €25 million increase from €2,216 million in 2009. The cost savings obtained from synergies from the acquisition of Alliance & Leicester were reinvested in growth in Corporate Banking and Global Banking & Markets. We continued to eliminate overlapping functions in back office and support departments.
Impairment losses on financial assets were €930 million in 2010, a 5.6% or €49 million increase from €881 million in 2009, due to the better evolution of retail products, mainly mortgages, enabling us to maintain high coverage levels.
The NPL ratio was 1.8% at the end of 2010 (compared to 1.7% at December 2009). The stock of foreclosed properties remained very low at 0.05% of the total portfolio. The evolution, in general, was better than the sector, according to the Council of Mortgage Lenders (the “CML”). NPL coverage was 46% (compared to 44% at December 2009).
Provisions were €151 million in 2010, a €44 million decrease from €195 million in 2009.
Profit attributable to the Parent was €1,965 million in 2010, a 14.0% or €241 million increase from €1,724 million in 2009, as a result of the combined effect of higher revenues, stable costs and lower provisions.
124
Latin America
Variations | Variations | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | |||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 16,473 | 14,678 | 11,959 | 12.2 | % | 22.7 | % | 17,881 | 16,473 | 14,678 | 8.5 | % | 12.2 | % | ||||||||||||||||||||||||||
Income from equity instruments | 72 | 80 | 96 | (10.0 | %) | (16.7 | %) | 60 | 71 | 80 | (15.5 | %) | (11.3 | %) | ||||||||||||||||||||||||||
Income from companies accounted for by the equity method | 37 | 10 | 10 | n/a | 0.0 | % | 183 | 37 | 10 | 394.6 | % | 270.0 | % | |||||||||||||||||||||||||||
Net fees and commissions | 4,991 | 4,661 | 3,925 | 7.1 | % | 18.8 | % | 5,097 | 4,992 | 4,661 | 2.1 | % | 7.1 | % | ||||||||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) | 1,067 | 1,410 | 1,663 | (24.3 | %) | (15.2 | %) | |||||||||||||||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) * | 1,071 | 1,067 | 1,409 | 0.4 | % | (24.3 | %) | |||||||||||||||||||||||||||||||||
Other operating income/(expenses) (net) | (198 | ) | (163 | ) | 15 | 21.5 | % | n/a | (357 | ) | (199 | ) | (163 | ) | 79.4 | % | 22.1 | % | ||||||||||||||||||||||
TOTAL INCOME | 22,442 | 20,676 | 17,668 | 8.5 | % | 17.0 | % | 23,935 | 22,441 | 20,675 | 6.7 | % | 8.5 | % | ||||||||||||||||||||||||||
Administrative expenses | (7,984 | ) | (7,193 | ) | (6,032 | ) | 11.0 | % | 19.2 | % | (8,198 | ) | (7,983 | ) | (7,192 | ) | 2.7 | % | 11.0 | % | ||||||||||||||||||||
Personnel expenses | (4,456 | ) | (3,955 | ) | (3,210 | ) | 12.7 | % | 23.2 | % | (4,617 | ) | (4,455 | ) | (3,955 | ) | 3.6 | % | 12.6 | % | ||||||||||||||||||||
Other general expenses | (3,528 | ) | (3,238 | ) | (2,822 | ) | 9.0 | % | 14.7 | % | (3,581 | ) | (3,528 | ) | (3,237 | ) | 1.5 | % | 9.0 | % | ||||||||||||||||||||
Depreciation and amortization | (925 | ) | (778 | ) | (566 | ) | 18.9 | % | 37.5 | % | (865 | ) | (926 | ) | (778 | ) | (6.6 | %) | 19.0 | % | ||||||||||||||||||||
Provisions (net) | (1,027 | ) | (1,232 | ) | (990 | ) | (16.6 | %) | 24.4 | % | ||||||||||||||||||||||||||||||
Impairment losses on financial assets (net) | (5,447 | ) | (4,687 | ) | (4,979 | ) | 16.2 | % | (5.9 | %) | (7,381 | ) | (5,447 | ) | (4,687 | ) | 35.5 | % | 16.2 | % | ||||||||||||||||||||
Provisions (net) | (1,232 | ) | (990 | ) | (681 | ) | 24.4 | % | 45.4 | % | ||||||||||||||||||||||||||||||
Impairment losses on other assets (net) | (38 | ) | (12 | ) | (22 | ) | n/a | (45.5 | %) | (17 | ) | (38 | ) | (12 | ) | (55.3 | %) | 216.7 | % | |||||||||||||||||||||
Gains/(losses) on other assets (net) | 241 | 255 | 40 | (5.5 | %) | n/a | 226 | 241 | 255 | (6.2 | %) | (5.5 | %) | |||||||||||||||||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 7,057 | 7,271 | 5,428 | (2.9 | %) | 34.0 | % | 6,673 | 7,056 | 7,271 | (5.4 | %) | (3.0 | %) | ||||||||||||||||||||||||||
Income tax | (1,655 | ) | (1,693 | ) | (1,257 | ) | (2.2 | %) | 34.7 | % | (1,502 | ) | (1,653 | ) | (1,693 | ) | (9.1 | %) | (2.4 | %) | ||||||||||||||||||||
PROFIT FROM CONTINUING OPERATIONS | 5,402 | 5,578 | 4,171 | (3.2 | %) | 33.7 | % | 5,171 | 5,403 | 5,578 | (4.3 | %) | (3.1 | %) | ||||||||||||||||||||||||||
Profit/(loss) from discontinued operations (net) | — | — | 91 | n/a | (100.0 | %) | — | — | — | n/a | n/a | |||||||||||||||||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 5,402 | 5,578 | 4,262 | (3.2 | %) | 30.9 | % | 5,171 | 5,403 | 5,578 | (4.3 | %) | (3.1 | %) | ||||||||||||||||||||||||||
Profit attributable to non-controlling interest | 738 | 850 | 428 | (13.2 | %) | 98.6 | % | 866 | 739 | 850 | 17.2 | % | (13.1 | %) | ||||||||||||||||||||||||||
Profit attributable to the Parent | 4,664 | 4,728 | 3,834 | (1.4 | %) | 23.3 | % | 4,305 | 4,664 | 4,728 | (7.7 | %) | (1.4 | %) |
* | Includes exchange differences (net) |
2012 compared to 20112
In 2012, Latin America contributed 50.1% of the profit attributable to the Parent bank’s total operating areas. Latin American financial systems displayed high levels of capital, liquidity and robust credit quality indicators. They also maintained double-digit rates of growth reflecting the dynamism of the economies. The scope of consolidation of this segment changed due to the sale of the subsidiary in Colombia, the agreement with Zurich Financial Services Group to strengthen insurance distribution and higher minority interests in Brazil, Mexico and Chile.
Interest income was €17,881 million in 2012, an 8.5% or €1,408 million increase from €16,473 million in 2011, due to higher volumes and improved management of spreads in a context of stable or declining interest rates, varying by country.
2 | For a summary by countries see “Item 4. Information of the Company. B. Business Overview—Latin America” |
Net fees and commissions were €5,097 million in 2012, a 2.1% or €105 million increase from €4,992 million in 2011, affected by regulatory pressures. Excluding the exchange rate impact, the main drivers of growth were cards (+18.7%), transactional banking (+9.8%), administration of accounts (+6.8%) and insurance (+2.5%). Mutual funds dropped 15.4% because of the shift into deposits.
Gains / losses on financial assets and liabilities remained stable at €1,071 million in 2012 compared to €1,067 million in 2011.
Administrative expenses were €8,198 million in 2012, a 2.7% or €215 million increase from €7,983 million in 2011. The increase was mainly due to the opening of branches (some traditional and others focused on priority customer segments), new business projects and inflationary pressures on wage agreements and outsourcing of services.
Impairment losses on financial assets were €7,381 million in 2012, a 35.5% or €1,934 million increase from €5,447 million in 2011. This increase was largely influenced by increased lending, collective provisions and a worsening of nonperforming loans in some markets. The NPL ratio increased 110 basis points, from 4.32% to 5.42%, while coverage decreased from 97% to 88%. For further details see Item 4 of Part I, “Information on the Company—B. Business Overview—Latin America” and Item 11 of Part I. “Quantitative and Qualitative Disclosures About Risk—Part 4. Credit Risk”.
Profit attributable to the Parent was €4,305 million in 2012, a 7.7% or €359 million decrease from €4,664 million in 2011. In local currency and excluding the effect of the changes in the scope of consolidation (the sale in Colombia, the sale of insurance businesses and the increase of non-controlling interests in Brazil, Mexico and Chile), the attributable profit rose by 3.7%. Also in local currency, Retail Banking’s net profit increased 0.8%, driven by gross income (+13.9%). Global Wholesale Banking’s net profit was 1.2% lower.
2011 compared to 2010
In 2011, Latin America contributed 50.8% of the profit attributable to the Parent bank’s total operating areas with strong growth in all countries. The main developments were the notable rise in basic revenues, which did not feed through to profits as it was offset by the decrease in gains on financial transactions caused by the market situation, the increase in administrative expenses and the rise in loan-loss provisions.
Interest income was €16,473 million in 2011, a 12.2% or €1,795 million increase from €14,678 million in 2010, due to larger volumes and management of spreads in a context of higher interest rates than in 2010. Interest income was the main driver of profit growth.
Net fees and commissions were €4,991€4,992 million in 2011, a 7.1% or €330€331 million increase from €4,661 million in 2010. Excluding the exchange rate impact, the main drivers of growth were insurance (+31.7%) and credit cards (+23.7%), while those from managing accounts fell 16.6%. Income from insurance business grew 16.9%, affected by the impact of the agreement with Zurich (excluding this impact: +34.8%), which acquired 51% of the share capital of ZS Insurance América, S.L. (the holding company for the Group’s insurance businesses in Latin America).
Gains / losses on financial assets and liabilities were €1,067 million in 2011, a 24.3% or €343€342 million decrease from €1,410€1,409 million in 2010, largely due to the volatility of markets in the third and fourth quarters.
Administrative expenses were €7,984€7,983 million in 2011, an 11.0% or €791 million increase from €7,193€7,192 million in 2010. The increase was mainly due to: (i) the growth in staff in the branch networks, (ii) renegotiation of salaries and collective agreements; (iii) new business projects; (iv) increased installed capacity; and (v) redesigning points of attention.
Impairment losses on financial assets were €5,447 million in 2011, a 16.2% or €760 million increase from €4,687 million in 2010, which is below lending growth. The NPL ratio increased 21 basis points, from 4.11% to 4.32%, while coverage was decreased from 104% to 97%.
Profit attributable to the Parentwas €4,664 million in 2011, a 1.4% or €64 million decrease from €4,728 million in 2010. This decrease was due to increased impairment loses, reduced gains on financial transactions due to the unfavorable
market situation, and higher commercial investment. This was partially offset thanks to the dynamism of net interest income and fee income, which lifted total income by 8.5%. By segment, in constant currency, Retail Banking’s attributable profit rose 0.8%, while Global Wholesale Banking and Asset Management and Insurance’s decreased 1.5% and 1.4%, respectively.
United States
Variations | ||||||||||||||||||||
2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 1,695 | 3,289 | 3,113 | (48.5 | %) | 5.7 | % | |||||||||||||
Income from equity instruments | 20 | 1 | 1 | n/a | 0.0 | % | ||||||||||||||
Income from companies accounted for by the equity method | 341 | — | — | n/a | n/a | |||||||||||||||
Net fees and commissions | 378 | 643 | 596 | (41.2 | %) | 7.9 | % | |||||||||||||
Gains/losses on financial assets and liabilities (net) * | 244 | 192 | 38 | 27.1 | % | 405.3 | % | |||||||||||||
Other operating income/(expenses) (net) | (74 | ) | (56 | ) | (67 | ) | 32.1 | % | (16.4 | %) | ||||||||||
TOTAL INCOME | 2,604 | 4,069 | 3,681 | (36.0 | %) | 10.5 | % | |||||||||||||
Administrative expenses | (1,029 | ) | (1,162 | ) | (1,065 | ) | (11.4 | %) | 9.1 | % | ||||||||||
Personnel expenses | (566 | ) | (640 | ) | (599 | ) | (11.6 | %) | 6.8 | % | ||||||||||
Other general expenses | (463 | ) | (522 | ) | (467 | ) | (11.3 | %) | 11.8 | % | ||||||||||
Depreciation and amortization | (145 | ) | (126 | ) | (117 | ) | 15.1 | % | 7.7 | % | ||||||||||
Provisions (net) | (170 | ) | (43 | ) | (85 | ) | 295.3 | % | (49.4 | %) | ||||||||||
Impairment losses on financial assets (net) | (265 | ) | (1,005 | ) | (1,368 | ) | (73.6 | %) | (26.5 | %) | ||||||||||
Impairment losses on other assets (net) | (24 | ) | (118 | ) | (19 | ) | (79.7 | %) | 521.1 | % | ||||||||||
Gains/(losses) on other assets (net) | 8 | — | (7 | ) | n/a | n/a | ||||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 979 | 1,615 | 1,019 | (39.4 | %) | 58.5 | % | |||||||||||||
Income tax | (168 | ) | (557 | ) | (318 | ) | (69.8 | %) | 75.2 | % | ||||||||||
PROFIT FROM CONTINUING OPERATIONS | 811 | 1,058 | 701 | (23.3 | %) | 50.9 | % | |||||||||||||
Profit/(loss) from discontinued operations (net) | — | — | — | n/a | n/a | |||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 811 | 1,058 | 701 | (23.3 | %) | 50.9 | % | |||||||||||||
Profit attributable to non-controlling interest | — | 48 | 22 | n/a | 118.2 | % | ||||||||||||||
Profit attributable to the Parent | 811 | 1,010 | 679 | (19.7 | %) | 48.7 | % |
125
* | Includes exchange differences (net) |
20102012 compared to 20092011
In 2010, Latin America2012, United States contributed 45.1%9.4% of the profit attributable to the Parent bank’s total operating areas with strong growth inareas. On December 31, 2011, SCUSA increased its capital to allow for new shareholders. This reduced Grupo Santander’s stake from 91.5% to around 65%. As a result, SCUSA is subject to the joint control of all countries.shareholders, which led the Group to stop consolidating this company by the global integration method and to record its stake by the equity method.
Interest income for 2012 was €14,678€1,695 million, in 2010, a 22.7%48.5% or €2,719€1,594 million increasedecrease from €11,959€3,289 million in 2009,for 2011, mainly due to greater volumes, the change in consolidation method of mix toward lower risk productsSCUSA. Eliminating SCUSA’s results in 2011, and defending spreads in an environment of lowerlocal currency, interest income was down by 6.7%, reflecting the fall in long-term interest rates thanand the reduction in 2009.the non-strategic portfolio.
Income from companies accounted for by the equity methodfor 2012 was €341 million. This income reflects SCUSA’s contribution to the Group.
Net fees and commissions for 2012 were €4,661€378 million, a 41.2% or €265 million decrease from €643 million for 2011, mainly due to the deconsolidation of SCUSA. Eliminating SCUSA’s results in 2010, an 18.8% or €736 million increase from €3,925 million in 2009. The main drivers of growth were,2011, in local currency, insurance activity (+18%), mutual funds (+14%),there was a 6.8% drop. The increased regulatory pressure resulted in a significant reduction in revenues linked to commissions from credit cards (+10%), cash management (+8%)card transactions and foreign trade (+7%). Income fromoverdrafts. This was partly offset by the administrationbusiness effort, which raised the quality of accounts, however, was 2% lower due to the negative impact from regulatory changes that eliminated certain commissions.revenues associated with current accounts.
Gains / lossesNet gains on financial assets and liabilities for 2012 were €1,410€244 million, in 2010, a 15.2%27.1% or €253€52 million decreaseincrease from €1,663€192 million in 2009, largelyfor 2011, this was due to large capital gainsthe increase in securities portfolios in 2009 that were not repeated in 2010.originations and sale of mortgages and greater customer activity.
Administrative expenses were €7,193€1,029 million in 2010,2012, an 11.4% or €133 million decrease as compared to €1,162 million in 2011.Depreciation and amortization was €145 million in 2012, a 19.2%15.1% or €1,161€19 million increase from €6,032as compared to €126 million in 2009. In Brazil, Mexico, Colombia, Uruguay2011. Operating expenses (administrative expenses and Puerto Rico, costsdepreciation and amortization) grew (in8.9% (eliminating SCUSA’s results in 2011 and in local currency). This increase reflects the investments in line withtechnology and in the sales and regulatory compliance teams needed to take advantage of the new status as a national bank.
Provisions (net) were €170 million in 2012, a 295.3% or below their respective inflation rates. In Argentina, they increased 26.9% (in local currency)€127 million increase as compared to €43 million in 2011. This increase was mainly due to provisions booked for Trust Piers due to the renegotiationcourt settlement reached to remunerate an investment at a higher rate of the collective bargaining agreement (+23%) in a context of significant growth in inflation. In Chile, the impact of the earthquake and the signing of a collective bargaining agreement produced an increase of 7.8% (in local currency).interest than it was earning.
Impairment losses on financial assets were €4,687€265 million in 2010,2012, a 5.9%73.6% or €292€740 million decrease from €4,979as compared to €1,005 million in 2009. The better macroeconomic environment2011. This was mainly due to the deconsolidation of SCUSA. Eliminating SCUSA’s results in 2011 and outlook, together with active risk management and a notable improvement in risk premiums (from 4.8% in 2009 to 3.6% in 2010)local currency, loan-loss provisions dropped by 34.7%, is beginning to be reflected in provisions (-19.5%). Thefurther lowering the NPL ratio declined 14 basis points,to 2.29% from 4.25%2.85% in 2011, and coverage rose to 4.11%, while coverage106% from 96% in 2011. This was stable at 104%.
Profit attributablemainly due to the non-controlling interest was €850 million in 2010, a 98.6% or €422 million increase from €428 million in 2009. This strong increase is the net resultimproved composition of the saleportfolio and strict management of Santander Brazil shares in 2009 and 2010 and the acquisition of the non-controlling interest of Santander Mexico in September 2010.risk.
Profit attributable to the Parent was €4,728€811 million in 2010,2012, a 23.3% or €894€199 million increase from €3,834decrease as compared to €1,010 million in 2009 reflecting2011. The main developments were: (i) entry of new shareholders in SCUSA, with the strong growth ofresult that the region,Santander Group stake in the strict control of expenses (withcompany went from 91.5% to approximately 65%, (ii) the increase being below that of inflation) and the intense management of recoveries of bad loans (resulting in a notable decline in loan-loss provisions). The increase in profit attributable to the Parent bank was positively affected by the exchange rate impact and negatively affected by the sale of Banco de Venezuela and by higher non-controlling interest. By segment and excluding these impacts, Retail Banking’s profit attributable to the parent bank was 32.8% higher, Wholesale Banking’s profit attributable to the parent bank declined 8.5% (notably influenced by very good results in 2009) and Asset Management and Insurance’s attributable profit rose 9.5%.above mentioned provision booked for Trust Piers.
Sovereign
Variations | ||||||||||||||||||||
2011 | 2010 | 2009 (¹) | 2011/2010 | 2010/2009 | ||||||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 1,678 | 1,736 | 1,160 | (3.3 | %) | 49.7 | % | |||||||||||||
Income from equity instruments | 1 | 1 | 1 | 0.0 | % | 0.0 | % | |||||||||||||
Income from companies accounted for by the equity method | — | — | (3 | ) | n/a | (100.0 | %) | |||||||||||||
Net fees and commissions | 375 | 408 | 380 | (8.1 | %) | 7.4 | % | |||||||||||||
Gains/losses on financial assets and liabilities (net) | 190 | 29 | 14 | 555.2 | % | 107.1 | % | |||||||||||||
Other operating income/(expenses) (net) | (56 | ) | (67 | ) | (89 | ) | (16.4 | %) | (24.7 | %) | ||||||||||
TOTAL INCOME | 2,188 | 2,107 | 1,463 | 3.8 | % | 44.0 | % | |||||||||||||
Administrative expenses | (863 | ) | (832 | ) | (766 | ) | 3.7 | % | 8.6 | % | ||||||||||
Personnel expenses | (469 | ) | (468 | ) | (457 | ) | 0.2 | % | 2.4 | % | ||||||||||
Other general expenses | (394 | ) | (364 | ) | (309 | ) | 8.2 | % | 17.8 | % | ||||||||||
Depreciation and amortization | (113 | ) | (105 | ) | (115 | ) | 7.6 | % | (8.7 | %) | ||||||||||
Impairment losses on financial assets (net) | (375 | ) | (510 | ) | (571 | ) | (26.5 | %) | (10.7 | %) | ||||||||||
Provisions (net) | (42 | ) | (66 | ) | (55 | ) | (36.4 | %) | 20.0 | % | ||||||||||
Impairment losses on other assets (net) | (18 | ) | (19 | ) | (1 | ) | (5.3 | %) | n/a | |||||||||||
Gains/(losses) on other assets (net) | (1 | ) | (8 | ) | (2 | ) | (87.5 | %) | 300.0 | % | ||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 776 | 567 | (47 | ) | 36.9 | % | n/a | |||||||||||||
Income tax | (250 | ) | (143 | ) | 22 | 74.8 | % | n/a | ||||||||||||
PROFIT FROM CONTINUING OPERATIONS | 526 | 424 | (25 | ) | 24.1 | % | n/a | |||||||||||||
Profit/(loss) from discontinued operations (net) | — | — | — | n/a | n/a | |||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 526 | 424 | (25 | ) | 24.1 | % | n/a | |||||||||||||
Profit attributable to non-controlling interest | — | — | — | n/a | n/a | |||||||||||||||
Profit attributable to the Parent | 526 | 424 | (25 | ) | 24.1 | % | n/a |
126
2011 compared to 2010
In 2011, SovereignUnited States contributed 5.7%11.0% of the profit attributable to the Parent bank’s total operating areas.
Interest incomefor 2011 was €1,678€3,289 million, a 3.3%5.7% or €58€176 million decreaseincrease as compared to €1,736€3,113 million for 2010. Net interest incomeThe good performance of Santander Consumer USA was impactedpartially offset by a €57 million decrease in Sovereign. In an environment of a sharp decline in interest rates, which was partially offset by the management of volumes and prices.prices was essential to the performance of interest income.
Net fees and commissionswere €375€643 million in 2011, an 8.1%a 7.9% or €33€47 million decreaseincrease from €408€596 million in 2010. This decrease wasThe positive performance of Santander Consumer USA and the management of volumes and prices were partially causedoffset by the negative impact of the Durbin Amendment to the Dodd-Frank Act, whichAct. This amendment limits the commissions charged to clients for certain transactions. We partially offset this impact through increased commercial efforts.Sovereign, in a stand-alone basis, experience a decrease of €33 million.
Administrative expenses were €863€1,162 million in 2011, a 3.7%9.1% or €31€97 million increase as compared to €832€1,065 million in 2010.Depreciation and amortization was €113€126 million in 2011, a 7.6%7.7% or €8€9 million increase as compared to €105€117 million in 2010. The increase in operating expenses reflects the impact of investments in technology and the increase in commercial structures which begun in the second half of 2010.
Impairment losses on financial assets were €375€1,005 million in 2011, a 26.5% or €135€363 million decrease as compared to €510€1,368 million in 2010. This reduction was due to the control of NPLs and the recovery capacity throughout the credit cycle. This change caused a better than expected evolution in credit quality. Non-performing loans and coverage improved for the eighth quarter running. The NPL ratio and the coverage ratio stood in 2011 at 2.9% down from 4.61% in December 2010. The NPL coverage was2.85% and 96% as compared to 75% in December 2010..
Profit attributable to the Parent was €526€1,010 million in 2011, a €102€331 million increase as compared to €424€679 million in 2010. Revenues and provisions performed well and costs rose because of investments in technology and commercial structures.
2010 compared to 2009
In 2010, Sovereign contributed 4.0% of the profit attributable to the Parent bank’s total operating areas.
Interest incomefor 2010 was €1,736 million, a 49.7% or €576 million increase as compared to €1,160 million for 2009, mainly due to the management of prices in loans, the lower cost of deposits and ALCO management, which offset the lower volume of loans.
127
Administrative expenses were €832 million in 2010, an 8.6% or €66 million increase as compared to €766 million in 2009.Depreciation and amortization was €105 million in 2010, an 8.7% or €10 million decrease as compared to €115 million in 2009. Operating expenses reflect the efforts to reduce costs, the positive impact of synergies and the optimization of structures.
Impairment losses on financial assets were €510 million in 2010, a 10.7% or €61 million decrease as compared to €571 million in 2009, thanks to containment of NPLs and the recovery capacity throughout the credit cycle. This is reflected in a better than expected evolution in credit quality.
Profit attributable to the Parent was €424 million in 2010, a €449 million increase as compared to a loss of €25 million in 2009. Sovereign consolidated the profitability of its franchise in 2010 and secured the breakeven point reached in the fourth quarter of 2009 due to effective management of spreads, the better mix of loans and deposits, control of costs and enhanced credit quality.
Corporate Activities
Variations | Variations | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | |||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||
INTEREST INCOME / (CHARGES) | (2,172 | ) | (1,828 | ) | (2,084 | ) | 18.8 | % | (12.3 | %) | (2,458 | ) | (2,172 | ) | (1,828 | ) | 13.2 | % | 18.8 | % | ||||||||||||||||||||
Income from equity instruments | 56 | 64 | 121 | (12.5 | %) | (47.1 | %) | 53 | 57 | 64 | (7.0 | %) | (10.9 | %) | ||||||||||||||||||||||||||
Income from companies accounted for by the equity method | 5 | (2 | ) | (15 | ) | n/a | (86.7 | %) | (119 | ) | 5 | (2 | ) | n/a | n/a | |||||||||||||||||||||||||
Net fees and commissions | (15 | ) | (40 | ) | (5 | ) | (62.5 | %) | n/a | (31 | ) | (16 | ) | (40 | ) | 93.8 | % | (60.0 | %) | |||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) | 421 | (142 | ) | 1,376 | n/a | n/a | ||||||||||||||||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) * | 133 | 420 | (141 | ) | (68.3 | %) | n/a | |||||||||||||||||||||||||||||||||
Other operating income/(expenses) (net) | 128 | 137 | 52 | (6.6 | %) | 163.5 | % | 534 | 129 | 137 | 314.0 | % | (5.8 | %) | ||||||||||||||||||||||||||
TOTAL INCOME | (1,577 | ) | (1,811 | ) | (555 | ) | (12.9 | %) | 226.3 | % | (1,888 | ) | (1,577 | ) | (1,810 | ) | 19.7 | % | (12.9 | %) | ||||||||||||||||||||
Administrative expenses | (733 | ) | (688 | ) | (695 | ) | 6.5 | % | (1.0 | %) | (705 | ) | (733 | ) | (688 | ) | (3.8 | %) | 6.5 | % | ||||||||||||||||||||
Personnel expenses | (285 | ) | (268 | ) | (307 | ) | 6.3 | % | (12.7 | %) | (169 | ) | (285 | ) | (267 | ) | (40.7 | %) | 6.7 | % | ||||||||||||||||||||
Other general expenses | (448 | ) | (420 | ) | (388 | ) | 6.7 | % | 8.2 | % | (536 | ) | (448 | ) | (420 | ) | 19.6 | % | 6.7 | % | ||||||||||||||||||||
Depreciation and amortization | (106 | ) | (132 | ) | (114 | ) | (19.7 | %) | 15.8 | % | (132 | ) | (105 | ) | (133 | ) | 25.7 | % | (21.1 | %) | ||||||||||||||||||||
Provisions (net) | 135 | (220 | ) | 114 | n/a | n/a | ||||||||||||||||||||||||||||||||||
Impairment losses on financial assets (net) | (1,255 | ) | (268 | ) | (1,861 | ) | 368.3 | % | (85.6 | %) | (5,887 | ) | (1,254 | ) | (268 | ) | 369.5 | % | 367.9 | % | ||||||||||||||||||||
Provisions (net) | (220 | ) | 114 | (762 | ) | n/a | n/a | |||||||||||||||||||||||||||||||||
Impairment losses on other assets (net) | (1,413 | ) | (207 | ) | (100 | ) | 582.6 | % | 107.0 | % | (336 | ) | (1,414 | ) | (207 | ) | (76.2 | %) | 583.1 | % | ||||||||||||||||||||
Gains/(losses) on other assets (net) | (196 | ) | (178 | ) | 382 | 10.1 | % | n/a | 69 | (198 | ) | (179 | ) | n/a | 10.6 | % | ||||||||||||||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | (5,500 | ) | (3,170 | ) | (3,705 | ) | 73.5 | % | (14.4 | %) | (8,744 | ) | (5,501 | ) | (3,170 | ) | 59.0 | % | 73.5 | % | ||||||||||||||||||||
Income tax | 1,600 | 867 | 2,437 | 84.5 | % | (64.4 | %) | 2,192 | 1,600 | 867 | 37.0 | % | 84.5 | % | ||||||||||||||||||||||||||
PROFIT FROM CONTINUING OPERATIONS | (3,900 | ) | (2,303 | ) | (1,268 | ) | 69.3 | % | 81.6 | % | (6,552 | ) | (3,901 | ) | (2,303 | ) | 68.0 | % | 69.4 | % | ||||||||||||||||||||
Profit/(loss) from discontinued operations (net) | — | (13 | ) | (15 | ) | (100.0 | %) | (13.3 | %) | — | — | (13 | ) | n/a | n/a | |||||||||||||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | (3,900 | ) | (2,316 | ) | (1,283 | ) | 68.4 | % | 80.5 | % | (6,552 | ) | (3,901 | ) | (2,316 | ) | 68.0 | % | 68.4 | % | ||||||||||||||||||||
Profit attributable to non-controlling interest | (67 | ) | (25 | ) | (24 | ) | 168.0 | % | 4.2 | % | (161 | ) | (68 | ) | (25 | ) | 136.8 | % | 172.0 | % | ||||||||||||||||||||
Profit attributable to the Parent | (3,833 | ) | (2,291 | ) | (1,259 | ) | 67.3 | % | 82.0 | % | (6,391 | ) | (3,833 | ) | (2,291 | ) | 66.7 | % | 67.3 | % |
* | Includes exchange differences (net) |
2012 compared to 2011
Interest income/(charges)for Corporate Activities was a loss of €2,458 million in 2012, a 13.2% increase as compared to losses of €2,172 million in 2011. The increase was largely due to a liquidity buffer kept in the European Central Bank and the greater cost of wholesale funding, which was partly offset by reduced recourse to wholesale markets because the need to finance the commercial gaps was lower. This higher cost also impacted the financing of the Group’s goodwill, which by definition has a negative nature, and which increased its cost proportionately. The net interest income of the ALCO portfolios improved in 2012 due to higher average volumes.
Gains / losses on financial assets and liabilitieswere a gain of €133 million in 2012 as compared to gains of €420 million in 2011. Of note were the results from liabilities management, the sale of small financial stakes and those arising from financial assets available for sale. The impact of hedging the results of subsidiaries was negative (it was positive in 2011) balancing the higher value in euros of the business units results.
Administrative expenses were €705 million in 2012, a 3.8% or €28 million decrease from €733 million in 2011, mainly due to lower personnel expenses.Depreciation and amortization stood at €132 million, a 25.7% increase from €105 million in 2011. As a result, general cost (administrative expenses plus depreciation and amortization) were almost flat with a €1 million decrease partly from higher indirect taxes, and amortizations which were offset by lower personnel expenses.
In 2012, Corporate Activities impairment losses on financial assets were €5,887 million a 369.5% or €4,633 million increase from €1,254 million in 2011. The main reason for this strong increase is the deterioration of the real estate segment in Spain.
Exposure to the real estate industry has taken on particular importance for Spanish financial institutions since 2008 due to a slowdown in sales, an increase in defaults, the difficulties experienced by companies related to the real estate industry in accessing credit and a fall in property prices. Accordingly, in 2009 the Group created a specialized corporate area that encompasses the entire life cycle of these transactions, including commercial management, legal processes, court procedures and recovery management, among others. This area manages the Group’s entire exposure to the property development and construction industry in Spain (including loans and non-current assets held for sale). As this area reports to Group senior management (see “Item 11. Quantitative and Qualitative Disclosures About Risk” for more detailed information), it is considered to belong to the Corporate Activities segment and is no longer considered attributable to the segment that gave rise to it. See “Item 2. Selected Statistical Information—Impaired Balances Ratios” for more detailed information.
Impairment losses on other assets were €336 million, a 76.2% or €1,078 million decrease from €1,414 million in 2011. This variation was mainly due to the following impairments that were solely recorded in 2011: €601 million to amortize goodwill related to Santander Totta, and the amortization of other intangibles, pensions and contingencies.
Loss attributable to the Parentamounted to €6,391 million in 2012, a €2,558 million increase as compared to a loss of €3,833 million in 2011. This variation was primarily due to impairment losses in real estate in Spain.
2011 compared to 2010
Interest income/(charges)for Corporate Activities was a loss of €2,172€2,171 million in 2011, an 18.8% increase as compared to 2010. The increase was largely due to the greater cost of wholesale funding. This was mainly due to the higher level of market reference interest rates and the rise in the credit spreads of issues, as well as the cost of maintaining a prudent liquidity position. This higher cost also had a negative impact on financing costs associated with of the Group’s investments and acquisitions, which costs are allocated to the Corporate Activities segment. The net interest income of the ALCO portfolios was higher in 2011 than 2010, while maintaining similar volumes, thanks to the greater return on the assets.
128
Gains / losses on financial assets and liabilitieswere a gain of €421€420 million in 2011 compared to losses of €142€141 million in 2010. The difference was mainly due to hedging. In 2011, the impact of hedging the results of subsidiaries was positive (offsetting the lower value in euros of the results of the business units) and more than €500 million above 2010. In 2010, there were higher losses from the hedging of the results of subsidiaries and writedowns of financial investments in the portfolio of equity stakes, both of which were partly offset by positive returns from the hedging of interest rates.
Administrative expenses were €733 million in 2011 a 6.5% or €45 million increase from €688 million in 2010, mainly due to an increase in rents.Depreciation and amortization stood at €106€105 million, a 19.7%21.1% reduction from the €132€133 million in 2010. The growth in general costs from the increase in rents was partially offset by lower amortizations.
In 2011, Corporate Activities impairment losses on financial assets were €1,255€1,254 million a 368.3%367.9% or €987€986 million increase from €268 million in 2010.Impairment losses on other assets were €1,413€1,414 million a 582.6%583.1% or €1,206€1,207 million increase from €207 million in 2010. These variations were mainly due to €1,812 million in provisions to cover real estate exposure in Spain, €601 million to amortize goodwill related to Santander Totta, and the amortization of other intangibles, pensions and contingencies.
Loss attributable to the Parentamounted to €3,833 million in 2011, a €1,542 million increase as compared to a loss of €2,291 million in 2010. This variation was primarily due to the impairment losses previously mentioned.
2010 compared to 2009
Interest income / (charges)for Corporate Activities was a loss of €1,828 million in 2010. The improvement of 12.3% over 2009 (€2.084 million loss) was mainly due to the prompt allocation of the increase in credit cost derived from the market conditions to the business areas of the Parent Bank in Spain, which receive liquidity from the Corporate Center. Partially offsetting this, the cost of financing the goodwill of the Group’s investments rose in the year. The net interest income of the ALCO portfolios showed no substantial changes.
Income from equity instruments was €64 million in 2010, a 47.1% decrease from 2009. This item has declined significantly in recent years as a result of the disposal of our equity stakes.
Gains / losses on financial assets and liabilities were a loss of €142 million in 2010, a €1,518 million decrease as compared to gains of €1,376 million in 2009. This item includes gains / losses from centralized management of interest rate and currency risk of the Parent bank as well as from equities. The main reason for the variation in 2010 was due to hedging. In 2009, the impact from hedging the results of units was low, and there were positive returns on the ALCO portfolio of the Parent bank and on the business of equity stakes. In 2010, the situation reverted, with higher losses from the hedging of the results of subsidiaries (which were compensated with higher results in euros for the business units) and allowances for financial investments in the portfolio of equity stakes.
Administrative expenses were €688 million in 2010, in line with €695 million in 2009. The growth in general expenses from rentals was offset by the reduction in personnel expenses from variable remuneration.
In 2010, Corporate Activities net provisions were releases of €114 million,impairment losses on financial assets were €268 million,impairment losses on other assets were €207 million andlosses on other assets were €178 million.
Loss attributable to the Parent amounted to €2,291 million in 2010, a €1,032 million increase as compared to a loss of €1,259 million in 2009.
Second level (business):
Retail Banking
Variations | ||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | ||||||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 30,273 | 28,144 | 25,674 | 7.6 | % | 9.6 | % | |||||||||||||
Income from equity instruments | 95 | 101 | 128 | (5.9 | %) | (21.1 | %) | |||||||||||||
Income from companies accounted for by the equity method | 22 | 19 | 14 | 15.8 | % | 35.7 | % | |||||||||||||
Net fees and commissions | 8,933 | 8,059 | 7,526 | 10.8 | % | 7.1 | % | |||||||||||||
Gains/losses on financial assets and liabilities (net) | 1,106 | 1,333 | 1,452 | (17.0 | %) | (8.2 | %) | |||||||||||||
Other operating income/(expenses) (net) | (537 | ) | (384 | ) | (224 | ) | 39.8 | % | 71.4 | % | ||||||||||
TOTAL INCOME | 39,892 | 37,272 | 34,570 | 7.0 | % | 7.8 | % | |||||||||||||
Administrative expenses | (15,243 | ) | (13,930 | ) | (12,682 | ) | 9.4 | % | 9.8 | % | ||||||||||
Personnel expenses | (8,874 | ) | (8,002 | ) | (7,237 | ) | 10.9 | % | 10.6 | % | ||||||||||
Other general expenses | (6,369 | ) | (5,928 | ) | (5,445 | ) | 7.4 | % | 8.9 | % | ||||||||||
Depreciation and amortization | (1,832 | ) | (1,623 | ) | (1,362 | ) | 12.9 | % | 19.2 | % | ||||||||||
Impairment losses on financial assets (net) | (10,471 | ) | (10,168 | ) | (9,741 | ) | 3.0 | % | 4.4 | % | ||||||||||
Provisions (net) | (2,325 | ) | (1,221 | ) | (999 | ) | 90.4 | % | 22.2 | % | ||||||||||
Impairment losses on other assets (net) | (82 | ) | (69 | ) | (61 | ) | 18.8 | % | 13.1 | % | ||||||||||
Gains/(losses) on other assets (net) | (57 | ) | 232 | (42 | ) | n/a | n/a | |||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 9,882 | 10,493 | 9,683 | (5.8 | %) | 8.4 | % | |||||||||||||
Income tax | (2,383 | ) | (2,519 | ) | (2,341 | ) | (5.4 | %) | 7.6 | % | ||||||||||
PROFIT FROM CONTINUING OPERATIONS | 7,499 | 7,974 | 7,342 | (6.0 | %) | 8.6 | % | |||||||||||||
Profit/(loss) from discontinued operations (net) | (24 | ) | (14 | ) | 46 | 71.4 | % | n/a | ||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 7,475 | 7,960 | 7,388 | (6.1 | %) | 7.7 | % | |||||||||||||
Profit attributable to non-controlling interest | 582 | 648 | 334 | (10.2 | %) | 94.0 | % | |||||||||||||
Profit attributable to the Parent | 6,893 | 7,312 | 7,054 | (5.7 | %) | 3.7 | % |
Variations | ||||||||||||||||||||
2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | ||||||||||||||||
(in millions of euros, except percentages) | ||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 29,986 | 30,319 | 28,487 | (1.1 | %) | 6.4 | % | |||||||||||||
Income from equity instruments | 121 | 95 | 100 | 27.4 | % | (5.0 | %) | |||||||||||||
Income from companies accounted for by the equity method | 399 | 23 | 19 | n/a | 21.1 | % | ||||||||||||||
Net fees and commissions | 8,804 | 8,929 | 8,042 | (1.4 | %) | 11.0 | % | |||||||||||||
Gains/losses on financial assets and liabilities (net) * | 2,215 | 1,103 | 1,338 | 100.8 | % | (17.6 | %) | |||||||||||||
Other operating income/(expenses) (net) | (655 | ) | (556 | ) | (389 | ) | 17.8 | % | 42.9 | % | ||||||||||
TOTAL INCOME | 40,870 | 39,913 | 37,597 | 2.4 | % | 6.2 | % | |||||||||||||
Administrative expenses | (15,494 | ) | (15,242 | ) | (13,911 | ) | 1.7 | % | 9.6 | % | ||||||||||
Personnel expenses | (9,055 | ) | (8,877 | ) | (8,000 | ) | 2.0 | % | 11.0 | % | ||||||||||
Other general expenses | (6,439 | ) | (6,365 | ) | (5,911 | ) | 1.2 | % | 7.7 | % | ||||||||||
Depreciation and amortization | (1,867 | ) | (1,827 | ) | (1,609 | ) | 2.2 | % | 13.5 | % | ||||||||||
Provisions (net) | (1,718 | ) | (2,321 | ) | (1,226 | ) | (26.0 | %) | 89.3 | % | ||||||||||
Impairment losses on financial assets (net) | (12,756 | ) | (10,469 | ) | (10,170 | ) | 21.8 | % | 2.9 | % | ||||||||||
Impairment losses on other assets (net) | (147 | ) | (82 | ) | (68 | ) | 79.3 | % | 20.6 | % | ||||||||||
Gains/(losses) on other assets (net) | 71 | (56 | ) | 234 | n/a | n/a | ||||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 8,959 | 9,916 | 10,847 | (9.7 | %) | (8.6 | %) | |||||||||||||
Income tax | (1,869 | ) | (2,392 | ) | (2,614 | ) | (21.9 | %) | (8.5 | %) | ||||||||||
PROFIT FROM CONTINUING OPERATIONS | 7,090 | 7,524 | 8,233 | (5.8 | %) | (8.6 | %) | |||||||||||||
Profit/(loss) from discontinued operations (net) | (7 | ) | (24 | ) | (14 | ) | (70.8 | %) | 71.4 | % | ||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 7,083 | 7,500 | 8,219 | (5.6 | %) | (8.7 | %) | |||||||||||||
Profit attributable to non-controlling interest | 697 | 591 | 646 | 17.9 | % | (8.5 | %) | |||||||||||||
Profit attributable to the Parent | 6,386 | 6,909 | 7,573 | (7.6 | %) | (8.8 | %) |
* | Includes exchange differences (net) |
1292012 compared to 2011
Interest income / (charges)were €29,986 million in 2012, a 1.1% or €333 million decrease from €30,319 million in 2011.
Income from companies accounted for by the equity methodwas €399 million in 2012, a €376 million increase from €23 million in 2011. This growth was mainly due to the change in the scope of consolidation (equity-method accounting of SCUSA and insurance companies in Latin America).
Net fees and commissionswere €8,804 million in 2012, a 1.4% or €125 million decrease from €8,929 million in 2011.
Gains / (losses) on financial assets and liabilitieswere €2,215 million in 2012, a 100.8% or €1,112 million increase from €1,103 million in 2011. This increase was mainly due to the repurchase of debt capital instruments in the U.K..
Administrative expenses were €15,494 million in 2012, a 1.7% or €252 million increase from €15,242 million in 2011. This was mainly due to the increasing costs in Latin America related to business development, inflationary pressures on wage agreements and outsourcing of services.Depreciation and amortization costs were €1,867 million in 2012, a 2.2% or €40 million increase from €1,827 million in 2011.
Provisions were €1,718 million in 2012, a €603 million decrease from €2,321 million for the same period in 2011 due to the €842 million one-off provision for PPI remediation (€620 million after taxes) booked in the U.K. in 2011.
Impairment losses on financial assets were €12,756 million in 2012, a 21.8% or €2,287 million increase from €10,469 million in 2011. This increase was mainly driven by (i) growth in loan loss provisions in Spain due to the worsening economic situation in 2012, including a contraction of the economy, which fell into recession; (ii) increased provisions in the rest of Europe mainly due to the rise in the NPL ratio in Portugal, the result of an economic cycle heading towards contraction, with falling domestic demand and private consumption, and to the increase in the United Kingdom; and (iii) growth in provisions in Brazil as a result of the increased volume of total lending and a slight rise in non-performing loans.
Profit attributable to the Parent was €6,386 million in 2012, a 7.6% or €523 million decrease from €6,909 million in 2011, because of higher loan-loss provisions and the impact of higher minority interests on Latin American units.
The Profit attributable to the Parent of Retail Banking in Continental Europe rose (+1.7%). This was mainly due to the resilience of revenues in the current phase of the cycle (favored by the incorporation of Bank Zachodni WBK in Poland and SEB’s business in Germany) and control of costs.
The Profit attributable to the Parent in Retail Banking in U.K. was 10.8% lower, largely due to lower net interest income (higher cost of funding and low interest rates).
The Profit attributable to the Parent in Retail Banking in Latin America was 5.9% lower. The good performance of the net interest income was offset by higher administrative expenses and impairment losses and the higher impact of minority interests following the sale of shares in the banks in Brazil, Mexico and Chile.
Retail Banking earnings in the U.S. were 26.5% lower. This reflects the reduced stake in SCUSA and the one-off charge at Sovereign Bank for the Trust Piers settlement.
2011 compared to 2010
In 2011, the Group’s Retail Banking segment generated 75.1%75.2% of the profit attributed to the Group’s total operating areas. The profits were affected by the provision of €620 million in the second quarter for PPI remediation in the UK.U.K.. Results were also slightly impacted by the perimeter effect (mainly the consolidation of Poland’s Bank Zachodni WBK). The impact was between three to four percentage points positive on revenues and costs. The evolution of exchange rates during the period had a negative impact of between one and two percentage points.
Interest income / (charges)were €30,273€30,319 million in 2011, a 7.6%6.4% or €2,129€1,832 million increase from €28,144€28,487 million in 2010.Net fees and commissionswere €8,933€8,929 million in 2011, a 10.8%an 11.0% or €874€887 million increase from €8,059€8,042 million in 2010. These results were mainly due to the continued growth in Latin America, and the impact of the change in the scope of consolidation, which was partially offset by the effect of the changes in exchange rates.
Gains / (losses) on financial assets and liabilitieswere €1,106€1,103 million in 2011, a 17.0%17.6% or €227€235 million decrease from €1,333€1,338 million in 2010.
Administrative expenses were €15,243€15,242 million in 2011, a 9.4%9.6% or €1,313€1,331 million increase from €13,930€13,911 million in 2010. This is mainly due to the increase in cost in Latin America along related to business development.Depreciation and amortization costs were €1,832€1,827 million in 2011, a 12.9%13.5% or €209€218 million increase from €1,623€1,609 million in 2010.
Impairment losses on financial assets were €10,471€10,469 million in 2011, a 3.0%2.9% or €303€299 million increase from €10,168€10,170 million in 2010. This increase was less than the increase in 2010 and reflects the efforts made in previous years to improve risk management in the Group’s units.
Profit attributable to the Parentwas €6,893€6,909 million in 2011, a 5.7%8.8% or €419€664 million decrease from €7,312€7,573 million in 2010.
Retail banking in Continental Europe, despite the recovery in revenues and the positive impact of the change in the scope of consolidation, was impacted by the higher amount assigned to provisions and writedowns. Profit attributable to the Parent bank declined 3.0%14.1%.
Retail banking in the UKU.K. was 42.5% lower in sterling as it was hit by the PPI charge. Excluding this impact, profit attributable to the Parent bank was almost the same as in 2010. Total income declined, affected by regulatory changes, but this was offset by flat costs and reduced provisions.
Retail banking revenues in Latin America continued to grow, as did costs, compatible with business development. Net operating income was 9.2% higher, excluding the exchange rate impact.
130
2010 compared to 2009
In 2010, the Group’s Retail Banking segment generated 69.8% of the profit attributed to the Group’s total operating areas.
Interest income / (charges)was €28,144 million in 2010, a 9.6% or €2,470 million increase from €25,674 million in 2009, driven by management of spreads against a background of weak business growth. This variation was positively impacted by the increase in scope of consolidation and exchange rates.
Net fees and commissionswere €8,059 million in 2010, a 7.1% or €533 million increase from €7,526 million in 2009. This variation was also positively affected by the increase in scope of consolidation and exchange rates.
Gains / (losses) on financial assets and liabilitieswere €1,333 million in 2010, an 8.2% or €119 million decrease from €1,452 million in 2009.
Administrative expenses were €13,930 million in 2010, a 9.8% or €1,248 million increase from €12,682 million in 2009 whiledepreciation and amortization costs were €1,623 million in 2010, a 19.2% or €261 million increase from €1,362 million in 2009. These operating costs remained flat, eliminating the effects of the increase in the scope of consolidation and of the exchange rates.
Impairment losses on financial assets were €10,168 million in 2010, a 4.4% or €427 million increase from €9,741 million in 2009. These figures reflect the impact of the review carried out by the Bank of Spain of the parameters established in circular 4/2004, taking into account the worsening in Spanish debtors’ conditions. Excluding this one-off impact and the scope of consolidation and foreign exchange effects, provisions were lowered by 10.1%, reflecting the quality of integral management of risk in all of the Group’s units.
Profit attributable to non-controlling interest was €648 million in 2010, a €314 million increase as compared to €334 million in 2009. This increase is the net result of the placement of Santander Brazil shares in 2009 and 2010 and acquisition of the non-controlling interest of Santander Mexico in September 2010.
Profit attributable to the Parent was €7,312 million in 2010, a 3.7% or €258 million increase from €7,054 million in 2009 reflecting an increase in interest income together with a rigorous control of expenses.
Retail Banking in Continental Europe was affected the most by the economic environment. Total income declined 3.0% while profit attributable to the Parent bank dropped 23.1% because of higher provisions. The main drivers were moderate business volumes and falls in lending, good management of asset spreads in an environment of strong pressure and low interest rates, the impact of the Group’s policy for capturing deposits, control of costs and the effect of the extra provisions under the new regulations.
The profit of Retail Banking in the United Kingdom was 16.0% higher than in 2009. Growth in total income was spurred by net interest income and lower costs.
The results of Retail Banking in Latin America came from growth in basic revenues (net interest income and fee income), control of costs compatible with business development (benefiting from Brazil’s synergies) and lower loan-loss provisions. Total income and costs rose moderately. As a result of a lower level of provisions profit attributable to the Parent bank rose 41.6% albeit with increased non-controlling interest.
131
Despite the negative impact of markets, Global Private Banking’s volume of managed assets was higher than in 2009 due to the capturing of new business and more customers. The volume stood at €97,888 million at the end of 2010, a 10.6% increase compared to 2009 with the effect of the variation in the scope of consolidation eliminated. Profit attributable to the Parent bank was €283 million (as compared to €330 million in 2009). Total income was hit by net interest income due to the evolution of interest rates, offset by higher fee income. Expenses, due to continued strict control, remained relatively stable and provisions continued to have a low share of costs.
132
Global Wholesale Banking
Variations | Variations | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | |||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 2,457 | 2,676 | 2,508 | (8.2 | %) | 6.7 | % | 2,501 | 2,416 | 2,336 | 3.5 | % | 3.4 | % | ||||||||||||||||||||||||||
Income from equity instruments | 242 | 197 | 187 | 22.8 | % | 5.3 | % | 249 | 242 | 197 | 2.9 | % | 22.8 | % | ||||||||||||||||||||||||||
Income from companies accounted for by the equity method | — | — | — | n/a | n/a | — | — | — | n/a | n/a | ||||||||||||||||||||||||||||||
Net fees and commissions | 1,174 | 1,292 | 1,128 | (9.1 | %) | 14.5 | % | 1,162 | 1,149 | 1,288 | 1.1 | % | (10.8 | %) | ||||||||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) | 785 | 1,364 | 1,384 | (42.4 | %) | (1.4 | %) | |||||||||||||||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) * | 785 | 788 | 1,359 | (0.4 | %) | (42.0 | %) | |||||||||||||||||||||||||||||||||
Other operating income/(expenses) (net) | 17 | (22 | ) | (22 | ) | n/a | 0.0 | % | 7 | 12 | (30 | ) | (41.7 | %) | (140.0 | %) | ||||||||||||||||||||||||
TOTAL INCOME | 4,675 | 5,507 | 5,185 | (15.1 | %) | 6.2 | % | 4,704 | 4,607 | 5,150 | 2.1 | % | (10.5 | %) | ||||||||||||||||||||||||||
Administrative expenses | (1,507 | ) | (1,343 | ) | (1,169 | ) | 12.2 | % | 14.9 | % | (1,455 | ) | (1,488 | ) | (1,346 | ) | (2.2 | %) | 10.5 | % | ||||||||||||||||||||
Personnel expenses | (998 | ) | (898 | ) | (758 | ) | 11.1 | % | 18.5 | % | (943 | ) | (987 | ) | (895 | ) | (4.5 | %) | 10.3 | % | ||||||||||||||||||||
Other general expenses | (509 | ) | (445 | ) | (411 | ) | 14.4 | % | 8.3 | % | (512 | ) | (501 | ) | (452 | ) | 2.2 | % | 10.8 | % | ||||||||||||||||||||
Depreciation and amortization | (136 | ) | (137 | ) | (88 | ) | (0.7 | %) | 55.7 | % | (155 | ) | (134 | ) | (146 | ) | 15.7 | % | (8.2 | %) | ||||||||||||||||||||
Provisions (net) | (25 | ) | (14 | ) | (6 | ) | 78.6 | % | 133.3 | % | ||||||||||||||||||||||||||||||
Impairment losses on financial assets (net) | (141 | ) | (5 | ) | 34 | n/a | n/a | (262 | ) | (144 | ) | (2 | ) | 81.9 | % | n/a | ||||||||||||||||||||||||
Provisions (net) | (10 | ) | (11 | ) | 5 | (9.1 | %) | n/a | ||||||||||||||||||||||||||||||||
Impairment losses on other assets (net) | (22 | ) | (10 | ) | (3 | ) | 120.0 | % | 233.3 | % | (25 | ) | (21 | ) | (10 | ) | 19.0 | % | 110.0 | % | ||||||||||||||||||||
Gains/(losses) on other assets (net) | — | 5 | — | (100.0 | %) | n/a | 2 | — | 5 | n/a | n/a | |||||||||||||||||||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 2,859 | 4,006 | 3,964 | (28.6 | %) | 1.1 | % | 2,784 | 2,806 | 3,644 | (0.8 | %) | (23.0 | %) | ||||||||||||||||||||||||||
Income tax | (766 | ) | (1,071 | ) | (1,084 | ) | (28.5 | %) | (1.2 | %) | (750 | ) | (753 | ) | (972 | ) | (0.4 | %) | (22.5 | %) | ||||||||||||||||||||
PROFIT FROM CONTINUING OPERATIONS | 2,093 | 2,935 | 2,880 | (28.7 | %) | 1.9 | % | 2,034 | 2,053 | 2,672 | (0.9 | %) | (23.2 | %) | ||||||||||||||||||||||||||
Profit/(loss) from discontinued operations (net) | — | — | — | n/a | n/a | — | — | — | n/a | n/a | ||||||||||||||||||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 2,093 | 2,935 | 2,880 | (28.7 | %) | 1.9 | % | 2,034 | 2,053 | 2,672 | (0.9 | %) | (23.2 | %) | ||||||||||||||||||||||||||
Profit attributable to non-controlling interest | 221 | 238 | 132 | (7.1 | %) | 80.3 | % | 207 | 214 | 241 | (3.3 | %) | (11.2 | %) | ||||||||||||||||||||||||||
Profit attributable to the Parent | 1,872 | 2,697 | 2,748 | (30.6 | %) | (1.9 | %) | 1,827 | 1,839 | 2,431 | (0.7 | %) | (24.4 | %) |
* | Includes exchange differences (net) |
2012 compared to 2011
The Global Wholesale Banking segment generated 21.3% of the operating areas’ total profit attributable to the Group in 2012. After a good start, the year experienced significant levels of volatility and uncertainty due to the worsening eurozone crisis. This conditioned business activity to a large extent.
Interest income / (charges) were €2,501 million in 2012, a 3.5% or €85 million increase from €2,416 million in 2011.Net fees and commissionswere €1,162 million in 2012, a 1.1% or €13 million increase from €1,149 million in 2011. These variations are explained by an environment of reduced activity in markets and issues in Europe.
Gains / (losses) on financial assets and liabilities was flat at €785 million in 2012 compared to €788 million in 2011.
Administrative expenses were €1,455 million in 2012, a 2.2% or €33 million decrease from €1,488 million in 2011. The investments made in 2011 in equipment and technology in order to attain leadership positions in our core markets stabilized during 2012.
Depreciation and amortization costs were €155 million in 2012, a 15.7% or €21 million increase from €134 million in 2011.
Impairment losses on financial assets were €262 million in 2012, a €118 million increase as compared to provisions of €144 million in 2011 as a result of the increased loan loss provisions in Spain.
Profit attributable to the Parent remained stable at €1,827 million in 2012, a 0.7% or €12 million decrease from €1,839 million in 2011. The increase in total income was offset by higher impairment losses on financial assets and liabilities.
From a management standpoint, the results continued to be supported by solid and diversified client revenues (87% of total gross income). Client revenues continued to rise (+1.1%), spurred by those generated within the Global customer relationship model (+5.8%), which give the area a considerable degree of stability.
The growth in client revenues was underpinned by the stability in Continental Europe (0%), and the better evolution in the U.K. (+16%) and the U.S.(+114%), where Sovereign Bank continued to advance toward its natural share in the wholesale business. On the other hand, Latin America’s contribution was lower (-6%), following the discontinuation of some businesses in Brazil (-18%), which was not offset by the rest of the countries (Mexico: +33% and Chile: +17%).
The performance of the business sub-areas and their contribution to revenue generation was as follows:
Global Transaction Banking, which includes Cash Management, Trade Finance, Basic Financing and Custody, increased its client revenues by 2%. Of note were Cash Management revenues (+16%), due to the efforts made to capture transaction volumes as well as the increase in commercial finance. Spain, Chile and Argentina grew by more than 15%. The growth in Cash Management was partially offset by a decline of 6% in client revenues generated by custody and settlement. The stagnation in Europe, due to the evolution of the stock market and a slower than expected recovery in mutual funds, was only partially mitigated by the robustness of Mexico and Chile.
In 2012 Corporate Finance (including Mergers and Acquisitions and Equity Capital Markets) reduced its client revenues by 23% in a very complex environment.
Credit Markets, which include origination and distribution of corporate loans or structured finance, bond origination and securitization teams and Asset and Capital Structuring, maintained strong generation of client revenues (+8%). Of note was the growth in the U.K., Sovereign Bank, Mexico and Chile.
Rates, which covers fixed income and FX, reduced its client revenues by 6% in a very complex environment in the financial markets, which required larger provisions.
The client revenues of Global Equities (activities related to the equity markets) rose 11%, due to a small recovery in the equity markets in the last months of 2012, compared to 2011, which was the weakest of the last few years.
2011 compared to 2010
The Global Wholesale Banking segment generated 20.4%20.0% of the operating areas’ total profit attributable to the Group in 2011. Beginning in the spring, markets were very unstable and they continued to deteriorate in the second half of the year due to the Eurozone’seurozone’s sovereign debt crisis. This environment had a significant impact on revenues, particularly those derived from equities and those not related to customers.
Interest income / (charges) were €2,457€2,416 million in 2011, an 8.2%a 3.4% or €219€80 million decreaseincrease from €2,676€2,336 million in 2010, due to adjustments to spreads and larger volumes.2010.
Net fees and commissionswere €1,174€1,149 million in 2011, a 9.1%10.8% or €118€139 million decrease from €1,292€1,288 million in 2010 lower due to reduced activity in the markets.
Gains / (losses) on financial assets and liabilities were €785€788 million in 2011, a 42.4%42.0% or €579€571 million decrease from €1,364€1,359 million in 2010.
Administrative expenses were €1,507€1,488 million in 2011, a 12.2%10.5% or €164€142 million increase from €1,343€1,346 million in 2010, reflecting the investment in equipment and technology.
Depreciation and amortization costs remained stable at €136were €134 million in 2011, which isan 8.2% or a €1€12 million decrease from €137€146 million 2010.
Impairment losses on financial assets were €141€144 million in 2011, a €136€142 million increase as compared to provisions of €5€2 million in 2010 due to the further deterioration of the economic environment.
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Profit attributable to the Parent was €1,872€1,839 million in 2011, a 30.6%24.4% or €825€592 million decrease from €2,697€2,431 million in 2010. Profits declined because of the fall in total income from the sharp reduction in gains on financial transactions and in fee income, coupled with higher costs and provisions.
The results were supported by strong and diversified client revenues, accounting for 87% of total income and showing greater stability, although they were impacted by the market stress in the second half of the year somewhat shaken in the last two quarters of very high stress.
Client revenues were 8.1% lower than in 2010, when they were particularly high because of certain operations and the positive impact of high volatility in some markets. All countries’ client revenues fell except Sovereign in the US, which almost doubled them, as part of a continuing trend to reach its natural share in corporate business. Among the big areas, Latin America only dropped 4%, affected by Mexico (-14%) as Brazil and Chile were more stable. Greater weakness in Europe, particularly Spain (-17%) and the UK (-18%), was caused by tensions and falls in markets in the last few months.
The revenues generated by clients in the Global Relation Model, which give the area great stability, were stronger. They were only 4% lower and already account for 70% of total client revenues.
The performance of the product areas was as follows:
Global Transaction Banking, which includes Cash Management, Trade Finance and Basic Financing, increased its client revenues by 4%. Cash Management revenues experienced the greatest growth with an 18% increase over 2010. Of note were the four large units in Spain, Brazil, Mexico and Chile, particularly the last two which grew higher than the overall average.
In 2011, Corporate Finance (including Mergers and Acquisitions and Asset & Capital Structuring) reduced its client revenues 29%, but this did not hinder notable participation in important transactions. Of note was the involvement in several of the most significant transactions in the Group’s markets, including the acquisition by a consortium led by Iberdrola of electricity and gas distributors in seven Latin American countries owned by AEI Energy (Ashmore Energy International); the integration of Vivo and Telesp in Brazil; the entry of Qatar Holding into Iberdrola and the purchase by the French company Schneider of Telvent, which was listed on Nasdaq.
Credit Markets, which include origination and distribution of corporate loans or structured finance, bond origination and securitization teams and asset and capital structuring, reduced client revenues by 3%. The growth in Latin America, strongly backed by Mexico, and in the US was offset by the sharp decline in Europe, particularly in the UK after the exceptional operations performance in 2010.
2010 compared to 2009
The Global Wholesale Banking segment generated 25.8% of the operating areas’ total profit attributable to the Group in 2010. The rise in revenues was offset by higher costs and provisions and contributed to a 1.9% fall in profit attributable to the Parent bank. Other reasons for this fall included higher non-controlling interest in Brazil because of the listing in October 2009 and the higher provisions. Nonetheless, the performance in 2010 was still notable and only slightly behind 2009, a record year in revenues and profits which were spurred by high spreads and volatility and reduced competition. The normalization of the environment in 2010 contributed to positive results, which continued to be backed by a business model focused on customers, the area’s global capacities and its connection with local units.
Interest income / (charges) were €2,676 million in 2010, a 6.7% or €168 million increase from €2,508 million in 2009, after absorbing deleveraging of mature markets, the higher cost of liquidity and normalization of spreads.
Net fees and commissionswere €1,292 million in 2010, a 14.5% or €164 million increase from €1,128 million in 2009, aided by the disintermediation trends in some Latin American countries. In these countries, more companies are obtaining liquidity through bond issuances made with the Bank instead of through loans. As a result, commissions have increased.
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Gains / (losses) on financial assets and liabilities were €1,364 million in 2010, a 1.4% or €20 million decrease from €1,384 million in 2009.
Administrative expenses were €1,343 million in 2010, a 14.9% or €174 million increase from €1,169 million in 2009, reflecting the investments made and some exchange rate impact.
Depreciation and amortization costs were €137 million in 2010, a 55.7% or €49 million increase from €88 million in 2009.
Impairment losses on financial assets were €5 million in 2010 as compared to releases of €34 million in 2009.
Profit attributable to non-controlling interest was €238 million in 2010, a €106 million increase as compared to €132 million in 2009.
Profit attributable to the Parent was €2,697 million in 2010, a 1.9% or €51 million decrease from €2,748 million in 2009. The results were supported by strong and diversified client revenues (86% of the total). They were 3.4% higher than in 2009. The weak evolution in Spain was offset by a higher contribution in euros from other large areas.
The product areas also made progress in their increasingly global business vision, which is adapted to the changing needs of markets and clients. Their performance was as follows:
Global Transaction Banking increased its client revenues by 15%. Growth was solid but lower than in 2009 because of a smaller rise in volumes and lower spreads.
During 2010 Corporate Finance stepped up its efforts in origination and presentation of new ideas. This resulted in a larger and more solid pipeline of projects and allowed for maintaining operations in an unfavorable environment. Customer revenues rose 44% due to a very active fourth quarter in Brazil and the UK, which returned business to pre-crisis levels.
Credit Markets continued to generate solid client revenues (+14%) with a good performance by products and countries.
The client revenues of the rates area (including trading activities, structuring and distribution of foreign exchange and bonds and interest rate derivatives for the Group’s wholesale and retail clients) declined 10%. The larger volumes with institutional and mid-corp clients did not offset the impact on revenues of the normalization of spreads since the highs reached in 2009.
The revenues of the Global Equities area (activities related to the equity markets, settlement and custody) in 2010 were 10% lower than in 2009 (a record year). The factors behind the fall were the considerable degree of uncertainty in the markets, the significant fall in share prices, high volatility and sharp declines in trading volumes. Nonetheless, Santander managed to defend its position in key markets.
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Asset Management and Insurance
Variations | Variations | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | 2012 | 2011 | 2010 | 2012/2011 | 2011/2010 | |||||||||||||||||||||||||||||||
(in millions of euros, except percentages) | (in millions of euros, except percentages) | |||||||||||||||||||||||||||||||||||||||
INTEREST INCOME / (CHARGES) | 263 | 232 | 201 | 13.4 | % | 15.4 | % | 118 | 258 | 229 | (54.3 | %) | 12.7 | % | ||||||||||||||||||||||||||
Income from equity instruments | 1 | — | — | n/a | n/a | — | — | 1 | n/a | n/a | ||||||||||||||||||||||||||||||
Income from companies accounted for by the equity method | 30 | — | — | n/a | n/a | |||||||||||||||||||||||||||||||||||
Income from companies accounted for by the equity method* | 147 | 29 | — | 406.9 | % | n/a | ||||||||||||||||||||||||||||||||||
Net fees and commissions | 380 | 424 | 431 | (10.4 | %) | (1.6 | %) | 373 | 410 | 445 | (9.0 | %) | (7.9 | %) | ||||||||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) | 4 | 50 | 34 | (92.0 | %) | 47.1 | % | 7 | 5 | 49 | 40.0 | % | (89.8 | %) | ||||||||||||||||||||||||||
Other operating income/(expenses) (net) | 410 | 375 | 338 | 9.3 | % | 10.9 | % | 222 | 433 | 388 | (48.7 | %) | 11.6 | % | ||||||||||||||||||||||||||
TOTAL INCOME | 1,088 | 1,081 | 1,004 | 0.6 | % | 7.7 | % | 867 | 1,135 | 1,112 | (23.6 | %) | 2.1 | % | ||||||||||||||||||||||||||
Administrative expenses | (298 | ) | (294 | ) | (279 | ) | 1.4 | % | 5.4 | % | (274 | ) | (318 | ) | (310 | ) | (13.8 | %) | 2.6 | % | ||||||||||||||||||||
Personnel expenses | (169 | ) | (161 | ) | (149 | ) | 5.0 | % | 8.1 | % | (156 | ) | (177 | ) | (167 | ) | (11.9 | %) | 6.0 | % | ||||||||||||||||||||
Other general expenses | (129 | ) | (133 | ) | (130 | ) | (3.0 | %) | 2.3 | % | (118 | ) | (141 | ) | (143 | ) | (16.3 | %) | (1.4 | %) | ||||||||||||||||||||
Depreciation and amortization | (35 | ) | (48 | ) | (32 | ) | (27.1 | %) | 50.0 | % | (35 | ) | (43 | ) | (52 | ) | (18.6 | %) | (17.3 | %) | ||||||||||||||||||||
Provisions (net) | (14 | ) | (46 | ) | (15 | ) | (69.6 | %) | 206.7 | % | ||||||||||||||||||||||||||||||
Impairment losses on financial assets (net) | (1 | ) | (2 | ) | (10 | ) | (50.0 | %) | (80.0 | %) | (1 | ) | (1 | ) | (3 | ) | 0.0 | % | (66.7 | %) | ||||||||||||||||||||
Provisions (net) | (46 | ) | (15 | ) | (36 | ) | 206.7 | % | (58.3 | %) | ||||||||||||||||||||||||||||||
Impairment losses on other assets (net) | — | — | (1 | ) | n/a | (100.0 | %) | — | — | (1 | ) | n/a | n/a | |||||||||||||||||||||||||||
Gains/(losses) on other assets (net) | (10 | ) | 1 | — | n/a | n/a | 7 | (9 | ) | — | (177.8 | %) | n/a | |||||||||||||||||||||||||||
OPERATING PROFIT/(LOSS) BEFORE TAX | 698 | 723 | 646 | (3.5 | %) | 11.9 | % | 550 | 718 | 731 | (23.4 | %) | (1.8 | %) | ||||||||||||||||||||||||||
Income tax | (227 | ) | (200 | ) | (219 | ) | 13.5 | % | (8.7 | %) | (148 | ) | (231 | ) | (204 | ) | (35.9 | %) | 13.2 | % | ||||||||||||||||||||
PROFIT FROM CONTINUING OPERATIONS | 471 | 523 | 427 | (9.9 | %) | 22.5 | % | 402 | 487 | 527 | (17.5 | %) | (7.6 | %) | ||||||||||||||||||||||||||
Profit/(loss) from discontinued operations (net) | — | — | — | n/a | n/a | — | — | — | n/a | n/a | ||||||||||||||||||||||||||||||
CONSOLIDATED PROFIT FOR THE YEAR | 471 | 523 | 427 | (9.9 | %) | 22.5 | % | 402 | 487 | 527 | (17.5 | %) | (7.6 | %) | ||||||||||||||||||||||||||
Profit attributable to non-controlling interest | 52 | 60 | 28 | (13.3 | %) | 114.3 | % | 19 | 51 | 59 | (62.7 | %) | (13.6 | %) | ||||||||||||||||||||||||||
Profit attributable to the Parent | 419 | 463 | 399 | (9.5 | %) | 16.0 | % | 383 | 436 | 468 | (12.2 | %) | (6.8 | %) |
* | Includes exchange differences (net) |
2012 compared to 2011
In 2012 this segment generated 4.5% of the operating areas’ total profit attributable to the Parent bank. In July, an agreement was reached with Abbey Life Insurance Ltd., a subsidiary of Deustche Bank AG, to reinsure all of the individual life risk portfolio of the insurance companies in Spain and Portugal. This transaction generated estimated gross results of €435 million.
In December, Santander agreed to a strategic alliance with the insurer Aegon to boost its bancassurance business in Spain through commercial networks. The transaction valued Santander’s insurance business at €431 million. The agreement does not affect savings, auto and health insurance, which Santander continues to manage.
Total incomein 2012 was €867 million, a 23.6% or €268 million decrease from €1,135 million in 2011. Administrative expenses were €274 million in 2012, a 13.8% decrease from €318 million in 2011.Depreciation and amortizationdecreased by €8 million in 2012. All of these performances reflect two main changes: (i) the reduction in the stake in the Latin American insurance companies and (ii) the reinsurance agreement in Spain and Portugal.
Profit attributable to the Parent was €383 million in 2012, a decrease of 12.2% or €53 million from €436 million in 2011. Attributable profit was 16.5% higher excluding the following impact: (i) the reinsurance agreement reached with Abbey Life Insurance Ltd., and (ii) the sale of 51% of the Latin American insurers to Zurich which meant recording the contribution of these companies by the equity accounted method.
The global area of Santander Asset Management posted €69 million in profit attributable to the parent a 2.9% increase, due to a decline in gross income of 7.4%, reduced costs (-5.5%) and lower needs for provisions. The total result for the Group (profit before tax plus fees paid to the networks) was €1,043 million (-1.6%).
The total volume of managed funds was €153.7 billion, 11% more than at the end of 2011. Of this, approximately €99 billion were mutual and pension funds, €8 billion in client portfolios other than mutual funds, including institutional mandates, and €46 billion of management mandates on behalf of other Group units.
Santander Insurance posted an attributable profit of €314 million, 14.1% less than in 2011. Results were impacted by the sale of 51% of the insurers in Latin America and by the reinsurance agreement of its life portfolio in Spain and Portugal, which reduced their contribution by €131 million. Eliminating these effects, profit was 19.0% higher.
Insurance business generated total revenues for the Group (including fee income paid to the commercial networks) of €2,784 million 2.3% higher on a like-for-like basis. The total results for the Group (income before taxes of insurers and brokers plus fee income received by the networks) amounted to €2,653 million, 3.0% on a like-for-like basis.
2011 compared to 2010
In 2011 this segment generated 4.6%4.7% of the operating areas’ total profit attributable to the Parent bank.
Total incomein 2011 was flat at €1,088€1,135 million, a 0.6%2.1% or €7€23 million increase from €1,081€1,112 million in 2010.2011.
Administrative expenses were €298€318 million in 2011, a 1.4%2.6% increase from €294€310 million in 2010.2011.
Depreciation and amortization decreased by €13€9 million in 2011 because of the one-off impact of the change in accounting criteria for amortization of intangible insurance assets in 2010.
Profit attributable to the Parent was €419€436 million in 2011, a decrease of 9.5%6.8% or €44€32 million from €463€468 million in 2010, largely affected by lower revenues from insurance in the fourth quarter after the global agreement with Zurich.
The revenue reduction was the result of a fall in managed volumes, accelerated in the second half, which was partly offset by a better mix of products and, in consequence, in average revenues.
The client revenues of the rates area (which restructured its businesses into three activities, Fixed Income Sales, Fixed Income Flow and FX) registered a 7% decrease. Improved sales were offset by the weakness of the sovereign debt markets and its impact on management of books.
The revenues from Global Equities (those related to the equity markets) decreased a 44% in 2011. This was due to the weak generation of revenues in the second half of the year as compared to the high revenues generated throughout 2010.
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The global area of Santander Asset Management posted €53 millionexperienced a reduction in profit attributable to the parent. The total contribution of profit before tax and fees paid to the networks was €1,062 million, 4.7% less than in 2010 due to reduction in total revenues (-2.1%). The revenue reduction was the result of a fall in managed volumes, accelerated in the second half, which was partly offset by a better mix of products and, in consequence, an increase in average revenues.
Total mutual and pension funds under management amounted to €112 billion, 10% less than at December 2010. The decrease in volume was due to the preference for liquidity and on-balance sheet funds, together with more unstable markets in the second half of the year and the resulting impact on prices.
TheProfits diminished in the global area of Santander Insurance posted €366 million in profit attributable to the parent, 3.8% less than in 2010. This resultas it was affected by the sale of 51% of the insurance companies in Latin America completed in the fourth quarter as, without it, growth would have been 4.0%.quarter.
2010 compared to 2009
In 2010 this segment generated 4.4% of the operating areas’ total profit attributable to the Parent bank.
Total incomein 2010 was €1,081 million, a 7.7% or €77 million increase from €1,004 million in 2009, boosted by insurance income and stable revenue from mutual funds.
Administrative expenses were €294 million in 2010, a 5.4% increase from €279 million in 2009.
Depreciation and amortization increased by €16 million in 2010 because of the one-off impact of the change in accounting criteria for amortization of intangible insurance assets.
Profit attributable to the Parent was €463 million in 2010, an increase of 16.0% or €64 million from €399 million in 2009, as a result of lower provisions and a more favorable tax rate which offset the higher non-controlling interest in Brazil.
Santander Asset Management generated profit attributable to the Parent bank in 2010 of €81 million, higher than in 2009 and reflecting the recovery in volumes, the rise in average commissions in the main markets due to the better product mix and a reduction in loan loss provisions.
Total revenues from mutual and pension funds, before distribution to the distribution networks, amounted to €1,278 million (+8%), while the total contribution to profits rose 12.3% to €1,099 million.
Total mutual and pension funds managed assets amounted to more than €124 billion at the end of 2010 (+7% and benefiting from the appreciation of currencies against the euro).
The global area of Santander Insurance generated profit attributable to the Parent bank of €381 million, 9.0% more than in 2009. The main reason for this was greater activity, which absorbed the higher non-controlling interest in Brazil.
Total revenues (the area’s total income plus fee income paid to the networks) were €2,688 million, 11% more than in 2009 (+3.5% in local currency).
The total contribution to the Group’s results (profit before tax of the insurance companies and brokers and fees received by networks) increased 10.7% to €2,491 million (+3.3% in local currency).
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Financial Condition
Assets and Liabilities
Our consolidated total assets were €1,251,526€1,269,628 million at December 31, 2011,2012, a 2.8%1.4% or €34,025€18,103 million increase from total assets of €1,217,501€1,251,526 million at December 31, 2010.2011. Our gross loans and advances to corporate clients, individual clients and government and public entities, including the trading portfolio, other financial assets at fair value and loans, increaseddecreased by 3.4%3.0% to €745,986 million at December 31, 2012 from €769,036 million at December 31, 2011 from €743,851 million at December 31, 2010. Our total assets increased during 2011 due2011.
The following factors contributed to the slightly positivevariations in the balance sheet:
A negative perimeter impact from the net effectsale of the following changesour subsidiary in the Group’s composition:
• Positive impactColombia, and from the consolidation of Banco Zachodni WBKunits that were previously consolidated by the proportional method, mainly in Poland, the incorporation into Santander Consumer Finance in 2011 of SEB’s retail banking business in Germany (Santander Retail)Spain, and the acquisition of GE Capital Corporation’s mortgage portfolio in Mexico.
• Negative impact from Santander Consumer USA, which in December stopped consolidating by global integration and movedchanged to be accounted for by the equity accounted method, andmethod.
The almost null effect from the saleevolution of our Latin American bancassurance business.
Another factor was the appreciation/depreciation of variousnon-euro currencies against the euro (end of period rates). Both on the one hand, the appreciation of sterling (2%), the Mexican peso (5%), the Chilean peso (6%) and the Polish zloty (9%) and, on the other, the depreciation of the dollar and sterling appreciated by 3%(2%), while the main Latin American currencies depreciated: Brazilian real and Mexican peso (8%); Chilean peso (7%(11%) and the Argentine peso (5%(14%). in each case against the euro.
The net impact of both is virtually zero.these factors was one percentage point negative on changes in customer balances and was offset by growth in other portfolios and in cash and deposits at central banks.
Customer deposits, which comprise deposits from clients and securities sold to clients under agreements to repurchase, increaseddecreased by 2.6%0.9% from €616,376 million at December 31, 2010, to €632,533 million at December 31, 2011, reflecting the efforts to open new current accounts mainly in Sovereign and Santander UK.€626,639 million at December 31, 2012. Other managed funds, including mutual funds, pension funds, managed portfolios and savings-insurance policies, decreased by 9.7%10.1% from €145,547 million at December 31, 2010, to €131,456 million at December 31, 2011.2011, to €118,141 million at December 31, 2012 affected by the greater commercial focus placed on capturing on-balance-sheet funds.
In addition, and as part of the global financing strategy, during 20112012 the Group issued €91,215€80,817 million of senior debt (including Santander UK’s medium term program), including €13,664€7,842 million of covered and territorial bonds and €171€2 million of subordinated debt.
During 2011, €81,3952012, €78,706 million of senior debt (including Santander UK’s medium term program), including €7,439€7,721 million of covered bonds and €8,616€4,080 million of subordinated debt, matured.
Goodwill was €24,626 million at the end of 2012, a €463 million decrease from €25,089 million at the end of 2011 a €467 million increase from €24,622 million at the end of 2010 mainlyentirely due to the net impact between the increase from the incorporationsevolution of BZ WBK, Santander Retailexchange rates in Germany, GE Capital Corporation’s mortgage portfoliovarious countries and goodwill amortization in Mexico and Creditel in Uruguay and the reductions resulting from the amortization of €601 million of goodwill in Santander Totta, the Santander Consumer USA consolidation by the equity accounted method and exchange rates.Italy.
Capital
Stockholders’ equity, net of treasury stock, at December 31, 2011,2012, was €76,414€74,654 million, an increasea decrease of €1,396€1,760 million or 1.9%2.3% from €75,018€76,414 million at December 31, 2010,2011, mainly due to the increase of reserves resulting from the issuance of 579,921,1051,412,136,547 shares in 2011. That increase2012 which was partially offset by the increase of negative valuation adjustments and the decrease in the consolidated income.
Our eligible stockholders’ equity under BIS II was €76,772€72,936 million at December 31, 2011.2012. The surplus over the minimum required by the Bank of Spain was €31,495€28,374 million. In accordance with the Basel II Accord criteria (which provide the framework under which Spanish entities must report capital ratios as of June 30, 2008), at December 31, 2011 2012
the BIS II ratio was 13.56% (13.11%13.09% (13.56% at December 31, 2010)2011), Tier I Capital was 11.01%11.17% (11.01% at December 31, 2011) and core capital was 10.33% (10.02% at December 31, 2010) and core capital was 10.02% (8.80% at December 31, 2010)2011). See Item 4 of Part I, “Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements”.
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B. Liquidity and capital resources
Management of liquidity
For information about our liquidity risk management process, see Item 11 of Part I, “Quantitative and Qualitative Disclosures About Market Risk—Part. 10 Market Risk—Statistical Tools for Measuring and Managing Market Risk—Non Trading activity—Liquidity Risk” and “—Quantitative analysis—B. Non Trading Activity—Asset and liability management— Management of structural liquidity”.
Sources of funding
As a financial group, a principal source of our liquidity is our customer deposits which consist primarily of demand, time and notice deposits. In addition, we complement the liquidity generated by our customer deposits through access to the domestic and international capital markets and to the interbank market (overnight and time deposits). For this purpose, we have in place a series of domestic and international programs for the issuance of commercial paper and medium- and long-term debt. We also maintain a diversified portfolio of liquid and securitized assets throughout the year. In addition, another source of liquidity is the generation of cash flow.
At December 31, 2011,2012, we had outstanding €197.4€206.0 billion of senior debt, of which €108.0€97.2 billion were mortgage bonds and €11.8€22.0 billion were promissory notes. Additionally, we had €23.0€18.2 billion in outstanding subordinated debt (which includes €5.4€4.3 billion preferred securities and €0.4 billion in preferred shares).
The following table shows the average balances during the years 2012, 2011 2010 and 20092010 of our principal sources of funds:
2011 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||
Due to credit entities | 146,638 | 134,577 | 141,930 | 154,686 | 146,638 | 134,577 | ||||||||||||||||||
Customer deposits | 616,690 | 568,915 | 463,602 | 636,351 | 616,690 | 568,915 | ||||||||||||||||||
Marketable debt securities | 196,107 | 209,006 | 221,230 | 204,701 | 196,107 | 209,006 | ||||||||||||||||||
Subordinated debt | 26,673 | 34,096 | 39,009 | 21,239 | 26,673 | 34,096 | ||||||||||||||||||
|
|
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|
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| |||||||||||||||||||
Total | 986,108 | 946,594 | 865,771 | 1,016,977 | 986,108 | 946,594 |
The average maturity of our outstanding debt as of December 31, 20112012 is as follows:
(1) Senior debt | ||||
(2) Mortgage debt | ||||
(3) Dated subordinated debt |
For more information see Notes 22.b, 23.a and 51.a to our consolidated financial statements.
The cost and availability of debt financing are influenced by our credit ratings. A reduction in these ratings could increase the cost of and reduce our market access to debt financing. Our credit ratings are as follows:
Long-Term | Short-Term | |||||||
Moody’s | Baa2 | P-2 | Negative | |||||
Standard & Poor’s | ||||||||
Fitch | ||||||||
| ||||||||
DBRS | R-1 (low) | Negative |
Our total customer deposits, excluding assets sold under repurchase agreements, totaled €563.7€578.9 billion at December 31, 2011.2012. Loans and advances to customers (gross) totaled €769.0€746.0 billion at the same date.
We remain well placed to access various wholesale funding sources from a wide range of counterparties and markets, and the changing mix between customer deposits and repos, deposits by banks and debt securities in issue primarily reflects comparative pricing, maturity considerations and investor counterparty demand rather than any material perceived trend.
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We use our liquidity to fund our lending and investment securities activities, for the payment of interest expense, for dividends paid to shareholders and the repayment of debt.
We, Grupo Santander, are a European, Latin American and North American financial group. Although at this moment we are not aware of any material legal or economic restrictions on the ability of our subsidiaries to transfer funds to the Bank (the Parent company) in the form of cash dividends, loans or advances, capital repatriation and other forms, or to have access to foreign currency at the official exchange rate, there is no assurance that in the future such restrictions will not be adopted or how they would affect our business. Nevertheless, the geographic diversification of our businesses limits the effect of any restrictions that could be adopted in any given country.
We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.
As of December 31, 2011,2012, and to the present date, we did not, and presently do not, have any material commitments for capital expenditures.
C. Research and development, patents and licenses, etc.
We do not currently conduct any significantDuring 2012, 2011 and 2010, we spent €1,098 million, €1,420 million and €1,338 million, respectively, in research and development activities.activities in connection with information technology projects.
The global financial services sector is likely to remain competitive with a large number of financial service providers and alternative distribution channels. Additionally, consolidation in the sector (through mergers, acquisitions or alliances) is likely to occur as other major banks look to increase their market share, combine complementary businesses or strengthen their balance sheets. In addition, regulatory changes will take place in the future that we expect will increase the overall level of regulation in the markets.
The following are the most important trends, uncertainties and events that are reasonably likely to have a material adverse effect on the Group or that would cause the disclosed financial information not to be indicative of our future operating results or our financial condition:
a continued downturn in the Spanish and the United Kingdom real estate markets, and a corresponding increase in mortgage defaults, which could impact our NPL and decrease consumer confidence and disposable income;
uncertainties relating to economic growth expectations and interest rates cycles, especially in the United States, Spain, the United Kingdom, other European countries, Brazil and other Latin America,American countries, and the impact they may have over the yield curve and exchange rates;
the continued effect of the global economic slowdown on Europe and the USU.S. and fluctuations in local interest and exchange rates;
continued changes in the macroeconomic environment, such as sustained unemployment above historical levels, could further deteriorate the quality of our customers’ credit;
increases in our cost of funding, partially as a result of the fragility of the Spanish, Portuguese, Irish and Greek economies, further downgrades in our credit rating or otherwise, could adversely affect our net interest margin as a consequence of timing differences in the repricing of our assets and liabilities;
the effects of withdrawal of significant monetary and fiscal stimulus programs and uncertainty over government responses to growing public deficits;
continued instability and volatility in the financial markets;
a drop in the value of the euro relative to the US dollar, the sterling pound or Latin American currencies;
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inflationary pressures, particularly in Latin America, because of the effect they may have in relation to increases of interest rates and decreases of growth;
increased consolidation of the global financial services sector, which could further reduce our spreads;
although it is foreseeable that entry barriers to domestic markets in Europe will eventually be lowered, our possible plans of expansion into other markets could be affected by regulatory requirements of the national authorities of these countries;
acquisitions or restructurings of businesses that do not perform in accordance with our expectations or that subject us to previously unknown risks;
increased regulation, government intervention and new laws prompted by the financial crisis which could change our industry and require us to modify our businesses or operations; and
the risk of further reductions in liquidity and increases of credit spreads as a consequence of the crisis in the financial markets, which could affect not only our cost of funding but also the value of our proprietary portfolios and our assets under management.
E. Off-balance sheet arrangements
As of December 31, 2012, 2011 2010 and 2009,2010, we had outstanding the following contingent liabilities and commitments:
2011 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||
Contingent liabilities: | ||||||||||||||||||||||||
Financial guarantees and other sureties | 15,417 | 18,395 | 20,974 | 14,437 | 15,417 | 18,395 | ||||||||||||||||||
Irrevocable documentary credits | 2,978 | 3,816 | 2,637 | 2,866 | 2,978 | 3,816 | ||||||||||||||||||
Other guarantees | 29,093 | 36,733 | 35,192 | 27,285 | 29,093 | 36,733 | ||||||||||||||||||
Other contingent liabilities | 554 | 851 | 453 | 445 | 554 | 851 | ||||||||||||||||||
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48,042 | 59,795 | 59,256 | 45,033 | 48,042 | 59,795 | |||||||||||||||||||
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Commitments: | ||||||||||||||||||||||||
Balances drawable by third parties | 181,559 | 179,964 | 150,563 | 187,664 | 181,559 | 179,964 | ||||||||||||||||||
Other commitments | 13,823 | 23,745 | 12,968 | 28,378 | 13,823 | 23,745 | ||||||||||||||||||
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195,382 | 203,709 | 163,531 | 216,042 | 195,382 | 203,709 | |||||||||||||||||||
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Total: | 243,424 | 263,504 | 222,787 | 261,075 | 243,424 | 263,504 | ||||||||||||||||||
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For more information see Note 35 to our consolidated financial statements.
In addition to the contingent liabilities and commitments described above, the following table provides information regarding off-balance sheet funds managed by us as of December 31, 2012, 2011 2010 and 2009:2010:
2011 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
(in millions of euros) | (in millions of euros) | |||||||||||||||||||||||
Off-balance sheet funds: | ||||||||||||||||||||||||
Mutual funds | 102,611 | 113,510 | 105,216 | 89,176 | 102,611 | 113,510 | ||||||||||||||||||
Pension funds | 9,645 | 10,965 | 11,310 | 10,076 | 9,645 | 10,965 | ||||||||||||||||||
Other managed funds | 19,200 | 20,314 | 18,364 | 18,889 | 19,200 | 20,314 | ||||||||||||||||||
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131,456 | 144,789 | 134,890 | 118,141 | 131,456 | 144,789 |
Relationship with unconsolidated companies
We have holdings in companies over which we are in a position to exercise significant influence, but that we do not control or jointly control. According to IFRS-IASB, these investments in associated companies are accounted for using the equity method (see further details of these companies in Exhibit II to our consolidated financial statements).
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Transactions with these companies are made under market conditions and are closely monitored by our regulatory authorities. See Note 53 to our consolidated financial statements for further information.
Also, in our securitization activity we use special purpose vehicles (fondos de titulización) that are consolidated in the Group’s financial statements. According to IFRS, only those vehicles that meet certain requirements can be consolidated. We are not required to repurchase assets from or contribute additional assets to any of these special purpose vehicles. We do, however, provide in the ordinary course of business certain loans (amounting to €238.1€383.3 million as of December 31, 2011)2012) to some of these special purpose vehicles, which are provided for in accordance with the risks involved. In 2011,2012, the Group sold securitized bonds and structured medium and long-term operations with customers whose collateral is securitized bonds or mortgage bonds amounting to close to €25€12 billion.
In the ordinary course of business, Santander UK enters into securitization transactions using special purpose securitization companies which are consolidated and included in Santander UK’s financial statements. Santander UK is under no obligation to support any losses that may be incurred by the securitization companies or the holders of the securities and has no right or obligation to repurchase any securitized loan. Santander UK has made some interest-bearing subordinated loans to these securitization companies.
We do not have any further transactions with unconsolidated entities other than those mentioned above.
We have no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
F. Tabular disclosure of contractual obligations
The following table summarizes our contractual obligations by remaining maturity at December 31, 2011:2012:
Contractual obligations
Contractual Obligations
(in millions of euros) | Less than 1 year | More than 1 year but less than 3 years | More than 3 years but less than 5 years | More than 5 years | Total | |||||||||||||||||||||||||||||||||||
Deposits from credit institutions and central banks | 65,619 | 10,983 | 39,607 | 160 | 116,369 | |||||||||||||||||||||||||||||||||||
(in millions of euros) | Less than 1 year | More than 1 year but less than 3 years | More than 3 years but less than 5 years | More than 5 years | Total | |||||||||||||||||||||||||||||||||||
Deposits from credit institutions | 61,071 | 55,983 | 11,076 | 3,540 | 131,670 | |||||||||||||||||||||||||||||||||||
Customer deposits | 502,009 | 63,284 | 14,301 | 9,383 | 588,977 | 508,314 | 60,827 | 13,992 | 5,971 | 589,104 | ||||||||||||||||||||||||||||||
Marketable debt securities | 45,453 | 52,077 | 33,899 | 57,681 | 189,110 | 72,713 | 54,158 | 27,291 | 46,902 | 201,064 | ||||||||||||||||||||||||||||||
Subordinated debt | 317 | 2,846 | 3,402 | 16,427 | 22,992 | 1,939 | 1,377 | 5,169 | 9,753 | 18,238 | ||||||||||||||||||||||||||||||
Liabilities under insurance contracts (1) | — | — | — | 517 | 517 | — | — | — | 1,425 | 1,425 | ||||||||||||||||||||||||||||||
Operating lease obligations | 317 | 580 | 531 | 2,220 | 3,648 | 331 | 619 | 564 | 2,176 | 3,690 | ||||||||||||||||||||||||||||||
Capital lease obligations | 150 | 9 | 9 | 72 | 240 | 51 | 9 | 10 | 67 | 137 | ||||||||||||||||||||||||||||||
Purchase obligations | 5 | 8 | 4 | 4 | 21 | 4 | 7 | 3 | 3 | 17 | ||||||||||||||||||||||||||||||
Other long-term liabilities (2) | — | — | — | 9,045 | 9,045 | — | — | — | 7,077 | 7,077 | ||||||||||||||||||||||||||||||
Contractual interest payments (3) | 7,031 | 7,877 | 7,541 | 25,096 | 47,545 | |||||||||||||||||||||||||||||||||||
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Total | 613,870 | 129,787 | 91,753 | 95,508 | 930,919 | 651,454 | 180,857 | 65,646 | 102,010 | 999,967 |
(1) | Includes life insurance contracts in which the investment risk is borne by the policy holder and insurance savings contracts. |
(2) | Other long-term liabilities relate to pensions and similar obligations. |
(3) | Calculated for all Deposits from credit institutions, Customer deposits, Marketable debt securities and Subordinated debt assuming a constant interest rate based on data as of December 31, 2012 over time for all maturities, and those obligations with maturities of more than five years have an average life of ten years. |
The table above excludes the “fixed payments” of our derivatives since derivative contracts executed by the Group apply close-out netting across all outstanding transactions, that is, these agreements provide for settlements to be made on a maturity or settlement date for the differences that arise, and as such, the obligation to be settled in the future is not fixed at the present date and is not determined by the fixed payments.
For a description of our trading and hedging derivatives, which are not reflected in the above table, see Note 36 to our consolidated financial statements.
For more information on our marketable debt securities and subordinated debt, see Notes 22 and 23 to our consolidated financial statements.
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Higher-Risk Loans
Grupo Santander does not have any significant exposure to higher-risk loans. Our credit profile is focused on retail banking with a medium-low risk profile and with broad diversification both by geography and segment, and nearly 60% of the Group’s total loan portfolio is secured (in most cases, by real estate).
Mortgages to individuals represent approximately 41% of the Group’s total lending. These mortgages are focused on our core markets, Spain and the UK,U.K., and are principal residence mortgages with a low risk profile, low non-performing ratios (below the ratios of our peers) and an acceptable coverage ratio. This low risk profile allows us to envisage a relatively minor impact at Group level and a low final estimated loss.
In Spain, at December 31, 2011,2012, the loan portfolio and thus its risk profile mainly comprises primary residence loans, with an average loan to value ratio (LTV) of 51.6%56.6% and an affordability rate of 29% under management criteria.criteria described below. Residential mortgages account for 25%26.8% of the total credit risk portfolio in Spain, of which 88%89% has a LTV at inception a LTVof under 80%.
All customers applying for a prime residential mortgage are subject to a rigorous assessment of credit risk and affordability.
In evaluating the payment capacity (affordability) of a potential customer, the credit analyst must determine if the income of the customer is sufficient to meet the payment of the loan installments taking into consideration other income that the customer may receive. In addition, the analyst must decide if the customer’s income will be stable over the term of the loan.
We define the affordability rate as the index that measures the financial ability of the family unit calculated as follows: (Monthly payments corresponding to the requested transaction + monthly payments for other loans) /( /(Net monthly salary + other monthly justified income).
This ratio is considered predictive of the customer’s payment capacity. The ratio indicates the percentage of a customer’s income that is currently available to repay debt obligations. For this reason, it is included as part of our credit policy in the application process for the mortgage portfolio and is used either as a minimum acceptance criteria or in prescriptive analyses (decision trees/ rules/ decision models).
The UK’sU.K.’s mortgage portfolio is focused on primary residence mortgages with high quality risk in terms of LTV (53%(52.2% as of December 31, 2011)2012). The mortgagesCertain portfolios with the highesthigh risk profile (buy-to-let) account for a small percentage of the total (less than 1%).profiles (interest only, flexible loans, loans with LTV>100%, buy to let) are subject to strict lending policies to mitigate risks. Furthermore, their performance is continuously monitored to ensure an adequate control.
Due to the economic downturn, the portfolio of loans to
Net real estate developers has been significantly reduced, especiallyexposure in Spain. At December 31, 2011, it accountedSpain was halved to €12.5 billion from €24.9 billion, accounting for less than 1%1,7% of the Group’s total credit portfolio. The Group’s risk policies stipulate that these loans should be granted not just based on the qualitybank sold 33,500 properties in 2012, from its own books and those of the projects but also on the credit quality of the clients.real estate developers.
Changes in Practices
There have not been any significant changes in policies and practices in response to the effects of the current economic environment that might affect the quality of the credit information presented. This is due to the fact that the following policies and practices already formed part of our normal course of business:
a) Medium-low risk profile of the portfolio
a) | Medium-low risk profile of the portfolio |
Our risk profile is characterized by the prevalence of primary residence loans and a low effort rate of loan approval, which leads to a medium-low risk profile for the mortgage portfolio. This is due to the establishment of risk management frameworks and policies that reflect our risk management principles.
In addition to the tasks performed by the internal auditing division, the risk unit has a specific risk monitoring function for adequate credit quality control with local and global teams.
b) Suspended accrual interest of non-performing past-due assets
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b) | Suspended accrual interest of non-performing past-due assets |
Balances are deemed to be impaired, and the interest accrual suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received to secure (fully or partially) collection of the related balances. For all non-performing past due assets, any collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, is applied to reduce the principal amount outstanding. The amount of the financial assets that would be deemed to be impaired had the conditions thereof not been renegotiated, is not material with respect to the Group’s financial statements taken as a whole.
When the recovery of any recognized amount is considered unlikely, the amount is written off, without prejudice to any actions that we may initiate to seek collection.
c) Allowances for credit losses and internal model
c) | Allowances for credit losses and internal model |
As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. The Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described in Item 4 in our annual report on Form 20-F for the year ended December 31, 2011,2012, and are subject to continuing review by Bank of Spain, and subsequent continuous improvement of the processes within our internal model. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain guidance, was not material for each one of the three years ending December 31, 2011.
Declines in Collateral Value
Declines in collateral value are not relevant in our portfolio given that Spanish residential mortgages with LTV up to 80% amount to only approximately 2% of the total Group’s lending as of December 31, 2011. When a mortgage with these characteristics is authorized, the Group’s polices establish that the client must provide additional guarantees such as more properties, insurance coverage or others.2012.
Other
During 2011,2012, the general deterioration of the economic environment had a negative effect on the evolution of non-performing loans and the cost of credit. This effect was softened by prudent risk management which kept non-performing loan and coverage ratios at reasonable levels. Both ratios compare well with those of our competitors.
We use credit derivatives to cover loans and trading transactions. The volume of this activity is small compared to that of our peers and is subject to strict internal controls that minimize operational risk. Risk in these activities is controlled via a series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, and sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by geographic area, sector and liquidity.
Exposures related to complex structured assets
We have a very limited exposure to complex structured assets. See “Item 11. Quantitative and Qualitative Analysis About Market Risk—Part 10. Market Risk—Quantitative analysis—D. Exposures related to complex structured assets”.
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Item 6. Directors,6.Directors, senior management and employees
A. Directors and senior management
We are managed by our board of directors, which currently consists of 16 members. In accordance with our Bylaws (Estatutos), the board shall consist of at least 14 and not more than 22 members. Each member of the board is elected to a three-year term by our shareholders at a general meeting. One-third of the members are elected each year and members may be re-elected.
Our board of directors holds its meetings in accordance with an annual calendar. The Rules and Regulations of the Board23 provide that the board shall hold not less than nine annual ordinary meetings; in 2011,2012, it met 1411 times. Our board of directors elects our chairman, vice chairmen and chief executive officer from among its members. Between board meetings, lending and other board powers reside with the executive committee(comisión ejecutiva) and with the risk committee(comisión delegada de riesgos).of our board of directors. The chairman is the Bank’s most senior officer and, as a result, all powers as may be delegated under Spanish law, our Bylaws and the Rules and Regulations of the Board of Directors have been delegated to him. The chairman leads the Bank’s management team in accordance with the decisions made and the criteria set by our shareholders at the general shareholders’ meeting and by the board.
By delegation and under the direction of the board and of the chairman, the chief executive officer leads the business and assumes the Bank’s highest executive functions.
Our board has ultimate lending authority and it delegates such authority to the risk committee, which generally meets twice a week.
Members of our senior management are appointed and removed by the board.
The Rules and Regulations of the Board of Directors are available on the Group’s website, which does not form part of this annual report on Form 20-F, atwww.santander.comunder the heading “Information for shareholders and investors—Corporate governance—Rules and Regulations of the Board of Directors”. |
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The current members of our board of directors are:
Name | Position with Banco Santander | Director
| ||
Emilio Botín (1) | Chairman | 1960 | ||
Fernando de Asúa | First vice chairman | 1999 | ||
Alfredo Sáenz | Second vice chairman and chief executive officer | 1994 | ||
Matías R. Inciarte (2) | Third vice chairman | 1988 | ||
Manuel Soto | Fourth vice chairman | 1999 | ||
Ana P. Botín (1) | Director | 1989 | ||
Javier Botín (1) | Director | 2004 | ||
Lord Burns | Director | 2004 | ||
Vittorio Corbo | Director | 2011 | ||
Guillermo de la Dehesa | Director | 2002 | ||
Rodrigo Echenique | Director | 1988 | ||
Esther Giménez-Salinas | Director | 2012 | ||
| Director | 2010 | ||
Abel Matutes | Director | 2002 | ||
| ||||
| ||||
| ||||
Juan R. Inciarte (2) | Director | 2008 | ||
Isabel Tocino | Director | 2007 |
(1) | Ana P. Botín and Javier Botín are daughter and son, respectively, of Emilio Botín. |
(2) | Matías R. Inciarte and Juan R. Inciarte are brothers. |
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Our current executive officers are:
Name | Position with Banco Santander | |
Emilio Botín | Chairman of the board of directors and of the executive committee | |
Alfredo Sáenz | Second vice chairman of the board of directors and chief executive officer | |
Matías R. Inciarte | Third vice chairman of the board of directors and chairman of the risk committee | |
Ana P. Botín | Director and chief executive officer, Santander UK | |
Juan R. Inciarte | Director and executive vice president, strategy and Asia | |
José A. Alvarez | Executive vice president, financial management and investor relations | |
Ignacio Benjumea | Executive vice president, general secretariat | |
Juan Manuel Cendoya | Executive vice president, communications, corporate marketing and research | |
José María Espí | Executive vice president, risk | |
José María Fuster | Executive vice president, technology and operations | |
José Luis G. Alciturri | Executive vice president, human resources | |
Enrique G. Candelas | Executive vice president, Retail Banking Spain (Santander Branch Network) | |
José G. Cantera | ||
| ||
| Executive vice president, global wholesale banking | |
| Executive vice president, internal auditing | |
Adolfo Lagos | Executive vice president, global wholesale banking | |
Jorge Maortua | Executive vice president, global wholesale banking | |
Javier Marín | Executive vice president, global private banking, asset management and insurance | |
Jorge Morán | Executive vice president, United States | |
José Mª Nus | Executive vice president, Santander UK | |
César Ortega | Executive vice president, general secretariat | |
Javier Peralta | Executive vice president, risk | |
Marcial Portela | Executive vice president, Brazil | |
Magda Salarich | Executive vice president, consumer finance | |
Javier San Félix | Chief executive officer, Banesto | |
José Tejón | Executive vice president, financial accounting and control | |
José Antonio | ||
Juan A. Yanes | Executive vice president, United States | |
Jesús Mª Zabalza | Executive vice president, America |
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The following is a summary of the relevant business experience and principal business activities of our current directors and executive officers:
Emilio Botín (chairman of the board of directors and of the executive committee)
Born in 1934. He joined the board of directors of Banco Santander in 1960 and was appointed chairman of the board in 1986.
Fernando de Asúa (first vice chairman of the board of directors and chairman of the appointments and remuneration committee)
Born in 1932. Former vice chairman of Banco Central Hispanoamericano from 1991 to 1999. He was appointed director in 1999 and first vice chairman in 2004. He is a former chairman of IBM España, S.A. and he is currently the honorary chairman. In addition, he is a non-executive vice chairman of Técnicas Reunidas, S.A.
Alfredo Sáenz (second vice chairman of the board of directors and chief executive officer)
Born in 1942. Former chief executive officer and vice chairman of Banco Bilbao Vizcaya, S.A. and chairman of Banca Catalana until 1993. In 1994, he was appointed chairman of Banesto and in 2002, second vice chairman and chief executive officer of Santander. He was appointed director in 1994.
Matías R. Inciarte (third vice chairman of the board of directors and chairman of the risk committee)
Born in 1948. He joined Banco Santander in 1984 and was appointed executive vice president and chief financial officer in 1986. He was appointed director in 1988 and second vice chairman in 1994.1994 and third vice chairman in 1999. He is non-executive chairman of Banco Santander Totta, S.A. and a non-executive director of Banesto, Sanitas, S.A. de Seguros and Financiera Ponferrada, S.A., SICAV and since 2008, president of the Fundación Príncipe de Asturias. Prior to joining Banco Santander, he was minister of the presidency of the Spanish Government from 1981 to 1982.
Manuel Soto (fourth vice chairman of the board of directors and chairman of the audit and compliance committee)
Born in 1940. He was appointed director in 1999. He is a non-executive director of Cartera Industrial REA, S.A. In addition, he was formerly chairman of Arthur Andersen’s Global Board and manager for EMEIA (Europe Middle East, India and Africa).
Ana P. Botín
Born in 1960. She was appointed director in 1989. Former executive vice president of Banco Santander, S.A., former chief executive officer of Banco Santander de Negocios from 1994 to 1999 and former executive chairwoman of Banesto from 2002 to 2010. In November 2010, she was appointed chief executive officer of Santander UK. She is also an executive director of Alliance & Leicester plc and a member of the International Advisory Board of the New York Stock Exchange and of the board of Georgetown University.
Javier Botín
Born in 1973. He was appointed director in 2004. He is chairman and chief executive officer of JB Capital Markets, Sociedad de Valores, S.A.
Lord Burns
Born in 1944. He was appointed director in 2004. He is also a non-executive chairman of Santander UK plc and Alliance & Leicester plc. In addition, he is non-executive chairman of Channel Four Television Corporation and a non-executive member of the Office for Budget Responsibility. He was Permanent Secretary to the UKU.K. Treasury and chaired the UKU.K. Parliamentary Financial Services and Markets Bill Joint Committee and was a non-executive chairman of Marks & Spencer Group plc, Glas Cymru (Welsh Water) and a non-executive director of Pearson Group plc, British Land plc and Legal & General Group plc.
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Vittorio Corbo
In July 2011, at the proposal of the appointments and remuneration committee, Vittorio CorboBorn in 1943. He was appointed director by co-option byin 2011. He is an associated senior researcher for the board. At the annual general meeting held on March 30, 2012, our shareholders ratified such appointmentCentre of Public Studies in Santiago. He is also a non-executive chairman of Compañía de Seguros SURA-Chile S.A., a non-executive director of Banco Santander—Chile, Banco Santander (México), S.A., CCU, S.A. and re-elected him for a three year term. Born in 1943 in Iquique (Chile), Vittorio Corbo served from 2003Endesa Chile, and an economic advisor to 2007 asvarious international institutions and chilean companies. He was previously chairman of the Central Bank of Chile. He is currentlyChile (2003-2007), a senior associate researcherprofessor of Economics at the Centro de Estudios PúblicosPontificia Catholic University of Chile (1981-1984 and 1991-2003) and at Concordia University in Chile, full professorMontreal, Canada (1972-1981) and professorial lecturer at the Universidad Católica de Chile, professorGeorgetown University, Washington, DC (1985-1991), and held management positions at the Universidad de Chile, director of Banco Santander Chile, chairman of the board of directors of ING-Seguros de Vida Chile, director of ENDESA-Chile, a member of the advisory council for the World Bank Chief Economist, a member of the consulting group on monetary and exchange policy of the money and capital markets department of the International Monetary Fund, a member of the board for resolutions on parliamentary assignments of the Chilean Congress, and a member of the international advisory board of the Center for Social and Economic Research (CASE) in Warsaw, Poland.
Esther Giménez-Salinas
Born in 1949. She joined the board in 2012 after her appointment as director by our shareholders acting at their annual general meeting held on March 30, 2012. She is Rector of the Ramon Llull University and Professor of Criminal Law for the ESADE-URL’s Law School. She has been a member of the Supreme Judicial Council, a member of the standing committee of the Conference of Rectors of Spanish Universities (CRUE) and an executive vice-president of the Center for Legal Studies of the Department of Justice of the Generalitat de Catalunya.Washington, D.C. (1984-1991).
Guillermo de la Dehesa
Born in 1941. He was appointed director in 2002. Former secretary of state of economy and secretary general of commerce of the Spanish Government and chief executive officer of Banco Pastor. He is a state economist and Bank of Spain’s office manager (on leave). He was appointed director in 2002. He is an international advisor ofto Goldman Sachs International, non-executive vice chairman of Amadeus IT Holding, S.A, and a non-executive director of Campofrío Food Group, S.A. and Amadeus IT Holding,Grupo Empresarial San José, S.A. He is also chairman of the Centre for Economic Policy Research (CEPR) in London, member of the Group of Thirty of Washington, chairman of the board of trustees of the IE Business School and non-executive chairman of Aviva Grupo Corporativo, S.L. and of Aviva Vida y Pensiones, S.A. de Seguros y Reaseguros.
Rodrigo Echenique
Born in 1946. He was appointed director in 1988. Former chief executive officer of Banco Santander, S.A. from 1988 to 1994. He is currently also non-executive chairman of NH Hoteles, S.A. and non-executive director of Vocento, S.A.
Esther Giménez-Salinas
Born in 1949. She joined the board in 2012. She is a professor of Criminal Law for the ESADE-URL’s Law School. She has been rector of the Ramon Llull University, member of the Supreme Judicial Council, member of the standing committee of the Conference of Rectors of Spanish Universities (CRUE) and an executive vice-president of the Center for Legal Studies of the Department of Justice of the Generalitat de Catalunya.
Ángel Jado
Born in 1945. He was appointed director in 2010. Former director of Banco Santander from 1972 to 1999 and director of Banco Banif, S.A. from 2001. He was appointed director in 2010. Since 2001 he is director of Banco Banif, S.A.
Abel Matutes
Born in 1941. He joined Banco Santanderwas appointed director in 2002 as member of the board.2002. Former foreign minister of the Spanish Government and EU commissioner for the portfolios of Loans and Investment, Financial Engineering and Policy for Small and Medium-sized Companies (1989); North-South Relations, Mediterranean Policy and Relations with Latin America and Asia (1989) and of the Transport and Energy and Supply Agency of Euroatom (1993). He is also a chairman of Grupo de Empresas Matutes and director of FCC Construcción, S.A.
Juan R. Inciarte
Born in 1952. He joined Banco Santander in 1985 as director and executive vice president of Banco Santander de Negocios. He was appointed executive vice president in 1989 and was a director of Banco Santander from 1991 to 1999. He was appointed director in January 2008. He is alsoexecutive vice president of the Bank. In addition, he is a non-executive vice chairman of Santander UK plc and a director of Santander Consumer Finance, S.A., Alliance & Leicester plc and Banco Banif, S.A.
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Isabel Tocino
Born in 1949. She joined Banco Santanderwas appointed director in 2007 as a member of the board.2007. Former minister for environment of the Spanish Government, former chairwoman of the European Affairs and of the Foreign Affairs Committees of Spanish Congress. She is currently an elected member of the Spanish State Council, a professor of the Complutense University of Madrid, and a member of the Royal Academy of Doctors.Doctors, and a non-executive director of ENCE Energía y Celulosa, SA.
José A. Alvarez
Born in 1960. He joined the Bank in 2002. In 2004, he was appointed executive vice president, Financial Management and Investor Relations.
Ignacio Benjumea
Born in 1952. He joined Banco Santander in 1987 as general secretary of Banco Santander de Negocios. In 1994 he was appointed executive vice president and general secretary and secretary of the board of Banco Santander. He is also a director of Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A., Sociedad Rectora de la Bolsa de Madrid, S.A. and La Unión Resinera Española, S.A.
Juan Manuel Cendoya
Born in 1967. Former manager of the Legal and Tax Department of Bankinter, S.A. from 1999 to 2001. He joined the Bank in July 2001 as executive vice president, communications, corporate marketing and research.
José María Espí
Born in 1944. He joined the Bank in 1985 and, in 1988, was appointed executive vice president, human resources. In 1999 he was appointed executive vice president, risk. He is also chairman of Unión de Crédito Inmobiliario, S.A., E.F.C. and director of UCI, S.A.
José María Fuster
Born in 1958. He joined the Group in 1988. In 2004, he was appointed chief information officer of Grupo Santander. In the same year, he was also named member of the board of Abbey National plc (now, Santander UK plc) and the board of Advisors of IBM Corporation. In 2006, he was appointed executive director of Banesto and, in 2007, executive vice president of technology and operations at Banco Santander. Presently, José María Fuster is also a director of Openbank, S.A. and of Ingeniería de Software Bancario, S.A. (ISBAN).
José Luis G. Alciturri
Born in 1949. He joined the Bank in 1996.1966. Since 2003, he has been responsible for the Group’s human resources. In 2007, he was appointed executive vice president.
Enrique G. Candelas
Born in 1953. He joined Banco Santander in 1975 and was appointed senior vice president in 1993. He was appointed executive vice president, Retail Banking Spain (Santander Branch Network) in 1999.
José G. Cantera
Born in 1966. He joined Banesto in 2003. In 2006, he was appointed Banesto’s chief executive officer. Formerly, he was member of the executive committee of Citigroup EMEA and member of the board of directors of Citigroup Capital Markets Int. Ltd. and Citigroup Capital Markets UK. He is also a non-executive director of Banesto.
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Juan Guitard
Born in 1960. Former general secretary of the board of Banco Santander de Negocios (from 1994 to 1999) and manager of the investment banking department of the Bank (from 1999 to 2000). He rejoined the Bank in 2002, being appointed executive vice president, vice-secretary general of the board. In 2009, he was appointed head of internal auditing. He is also a non-executive director of Banesto.
Adolfo Lagos
Born in 1948. Former chief executive officer of Grupo Financiero Serfin since 1996. He was appointed executive vice president, America, in 2002 and executive vice president, global wholesale banking in 2003. From June 2012 he is an adviser for Santander on new business opportunities in the U.S. and Latin America.
Jorge Maortua
Born in 1961. Former executive vice president of Banesto since 2001.between 2001 and 2003. He joined the Bank in 2003 as head of global treasury and was appointed executive vice president, global wholesale banking in 2004.
Javier Marín
Born in 1966. He joined the Bank in 1991. After serving in various positions within the Group, he was appointed executive vice president of the global private banking division in 2007. In 2009, he was appointed head of the asset management and global private banking division. In 2010 he was appointed head of the global private banking, asset management and insurance division.
Jorge Morán
Born in 1964. He joined the Bank in 2002. He was appointed executive vice president, asset management and insurance, in 2004. In 2005, he was appointed executive vice president and chief operating officer of Santander UK and, in 2006, executive vice president in charge of insurance and global direct banking. In 2010 he was appointed chief executive officer of Sovereign and country head of all our businesses in the United States.
José Mª Nus
Born in 1950. He joined Santander UK in 2010 as executive director and chief risk officer. He is also an executive vice president of Santander. Formerly, he was executive director and chief risk officer of Banesto. He has also been executive vice president, risk in Argentaria and Bankinter, and member of the board of directors in Banco de Vitoria, Banco de Negocios Argentaria, Banco de Crédito Local and Banco de Alicante. He is currently a member of the board of Societat Catalana d’Economia.
César Ortega
Born in 1954. He joined the Bank in 2000 and was appointed executive vice president, general secretariat in 2006. He is also a non-executive director of Fomento de Construcciones y Contratas, S.A.
Javier Peralta
Born in 1950. He joined the Bank in 1989 and was appointed executive vice president in 1993. In 2002, he was appointed executive vice president, risk.
Marcial Portela
Born in 1945. He joined the Bank in 1998 as executive vice president. In 1999, he was appointed executive vice president, America. In 2010 he was appointed chief executive officer of Santander Brasil. He is also a director of Best Global, S.A.
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Magda Salarich
Born in 1956. She joined the Bank in 2008 as executive vice president responsible for Santander’s Consumer Finance division. Previously, she had held several positions in the automobile industry, including the position of director and executive vice president of Citroën España and head of commerce and marketing for Europe of Citroën Automobiles.
Javier San Félix
Born in 1967. He joined the Group in 2004 as head of strategic planning. In 2005 he was appointed director and executive vice president of Santander Consumer Finance in Spain and in 2006 he was appointed chief operating officer of the Santander Consumer Finance division. Since May 2012 he has been is the chief executive officer of Banesto.
José Tejón
Born in 1951. He joined the Bank in 1989. In 2002, he was appointed executive vice president, financial accounting and control.
José Antonio Vieira MonteiroVillasante
Born in 1946. He joined1946. His entire professional career has been with Banco Santander, Tottawhich he joined in 2004 as an executive director. Previously, he had held several positions in the Portuguese banking industry, including the directorship of Crédito Predial Português and chairmanship, on behalf of Banco Totta, of Banco Totta de Angola and Banco Standard Totta Moçambique. In 2012, he1964. He was appointed chairman of thesenior vice president in 1994 and deputy executive committee of Banco Santander Totta, S.A. and Santander Totta SGPS, S.A.vice president in 2006. He is currently also a non-executive directorexecutive vice president, head of Portal Universia, S.A.Santander Universities global division.
Juan A. Yanes
Born in 1962. He joined Grupo Santander in 1991 and was involved in Investment Banking, Corporate Finance, and Financial Markets until 1999. From 1999 until 2009, he was in the Risk Management Division. In 2009 he was appointed as chief corporate officer for Santander USA. In 2011, he was named head of compliance and internal control for the Group’s USU.S. operations. He serves as a board member of various USU.S. business units.
Jesús Mª Zabalza
Born in 1958. Former executive vice president of La Caixa (from 1996 to 2002). He joined the Bank in 2002, being appointed executive vice president, America. He is also member of the Board of Directors of Grupo Finaciero Santander Mexico, S.A.B. de C.V. and Banco Santander Chile.
* * * * * *
In addition, Ramón Tellaeche, an adjunct to executive vice president of the Bank, is the head of the payment means division, and José A. Villasante, an adjunct to executive vice president of the Bank, is the head of the Santander Universidades division.
For a description of arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was appointed, see Item 7 of Part I, “Shareholders and Related Party Transactions – Transactions—A. Major Shareholders– Shareholders—Shareholders’ agreements” herein.
Directors’ compensation
Bylaws stipulated fees
Article 58 of the Bank’s current Bylaws approved by the shareholders at their annual general meeting held on June 21, 2008 providesprovided that the annual share in the Bank’s profit for that the directors will be entitled to receive for discharging their duties as members of the board of directors -annual emolumentretainer and attendance fees- will be equal to 1% of the Bank’s net profit for the year. However, the board of directors may resolve to reduce this percentage.
The amount set by the board of directors for 2011,2012, calculated pursuant to the aforementioned Article 58 of the Bylaws, was 0.275%0.321% of the Bank’s profit for 2011 (2010: 0.183%2012 (2011: 0.275% in like-for-like terms).
Article 58 of the Bank’s Bylaws has been amended by our shareholders at their annual general meeting held on March 22, 2013. As a consequence, directors will continue to receive remuneration for undertaking supervision and decision-making responsibilities, consisting of a fixed amount, determined at the general shareholders’ meeting and comprising two components: attendance fees and a yearly assigned amount.
For more information on the amendment of section 2 of article 58 of our Bylaws, see below, “Certain Powers of the Board of Directors”.
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Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2013.
At the proposal of the appointments and remuneration committee, the directors at the board meeting held on December 19, 201117, 2012 resolved to reduce the annual emolumentretainer for 20112012 by 6%15% with respect to the amounts paid out of the profits for 2010.2011.
The amounts received individually by each board member in 2012 and 2011 and 2010 basedfor each position held on their positions held in the board and for each position held on a board committees werecommittee are as follows:
Euros | Euros | |||||||||||||||
2011 | 2010 | 2012 | 2011 | |||||||||||||
Members of the board of directors | 99,946 | 106,326 | 84,954 | 99,946 | ||||||||||||
Members of the executive committee | 200,451 | 213,246 | 170,383 | 200,451 | ||||||||||||
Members of the audit and compliance committee | 46,530 | 49,500 | 39,551 | 46,530 | ||||||||||||
Members of the appointments and remuneration committee | 27,918 | 29,700 | 23,730 | 27,918 | ||||||||||||
First and fourth deputy chairmen | 33,502 | 35,640 | 28,477 | 33,502 |
Furthermore, the directors received fees for attending board and committee meetings, excluding executive committee meetings, sincebecause no attendance fees are received for this committee.
The amounts of the fees for attending the meetings of the board of directors and of the board committees (excluding the executive committee) were the same in 20112012 as in 2010, in accordance with the proposal made by the appointments and remuneration committee at its meeting on December 14, 2010 and approved by the directors at the board meeting on December 20, 2010.2011. These attendance fees were approved by the directors at the board meeting held on December 17, 2007 in the following amounts:
Board of directors: €2,540 for directors resident directorsin Spain and €2,057 for non-resident directors.
Risk committee and audit and compliance committee: €1,650 for resident directors and €1,335 for non-resident directors.
Other committees: €1,270 for resident directors and €1,028 for non-resident directors.
Salary compensationfor executive directors
Executive directors received the following salaries for 2012 and 2011 approved by the board at the proposal of the appointments and remuneration committee:
Thousands of euros | ||||||||
2012 | 2011 | |||||||
Emilio Botín | 1,344 | 1,344 | ||||||
Alfredo Sáenz | 3,703 | 3,703 | ||||||
Matías R. Inciarte | 1,710 | 1,710 | ||||||
Ana P. Botín (*) | 2,100 | 1,962 | ||||||
Francisco Luzón (**) | 108 | 1,656 | ||||||
Juan R. Inciarte | 987 | 987 | ||||||
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Total | 9,952 | 11,362 | ||||||
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(*) | On December 20, 2010, the board approved the fixed remuneration for Ana P. Botín to reflect the assumption of her new responsibilities as chief executive officer of Santander UK. Her fixed remuneration was established at €2 million which, at the exchange rate published by the Bank of Spain on the preceding business day, amounts to GBP 1,702 thousand. There was no change to that remuneration in 2012. The amounts shown in the table above are the equivalent values calculated by applying the average exchange rates in those years to the fixed remuneration in pounds sterling. |
(**) | Retired from the board on January 23, 2012. |
The fixed salarymaximum variable remuneration of the executive directors for 20112012 and 20102011 approved by the board at the proposal of the appointments and remuneration committee was as follows:
Thousands of euros | Thousands of euros | |||||||||||||||
2011 | 2010 | 2012 | 2011 | |||||||||||||
Emilio Botín | 1,344 | 1,344 | 1,412 | 2,825 | ||||||||||||
Alfredo Sáenz | 3,703 | 3,703 | 3,510 | 7,019 | ||||||||||||
Matías R. Inciarte | 1,710 | 1,710 | 2,669 | 3,568 | ||||||||||||
Ana P. Botín | 1,962 | 1,353 | ||||||||||||||
Francisco Luzón(*) | 1,656 | 1,656 | ||||||||||||||
Ana P. Botín (*) | 2,247 | 2,667 | ||||||||||||||
Francisco Luzón | — | 3,717 | ||||||||||||||
Juan R. Inciarte | 987 | 987 | 1,557 | 2,082 | ||||||||||||
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Total | 11,362 | 10,753 | 11,395 | 21,878 | ||||||||||||
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(*) |
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The maximum variable remuneration of the executive directors for 2011 and 2010 approved by the board at the proposal of the appointments and remuneration committee was as follows:
Thousands of euros | ||||||||
2011 | 2010 | |||||||
Emilio Botín | 2,825 | 3,263 | ||||||
Alfredo Sáenz | 7,019 | 8,107 | ||||||
Matías R. Inciarte | 3,568 | 4,122 | ||||||
Ana P. Botín(*) | 2,667 | 3,871 | ||||||
Francisco Luzón | 3,717 | 4,294 | ||||||
Juan R. Inciarte | 2,082 | 2,405 | ||||||
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Total | 21,878 | 26,062 | ||||||
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The amounts shown in the foregoing table reflect the maximum total maximum variable remuneration allocated annually to the executive directors.directors for each year. These amounts include both the cash-based and share-based variable remuneration (according to the plans agreedadopted for each year) and both the remuneration payable immediately and onthat which, as the case may be, is payable following a deferred basis payable.deferral period.
In recent years the Group has adaptedaligned its remuneration policy to the new requirements and best practices, increasing the variable remuneration to be deferred and paid in shares, rather than in cash. The following table shows a breakdown of the variable remuneration:
154
Thousands of euros | ||||||||||||||||||||||||||||||||
Thousands of euros | 2012 | 2011 | ||||||||||||||||||||||||||||||
2011(1) | 2010(2) | Immediate payment | Deferred payment | Immediate payment | Deferred payment | |||||||||||||||||||||||||||
Immediate payment | Deferred payment | Immediate payment | Deferred payment | |||||||||||||||||||||||||||||
Emilio Botín | 1,130 | 1,695 | 1,682 | 1,581 | 564 | 848 | 1,130 | 1,695 | ||||||||||||||||||||||||
Alfredo Sáenz | 2,808 | 4,212 | 3,351 | 4,756 | 1,404 | 2,106 | 2,808 | 4,212 | ||||||||||||||||||||||||
Matías R. Inciarte | 1,427 | 2,141 | 1,994 | 2,128 | 1,068 | 1,602 | 1,427 | 2,141 | ||||||||||||||||||||||||
Ana P. Botín | 1,067 | 1,600 | 1,980 | (3) | 1,891 | (3) | ||||||||||||||||||||||||||
Ana P. Botín (*) | 898 | 1,348 | 1,067 | 1,600 | ||||||||||||||||||||||||||||
Francisco Luzón | 1,487 | 2,230 | 2,146 | 2,148 | — | — | 1,487 | 2,230 | ||||||||||||||||||||||||
Juan R. Inciarte | 833 | 1,249 | 1,304 | 1,101 | 622 | 934 | 833 | 1,249 | ||||||||||||||||||||||||
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Total | 8,752 | 13,127 | 12,457 | 13,605 | 4,556 | 6,838 | 8,752 | 13,127 | ||||||||||||||||||||||||
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The first cycle of the deferred conditional variable remuneration plan was approved in 2011, whereby payment of a portion of the variable remuneration for 2011 amounting to €13,127 thousand in the aggregate for all executive directors is deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. Similarly, the portion of the variable remuneration that is not deferred (immediate payment) was paid 50% in cash and 50% in shares. The second cycle of the deferred conditional variable remuneration plan was approved in 2012 under the same payment terms as the previous plan.
The amounts relating to the variable share-based remuneration reflect the equivalent value, at the agreement date, of the maximum number of shares (886,510 shares) that may be received by the directors for their participation in the various plans. The number of shares that each director will actually receive on expiry of each plan will depend on the director’s compliance with the conditions for entitlement thereto (see Note 5.e) to our consolidated financial statements).statements.
A detailed explanation for the 2011 renumeration2012 remuneration for each director is provided below. The salaries of the executive directors disclosed in the table below relate to the maximum amounts approved by the board of directors as period remuneration, regardless of the actual year of payment and of any amounts paid to the directors under the agreed deferred remuneration scheme. Note 5.e) to our consolidated financial statements includes disclosures on the shares delivered by virtuepursuant to the terms of the deferred remuneration schemes in place in previous years the conditions for delivery of which were met in the relatedapplicable years.
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Thousands of euros | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Directors | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bylaw-stipulated emoluments | Salaries of executive directors | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Annual emolument | Attendance fees | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Audit and | Appointments and | Variable -Immediate | Variable -Deferred | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Board | Executive Committee | compliance committee | remuneration committee | Board | Other fees | Fixed remuneration | In cash | In shares | In cash | In shares | Total | remuneration (b) | Total | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Emilio Botín | 100 | 200 | — | — | 30 | 4 | 1,344 | 565 | 565 | 847 | 847 | 4,168 | 1 | 4,505 | 4,959 | |||||||||||||||||||||||||||||||||||||||||||||
Fernando de Asúa | 133 | 200 | 47 | 28 | 30 | 186 | — | — | — | — | — | — | — | 625 | 654 | |||||||||||||||||||||||||||||||||||||||||||||
Alfredo Sáenz | 100 | 200 | — | — | 30 | 4 | 3,703 | 1,404 | 1,404 | 2,106 | 2,106 | 10,723 | 548 | 11,604 | 12,635 | |||||||||||||||||||||||||||||||||||||||||||||
Matías R. Inciarte | 100 | 200 | — | — | 33 | 163 | 1,710 | 714 | 714 | 1,071 | 1,071 | 5,280 | 239 | 6,015 | 6,569 | |||||||||||||||||||||||||||||||||||||||||||||
Manuel Soto | 133 | — | 47 | 28 | 30 | 36 | — | — | — | — | — | — | — | 274 | 279 | |||||||||||||||||||||||||||||||||||||||||||||
Assicurazioni Generali, SpA.(1) | 96 | — | — | — | 12 | — | — | — | — | — | — | — | — | 108 | 139 | |||||||||||||||||||||||||||||||||||||||||||||
Antonio Basagoiti | 100 | 200 | — | — | 33 | 158 | — | — | — | — | — | — | 7 | 498 | 510 | |||||||||||||||||||||||||||||||||||||||||||||
Ana P. Botín | 100 | 200 | — | — | 28 | 1 | 1,962 | 534 | 534 | 800 | 800 | 4,630 | 51 | 5,010 | 5,592 | (c) | ||||||||||||||||||||||||||||||||||||||||||||
Javier Botín (2) | 100 | — | — | — | 30 | — | — | — | — | — | — | — | — | 130 | 131 | |||||||||||||||||||||||||||||||||||||||||||||
Lord Terence Burns | 100 | — | — | — | 19 | — | — | — | — | — | — | — | — | 119 | 125 | |||||||||||||||||||||||||||||||||||||||||||||
Vittorio Corbo (3) | 45 | — | — | — | 8 | — | — | — | — | — | — | — | — | 53 | — | |||||||||||||||||||||||||||||||||||||||||||||
Guillermo de la Dehesa | 100 | 200 | — | 28 | 33 | 15 | — | — | — | — | — | — | — | 377 | 390 | |||||||||||||||||||||||||||||||||||||||||||||
Rodrigo Echenique (4) | 100 | 200 | 47 | 28 | 33 | 35 | — | — | — | — | — | — | 37 | 480 | 423 | |||||||||||||||||||||||||||||||||||||||||||||
Antonio Escámez | 100 | 200 | — | — | 33 | 154 | — | — | — | — | — | — | 41 | 528 | 530 | |||||||||||||||||||||||||||||||||||||||||||||
Ángel Jado (5) | 100 | — | — | — | 33 | — | — | — | — | — | — | — | — | 133 | 72 | |||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón (6) | 100 | 200 | — | — | 30 | 1 | 1,656 | 743 | 743 | 1,115 | 1,115 | 5,372 | 1,089 | 6,792 | 7,297 | |||||||||||||||||||||||||||||||||||||||||||||
Abel Matutes | 100 | — | 47 | — | 30 | 21 | — | — | — | — | — | — | — | 198 | 197 | |||||||||||||||||||||||||||||||||||||||||||||
Juan R. Inciarte | 100 | — | — | — | 28 | 96 | 987 | 416 | 416 | 625 | 625 | 3,069 | 120 | 3,413 | 3,759 | |||||||||||||||||||||||||||||||||||||||||||||
Luis Ángel Rojo (7) | 39 | — | 18 | 11 | 8 | 9 | — | — | — | — | — | — | — | 85 | 215 | |||||||||||||||||||||||||||||||||||||||||||||
Luis Alberto Salazar-Simpson | 100 | — | 47 | — | 30 | 21 | — | — | — | — | — | — | — | 198 | 200 | |||||||||||||||||||||||||||||||||||||||||||||
Isabel Tocino (8) | 100 | — | — | 13 | 30 | 5 | — | — | — | — | — | — | — | 148 | 134 | |||||||||||||||||||||||||||||||||||||||||||||
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Total 2011 | 2,046 | 2,005 | 251 | 135 | 575 | 909 | 11,362 | 4,376 | 4,376 | 6,564 | 6,564 | 33,242 | 2,133 | 41,293 | — | |||||||||||||||||||||||||||||||||||||||||||||
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Total 2010 | 2,168 | 2,132 | 248 | 149 | 482 | 904 | 10,753 | 12,457 | — | — | 13,605 | 36,815 | 1,912 | — | 44,810 | |||||||||||||||||||||||||||||||||||||||||||||
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Directors | Thousands of euros | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bylaw-stipulated retainers | Salaries of executive directors | Other remuneration (b) | Total | Total (c) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Annual retainer | Attendance fees | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Board | Executive Committee | Audit and compliance committee | Appointments and remuneration committee | Board | Other fees | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed remuneration | Variable - immediate payment | Variable - deferred payment (a) | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In cash | In shares | In cash | In shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Emilio Botín | 85 | 170 | — | — | 25 | 4 | 1,344 | 282 | 282 | 424 | 424 | 2,756 | 20 | 3,061 | 4,505 | |||||||||||||||||||||||||||||||||||||||||||||
Fernando de Asúa | 113 | 170 | 40 | 24 | 25 | 195 | — | — | — | — | — | — | — | 567 | 625 | |||||||||||||||||||||||||||||||||||||||||||||
Alfredo Sáenz | 85 | 170 | — | — | 25 | 4 | 3,703 | 702 | 702 | 1,053 | 1,053 | 7,213 | 740 | 8,237 | 11,604 | |||||||||||||||||||||||||||||||||||||||||||||
Matías R. Inciarte | 85 | 170 | — | — | 25 | 160 | 1,710 | 534 | 534 | 801 | 801 | 4,380 | 334 | 5,154 | 6,015 | |||||||||||||||||||||||||||||||||||||||||||||
Manuel Soto (9) | 113 | — | 40 | 24 | 25 | 150 | — | — | — | — | — | — | — | 352 | 274 | |||||||||||||||||||||||||||||||||||||||||||||
Assicurazioni Generali, SpA. (1) | — | — | — | — | — | — | — | — | — | — | — | — | — | — | 108 | |||||||||||||||||||||||||||||||||||||||||||||
Antonio Basagoiti (2) | 21 | 42 | — | — | 8 | 44 | — | — | — | — | — | — | — | 115 | 498 | |||||||||||||||||||||||||||||||||||||||||||||
Ana P. Botín | 85 | 170 | — | — | 23 | 4 | 2,100 | 449 | 449 | 674 | 674 | 4,346 | 512 | 5,140 | 5,010 | |||||||||||||||||||||||||||||||||||||||||||||
Javier Botín (3) | 85 | — | — | — | 23 | — | — | — | — | — | — | — | — | 108 | 130 | |||||||||||||||||||||||||||||||||||||||||||||
Lord Burns (Terence) | 85 | — | — | — | 21 | — | — | — | — | — | — | — | — | 106 | 119 | |||||||||||||||||||||||||||||||||||||||||||||
Vittorio Corbo (4) | 85 | — | — | — | 21 | — | — | — | — | — | — | — | — | 106 | 53 | |||||||||||||||||||||||||||||||||||||||||||||
Guillermo de la Dehesa | 85 | 170 | — | 24 | 25 | 15 | — | — | — | — | — | — | — | 320 | 377 | |||||||||||||||||||||||||||||||||||||||||||||
Rodrigo Echenique | 85 | 170 | 40 | 24 | 25 | 32 | — | — | — | — | — | — | 40 | 415 | 480 | |||||||||||||||||||||||||||||||||||||||||||||
Antonio Escámez (2) | 21 | 42 | — | — | 8 | 45 | — | — | — | — | — | — | 2 | 118 | 528 | |||||||||||||||||||||||||||||||||||||||||||||
Esther Giménez-Salinas (5) | 64 | — | — | — | 18 | — | — | — | — | — | — | — | — | 82 | — | |||||||||||||||||||||||||||||||||||||||||||||
Ángel Jado | 85 | — | — | — | 25 | — | — | — | — | — | — | — | — | 110 | 133 | |||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón (6) | 5 | 11 | — | — | 3 | — | 108 | — | — | — | — | 108 | 3 | 130 | 6,792 | |||||||||||||||||||||||||||||||||||||||||||||
Abel Matutes | 85 | — | 40 | — | 25 | 19 | — | — | — | — | — | — | — | 169 | 198 | |||||||||||||||||||||||||||||||||||||||||||||
Juan R. Inciarte | 85 | — | — | — | 25 | 99 | 987 | 311 | 311 | 467 | 467 | 2,543 | 183 | 2,937 | 3,413 | |||||||||||||||||||||||||||||||||||||||||||||
Luis Ángel Rojo (7) | — | — | — | — | — | — | — | — | — | — | — | — | — | — | 85 | |||||||||||||||||||||||||||||||||||||||||||||
Luis Alberto Salazar-Simpson (2) | 21 | — | 10 | — | 8 | 6 | — | — | — | — | — | — | — | 44 | 198 | |||||||||||||||||||||||||||||||||||||||||||||
Isabel Tocino (8) (9) | 85 | — | — | 24 | 25 | 123 | — | — | — | — | — | — | — | 257 | 148 | |||||||||||||||||||||||||||||||||||||||||||||
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Total 2012 | 1,464 | 1,287 | 168 | 119 | 409 | 900 | 9,952 | 2,278 | 2,278 | 3,419 | 3,419 | 21,347 | 1,833 | 27,528 | — | |||||||||||||||||||||||||||||||||||||||||||||
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Total 2011 | 2,046 | 2,005 | 251 | 135 | 575 | 909 | 11,362 | 4,376 | 4,376 | 6,564 | 6,564 | 33,242 | 2,133 | — | 41,293 | |||||||||||||||||||||||||||||||||||||||||||||
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(1) | Retired from the board on October 24, 2011. |
(2) | Retired from the board on March 30, 2012. |
(3) | Amounts contributed to Marcelino Botín Foundation. |
Board member since July 22, 2011. |
(5) | Board member since |
(6) | Retired from the board on January 23, 2012. |
(7) | Deceased on May 24, 2011. |
(8) | Member of the appointments and remuneration committee since July 21, 2011. |
(9) | Member of the risk committee since March 30, 2012. |
(a) | Maximum deferred variable remuneration for the period approved by the board of directors, at the related meetings, for each of the directors. |
(b) | Includes, inter alia, the life and medical insurance costs borne by the Group relating to Bank directors. |
(c) |
Following the amendment made by the Group in 2011 to its remuneration policy in order to adapt to the new European standards and recommendations on remuneration, the foregoing table was prepared including the maximum variable remuneration agreed for that year, regardless of the deferral of a portion thereof over several years and of the amount that will ultimately be received, since collection of the deferred amounts is subject to certain conditions being met. For comparison purposes, the figures for 2010 were prepared using consistent criteria.
156
Compensation to the board membersfor service on other boards as representatives of the Bank and to senior management
Representation on other boards
By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. TheIn 2012 and 2011 the Bank’s directors did not receive any remuneration received in respect of representation duties of this kind, relating to appointments agreed upon before March 18, 2002, was as follows:these representative duties.
Thousands of euros | ||||||||||
Company | 2011 | 2010 | ||||||||
Antonio Escámez | Attijariwafa Bank Société Anonyme | — | 10.0 |
Emilio Botín ceased to discharge his duties as director of Shinsei Bank, Ltd. on 23 June 23, 2009 and received compensation of €73.1 thousand.
Also, in2009. In 2008, 2007, 2006 and 2005 Emilio Botínhe had received, in each year, options to acquire shares of Shinsei Bank, Ltd. (Shinsei), the detail being as follows: 10,000 shares at a price of JPY 416 per shareeach in 2008; 10,000 shares at a price of JPY 555 per shareeach in 2007; 25,000 shares at a price of JPY 825 per shareeach in 2006; and 25,000 shares at a price of JPY 601 per shareeach in 2005. At December 31, 2011,2012, the market price of the Shinsei share was JPY 80171 and, therefore, regardless of the stipulated exercise periods, the options granted in those years would not have given rise to any gains had they been exercised.
Furthermore, other directors of the Bank received a total of €1,413€ 1,317 thousand in 20112012 as members of the boards of directors of Group companies (2010: €741(2011: € 1,413 thousand), the detail being as follows: Lord Burns received €600€ 708 thousand as non-executive chairman of the board of directors of the Group companies Santander UK plc and Alliance & Leicester plc;Plc.; Antonio Basagoiti received €375€ 120 thousand as non-executive chairman of the board of directors of Banesto and in bylawsbylaw stipulated directors’ fees;fees, from the beginning of 2012 until March 30, 2012, when he retired as director of Banco Santander; Matías R. Inciarte received €42€ 42 thousand as a non-executive director of U.C.I., S.A., and Vittorio Corbo received €107€ 119 thousand as a non-executive director of Banco Santander Chile, and €289€ 321 thousand for advisory services provided to that bank.
157
Senior management
Following is a detailentity and € 7 thousand as non-executive director of the maximum aggregate remuneration approved for the Bank’s executive vice presidents (*) for 2011 and 2010:
Number of managers (1) | Thousands of euros | |||||||||||||||||||||||||||||||||||
Salaries | Other remuneration (4) | Total | ||||||||||||||||||||||||||||||||||
Variable - Immediate payment | Variable - Deferred payment | |||||||||||||||||||||||||||||||||||
Fixed | In cash | In shares | In cash | In shares | Total | |||||||||||||||||||||||||||||||
2010 | 23 | 23,756 | 28,484 | — | — | 26,697 | (2) | 78,937 | 5,510 | 84,447 | ||||||||||||||||||||||||||
2011 | 22 | 23,095 | 12,584 | (3) | 12,584 | 12,584 | 12,584 | 73,431 | 7,887 | 81,318 |
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Following is a detail of the maximum number ofGrupo Financiero Santander shares that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2011 and 2010 under the various plans then in force (see Note 47 to our consolidated financial statements):
Maximum number of shares to be delivered | December 31, 2011 | December 31, 2010 | ||||||
Plan I11 | — | 1,226,754 | ||||||
Plan I12 | 1,468,762 | (1) | 1,468,762 | |||||
Plan I13 | 1,468,762 | (2) | 1,468,762 | |||||
First cycle of obligatory investment | — | 261,681 | ||||||
Second cycle of obligatory investment | 452,994 | 508,764 | ||||||
Third cycle of obligatory investment | 293,140 | 330,104 | ||||||
Deferred conditional delivery plan | 1,496,628 | (3) | 1,496,628 | |||||
Deferred variable remuneration plan | 2,119,944 | (4) | — |
In 2011 and 2010, since the conditions established in the related deferred share-based remuneration schemes from prior years had been met, the following number of Santander shares were delivered to the executive vice presidents:
Number of shares delivered | 2011 | 2010 | ||||||
Plan I10 | — | 1,078,730 | ||||||
Plan I11 | 1,042,130 | (1) | — | |||||
First cycle of obligatory investment | 232,852 | — |
158
The actuarial liability recognized in respect of post-employment benefits earned by the Bank’s executive vice presidents totaled €267 million as of December 31, 2011 (December 31, 2010: €227 million). Settlements of €47 million took place in 2010. The net charge to the consolidated income statement amounted to €29 million in 2011 (2010: €31 million). Additionally, the total sum insured under life and accident insurance policies relating to this group amounted to €66 million at December 31, 2011 (December 31, 2010: €61 million).México, S.A.B. de C.V.
Pension commitments, other insurance and other items of directors
InAt December 31, 2011, in the event of pre-retirementearly retirement or retirement the executive directors havehad the right to receive a supplementary pension benefits which maycould be externalized by the Bank.
In prior years, the board of directors of the Bank resolved to change the contracts of the executive directors and the other members of the Bank’s senior management (the senior executives) granting them the right, on the date of retirement or pre-retirement, as appropriate, to opt to receive the accrued pensions, or amounts similar thereto, in the form of an annuity or a lump sum, i.e. in one single payment. The board also resolved that the senior executives who have not reached the retirement age may opt, after reaching the age of 60, and each year thereafter until the age of 64, to receive their accrued pensions in the form of a lump sum, which will be determined at the date of economic effect of exercising the option and which they (or their heirs, in the event of death) will be entitled to receive when they retire or are declared disabled; any person who exercises this option must undertake not to take pre-retirement, retire early or retire, in all cases at his/her own request, within two years from the exercise date. In order to maintain the financial neutrality for the Group, the amount to be received in the form of a lump sum by the commitment beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior executives at the date of economic effect of exercising the option. The senior executives who reach the age of 60 and, prior to the age of retirement, do not opt to receive their accrued pensions as a lump sum, and who are still in service when reaching the age of retirement or who at the date of the contract have passed the age of retirement must state whether they wish to opt for this form of benefit. The exercise of this option will mean, in all cases, that no further pension benefit will accrue and, from the date of economic effect of exercising the option, the lump sum to be received, which will be updated at the agreed-upon interest rate, will be fixed. Should the senior executive subsequently die whilst still in service and prior to retirement, the lump sum of the pension will correspond to his/her heirs. Lastly, the board of directors also regulated the impact of the deferral of the computable variable remuneration on the determination of the pension obligations (or similar amounts), in the form of an annuity or a lump sum, for pre-retirement, early retirement or normal retirement.
In 2009, Emilio Botín and Alfredo Sáenz, who had passed the age of retirement, exercised the option to receive their respective accrued pensions as a lump sum on the date of effective retirement.
In 2010, Matías R. Inciarte, who had reached the age of 60, exercised the option to receive his accrued pension as a lump sum on the date of effective retirement.
The total balance of supplementary pension obligations assumed by the Group over the years to its current and retired employees, which is covered mostly by in-house provisions amounted to €9,045 million as of December 31, 2011. This amount includes obligations to former directors of the Bank during the year who discharge (or have discharged) executive functions.
The following table provides information on the pension obligations assumed and covered by the Group in respect of the Bank’s current executive directors:directors at December 31, 2011:
Thousands of euros | ||||||||
2011 | 2010 | |||||||
Emilio Botín | 25,400 | 25,029 | ||||||
Alfredo Sáenz | 87,758 | 86,620 | ||||||
Matías R. Inciarte | 45,224 | 44,560 | ||||||
Ana P. Botín | 31,856 | 31,329 | ||||||
Francisco Luzón | 63,608 | (*) | 55,950 | |||||
Juan R. Inciarte | 12,309 | 11,629 | ||||||
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266,155 | 255,117 | |||||||
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Thousands of euros (*) | ||||
2011 | ||||
Emilio Botín | 25,400 | |||
Alfredo Sáenz | 87,758 | |||
Matías R. Inciarte | 45,224 | |||
Ana P. Botín | 31,856 | |||
Juan R. Inciarte | 12,309 | |||
202,547 | ||||
(*) |
159
The contracts of the executive directors and the other members of the Bank’s senior management prior to the amendment mentioned below granted senior executives the right, on the date of retirement, or prior to that date, from the age of 60, to opt to receive the accrued pensions -or amounts similar thereto- in the form of an annuity or a lump sum, i.e. in one single payment. The exercise of this option meant, in all cases, that no further pension benefit would accrue and, from the date of economic effect of exercising the option, the lump sum to be received, which would be updated at the agreed-upon interest rate, would be fixed. Since the aforementioned option has been exercised, the amounts included in the foregoing table in respect of the directors Emilio Botín, Alfredo Sáenz and Matías R. Inciarte are those relating to the aforementioned lump sums, and no further amounts will accrue to each of them in respect of pensions followingsums.
In 2012, under the exerciseframework of the aforementioned option. The lump sumsmeasures implemented by the Group in order to mitigate the risks arising from the defined-benefit pension obligations payable to certain employees, which led to an agreement with the workers’ representatives to convert the defined-benefit obligations existing under the collective agreement into defined-contribution plans (see Note 25 to our consolidated financial statements), the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. Under the new system, the executive directors are updated atgranted the agreed-upon interest rate.
The other amounts inright to receive a pension benefit upon retirement which is based on the foregoing table relatecontributions made to the accrued present actuarial valueaforementioned system and supersedes the right to receive a pension supplement which had hitherto been payable to them upon retirement. The new system expressly excludes any obligation of the futureBank to the executive directors other than the conversion of the current system into the new employee welfare system and, as the case may be, the annual paymentscontributions to be made by the Group. These amounts were obtained using actuarial calculations and cover the obligations to pay the respective pension supplements or lump sums.as described below. In the caseevent of Ana P. Botín, these supplements or lump sums were calculated as 100%pre-retirement, the executive directors who have not exercised the option described in the preceding paragraph are entitled to an annual retainer until the date of retirement.
A detail of each of the sum ofexecutive directors’ beginning balance under the fixed annual salary receivednew employee welfare system is provided below. This balance reflects the market value, at the date of effective retirement or,conversion of the pension obligations under the new employee welfare system, of the assets in her case, atwhich the date of optingprovisions for the respective accrued obligations had been invested.
Thousands of euros | ||||
Emilio Botín | 25,566 | |||
Alfredo Sáenz | 88,174 | (*) | ||
Matías R. Inciarte | 45,524 | |||
Ana P. Botín | 34,941 | (*) | ||
Juan R. Inciarte | 12,824 | |||
207,029 | ||||
(*) | Includes the amounts relating to the period of the provision of services at Banesto, externalized with another insurance company. |
From 2013 onwards, the Bank will make annual contributions to receivethe employee welfare system for the benefit in a lump sum plus 30% of the arithmetical meanexecutive directors and senior executives, in proportion to their individual pensionable bases, until they leave the Group, or until their retirement from the Group, death or disability (including, as the case may be, during the pre-retirement period). No contributions will be made for the executive directors and senior executives who have exercised the aforementioned option prior to the conversion of the last threedefined-benefit pension obligations into the defined-contribution employee welfare system.
The terms of the employee welfare system regulate the impact of the deferral of the computable variable salaryremuneration on the benefit payments received until that date. In addition, incovered by the system upon retirement and, as the case may be, the retention of Francisco Luzón, to the amount thus calculated here will be added the amounts received by him in the year before retirement or pre-retirement or, where appropriate, at the date of opting to receive the benefit in a lump sum, in his capacity as a member of the board of directors or the committees of the Bank or of other consolidable Group companies and, in the case of Juan R. Inciarte, 100% of the gross fixed annual salary received at the date of effective retirement or, where appropriate, at the date of opting to receive the benefit in a lump sum.
On January 23, 2012, Francisco Luzón took voluntary pre-retirement and resignedshares arising from his positions as director and executive vice president of the Bank and head of the America division, and opted to receive his accrued pre-retirement pension (€2.8 million) as a lump sum. This amount, which is included in the figure shown in the foregoing table, will be paid to him as follows: €2.5 million in 2012 and €0.1 million each year in 2013, 2014 and 2015.
Francisco Luzón retained his right to opt to receive his accrued retirement pension on reaching early retirement age as an annuity or a lump sum.such remuneration.
The Group also continues to have pension obligations to other directors amounting to €39€18 million (December 31, 2010: €402011: €39 million). The payments made in 20112012 to the members of the board entitled to post-employment benefits amounted to €2.6€1.6 million (2010:(2011: €2.6 million).
Pension provisions recognized and reversed in 20112012 amounted to €7.8 million€2,166 thousand (2011: €7,826 thousand recognized and €886 thousand respectively (2010: €9.6 million and €7.4 million, respectively)reversed).
The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the ‘Other remuneration’Other remuneration column of the table shown in Note 5.a.iii to our consolidated financial statements. Also, the following table provides information on the sums insured for the Bank’s executive directors:
Thousands of euros | ||||||||||||||||
Thousands of euros | 2012 | 2011 | ||||||||||||||
2011 | 2010 | |||||||||||||||
Emilio Botín | — | — | — | — | ||||||||||||
Alfredo Sáenz | 11,108 | 11,108 | 11,108 | 11,108 | ||||||||||||
Matías R. Inciarte | 5,131 | 5,131 | 5,131 | 5,131 | ||||||||||||
Ana P. Botín | 988 | 1,403 | 6,000 | 988 | ||||||||||||
Francisco Luzón | 9,934 | 9,934 | — | 9,934 | ||||||||||||
Juan R. Inciarte | 2,961 | 2,961 | 2,961 | 2,961 | ||||||||||||
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30,122 | 30,537 | |||||||||||||||
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Additionally, the Group is responsible forother directors have life insurance policies for other executive directors,the cost of which is borne by the Group, the related insured sum being €3€1.4 million at December 31, 2011 (2010:2012 (2011: €3 million).
160
Share-based payments to executive directors
The detailsFollowing is a description of the various share delivery plans instrumenting the directors’ share-based paymentdeferred variable remuneration. For more information on these plans granted to directors (seesee Note 47 to our consolidated financial statements) are as follows:statements:
i) Performance share plan
This plan involves successive three-year cycles of share deliveries to the beneficiaries, as part of their variable remuneration for the year in which each cycle begins, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. Following the changes implemented in 2011 to the remuneration policy for the executive directors, the latter ceaseceased to be beneficiaries of the cycle approved in 2011 and of any successive cycles which are approved.
The table below shows the maximum number of options granted to each executive director in each cycle and the number of shares received in 20112012 and 20102011 under the I11I12 and I10I11 incentive plans (Plans I11I12 and I10)I11), respectively. As established in these plans, the number of shares received was determined by the degree of achievement of the targets to which each plan was tied, to and all plans fell short of the maximum number.
161
Options at January 1, 2010 | Options granted in 2010 (number) | Shares delivered in 2010 (number) | Options cancelled in 2010 (number) | Options at December 31, 2010 | Shares delivered in 2011 (number) | Options cancelled in 2011 (number) | Options at December 31, 2011 | Grant date | Share delivery deadline | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Plan I10: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Emilio Botín | 62,589 | — | (56,825 | ) | (5,764 | ) | — | — | — | — | 06/23/07 | 07/31/10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Alfredo Sáenz | 164,894 | — | (149,707 | ) | (15,187 | ) | — | — | — | — | 06/23/07 | 07/31/10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Matías R. Inciarte | 79,627 | — | (72,293 | ) | (7,334 | ) | — | — | — | — | 06/23/07 | 07/31/10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ana P. Botín (1) | 41,835 | — | (37,982 | ) | (3,853 | ) | — | — | — | — | 06/23/07 | 07/31/10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón | 67,029 | — | (60,856 | ) | (6,173 | ) | — | — | — | — | 06/23/07 | 07/31/10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Juan R. Inciarte (2) | 64,983 | — | (58,998 | ) | (5,985 | ) | — | — | — | — | 06/23/07 | 07/31/10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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480,957 | — | (436,661 | ) | (44,296 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Options at January 1,2011 | Shares delivered in 2011 (number) | Options cancelled in 2011 (number) | Options at December 31, 2011 | Shares delivered in 2012 (number) | Options cancelled in 2012 (number) | Options at December 31, 2012 | Grant date | Share delivery deadline | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Plan I11: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Emilio Botín | 68,848 | — | — | — | 68,848 | 59,209 | (9,639 | ) | — | 06/21/08 | 07/31/11 | 68,848 | 59,209 | (9,639 | ) | — | — | — | — | 06/21/08 | 07/31/11 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Alfredo Sáenz | 189,628 | — | — | — | 189,628 | 163,080 | (26,548 | ) | — | 06/21/08 | 07/31/11 | 189,628 | 163,080 | (26,548 | ) | — | — | — | — | 06/21/08 | 07/31/11 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Matías R. Inciarte | 87,590 | — | — | — | 87,590 | 75,327 | (12,263 | ) | — | 06/21/08 | 07/31/11 | 87,590 | 75,327 | (12,263 | ) | — | — | — | — | 06/21/08 | 07/31/11 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Ana P. Botín (1) | 46,855 | — | — | — | 46,855 | 40,295 | (3) | (6,560 | ) | — | 06/21/08 | 07/31/11 | 46,855 | 40,295 | (2) | (6,560 | ) | — | — | — | — | 06/21/08 | 07/31/11 | |||||||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón | 77,083 | — | — | — | 77,083 | 66,291 | (10,792 | ) | — | 06/21/08 | 07/31/11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón (3) | 77,083 | 66,291 | (10,792 | ) | — | — | — | — | 06/21/08 | 07/31/11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Juan R. Inciarte | 50,555 | — | — | — | 50,555 | 43,477 | (7,078 | ) | — | 06/21/08 | 07/31/11 | 50,555 | 43,477 | (7,078 | ) | — | — | — | — | 06/21/08 | 07/31/11 | |||||||||||||||||||||||||||||||||||||||||||||||||||
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520,559 | — | — | — | 520,559 | 447,679 | (72,880 | ) | — | 520,559 | 447,679 | (72,880 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Plan I12: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Emilio Botín | 82,941 | — | — | — | 82,941 | — | — | 82,941 | 06/19/09 | 07/31/12 | 82,941 | — | — | 82,941 | 24,882 | (58,059 | ) | — | 06/19/09 | 07/31/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Alfredo Sáenz | 228,445 | — | — | — | 228,445 | — | — | 228,445 | 06/19/09 | 07/31/12 | 228,445 | — | — | 228,445 | 68,534 | (159,911 | ) | — | 06/19/09 | 07/31/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Matías R. Inciarte | 105,520 | — | — | — | 105,520 | — | — | 105,520 | 06/19/09 | 07/31/12 | 105,520 | — | — | 105,520 | 31,656 | (73,864 | ) | — | 06/19/09 | 07/31/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Ana P. Botín (1) | 56,447 | — | — | — | 56,447 | — | — | 56,447 | 06/19/09 | 07/31/12 | 56,447 | — | — | 56,447 | 16,934 | (4) | (39,513 | ) | — | 06/19/09 | 07/31/12 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón (4) | 92,862 | — | — | — | 92,862 | — | — | 92,862 | 06/19/09 | 07/31/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón (3) | 92,862 | — | — | 92,862 | — | (92,862 | ) | — | 06/19/09 | 07/31/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Juan R. Inciarte | 60,904 | — | — | — | 60,904 | — | — | 60,904 | 06/19/09 | 07/31/12 | 60,904 | — | — | 60,904 | 18,271 | (42,633 | ) | — | 06/19/09 | 07/31/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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627,119 | — | — | — | 627,119 | — | — | 627,119 | 627,119 | — | — | 627,119 | 160,277 | (466,842 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Plan I13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Emilio Botín | — | 82,941 | — | — | 82,941 | — | — | 82,941 | 06/11/10 | 07/31/13 | 82,941 | — | — | 82,941 | — | — | 82,941 | 06/11/10 | 07/31/13 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Alfredo Sáenz | — | 228,445 | — | — | 228,445 | — | — | 228,445 | 06/11/10 | 07/31/13 | 228,445 | — | — | 228,445 | — | — | 228,445 | 06/11/10 | 07/31/13 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Matías R. Inciarte | — | 105,520 | — | — | 105,520 | — | — | 105,520 | 06/11/10 | 07/31/13 | 105,520 | — | — | 105,520 | — | — | 105,520 | 06/11/10 | 07/31/13 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Ana P. Botín (1) | — | 56,447 | — | — | 56,447 | — | — | 56,447 | 06/11/10 | 07/31/13 | 56,447 | — | — | 56,447 | — | — | 56,447 | 06/11/10 | 07/31/13 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón (4) | — | 92,862 | — | — | 92,862 | — | — | 92,862 | 06/11/10 | 07/31/13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón (3) | 92,862 | — | — | 92,862 | — | (92,862 | ) | — | 06/11/10 | 07/31/13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Juan R. Inciarte | — | 60,904 | — | — | 60,904 | — | — | 60,904 | 06/11/10 | 07/31/13 | 60,904 | — | — | 60,904 | — | — | 60,904 | 06/11/10 | 07/31/13 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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— | 627,119 | — | — | 627,119 | — | — | 627,119 | 627,119 | — | — | 627,119 | — | (92,862 | ) | 534,257 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(1) | Without prejudice to the Banesto shares corresponding to Ana P. Botín by virtue of the various Banesto Share-Based Incentive Plans approved by the shareholders at the general |
(2) |
In 2011 Ana P. Botín received a further 10,786 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010. |
Following his resignation on January 23, 2012, Francisco Luzón lost his entitlement arising from his participation in these plans since he did not meet all the conditions stipulated for the shares to be received. |
(4) | In 2012 Ana P. Botín received a further 14,022 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010. |
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ii) Obligatory investment share plan
Pursuant to the Obligatoryobligatory investment share plan (see Note 47 to our consolidated financial statements), and also as part of the deferred share-based variable remuneration for each period, the current executive directors acquired, prior to February 29, 2008, February 28, 2009 and February 28, 2010, the current executive directors acquired as deferred share-based variable remuneration the number of Bank shares shown in the table below, which represented a costinvolved an aggregate investment of €1.5 million in 2008, €0.8 million in 2009 and €1.5 million in 2010. Executive directors who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made will beare entitled to receive the same number of Bank shares as that composing their initial obligatory investment.
The shareholders at the annual shareholders’general meeting of June 19, 2009 introduced, for the third cycle, ana requirement additional requirement to that of remaining in the Bank’sGroup’s employ, namely,which is that in the three-year period from the investment in the shares, none of the following circumstances may arise:should exist: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, (including,including, in particular, risk regulations)those relating to risks, where applicable to the executive in question; or (iii) a material restatement of the Group’s financial statements, except ifwhen it is required pursuant to a change in accounting standards.
Maximum number of shares to be delivered | Maximum number of shares to be delivered | |||||||||||||||||||||||
Executive directors | 3rd Cycle 2010-2012 | 2nd Cycle 2009-2011 | 1st Cycle 2008-2010 | |||||||||||||||||||||
3rd cycle 2010-2012 | 2nd cycle 2009-2011 | 1st cycle 2008-2010 | ||||||||||||||||||||||
Emilio Botín | 20,515 | 19,968 | 16,306 | 20,515 | 19,968 | 16,306 | ||||||||||||||||||
Alfredo Sáenz | 49,000 | 47,692 | 37,324 | 49,000 | 47,692 | 37,324 | ||||||||||||||||||
Matías R. Inciarte | 25,849 | 25,159 | 20,195 | 25,849 | 25,159 | 20,195 | ||||||||||||||||||
Ana P. Botín(1) | 18,446 | 16,956 | 13,610 | 18,446 | 16,956 | 13,610 | ||||||||||||||||||
Francisco Luzón(2) | 28,434 | 27,675 | 22,214 | — | — | 22,214 | ||||||||||||||||||
Juan R. Inciarte | 15,142 | 14,738 | 14,617 | 15,142 | 14,738 | 14,617 | ||||||||||||||||||
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157,386 | 152,188 | 124,266 | 128,952 | 124,513 | 124,266 | |||||||||||||||||||
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(1) | In accordance with the resolution adopted by the shareholders at the annual |
(2) | Following his resignation on January 23, 2012, Francisco Luzón lost his entitlement to receive the shares relating to the second and third cycles of this plan since he did not meet all the conditions stipulated for the shares to be received. |
Since the condition to retain the shares acquired in the first cycle and the additional requirement to stay in the Group for three years had been complied with, in March 2011 and February 2012, as approved by the board, at the proposal of the appointments and remuneration committee, the gross number of shares detailed in the foregoing table relating to the first and second cycles accrued to the executive directors, which is equivalent to the number of shares initially acquired by them. Also, the shares relating to the secondthird cycle werehave been delivered in February 2012,March 2013, once compliance with the conditions for delivery thereof were satisfied -holding the shares acquired and remaining employed by the Group-.has been verified.
The obligatory investment share plan ended in 2010.
iii) Deferred conditional delivery share plan
At the annual general meeting held on June 11, 2010, the shareholders approved the first cycle of the deferred conditional delivery share plan, applicable to the variable remuneration for 2010 of the executive directors and executives and employees of Santander Group whose variable remuneration or annual bonus for 2010 generally exceeded €300,000 (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid, where appropriate, in Santander shares.
In addition to the requirement that the beneficiary remains employed byin the Group,Group’s employ, with the exceptions included in the plan regulations, the accrual of the share-based deferred remuneration is conditional upon none of the following circumstances existing, in the opinion of the board of directors, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk.
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The share-based bonus will be deferred over three years and will be paid, where appropriate, in three instalmentsinstallments starting in the first year.
The number of shares allocated to each executive director for deferral purposes, and the shares relating todelivered in 2012 (first third) and in February 2013 (second third), once the first of the three deliveries envisaged under this plan,conditions for receiving them have been met, are as follows:
| Number of shares deferred on bonus for 2010 | Number delivered in 2012 (1st third) | Number of shares delivered in 2013 ( | |||||||||
Emilio Botín | 94,345 | 31,448 | 31,448 | |||||||||
Alfredo Sáenz | 312,450 | 104,150 | 104,150 | |||||||||
Matías R. Inciarte | 135,188 | 45,063 | 45,063 | |||||||||
Ana P. Botín (*) | 91,187 | 30,395 | 30,395 | |||||||||
Francisco Luzón (**) | 154,981 | 51,660 | 51,660 | |||||||||
Juan R. Inciarte | 61,386 | 20,462 | 20,462 |
(*) | Shares of Banesto, as authorized by the shareholders of that |
(**) | On January 23, 2012, Francisco Luzón took |
A detailed description of the terms of the first cycle of this plan is contained in our 2009 annual report on Form 20-F.
iv) Deferred conditional variable remuneration plan
Variable remuneration for 2011
The shareholders at the annual general meeting of June 17, 2011 approved the first cycle of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 2011 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration which puts them on the same remuneration level as senior executives and employees who assume risks (all of them are referred to as identified staff, in accordance with the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010).
The purpose of this first cycle is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof over a period of three years for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycle, in accordance with the rules set forth below.
The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is deferred):
Immediate payment percentage | Deferred percentage | Immediate payment percentage | Deferred percentage | |||||
Executive directors | 40% | 60% | 40% | 60% | ||||
Division directors and other executives of the Group with a similar profile | 50% | 50% | 50% | 50% | ||||
Other executives subject to supervision | 60% | 40% | 60% | 40% |
The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in thirds, within fifteen days following the anniversaries of the initial date in 2013, 2014 and 2015, 50% being paid in cash and 50% in shares, provided that the conditions listed below are met.
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In addition to the requirement that the beneficiary remains employed byin the Group,Group’s employ, with the exceptions included in the plan regulations,terms, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing, in the opinion ofexisting—as determined by the board of directors and following a proposal of the appointments and remuneration committeecommittee-, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.
On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the amount deferred in shares plusand the interest on the amount deferred in cash.
The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for 2011.
The number of Santander shares allocated as variable remuneration to each executive director, for 2011, distinguishing between those which have beenwere delivered in 2012 (immediate payment) and those subject to a three-year deferral, is as follows:shown in the table below.
In January 2013, at the proposal of the appointments and remuneration committee and, considering that the conditions for delivery had been met, the board approved the accrual of the first third of the plan and, accordingly, in February 2013 the cash has been paid and the shares corresponding to the first third have been delivered. These amounts are shown in the following table:
Maximum number of shares to be delivered | ||||||||||||||||||||||||||||
Immediate payment | Deferred payment | Immediate payment (shares delivered in 2012) | Deferred payment (maximum number of shares to be delivered) | Cash paid in 2013 (1st third) (Thousands of euros) | Number of shares delivered in 2013 (1st third) | |||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||
Emilio Botín | 99,552 | 149,327 | 248,879 | 99,552 | 149,327 | 282 | 49,776 | |||||||||||||||||||||
Alfredo Sáenz | 247,366 | 371,049 | 618,415 | 247,366 | 371,049 | 702 | 123,683 | |||||||||||||||||||||
Matías R. Inciarte | 125,756 | 188,634 | 314,390 | 125,756 | 188,634 | 357 | 62,878 | |||||||||||||||||||||
Ana P. Botín | 94,002 | 141,002 | 235,004 | 94,002 | 141,002 | 286 | (2) | 47,001 | ||||||||||||||||||||
Francisco Luzón(1) | 130,996 | 196,494 | 327,490 | 130,996 | 196,494 | 371 | 65,498 | |||||||||||||||||||||
Juan R. Inciarte | 73,380 | 110,070 | 183,450 | 73,380 | 110,070 | 208 | 36,690 | |||||||||||||||||||||
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771,052 | 1,156,576 | 1,927,628 | 771,052 | 1,156,576 | 2,206 | 385,526 | ||||||||||||||||||||||
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(1) | On January 23, 2012, Francisco Luzón took pre-retirement and resigned from his positions as director and head of the |
(2) | Euro equivalent value of the original amount in pounds sterling. |
A detailed description of the terms of the first cycle of this plan is contained in our 2010 annual report on Form 20-F.
General description of long term incentive plan (or performance share plan), obligatory investment plan, deferred conditional delivery share plan and deferred conditional variableVariable remuneration planfor 2012
Executive directors and the other members of the Bank’s senior management participate in the following plans:
1. Performance share plan;
2. Obligatory investment plan with matched deferred bonus in shares or matched deferred bonus plan;
3. Deferred conditional delivery share plan; and
4. Deferred conditional variable remuneration plan.
At the board meeting on March 26, 2007, following the report of the appointments and remuneration committee, the Bank’s directors approved a long-term incentive policy aimed at the Bank’s executive directors and certain executive personnel of the Bank and of other Santander Group companies. This policy, through which the deferred share-based variable remuneration is paid, includes Bank share-based payments, and its implementation requires, in conformity with the Spanish law and our Bylaws, specific resolutions to be adopted by the annual general shareholders meeting.
Were it necessary or advisable for legal, regulatory or other similar reasons, the delivery mechanisms described below may be adapted in specific cases without altering the maximum number of shares linked to the plan or the essential conditions to which the delivery thereof is subject. These adaptations may involve replacing the delivery of shares with the delivery of cash amounts of an equal value.
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The plans shaping the aforementioned incentive policy are currently as follows: (i) performance share plan; (ii) obligatory investment share plan; (iii) deferred conditional delivery share plan and (iv) deferred conditional variable remuneration plan. The characteristics of the plans are set forth below:
In addition, the Bank had a long-term incentive plan (I-06 plan) which expired on January 15, 2009.
Under Spanish law and our Bylaws, the implementation of the share based plans requires specific resolutions of shareholders adopted at general shareholders’ meetings, which, to date, have been the following:
The shareholders acting at the general shareholders meeting of June 18, 2005, authorized a share option plan of the Bank (I-06 plan) tied to certain targets.
At the general shareholders’ meeting of June 23, 2007, the shareholders authorized the first two cycles of the performance shares plan (the I-09 and I-10 plans), the first cycle of the matched deferred bonus plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 2,189,004 shares. The maximum amount of all shares to be delivered by application of these programs was fixed at 28,144,334 shares (the 2007 Total Limit).
At the general shareholders’ meeting of June 21, 2008, the shareholders authorized the third cycle of the performance shares plan (the I-11 plan), the second cycle of the matched deferred bonus plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 1,900,000 shares. The maximum amount of all shares to be delivered by application of these programs was fixed at 19,960,000 shares (the 2008 Total Limit).
At the general shareholders’ meeting held on June 19, 2009, the shareholders authorized the fourth cycle of the performance shares plan (the I-12 plan), the third cycle of the matched deferred bonus plan and the restricted shares plan. In the case of the latter, the authorization was for a 12-month period and for up to a maximum of 2,478,000 shares. The aggregate maximum amount of shares to be delivered pursuant to these programs was fixed at 26,027,580 shares (the 2009 Total Limit).
At the general shareholders’ meeting held on June 11, 2010, the shareholders authorized the fifth cycle of the performance shares plan (the I-13 plan), the first cycle of deferred conditional delivery share plan and the restricted shares plan, in the case of the latter for a 12-month period and up to a maximum of 2,500,247 shares. The aggregate maximum amount of shares to be delivered pursuant to these programs was fixed at 25,028,650 shares (the 2010 Total Limit).
At the general shareholders’ meeting held on June 17, 2011, the shareholders authorized the sixth cycle of the performance shares plan (the I-14 plan), the second cycle of the deferred conditional delivery share plan and the first cycle of deferred conditional variable remuneration plan. The maximum amount of shares to be delivered pursuant to the sixth cycle of the performance shares plan (the I-14 plan) was fixed at 19,000,000 shares. The maximum amount of shares to be delivered pursuant to the second cycle of the deferred conditional delivery share plan has been determined by dividing the maximum amount estimated by the board of directors to defer in shares of the global bonus for financial year 2011 of the beneficiaries of this cycle (40 million euros) by the share price of Santander which will be calculated as the average weighted daily volume of the average weighted listing prices of the relevant Santander shares for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2011 (5.675 euros per share). The maximum amount of shares to be delivered pursuant to the first cycle of deferred conditional variable remuneration plan has, after deducting applicable taxes (or withholding), been determined by dividing the maximum amount estimated by the board of directors to deliver in shares to the beneficiaries (165 million euros and out of which 17.5 million for executive directors) by the share price of Santander which will be calculated as the average weighted daily volume of the average weighted listing prices of the relevant Santander for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2011 (5.675 euros per share).
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At the general shareholders’ meeting held on March 30, 2012, the shareholders authorized the third cycle of the deferred conditional delivery share plan and the second cycle of deferred conditional variable remuneration plan. The maximum amount of shares to be delivered pursuant to the third cycle of the deferred conditional delivery share plan will be determined, after deducting applicable taxes (or withholdings), by dividing the maximum amount estimated by the board of directors to be deferred in shares of the global bonus for financial year 2012 of the beneficiaries (22 million euros) by the share price of Santander which will be calculated as the average weighted daily volume of the average weighted listing prices of Santander shares for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2012. The maximum amount of shares to be delivered pursuant to the second cycle of deferred conditional variable remuneration plan will be determined by dividing, after deducting applicable taxes (or withholdings), the maximum amount estimated by the board of directors of the bonus for the financial year 2012 to be delivered in shares for the beneficiaries (140 million and out of which 12.1 million for executive directors) by the share price of Santander which will be calculated as the average weighted daily volume of the average weighted listing prices of Santander shares for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2012.
I-06 plan
At the general shareholders’ meeting held on June 18, 2005, a long-term incentive plan (the I-06 plan) for executive directors, which consisted of options on shares of the Bank and was tied to two pre-determined targets (increase in the trading price of the Bank’s shares and growth in earnings per share – in both cases above a sampling of comparable banks), was approved. The appointments and remuneration committee and the board of directors at their meetings on March 26, 2007 each took note of compliance with the conditions to which the plan was subject giving participants the right to exercise options to purchase shares of the Bank during the period between January 15, 2008 and January 15, 2009.
Options not exercised as of January 15, 2009 expired without value and this plan was cancelled at December 31, 2009.
1. Performance shares plan
The performance shares plan is implemented with a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and other members of senior management, together with any other Group executives determined by the board of directors or, when delegated by the board, the executive committee.
This plan involves successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. The aim is to establish an adequate sequence between the end of the incentive program linked to the previous I-06 plan and the successive cycles of this plan. Thus, the first two cycles commenced in July 2007, the first cycle having a duration of two years (PI09) and the second cycle having a standard three-year term (PI10). In June 2008, 2009, 2010 and 2011 the third, fourth, fifth and sixth cycles of the performance share plan (PI11, PI12, PI13 and Pl14, respectively) were approved. On July 31, 2009, 2010 and 2011 the first, second and third cycles (Pl09, Pl10 and Pl11) were cancelled.
For each cycle a maximum number of shares is established for each beneficiary who remains in the Group’s employ for the duration of the plan. The target, which, if met, will determine the number of shares to be delivered is defined by comparing the Group’s performance with that of a benchmark group of financial institutions and is linked to only one parameter, the Total Shareholder Return (TSR). With regard to the plans approved until June 2008, the targets, which, if met, determined the number of shares to be delivered, were defined by comparing the Group’s performance with that of a benchmark group of financial institutions and were linked to two parameters, namely Total Shareholder Return (TSR) and growth in Earnings per Share (EPS).
The ultimate number of shares to be delivered will be determined in each of the cycles by the degree of achievement of the targets on the third anniversary of commencement of each cycle (with the exception of the first cycle, for which the second anniversary was considered), and the shares will be delivered within a maximum period of seven months from the beginning of the year in which the cycle ends.
For more information, see Note 47 c) (i) to our consolidated financial statements.
At December 31, 2011, there were three cycles in effect: I-12, I-13 and I-14 plans. The table below describes the number of participants and the maximum number of shares to be distributed.
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Number of shares | Year granted | Number of persons | Date granted | Deadline for delivery of shares | ||||||||||||||||
Plans in effect at December 31, 2011 | 54,765,213 | |||||||||||||||||||
Of which: | ||||||||||||||||||||
I-12 plan | 18,866,927 | 2009 | 6,510 | June 19, 2009 | July 31, 2012 | |||||||||||||||
I-13 plan | 19,612,616 | 2010 | 6,782 | June 11, 2010 | July 31, 2013 | |||||||||||||||
I-14 plan | 16,285,670 | 2011 | 6,500 | June 17, 2011 | July 31, 2014 |
Previous cycles of the performance share plan
A detailed description of the terms of the third cycle (I-11 plan) is contained in our 2008 annual report on Form 20-F.
A detailed description of the terms of the fourth cycle (I-12 plan) is contained in our 2009 annual report on Form 20-F.
A detailed description of the terms of the fifth cycle (I-13 plan) is contained in our 2010 annual report on Form 20-F.
A detailed description of the terms of the sixth cycle (I-14 plan) is contained in our 2010 annual report on Form 20-F.
2. Obligatory investment plan with matched deferred bonus in shares or matched deferred bonus plan
The matched deferred bonus plan is implemented via the multiannual incentive plan, which is payable in shares of the Bank and is conditional upon compliance with certain investment and continued service requirements.
The current beneficiaries of the plan are the Group’s top executives, who include the executive directors, non-director members of senior management and other executives.
This plan, which was discontinued in 2010, is structured in three-year cycles which start each year. The beneficiaries of the plan must use 10% of their gross annual variable cash-based remuneration (or bonus) to acquire shares of the Bank in the market (the “Obligatory Investment”). As resolved by the shareholders at the relevant general shareholders’ meeting, the Obligatory Investments were made before February 29, 2008, February 28, 2009 and February 28, 2010, respectively.
Participants who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made will be entitled to receive the same number of Bank shares as that composing their initial obligatory investment.
The shares will be delivered within a period of one month from the third anniversary of the date on which the obligatory investment was made.
The shareholders at the annual general meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should concur: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks that is applicable to the executive in question; or (iii) a material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.
As of the date of this report, there is in effect one cycle of this plan (third cycle), whose main terms of which are described in our 2009 annual report on Form 20-F.
3. Deferred conditional delivery share plan
At the annual general meeting held on June 11, 2010, the shareholders approved the first cycle of the deferred conditional delivery share plan. This deferred share-based variable remuneration is instrumented through a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and executives and employees of the Group whose variable remuneration or annual bonus for 2010 generally exceeded €0.3 million (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid in Santander shares.
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The share-based bonus is deferred over three years and will be paid, where appropriate, in three instalments starting in the first year. The amount in shares is calculated based on the tranches of the following scale established by the board of directors on the basis of the gross variable cash-based remuneration or annual bonus for 2010:
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The condition for accrual of the share-based deferred remuneration was, in addition to that of the beneficiary remaining employed by the Group, with the exceptions envisaged in the plan regulations, that none of the following circumstances should occur in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks, where applicable to the executive in question; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk.
The shareholders at the annual general meeting on June 17, 2011 approved the second cycle of this plan. The beneficiaries are the executives or employees of the Group whose variable remuneration or annual bonus for 2011 generally exceeds €0.3 million (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid in Santander shares. This second cycle is not applicable to executive directors or other senior executives and other executives who are beneficiaries of the deferred conditional variable remuneration plan described below.
The share-based bonus is deferred over three years and will be paid, where appropriate, in three instalments starting in the first year. The amount in shares is calculated based on the tranches of the following scale established by the board of directors on the basis of the gross variable cash-based remuneration or annual bonus for 2011:
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The condition for accrual of the share-based deferred remuneration was, in addition to that of the beneficiary remaining employed by the Group, with the exceptions envisaged in the plan regulations, that none of the following circumstances should occur in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.
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At the annual general meeting held on March 30, 2012 the shareholders approved the third cycle of the deferred conditional delivery share plan, which is subject to the following rules:
This Plan (also known as the 2012 Variable Remuneration Plan for Other Executives) applies in relation to the variable remuneration or bonus for financial year 2012 approved by the board of directors, or the appropriate body in each case, for the executives or employees of the Grupo Santander whose gross variable remuneration or annual bonus for 2012 is generally above 300,000 euros, in order to defer a portion of said variable remuneration or bonus for payment, if any, within a three-year period in Santander shares, in accordance with the rules set forth below. This Plan does not apply to the executive directors, other members of senior management or other executives who are beneficiaries of the second cycle of the Deferred and Conditional Variable Remuneration Plan (described below).
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II.Operation
In addition to the beneficiary remaining with Grupo Santander3, the accrual of deferred remuneration in the form of shares is conditional upon none of the following circumstances existing during the period prior to each of the deliveries, in the opinion of the board of directors and following a proposal of the appointments and remuneration committee:
The deferral of the bonus in shares will last for a period of three years and will be paid, where applicable, in thirds from the first year on.
The amount to be deferred in shares shall generally be calculated in accordance with the tranches in the following scale set by the board of directors based on the gross amount of variable remuneration or annual bonus for financial year 2012:
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Upon each delivery of shares, and thus subject to the same requirements, the beneficiary will be paid an amount in cash equal to the dividends paid on such shares from the date of payment of the bonus and through the time of delivery, whether on the first, second or third anniversary. In cases of application of the Santander Scrip Dividend Program (Programa Santander Dividendo Elección), the price offered by the Bank for the free allotment rights corresponding to such shares will be paid.
The beneficiaries of this 2012 Variable Remuneration Plan for Other Executives may not directly or indirectly hedge the shares prior to the delivery thereof.
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In the event of death, the right shall pass to the successors of the beneficiary.
In cases of justified temporary leave due to temporary disability, suspension of the contract due to maternity or paternity, or leave to care for children or a relative, there shall be no change in the rights of the beneficiary.
If the beneficiary goes to another company of the Santander Group (including through international assignment and/or expatriation), there will be no change in the rights thereof.
If the employment relationship terminates by mutual agreement or because the beneficiary obtains a leave not referred to in any of the preceding paragraphs, the terms of the termination or temporary leave agreement shall apply.
None of the above circumstances shall give the right to receive the deferred amount in advance. If the beneficiary or the successors thereof maintain the right to receive deferred remuneration in shares (as well as the respective dividends), such remuneration shall be delivered within the periods and upon the terms set forth in the plan rules.
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III.Maximum number of shares to be delivered
Taking into account that, in application of the scale above, the board of directors has estimated that the maximum amount to be deferred in shares of the global bonus for financial year 2012 of the beneficiaries of this 2012 Variable Remuneration Plan for Other Executives is 22 million euros (the “Maximum Amount Distributable in Shares”), the maximum number of Santander shares that may be delivered under this plan (the “Share Limit for the 2012 Variable Remuneration Plan of Other Executives”) will be determined by applying the following formula:
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where “Santander Share Price” will be the average weighted daily volume of the average weighted listing prices of the relevant Santander shares for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2012.
IV.Other rules
In the event of a change in the number of shares due to a decrease or increase in the par value of the shares or a transaction with an equivalent effect, the number of shares to be delivered will be modified so as to maintain the percentage of the total share capital represented by them.
Information from the stock exchange with the largest trading volume shall be used to determine the listing price of the share.
If necessary or appropriate for legal, regulatory or similar reasons, the delivery mechanisms provided for herein may be adapted in specific cases without altering the maximum number of shares linked to the plan or the basic conditions upon which the delivery thereof is made contingent. Such adaptations may include the substitution of the delivery of shares for the delivery of equivalent amounts in cash.
The shares to be delivered may be owned by the Bank or by any of its subsidiaries, be newly-issued shares, or be obtained from third parties that have signed agreements to ensure that the commitments made will be met.
4. Deferred conditional variable remuneration plan
The shareholders at the annual general meeting of June 17, 2011 approved the first cycle of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 20112012 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration which puts them on the same remuneration level as senior executives and employees who assume risks (all of them are referred to asidentified staff,, in accordance with the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010)., under the same conditions as the first cycle.
The purposenumber of this first cycle isSantander shares allocated to defer a portion of theeach executive director as variable remuneration, or bonus of the beneficiaries thereof overdistinguishing between those which are delivered immediately and those subject to a period of three years for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remunerationthree-year deferral, is also to be paid in cash and Santander shares, upon commencement of the cycle, in accordance with the rules set forth below:
The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is deferred):as follows:
Immediate payment percentage | Deferred percentage | |||||||
Executive directors | 40 | % | 60 | % | ||||
Division directors and other executives of the Group with a similar profile | 50 | % | 50 | % | ||||
Other executives subject to supervision | 60 | % | 40 | % |
Maximum number of shares to be delivered | ||||||||||||
Immediate payment | Deferred payment (*) | Total | ||||||||||
Emilio Botín | 43,952 | 65,927 | 109,879 | |||||||||
Alfredo Sáenz | 109,211 | 163,867 | 273,028 | |||||||||
Matías R. Inciarte | 83,059 | 124,589 | 207,648 | |||||||||
Ana P. Botín | 69,916 | 104,874 | 174,790 | |||||||||
Juan R. Inciarte | 48,466 | 72,699 | 121,165 | |||||||||
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354,604 | 531,906 | 886,510 | ||||||||||
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Compensation for the senior management who are not also executive directors on our board
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The paymentFollowing is a detail of the deferred percentage of the bonus applicable in each case will be deferred over a period of 3 years and will be paid in thirds, within fifteen days following the anniversaries of the initial date in 2013, 2014 and 2015, 50% being paid in cash and 50% in shares, provided that the conditions described in the paragraph below are met.
In addition to the requirement that the beneficiary remains employed by the Group, with the exceptions included in the plan regulations, the accrual of the deferredmaximum remuneration is conditional upon none of the following circumstances existing in the opinion of the board of directors and following a proposal of the appointments and remuneration committee during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.
On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the deferred amount in shares and the interest on the amount accrued in cash.
The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonusapproved for the Bank’s executive directors for 2011.
At the annual general meeting held on March 30,vice presidents (*) in 2012 the shareholders approved the second cycle of the deferred conditional variable remuneration plan, which is subject to the following rules:
I.Purpose and Beneficiaries
This Plan (also known as the 2012 Variable Remuneration Plan of the Supervised Group) applies in relation to the variable remuneration or bonus for financial year 2012 approved by the board of directors, or the appropriate body in each case, for executive directors and certain executives (including senior management) and employees whose professional activities have a significant impact on the Bank’s risk profile, who perform control functions or receive overall remuneration which puts them at the same remuneration level as senior executives, and employees whose professional activities have a significant impact on the risk profile of the entity (all of whom are referred to asidentified staff in accordance with the aforementioned Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010).
The number of beneficiaries is approximately 270 persons, who are distributed into three groups for purposes of this second cycle: “Executive Directors,” which consists of directors of the Bank performing executive duties; “Division Directors,” consisting of division directors and other executives of the Group with a similar profile, and “Other Executives Subject to Supervision,” composed of other executives who are beneficiaries of this second cycle.
The purpose of this 2012 Variable Remuneration Plan of the Supervised Group is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof for a period of three years, with any payment thereof being made in cash and in Santander shares, also paying the other portion of such variable remuneration in cash and Santander shares upon commencement, all in accordance with the rules set forth below.
II.Operation
The total variable remuneration (bonus) of the beneficiaries for financial year 2012 shall be paid according to the following percentages, depending on the time of payment and on the group to which the beneficiary belongs (the “Immediate Payment Percentage,” to identify the portion of the bonus payment of which is not deferred, and the “Deferred Percentage,” to identify the portion of the bonus payment of which is deferred):2011:
Immediate Payment Percentage | Deferred Percentage | |||||||
Executive directors | 40 | % | 60 | % | ||||
Division directors and other executives of the Group with a similar profile | 50 | % | 50 | % | ||||
Other executives subject to supervision | 60 | % | 40 | % |
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Taking into account the foregoing, the total variable remuneration (bonus) for financial year 2012 of the beneficiaries of this 2012 Variable Remuneration Plan of the Supervised Group shall be paid as follows:
Number of managers (1) | Thousands of euros | |||||||||||||||||||||||||||||||||||
Salaries | Other remuneration(4) | Total | ||||||||||||||||||||||||||||||||||
Fixed | Variable - Immediate payment | Variable - Deferred payment | Total | |||||||||||||||||||||||||||||||||
In cash | In shares | In cash | In shares | |||||||||||||||||||||||||||||||||
2011 | 22 | 23,095 | 12,584 | (2) | 12,584 | 12,584 | 12,584 | 73,431 | 7,887 | 81,318 | ||||||||||||||||||||||||||
2012 | 24 | 24,580 | 10,689 | (3) | 10,689 | 10,769 | 10,769 | 67,495 | 6,615 | 74,110 |
(1) | At some point in |
In addition to the beneficiary remaining with the Grupo Santander4, the accrual of deferred remuneration is conditional upon none of the following circumstances existing during the period prior to each of the deliveries, in the opinion of the board of directors and following a proposal of the appointments and remuneration committee:
The board of directors, at the proposal of the appointments and remuneration committee and depending on the degree of compliance with such conditions, shall determine the specific amount of the deferred remuneration to be paid on each occasion.
If the foregoing requirements are met on each Anniversary, the beneficiaries shall receive the cash and the shares, in thirds, within 30 days of the first, second and third Anniversary.
On the occasion of each delivery of shares and cash and, therefore, subject to the same requirements, the beneficiary shall be paid an amount in cash equal to the dividends paid on the deferred amount in shares of the annual bonus and the interest accrued on the deferred cash amount of the annual bonus, in both cases from the Initial Date until the date of payment of the shares and cash in each applicable case. In cases of application of the Santander Scrip Dividend Program (Programa Santander Dividendo Elección), the price paid€21,298 thousand will be that offered by the Bank for the free allotment rights corresponding to such shares.
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(4) | Includes other remuneration items, such as life insurance premiums amounting to €1,355 thousand (2011: €1,104 thousand) and payments of |
In the eventFollowing is a detail of death, the right shall pass to the successors of the beneficiary.
In cases of justified temporary leave due to temporary disability, suspension of the contract due to maternity or paternity, or leave to care for children or a relative, there shall be no change in the rights of the beneficiary.
If the beneficiary goes to another company of the Santander Group (including through international assignment and/or expatriation), there will be no change in the rights thereof.
If the employment relationship terminates by mutual agreement or because the beneficiary obtains a leave not referred to in any of the preceding paragraphs, the terms of the termination or temporary leave agreement shall apply.
None of the above circumstances shall give the right to receive the deferred amount in advance. If the beneficiary or the successors thereof maintain the right to receive deferred remuneration in shares and in cash (as well as applicable dividends and interest), such remuneration shall be delivered within the periods and upon the terms set forth in the plan rules.
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III.Maximum number of shares to be delivered
The final number of shares delivered to each beneficiary will be calculated taking into account: (i) the amount resulting from applying applicable taxes (or withholdings); and (ii) the average weighted daily volume of the average weighted listing prices for the fifteen trading sessions prior to the date on which the board of directors approves the bonus for the executive directors of the Bank for financial year 2012.
Taking into account that the maximum amount estimated by the board of directors of the bonus to be delivered in shares to the beneficiaries of the 2012 Variable Remuneration Plan of the Supervised Group is 140 million euros (the “Maximum Amount of Variable Remuneration Distributable in Shares” (Importe Máximo Distribuible en Acciones de Retribución Variable) or “IMDARV”), the maximum number of Santander shares that may be deliveredthe Bank’s executive vice presidents (excluding executive directors) were entitled to such beneficiariesreceive at December 31, 2012 and 2011 relating to the deferred portion of their compensation under this plan (the “Limit of Variable Remunerationthe various plans then in Shares” (Límite de Acciones de Retribución Variable) or “LARV”) will be determined, after deducting applicable taxes (or withholdings), by applying the following formula:force (see Note 47 to our consolidated financial statements):
Maximum number of shares to be delivered | December 31, 2012 | December 31, 2011 | ||||||
Plan I12(1) | — | 1,468,762 | ||||||
Plan I13(2) | 1,463,987 | 1,468,762 | ||||||
Second cycle of obligatory investment | — | 452,994 | ||||||
Third cycle of obligatory investment | 286,327 | 293,140 | ||||||
Deferred conditional delivery plan(3) Deferred conditional variable remuneration plan (2011)(4) |
| 980,780 2,076,477 |
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| 1,496,628 2,119,944 |
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Deferred conditional variable remuneration plan (2012)(5) | 1,622,485 | — |
(1) | In addition, they were entitled to a maximum of 29,951 Banesto shares at December 31, 2011. |
(2) | In addition, they were entitled to a maximum of 114,160 Banesto shares at December 31, 2012 (December 31, 2011: 44,926 Banesto shares). |
(3) | In addition, they were entitled to a maximum of 14,705 Banesto shares at December 31, 2012 (December 31, 2011: 3,364 Banesto shares). |
(4) | In addition, they were entitled to a maximum of 123,973 Banesto shares and 79,696 Santander Brasil shares at December 31, 2012 (December 31, 2011: 97,515 Santander Brasil shares). |
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In addition, they were entitled to a maximum of 61,328 Santander | Brasil shares at December 31, 2012 and a maximum of 500,000 options on Santander Brasil shares at December 31, 2012 and 2011 under the share option plan approved in 2011, exercise of which, subject to the plan‘s terms and conditions, may commence in July 2014. |
where “Santander Share Price” will beIn 2012 and 2011, since the average weighted daily volume ofconditions established in the average weighted listing pricesrelated deferred share-based remuneration schemes corresponding to prior years had been met, the following number of Santander shares for the fifteen trading sessions priorwas delivered to the date on whichexecutive vice presidents:
Number of shares delivered | 2012 | 2011 | ||||||
Plan I11 | — | 1,042,130 | (1) | |||||
Plan I12 | 439,195 | (2) | — | |||||
First cycle of obligatory investment | — | 232,852 | ||||||
Second cycle of obligatory investment | 442,319 | — | ||||||
Deferred conditional delivery plan (2010) | 490,338 | (3) | — |
(1) | In addition, 14,975 Banesto shares were delivered. |
(2) | In addition, 49,469 Banesto shares were delivered. |
(3) | In addition, 14,705 Banesto shares were delivered. |
The actuarial liability recognized in respect of post-employment benefits earned by the boardBank’s executive vice presidents totaled €267 million at December 31, 2011.
Settlements of directors approves€10.7 million took place in 2012. The net charge to the bonus forconsolidated income statement amounted to €17.5 million in 2012 (2011: €29 million).
As indicated in Note 5.c) to our consolidated financial statements, in 2012 the executive directorscontracts of the Bank for financial year 2012.
Included in the Maximum Amount of Variable Remuneration Distributable in Shares is the estimated maximum amount of the bonus to be delivered in shares for the executive directorssenior executives of the Bank, which is €12.1 million (the “Maximum Amount Distributable in Sharesprovided for Executive Directors” (Importe Máximo Distribuible en Acciones para Consejeros Ejecutivos) or (“IMDACE”). The maximum number ofdefined-benefit pension obligations, were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander shares that may be delivered to executive directors under this plan (the “Limit on Shares for Executive Directors” (Límite de Acciones para Consejeros Ejecutivos) or “LACE”) will be determined by applyingSeguros y Reaseguros, Compañía Aseguradora, S.A. Under the following formula, after deducting applicable taxes (or withholdings):
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where “Santander Share Price” will be the average weighted daily volume of the average weighted listing prices of Santander shares for the fifteen trading sessions prior to the date on which the board of directors approves the bonus fornew system, the executive directors are granted the right to receive a pension benefit upon retirement which is based on the contributions made to the aforementioned system and supersedes the right to receive a pension supplement which had hitherto been payable to them upon retirement. The new system expressly excludes any obligation of the Bank for financial year 2012.
IV.Other rules:
to the executives other than the conversion of the current system into the new employee welfare system and, as the case may be, the annual contributions to be made. In the event of a changepre-retirement, the senior executives who have not exercised the option described in Note 5.c to our consolidated financial statements are entitled to an annual retainer until the numberdate of shares dueretirement.
The executive directors’ beginning balance under the new employee welfare system amounted to a decrease or increase in€287 million. This balance reflects the parmarket value, at the date of conversion of the shares or a transaction with an equivalent effect,pension obligations under the number of shares to be delivered will be modified so as to maintain the percentagenew employee welfare system, of the total share capital represented by them.
Information from the stock exchange with the largest trading volume shall be used to determine the listing price of the share.
If necessary or appropriate for legal, regulatory or similar reasons, the delivery mechanisms provided for herein may be adaptedassets in specific cases without altering the maximum number of shares linked to the plan or the basic conditions upon which the delivery thereof is made contingent. Such adaptations may include the substitution of the delivery of sharesprovisions for the delivery of equivalent amounts in cash.respective accrued obligations had been invested.
The sharesAdditionally, the total sum insured under life and accident insurance policies relating to be delivered may be owned by the Bank or by any of its subsidiaries, be newly-issued shares, or be obtained from third parties that have signed agreementsthis group amounted to ensure that the commitments made will be met.
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Santander UK
The long-term incentive plans on shares of the Bank originally granted by management of Santander UK to its employees (consisting of Santander UK shares) are as follows:
Number of shares | Exercise price in pounds sterling (*) | Year granted | Employee Group | Number of persons | Date of commencement of exercise period | Date of expiry of exercise period | ||||||||||||||||||||||
Plans outstanding at 01/01/09 | 6,153 | 7.00 | ||||||||||||||||||||||||||
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Options granted (Sharesave) | 4,528 | 7.26 | 2009 | Employees | 7,066 | (**) | 11/01/09 | 11/01/12 | ||||||||||||||||||||
11/01/09 | 11/01/14 | |||||||||||||||||||||||||||
Options exercised | (678 | ) | 3.85 | |||||||||||||||||||||||||
Options cancelled (net) or not exercised | (1,278 | ) | 7.48 | |||||||||||||||||||||||||
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Plans outstanding at 12/31/09 | 8,725 | 7.24 | ||||||||||||||||||||||||||
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Options granted (Sharesave) | 3,359 | 6.46 | 2010 | Employees | 4,752 | (**) | 11/01/10 | 11/01/13 | ||||||||||||||||||||
11/01/10 | 11/01/15 | |||||||||||||||||||||||||||
Options exercised | (72 | ) | 7.54 | |||||||||||||||||||||||||
Options cancelled (net) or not exercised | (3,073 | ) | 6.82 | |||||||||||||||||||||||||
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Plans outstanding at 12/31/10 | 8,939 | 7.09 | ||||||||||||||||||||||||||
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Options granted (Sharesave) | 7,725 | 4.46 | 2011 | Employees | 7,429 | (**) | 11/01/11 | 11/01/14 | ||||||||||||||||||||
11/01/11 | 11/01/16 | |||||||||||||||||||||||||||
Options exercised | (43 | ) | 4.09 | |||||||||||||||||||||||||
Options cancelled (net) or not exercised | (5,348 | ) | 6.92 | |||||||||||||||||||||||||
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Plans outstanding at 12/31/11 | 11,273 | |||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
Executive Options | 12 | 4.54 | 2003-2004 | Executives | 2 | 03/26/06 | 03/24/13 | |||||||||||||||||||||
Sharesave | 11,261 | 5.37 | 2008-2011 | Employees | 12,421 | (**) | 11/01/08 | 11/01/16 |
In 2008 the Group launched a voluntary savings scheme for Santander UK employees (Sharesave Scheme) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank€73 million at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the three trading sessions prior to the approval of the plan by the UK tax authorities (HMRC). This approval must be received within 21 to 41 days following the publication of the Group’s results for the first half of the year. This scheme, which commenced in September 2008, was approved by the shareholders at the annual general meeting held on June 21, 2008 and was authorized by the UK tax authorities (HMRC). At the annual general meetings held on June 19, 2009, June 11, 2010, June 17, 2011, and March 30,December 31, 2012 the shareholders approved a plan with similar features to the plan approved in 2008.(December 31, 2011: €66 million).
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Date of expiration of the current term of office of the directors and the period during which the directors have served in that office:
The period during which the directors have served in their office is shown in the table under Section A of this Item 6.
The date of expiration of the current term of office is shown in the table below:
Name | Date of expiration (1) | |
Emilio Botín | 1st half 2015 | |
Fernando de Asúa | 1st half 2016 | |
Alfredo Sáenz | 1st half 2014 | |
| 1st half 2015 | |
Manuel Soto | 1st half 2015 | |
Ana P. Botín | 1st half 2014 | |
| 1st half 2016 | |
Lord Burns | 1st half 2014 | |
Vittorio Corbo | 1st half 2014 | |
Guillermo de la Dehesa | 1st half 2015 | |
| 1st half 2014 | |
Esther Giménez-Salinas | 1st half 2014 | |
Ángel Jado. | 1st half 2016 | |
Abel Matutes | 1st half 2015 | |
| ||
| ||
| ||
| 1st half 2015 | |
| 1st half | |
| ||
| ||
| ||
| ||
| ||
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(1) | Pursuant to the provisions of our |
At the annual general meeting held on March 30, 2012,22, 2013, the shareholders passed the following resolutions:
To appoint Esther Giménez-Salinas as director for the three-year term provided in our Bylaws.
To ratify the appointmentresolutions of Vittorio Corbo as director, which appointment was approved by the board of directors at its meeting of July 21, 2011, and also to re-elect him for a three-year term.
To re-electre-electing for a term of three years the following directors: EmilioGuillermo de la Dehesa, Abel Matutes, Ángel Jado, Javier Botín, Juan R. Inciarte, Matías R. InciarteIsabel Tocino and Manuel Soto.
As a consequence of the non-renewal of the appointments of Antonio Basagoiti, Antonio Escámez and Luis Alberto Salazar-Simpson, the number of directors of the Bank has been reduced to sixteen.Fernando de Asúa.
The principal terms and conditions of the contracts entered into by the Bank with its executive directors are as follows:
(i) Exclusivity and non-competition
Executive directors may not enter into other service contracts with other companies or entities, unless express prior authorization is obtained from the board of directors. In addition, executive director’s contracts contain non-compete provisions, which prohibit executive directors from providing services to companies engaged in activities of a nature similar to that of the Bank or the consolidated Group.
To that end, during its meeting on January 24, 2011,Likewise, the board, without the participationcontracts of the executive directors unanimously voted, following the favorable report from the appointments and remuneration committee, to draft anaddendato the contracts of executive directors and members of senior management in order to includeprovide for certain amendments to the clauses applicable to the termination of services of such officers with respect to the prohibitionprohibitions against competition and solicitationthe taking of customers,clients, employees and providers.suppliers that may be enforced after the termination thereof.
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(ii) Code of conduct
Executive directors are required to strictly observe the provisions contained in the Grupo Santander’s General Code of Conduct and the Code of Conduct in the Securities Market, specifically with respect to rules of confidentiality, professional ethics and conflicts of interest.
(iii) Remuneration
Set forth below is the remuneration system resulting from the policies applied in 20112012 to determine the remuneration of directors for the performance of duties of supervision and collective decision-making as well as for the performance by the executive directors of other duties56.
a) Principles appliedi) Composition and limits
The principles applied to the remuneration of directors, including executive directors, for exercising the duties of supervision and collective decision-making were the following:
• The directors share in the profits from the financial year for the performance of duties of supervision and collective decision-making through bylaw-mandatedBy-law-mandated payments, which are made up of an annual allotment and attendance fees.
• The BylawsBy-laws set the above-describedaforementioned share as an amount equal to one per cent of the net profits obtained by the Bank for the financial year, although the board may resolve to reduce such percentage annually. Moreover, payment thereof requires that the priority payments established by applicable law (such as, for instance, allocations to reserves required under the equity rules for financial institutions) be paid first.
The specific amount payable to each of the directors for the aforementioned items is determined by the board of directors. To such end, all positions held by each director on the board itself as well as membership in and attendance at board meetings and meetings of the various committees are taken into account.
b)ii) Annual emolumentallotment
In 2011,2012, the board, at the proposal of the appointments and remuneration committee, resolved to reduce the annual allotment payable to its members for the financial year for performing the duties of supervision and collective decision-making.decision-making by 15% compared to the prior year, which in turn was 6% less than the amount paid for the 2010 results.
The amounts received individually by the directors for the most recent financial years based on the positions held on the board and for belonging to the various committees thereof were as follows:
Amounts per director | ||||||||||||||||||||||||||||||||
Amount in euros | ||||||||||||||||||||||||||||||||
Amount in euros Amounts per director: | 2012 | Change (%) | 2011 | Change (%) | 2010, 2009 and 2008 | |||||||||||||||||||||||||||
2011 | Change (%) | 2010, 2009 and 2008 | ||||||||||||||||||||||||||||||
Members of the board of directors | 99,946 | -6.0 | 106,326 | 84,954 | -15.00 | % | 99,946 | -6.00 | % | 106,326 | ||||||||||||||||||||||
Members of the executive committee | 200.451 | -6.0 | 213,246 | 170,383 | -15.00 | % | 200,451 | -6.00 | % | 213,246 | ||||||||||||||||||||||
Members of the audit and compliance committee | 46,530 | -6.0 | 49,500 | 39,551 | -15.00 | % | 46,530 | -6.00 | % | 49,500 | ||||||||||||||||||||||
Members of the appointments and remuneration committee | 27,918 | -6.0 | 29,700 | 23,720 | -15.00 | % | 27,918 | -6.00 | % | 29,700 | ||||||||||||||||||||||
First and fourth vice-chairmen | 33,502 | -6.0 | 35.640 | 28,477 | -15.00 | % | 33,502 | -6.00 | % | 35,640 |
iii) Attendance fees
By resolution of the board, upon a proposal of the appointments and remuneration committee, the amount of attendance fees applicable to meetings of the board and the committees thereof—excluding the executive committee, for which no fees are established—was the same in financial years 2008, 2009, 2010, 2011 and 2012 and will likewise remain unchanged from January 1, 2013 onwards.
Remuneration for duties other than executive duties and beyond those of a mere director (for example, for the provision of professional advisory services by non-executive directors) is |
The respective amounts paid during the financial years mentioned in the preceding paragraph are as follows:
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Amount in euros Attendance fees per meeting | 2013 - 2008 | |||
Board of Directors | 2,540 | |||
Resident directors | 2,057 | |||
Non-resident directors | ||||
Risk committee and audit and compliance committee | 1,650 | |||
Resident directors | 1,335 | |||
Non-resident directors | ||||
Other committees | 1,270 | |||
Resident directors | 1,028 | |||
Non-resident directors |
The principles applied in 20112012 to remuneration of the directors for the performance of executive duties were the following:
Fixed remuneration represented a significant proportion of total remuneration.
The variable remuneration of executive directors was established
• | The variable remuneration of executive directors was determined on the basis of the achievement of targets set in terms of budgeted net profits,rorac, and additional qualitative factors: |
a) Quantitative targets. There is an evaluation of the achievement of basicannual targets set in terms of budgetedfor net profits and additional qualitative factors.
a) Basic targets. For purposesrorac(both adjusted for extraordinary results and special write-downs). These targets are the best indicators of determining the variable componentability to generate recurring results and to assume allowances in the event of remuneration, aadverse circumstances. A distinction is made between executive directors with general Group management duties within the Group and those to whomentrusted with the management of a specific business division has been entrusted.division. The paramount factor in the case of the former is the Group’s net profits and RORAC,rorac, and in the case of the latter, the net profits of the division managed by the director in question.
b) Additional qualitative factors.factors or targets. In addition to the foregoing, and in order to determinetake into account a qualitative assessment of results and alignment with the amountinterests of the variable remuneration of each director, the quality of the net profits obtained, whether at the Group level or at the division level, is assessed in the light ofshareholders, the following factors:factors are taken into account:
Appropriate risk management (including the risk of losses, liquidity, capital, concentration and |
Form of payment of the variable remuneration of executive directors:
-
40% of the variable remuneration has beenis paid, net of taxes (or withholdings), half in cash and half in shares, which shares must be held for one year.
-
Deferral of 60% of variable remuneration for 3three years, payment of which is subject to the satisfaction of certain conditions (continuity within the Group and bad actor provisions).
After deduction of applicable taxes (or withholdings), the net amount of the deferred remuneration, if any, shall be paid if appropriate, in thirds, on the first, second and third anniversary, 50% in cash and the other 50% in Santander shares, which shares may not be sold until the passage of one year in each case.
Hedging the value of the Santander shares received during the retentiondeferral and deferralretention period is expressly forbidden.
For more information see “Item 6. Directors, senior management and employees—B. Compensation” herein.
(iv) Termination
The Bank has signed contracts with all its executive directors. The Bank’s executive directors have indefinite-term employment contracts. Executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. Under current conditions, if the contracts are terminated for reasons attributable to the Bank or due to objective circumstances (such as those affectingIn any other termination event, the executive directors’ functional and organic statute),directors indicated below will be eligible for the directors are entitled, at the date of termination of their employment relationship with the Bank, to the following:following rights:
Had Alfredo Sáenz’s contract been terminated in 2009, he would have been ableIn the case of Ana P. Botín: to choose between retiring or receiving severance pay equivalent to 40% of his fixedtake pre-retirement, earning an annual salary multiplied by the number of years’ service in banking, up to a maximum of ten times his fixed annual salary. However, Alfredo Sáenz waived his right to receive this severance pay.
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payment. At December 31, 2009,2012, this annual retainer would amount to €2,645 thousand (December 31, 2011: €2,557 thousand).
In the case of Juan R. Inciarte was entitledInciarte: to receive a termination benefit amountingtake pre-retirement, earning an annual payment. At December 31, 2012, this annual payment would amount to five years’ annual fixed salary at the date of termination (€4.9 million), although this entitlement to termination benefit ceased as a result of the change in his contract.€987 thousand (December 31, 2011: €948 thousand).
If Ana P. Botín or Juan R. Inciarte retire or take pre-retirement, they have the right to opt to receive the pensions accrued -or similar amounts-annual retainers in the form of an annuity or a lump sum -i.e. in a single payment- in full but not in part, without prejudicepart.
If the other executive directors’ contracts are terminated for any reason, they may take retirement and, therefore, claim from the insurer the benefits accrued to them under the right to exercise their respective options, after reaching the age of 60 (seeexternalized employee welfare system described in Note 5.c) to our consolidated financial statements).
Francisco Luzón retired as a director and executive vice president on January 23, 2012 (see Note 5.c) to our consolidated financial statements).
Additionally, other non-director members of the Group’s senior management have contracts which entitle them to receive benefits in the event of termination for reasons other than voluntary redundancy, retirement, disability or serious breach of duties. These benefits are recognized as a provision for pensions and similar obligations and as a staff cost only when the employment relationship between5.c, with no obligation whatsoever being incumbent upon the Bank and its managers is terminated before the normal retirement date.in such circumstances.
(v) Insurance
The Group provideshas taken out life insurance policies for the Bank’s executive directors, with life insurance (the premium for which iswho will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the ‘Other remuneration’ column in the tableof the table shown in Note 5.a.iii to our consolidated financial statements) and accident insurance,statements. Also, the coverage of which varies in each case according tofollowing table provides information on the policy established bysums insured for the Bank for its senior officers, as well as reimbursement-based medical insurance.Bank’s executive directors:
Thousands of euros | ||||||||
2012 | 2011 | |||||||
Emilio Botín | — | — | ||||||
Alfredo Sáenz | 11,108 | 11,108 | ||||||
Matías R. Inciarte | 5,131 | 5,131 | ||||||
Ana P. Botín | 6,000 | 988 | ||||||
Francisco Luzón | — | 9,934 | ||||||
Juan R. Inciarte | 2,961 | 2,961 | ||||||
|
|
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| |||||
25,200 | 30,122 | |||||||
|
|
|
|
For more information see “Item 6. Directors, senior management and employees—A. Directors and senior management”.
(vi) Confidentiality and return of documents
A strict duty of confidentiality is established during the relationship and following termination thereof, pursuant to which executive directors must return to the Bank the documents and items related to their activities that are in their possession.
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(vii) Other conditions
The contracts provide for the following advance notice periods for termination of the executive officers’ position by the Bank or resignation by the executive officer.
Advance notice period | Date of current contract (month/day/year) | By decision of the Bank (months) | By decision of the director (months) | Date of current contract (month/day/year) | By decision of the Bank (months) | By decision of the director (months) | ||||||||||||
Emilio Botín | 04/29/2009 | (*) | (*) | 12/26/2012 | ( | *) | ( | *) | ||||||||||
Alfredo Sáenz | 04/29/2009 | 4 | 4 | 12/26/2012 | ( | *) | ( | *) | ||||||||||
Matías R. Inciarte | 04/29/2009 | 4 | 4 | 12/26/2012 | 4 | 4 | ||||||||||||
Ana P. Botín | 04/29/2009 | 4 | 4 | 12/26/2012 | 4 | 4 | ||||||||||||
Juan R. Inciarte | 04/29/2009 | 4 | 4 | 12/26/2012 | 4 | 4 |
(*) | It is not contractually established. |
Audit and compliance committee and appointments and remuneration committee
An audit and compliance committee as well as an appointments and remuneration committee operate as part of the board of directors. The audit and compliance committee consists exclusively of 4 external directors (all of whom are independent in accordance with the principles set forth in Article 6.2(c) of the Rules and Regulations of the Board). The appointments and remuneration committee consists of five external directors (all of whom are independent in accordance with the principles set forth in Article 6.2(c) of the Rules and Regulations of the Board). These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE.
The audit and compliance committee
The audit and compliance committee was created to provide support and specialization for the tasks of controlling and reviewing the Bank’s accounts and compliance function. Its mission, which has been defined and approved by the Board, is established in our Bylaws and in the Rules and Regulations of the Board.
Only non-executive directors can be members of this committee with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation. Its chairman must always be an independent director (as defined in the Rules and Regulations of the Board) and someone who has the necessary knowledge and experience in matters of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Manuel Soto, the fourth vice chairman of the board of directors.
The members of the audit and compliance committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitude and experience in the areas of accounting, auditing or risk management.
Functions of the audit and compliance committee:
a) Have its chairman and/or secretary report to the general shareholders’ meeting with respect to matters raised therein by shareholders regarding its powers.
b) Propose the appointment of the auditor, as well as the conditions in which such auditor will be hired, the scope of its professional duties and, if applicable, the revocation or non-renewal of its appointment. The committee shall favor the Group’s auditor also assuming responsibility for auditing the companies which comprise the Group.
c) Review the accounts of the Company and the Group, monitor compliance with legal requirements and the proper application of generally accepted accounting principles, and report on the proposals for alterations to the accounting principles and standards suggested by management.
d) Supervise the Bank’s internal audit services, and particularly:
(i) Propose the selection, appointment and withdrawal of the party responsible for internal audit; |
(ii) Review the annual working plan for internal audit and the annual activities report;
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(iii) Ensure the independence and effectiveness of the internal audit function;
(v) Receive periodic information regarding the activities thereof; and
(vi) Verify that senior management takes into account the conclusions and recommendations of its reports.
e) Supervise the process for gathering financial information and for the internal control systems. In particular, the audit and compliance committee shall:
(i) | Supervise the process of preparing and presenting the regulated financial information relating to the Company and the Group, as well as its integrity, reviewing compliance with regulatory requirements, the proper demarcation of group consolidation and the correct application of accounting standards; |
(ii) | Supervise the effectiveness of the systems for the internal monitoring and management of risks, reviewing them periodically, so that the principal risks are identified, managed and properly disclosed; and |
(iii) | Discuss with the external auditor any significant weaknesses detected in the internal control system during the course of the audit. |
f) Report on, review and supervise the risk control policy established in accordance with the provisions of the Rules and Regulations of the Board.
g) Serve as a channel of communication between the board and the auditor, assess the results of each audit and the response of the management team to its recommendations, and act as a mediator in the event of disagreement between the board and the auditor regarding the principles and standards to be applied in the preparation of the financial statements. Specifically, it shall endeavor to ensure that the statements ultimately drawn up by the board are submitted to the general shareholders’ meeting without any qualifications or reservations in the auditor’s report.
h) Supervise the fulfillment of the audit contract, endeavoring to ensure that the opinion on the annual financial statements and the main contents of the auditor’s report are set forth in a clear and accurate fashion.
i) Ensure the independence of the auditor, by taking notice of those circumstances or issues that might risk such independence and any others related to the development of the auditing procedure, as well as receive information and maintain such communication with the auditor as is provided for in legislation regarding the auditing of financial statements and in technical auditing regulations. And, specifically, verify the percentage represented by the fees paid for any and all reasons of the total income of the audit firm, and the length of service of the partner who leads the audit team in the provision of such services to the Company. The annual report shall set forth the fees paid to the audit firm, including information relating to fees paid for professional services other than audit work.
In any event, the audit and compliance committee should receive annually from the external auditor written confirmation of the latter’s independence versus the Company or institutions directly or indirectly linked to the Company, as well as information on any type of additional services provided to such institutions by the aforementioned auditor or by persons or institutions related to the latter, as stipulated in External Auditing Law 19/1988, of July 1267.
Likewise, prior to the issuing of the external auditor’s report, the committee shall issue annually a report expressing an opinion on the independence of the external auditor. In any event, such report should make a statement as to the providing of the additional services referred to in the preceding paragraph.
j) The committee shall ensure that the Company publicly communicates a change of auditor and accompanies such communication with a declaration regarding the possible existence of disagreements with the outgoing auditor and, if any, regarding the content thereof and, in the event of the resignation of the auditor, the committee shall examine the circumstances causing it.
Now Legislative Royal Decree 1/2011, of July 1, approving the Consolidated Audit Act. |
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k) Report to the board, in advance of its adoption of the corresponding decisions, regarding:
(i) The financial information that the Company must periodically make public, ensuring that such information is prepared in accordance with the same principles and practices applicable to the annual financial statements.
(ii) The creation or acquisition of equity interests in special purpose entities or entities domiciled in countries or territories that are considered to be tax havens.
l) Supervise the observance of the Group’s Code of Conduct in the Securities Markets, the Manuals and Procedures for the Prevention of Money Laundering and, in general, the rules of governance and compliance in effect in the Company, and make such proposals as are deemed necessary for the improvement thereof. In particular, the committee shall have the duty to receive information and, if applicable, issue a report on disciplinary penalties to be imposed upon members of the senior management.
m) Review compliance with such courses of action and measures as result from reports issued or inspection proceedings carried out by administrative authorities having functions of supervision and control.
n) Know and, if applicable, respond to the initiatives, suggestions or complaints put forward or raised by the shareholders regarding the area of authority of this committee and which are submitted to it by the office of the general secretary of the Company. The committee shall also:
(i) Receive, deal with and keep a record of the complaints received by the Bank on matters related to the process of gathering financial information, auditing and internal controls.
(ii) Receive on a confidential and anonymous basis communications from Group employees who express their concern on possible questionable practices in the areas of accounting or auditing.
o) Receive information from the person responsible for the Company’s taxation matters on the tax policies applied, at least prior to the drawing-up of the annual accounts and the filing of the Corporate Tax return, and where relevant, on the tax consequences of transactions or matters submitted to the board of directors or the executive committee for approval, unless such bodies have been informed directly, in which case this will be reported to the committee at the first subsequent meeting held by it. The audit and compliance committee shall transfer the information received to the board of directors.
p) Report on any proposed amendments to the Rules and Regulations of the Board prior to the approval thereof by the board of directors.
q) Evaluate, at least once a year, the committee’s operation and the quality of its work.
r) And the others specifically provided for in the Rules and Regulations of the Board.
The Group’s 20112012 audit and compliance committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, atwww.santander.comunder the heading “Information for shareholders and investors—corporate governance—committees’ report”.
The following are the current members of the audit and compliance committee:
Name | Position | |||||||
| ||||||||
| Chairman | |||||||
| Member | |||||||
| Member | |||||||
Abel Matutes | Member |
Ignacio Benjumea acts as secretary to the audit and compliance committee, but is classified as a non-member.
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The appointments and remuneration committee:
The Rules and Regulations of the Board state that the members of this committee must all be non-executive directors with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation including an independent director as chairman (as defined in the Rules and Regulations of the Board).
Currently, the chairman of the appointments and remuneration committee is Fernando de Asúa, the first vice chairman of the board of directors.
The members of the appointments and remuneration committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitudes and experience and the goals of the committee.
Functions of the appointments and remuneration committee:
a) Establish and review the standards to be followed in order to determine the composition of the board and select those persons who will be proposed for election to serve as directors. In particular, the appointments and remuneration committee:
(i) Shall evaluate the competencies, knowledge and experience required of the director;
(ii) Shall specify the duties and the aptitudes needed of the candidates to fill each vacancy, evaluating the time and dedication needed for them to properly carry out their commitments; and
(iii) Shall receive for consideration the proposals of potential candidates to fill vacancies that might be made by the directors.
b) Prepare the proposals for appointment, re-election and ratification of directors provided for the Rules and Regulations of the Board, as well as the proposals for appointment of the members of each of the committees of the board of directors. Likewise, it shall prepare, the proposals for the appointment of positions on the board of directors and its committees.
c) Annually verify the classification of each director (as executive, proprietary, independent or other) for the purpose of their confirmation or review at the ordinary general meeting and in the annual corporate governance report.
d) Report on proposals for appointment or withdrawal of the secretary of the board, prior to submission thereof to the board.
e) Report on appointments and withdrawals of the members of senior management.
f) Propose to the board:
(i) The policy for compensation of directors and the corresponding report.
(ii) The policy for compensation of the members of senior management.
(iii) The individual compensation of the directors.
(iv) The individual compensation of the executive directors and, if applicable, external directors, for the performance of duties other than those of a mere director, and other terms of their contracts.
(v) The basic terms of the contracts and compensation of the members of senior management.
(vi) The remuneration of those other officers who, though not members of senior management, receive significant compensation, particularly variable compensation and whose activities may have a significant impact on the assumption of risk by the Group.
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g) Ensure compliance with the policy established by the Company for compensation of the directors and the members of senior management.
h) Periodically review the compensation programs, assessing the appropriateness and yield thereof and endeavoring to ensure that the compensation of directors shall conform to standards of moderation and correspond to the earnings of the Company.
i) Ensure the transparency of such compensation and the inclusion in the annual report and in the annual corporate governance report of information regarding the compensation of directors and, for such purposes, submit to the board any and all information that may be appropriate.
j) Ensure compliance by the directors with the duties prescribed the Rules and Regulations of the Board, prepare the reports provided for therein and receive information, and, if applicable, prepare a report on the measures to be adopted with respect to the directors in the event of non-compliance with the above mentioned duties or with the Group’s Code of Conduct in the Securities Markets.
k) Examine the information sent by the directors regarding their other professional obligations and assess whether such obligations might interfere with the dedication required of directors for the effective performance of their work.
l) Evaluate, at least once a year, its operation and the quality of its work.
m) Report on the process of evaluation of the committee and of the members thereof.
n) And others specifically provided for in the Rules and Regulations of the Board.
The Group’s 20112012 appointments and remuneration committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, atwww.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.
The following are the members of the appointments and remuneration committee:
Name | Position | |||||
Fernando de Asúa | Chairman | |||||
Manuel Soto | Member | |||||
Guillermo de la Dehesa | Member | |||||
Rodrigo Echenique | Member | |||||
Member | ||||||
|
Ignacio Benjumea acts as secretary to the appointments and remuneration committee but is classified as a non-member.
As of December 31, 2011,2012, we had 193,349186,763 employees (as compared to 193,349 in 2011 and 178,869 in 2010 and 169,460 in 2009)2010) of which 35,73734,862 were employed in Spain (as compared to 35,737 in 2011 and 36,429 in 20102010) and 35,076 in 2009) and 157,612151,901 were employed outside Spain (as compared to 157,612 in 2011 and 142,440 in 2010 and 134,384 in 2009)2010). The terms and conditions of employment in the non-government-owned banks in Spain are negotiated on an industry-wide basis with the trade unions. This process has historically produced collective agreements binding on all the private banks and their employees. The 2011-2014 agreement was signed on March 14, 2012. The terms and conditions of employment in many of our subsidiaries outside Spain (including in Argentina, Portugal, Italy, Uruguay, Puerto Rico, Colombia, Chile, Mexico, Germany, the UK,U.K., Brazil and Poland) are negotiated either directly or indirectly (on an industry-wide basis) with the trade unions.
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The table below shows our employees by geographic area:
Number of employees | Number of employees | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
SPAIN | 35,737 | 36,429 | 35,076 | 34,862 | 35,737 | 36,429 | ||||||||||||||||||
LATIN AMERICA | 90,821 | 88,490 | 84,976 | 89,622 | 90,821 | 88,490 | ||||||||||||||||||
Argentina | 6,773 | 6,453 | 5,753 | 6,818 | 6,773 | 6,453 | ||||||||||||||||||
Brazil | 54,197 | 53,829 | 50,904 | 53,543 | 54,197 | 53,829 | ||||||||||||||||||
Chile | 12,204 | 11,702 | 11,850 | 12,336 | 12,204 | 11,702 | ||||||||||||||||||
Colombia | 1,458 | 1,321 | 1,304 | — | 1,458 | 1,321 | ||||||||||||||||||
Mexico | 13,168 | 12,531 | 12,509 | 14,068 | 13,168 | 12,531 | ||||||||||||||||||
Peru | 60 | 56 | 47 | 66 | 60 | 56 | ||||||||||||||||||
Puerto Rico | 1,753 | 1,807 | 1,796 | 1,578 | 1,753 | 1,807 | ||||||||||||||||||
Uruguay | 1,166 | 735 | 757 | 1,209 | 1,166 | 735 | ||||||||||||||||||
Venezuela | 42 | 56 | 56 | 4 | 42 | 56 | ||||||||||||||||||
EUROPE | 53,859 | 41,116 | 37,871 | 52,209 | 53,859 | 41,116 | ||||||||||||||||||
Austria | 399 | 389 | 467 | 360 | 399 | 389 | ||||||||||||||||||
Czech Republic | 90 | 116 | 166 | — | 90 | 116 | ||||||||||||||||||
Germany | 5,406 | 3,020 | 2,852 | 5,628 | 5,406 | 3,020 | ||||||||||||||||||
Belgium | 23 | 23 | 13 | 22 | 23 | 23 | ||||||||||||||||||
Finland | 151 | 143 | 89 | 146 | 151 | 143 | ||||||||||||||||||
France | 52 | 41 | 32 | 48 | 52 | 41 | ||||||||||||||||||
Greece | 24 | 26 | 19 | — | 24 | 26 | ||||||||||||||||||
Hungary | 38 | 42 | 47 | 37 | 38 | 42 | ||||||||||||||||||
Ireland | 16 | 8 | 7 | 21 | 16 | 8 | ||||||||||||||||||
Italy | 894 | 922 | 931 | 840 | 894 | 922 | ||||||||||||||||||
Luxembourg | 3 | 3 | 3 | — | 3 | 3 | ||||||||||||||||||
Norway | 454 | 421 | 385 | 493 | 454 | 421 | ||||||||||||||||||
Poland | 12,754 | 3,622 | 867 | 12,625 | 12,754 | 3,622 | ||||||||||||||||||
Portugal | 6,300 | 6,522 | 6,522 | 6,105 | 6,300 | 6,522 | ||||||||||||||||||
Russia | — | — | 85 | — | — | — | ||||||||||||||||||
Switzerland | 170 | 175 | 178 | 159 | 170 | 175 | ||||||||||||||||||
The Netherlands | 365 | 423 | 423 | 360 | 365 | 423 | ||||||||||||||||||
United Kingdom | 26,720 | 25,220 | 24,785 | 25,365 | 26,720 | 25,220 | ||||||||||||||||||
USA | 12,722 | 12,644 | 11,355 | 9,882 | 12,722 | 12,644 | ||||||||||||||||||
ASIA | 141 | 114 | 103 | 144 | 141 | 114 | ||||||||||||||||||
Hong Kong | 91 | 78 | 72 | 89 | 91 | 78 | ||||||||||||||||||
China | 33 | 23 | 23 | 38 | 33 | 23 | ||||||||||||||||||
Japan | 7 | 6 | 5 | 6 | 7 | 6 | ||||||||||||||||||
Others | 10 | 7 | 3 | 11 | 10 | 7 | ||||||||||||||||||
OTHERS | 69 | 76 | 79 | 44 | 69 | 76 | ||||||||||||||||||
Bahamas | 46 | 55 | 56 | 24 | 46 | 55 | ||||||||||||||||||
Others | 23 | 21 | 23 | 20 | 23 | 21 | ||||||||||||||||||
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Total | 193,349 | 178,869 | 169,460 | 186,763 | 193,349 | 178,869 |
In those cases where an employee is working from one country but is technically employed by a Group company located in a different country, we designate that employee as working from his/her country of residence.
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The table below shows our employees by type of business:
Number of employees | Number of employees | |||||||||||||||||||||||
2010 | 2010 | 2009 | 2012 | 2011 | 2010 | |||||||||||||||||||
Retail Banking | 187,022 | 171,964 | 163,184 | 176,715 | 187,022 | 171,964 | ||||||||||||||||||
Asset Management and Insurance | 1,272 | 1,338 | 1,558 | 1,756 | 1,272 | 1,338 | ||||||||||||||||||
Global Wholesale Banking | 2,722 | 3,037 | 2,898 | 5,890 | 2,722 | 3,037 | ||||||||||||||||||
Corporate Activities | 2,333 | 2,530 | 1,820 | 2,402 | 2,333 | 2,530 | ||||||||||||||||||
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Total | 193,349 | 178,869 | 169,460 | 186,763 | 193,349 | 178,869 | ||||||||||||||||||
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As of December 31, 2011,2012, we had 5,1096,875 temporary employees (as compared to 5,109 as of December 31, 2011 and 2,216 as of December 31, 2010 and 1,577 as of December 31, 2009)2010). In 2011,2012, the average number of temporary employees working for the Group was 3,6645,992 employees.
As of April 12, 2012,17, 2013, the direct, indirect and represented holdings of our current directors were as follows:
Directors | Direct Stake | Indirect stake and represented | Total shares | % of Capital stock | Direct Stake | Indirect stake and represented | Total shares | % of Capital stock | ||||||||||||||||||||||||
Emilio Botín (1) | 8,367,504 | 151,922,027 | 160,289,531 | 1.972 | % | 6,464,149 | 174,667,735 | 181,131,884 | 1.719 | % | ||||||||||||||||||||||
Fernando de Asúa | 67,684 | 53,609 | 121,293 | 0.001 | % | 76,836 | 60,543 | 137,379 | 0.001 | % | ||||||||||||||||||||||
Alfredo Sáenz | 1,310,180 | 1,304,950 | 2,615,130 | 0.029 | % | 429,358 | 2,404,950 | 2,834,308 | 0.027 | % | ||||||||||||||||||||||
Esther Giménez-Salinas | — | — | — | 0.000 | % | 2,151 | — | 2,151 | 0.000 | % | ||||||||||||||||||||||
Matías R. Inciarte (3) | 1,139,525 | 168,591 | 1,308,116 | 0.014 | % | 1,261,678 | 183,374 | 1,445,052 | 0.014 | % | ||||||||||||||||||||||
Manuel Soto | 65,107 | 464,346 | 529,453 | 0.006 | % | 73,532 | 513,096 | 586,628 | 0.006 | % | ||||||||||||||||||||||
Ana P. Botín (1) | 5,207,841 | 4,024,136 | 9,231,977 | 0.000 | % | 5,064,820 | 11,995,761 | 17,060,581 | 0.000 | % | ||||||||||||||||||||||
Javier Botín (1)(2) | 4,793,481 | 4,678,044 | 9,471,525 | 0.000 | % | |||||||||||||||||||||||||||
Javier Botín(1) (2) | 4,793,481 | 11,486,545 | 16,280,026 | 0.000 | % | |||||||||||||||||||||||||||
Lord Burns (Terence) | 30,107 | 27,001 | 57,108 | 0.001 | % | 30,119 | 27,001 | 57,120 | 0.001 | % | ||||||||||||||||||||||
Vittorio Corbo | 1 | — | 1 | 0.000 | % | 1 | — | 1 | 0.000 | % | ||||||||||||||||||||||
Guillermo de la Dehesa | 107 | — | 107 | 0.000 | % | 119 | — | 119 | 0.000 | % | ||||||||||||||||||||||
Rodrigo Echenique | 658,758 | 9,947 | 668,705 | 0.007 | % | 658,758 | 11,232 | 669,990 | 0.006 | % | ||||||||||||||||||||||
Ángel Jado | 2,000,000 | 4,950,000 | 6,950,000 | 0.077 | % | 2,000,000 | 4,950,000 | 6,950,000 | 0.066 | % | ||||||||||||||||||||||
Abel Matutes Juan | 132,293 | 2,357,399 | 2,489,692 | 0.027 | % | 182,135 | 2,500,050 | 2,682,185 | 0.025 | % | ||||||||||||||||||||||
Juan R. Inciarte | 1,459,177 | — | 1,459,177 | 0.016 | % | 1,528,082 | — | 1,528,082 | 0.014 | % | ||||||||||||||||||||||
Isabel Tocino | 41,557 | — | 41,557 | 0.000 | % | 78,855 | — | 78,855 | 0.001 | % | ||||||||||||||||||||||
Total | 25,273,322 | 169,960,050 | 195,233,372 | 2.151 | % | 22,644,074 | 208,800,287 | 231,444,361 | 1.880 | % |
(1) | Emilio Botín has attributed the right of vote in a general shareholders’ meeting of |
(2) | Javier Botín |
(3) | Matías R. Inciarte |
Santander’s capital is comprised of only one class of shares, all of which are ordinary and have the same rights.
As of April 12, 201217, 2013 our current executive officers (not directors) referred to above under Section A of this Item 6 as a group beneficially owned, directly or indirectly, 6,575,5917,525,493 ordinary shares, or 0.07% of our issued and outstanding share capital as of that date. No individual executive officer beneficially owns, directly or indirectly, one percent or more of the outstanding share capital as of that date.
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Item 7. Major7.Major Shareholders and Related Party Transactions
As of December 31, 2011,2012, to our knowledge no person beneficially owned, directly or indirectly, 5% or more of our shares.
At December 31, 20112012 a total of 1,035,247,9281,182,915,220 shares, or 11.62%11.46% of our share capital, were held by 1,1521,203 registered holders with registered addresses in the United States and Puerto Rico, including JP Morgan Chase, as depositary of our American Depositary Share Program. These ADSs were held by 20,65319,893 record holders. Since certain of such shares and ADSs are held by nominees, the foregoing figures are not representative of the number of beneficial holders. Our directors and executive officers did not own any ADSs as of December 31, 2011.2012.
To our knowledge, we are not controlled directly or indirectly, by any other corporation, government or any other natural or legal person. We do not know of any arrangements which would result in a change in our control.
Shareholders’ agreements
The Bank was informed in February 2006 of an agreement among certain shareholders. The agreement was also communicated to the CNMV, following the filing of the agreement both with the CNMV and in the Mercantile Registry of Cantabria.
The agreement was entered into by Emilio Botín, Ana P. Botín, Emilio Botín O., Javier Botín, Simancas, S.A., Puente San Miguel, S.A., Puentepumar, S.L., Latimer Inversiones, S.L. and Cronje, S.L. Unipersonal and relates to the shares of the Bank held by them or those over which they have voting rights.
Under this agreement and through the establishment of restrictions on the free transferability of their shares and the regulation of the exercise of the voting rights inherent in them, these shareholders have agreed to act in a coordinated manner in order to develop a common, lasting and stable policy and an effective and unified presence and representation in the Bank’s governing bodies.
TheAt the date of execution of the agreement, comprisesthe syndicate comprised a total of 44,396,513 shares of the Bank (0.498%(0.430% of its share capital at the end of the year 2011)December 31, 2012). In addition, andas established in accordance with the first clause one of the shareholders’ agreement, the agreement will besyndication extended, only in termssolely with respect to the exercise of the exercising of voting rights, to other Bank shares of the Bank that are subsequently held either directly or indirectly by the signatories, or those over which they havewhose voting rights. As a result, as ofrights are assigned to them. Accordingly, at December 31, 2011, another 34,460,0552012, a further 34,885,821 shares (0.387%(0.338% of the Bank’s share capital at the end of the year 2011) are alsocapital) were included in the syndicate of shareholders.syndicate.
TheAt any given time, the chairman of the syndicate of shareholders is the person who of the same time holds the position of chairman ofthen presiding over the Marcelino Botín Foundation, which is currently Emilio Botín.
MembersThe members of the syndicate are obligedundertake to group togethersyndicate and pool the voting rights and other political rights inherent inattaching to the syndicated shares, so that the exercising of suchthese rights may be exercised and, in general, the conduct ofsyndicate members heading the members ofBank may act in a concerted manner, in accordance with the instructions and indications and with the voting criteria and orientation, necessarily unitary, issued by the syndicate, before the Bank, is done in a coordinated and, unified fashion. For suchfor this purpose, the representation of suchthese shares is attributed to the chairman of the syndicate as the common representative of the members of the syndicate.its members.
Except for the transfers made totransactions carried out in favor of other members of the syndicate or in favor of the Marcelino Botín Foundation, the prior authorization must be granted from the syndicate assembly, which may freely approve or refuse permission for the planned transfer.
Banco Santander informed the CNMV on August 3 and November 19, 2012, by means of the syndicate is required before any transferapplicable significant event filings, that it had been officially notified of amendments to this shareholder agreement in respect of the persons subscribing to it.
The agreement encompasses a total of 79,282,334 Bank shares is proposed and it can freely authorize or deny any such transfer proposal.
Parties to the shareholders’ agreement | No of shares syndicated | |||
Emilio Botín | 6,365,296 | |||
Ana P. Botín(1) | 13,207,720 | |||
Emilio Botín O.(2) | 13,567,504 | |||
Javier Botín (3) | 16,279,089 | |||
Paloma Botín(4) | 7,811,706 | |||
Carmen Botín | 8,622,491 | |||
Puente San Miguel, S.A. | 3,275,605 | |||
Latimer Inversiones, S.L. (5) | 553,508 | |||
Cronje, S.L., Unipersonal | 4,024,136 | |||
Nueva Azil, S.L. | 5,575,279 | |||
Total | 79,282,334 |
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(1) | 7,971,625 shares held indirectly through Bafimar, S.L. |
(2) | 3,024,727 shares held indirectly through Leugim Bridge, S.L. and 1,500,000 shares indirectly through Jardín Histórico Puente San Miguel, S.A., the latter being 100%-owned by the former. |
(3) | 4,652,747 shares held indirectly through Inversiones Zulú, S.L. and 6,794,391 shares indirectly through Apecaño, S.L |
(4) | 6,628,291 shares held indirectly through Bright Sky 2012, S.L. |
(5) | Bare ownership (ownership without usufruct) of 553,508 shares corresponds to Fundación Marcelino Botín, but the voting rights are assigned to Latimer Inversiones, S.L. as their beneficial owner. |
In all other issues, the agreement is unchanged as compared to that signed in February 2006.
Loans made to members of our board of directors and to our executive officers
The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below.
Thousands of euros | ||||||||||||||||||||||||||||||||||||||||||||||||
Thousands of euros | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Loans and credits | Guarantees | Total | Loans and credits | Guarantees | Total | |||||||||||||||||||||||||||||||||||||||||
Loans and credits | Guarantees | Total | Loans and credits | Guarantees | Total | |||||||||||||||||||||||||||||||||||||||||||
Alfredo Sáenz | 8 | — | 8 | 31 | — | 31 | 17 | — | 17 | 8 | — | 8 | ||||||||||||||||||||||||||||||||||||
Matías R. Inciarte | 1 | — | 1 | 14 | — | 14 | 13 | — | 13 | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||
Manuel Soto | 1 | — | 1 | 2 | — | 2 | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||
Antonio Basagoiti | 12 | 1 | 13 | 36 | 1 | 37 | ||||||||||||||||||||||||||||||||||||||||||
Antonio Basagoiti (1) | — | — | — | 12 | 1 | 13 | ||||||||||||||||||||||||||||||||||||||||||
Ana P. Botín | 6 | — | 6 | 2 | — | 2 | 7 | — | 7 | 6 | — | 6 | ||||||||||||||||||||||||||||||||||||
Javier Botín | 3 | — | 3 | 5 | — | 5 | 13 | — | 13 | 3 | — | 3 | ||||||||||||||||||||||||||||||||||||
Rodrigo Echenique | 1,500 | — | 1,500 | 16 | — | 16 | 1,178 | — | 1,178 | 1,500 | — | 1,500 | ||||||||||||||||||||||||||||||||||||
Antonio Escámez | 1,851 | — | 1,851 | 1,500 | — | 1,500 | ||||||||||||||||||||||||||||||||||||||||||
Antonio Escámez (1) | — | — | — | 1,851 | — | 1,851 | ||||||||||||||||||||||||||||||||||||||||||
Ángel Jado | 3,004 | — | 3,004 | 3,002 | — | 3,002 | 7 | — | 7 | 3,004 | — | 3,004 | ||||||||||||||||||||||||||||||||||||
Francisco Luzón (*) | 11,670 | — | 11,670 | 9,230 | — | 9,230 | ||||||||||||||||||||||||||||||||||||||||||
Francisco Luzón (2) | — | — | — | 11,670 | — | 11,670 | ||||||||||||||||||||||||||||||||||||||||||
Juan R. Inciarte | 321 | — | 321 | 370 | — | 370 | 5,313 | — | 5,313 | 321 | — | 321 | ||||||||||||||||||||||||||||||||||||
Luis Alberto Salazar-Simpson | 3 | — | 3 | 401 | — | 401 | ||||||||||||||||||||||||||||||||||||||||||
Luis Alberto Salazar-Simpson (1) | — | — | — | 3 | — | 3 | ||||||||||||||||||||||||||||||||||||||||||
Isabel Tocino | 322 | — | 322 | 30 | — | 30 | 42 | — | 42 | 322 | — | 322 | ||||||||||||||||||||||||||||||||||||
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18,702 | 1 | 18,703 | 14,639 | 1 | 14,640 | 6,591 | — | 6,591 | 18,702 | 1 | 18,703 | |||||||||||||||||||||||||||||||||||||
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Retired from the board on March 30, 2012. |
(2) | Retired from the board on January 23, |
Additionally, the total amount of loans and credits made by us to our executive officers who are not directors, as of December 31, 20112012 amounted to €31million€33 million (see Note 53 to our consolidated financial statements).
Loans extended to related parties were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibilitycollectability or present other unfavorable features.
Loans made to other Related Parties
The companies of the Group engage, on a regular and routine basis, in a number of customary transactions among Group members, including:
overnight call deposits;
foreign exchange purchases and sales;
derivative transactions, such as forward purchases and sales;
money market fund transfers; and
letters of credit for imports and exports
and others within the scope of the ordinary course of the banking business, such as loans and other banking services to our shareholders, to employees of all levels, and the associates and the members of the families of all these persons, as well as those other businesses conducted by the companies of the Group. All these transactions are made:
in the ordinary course of business;
on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons; and
did not involve more than the normal risk of collectibilitycollectability or other unfavorable features.
As of December 31, 20112012 our loans and credits to associated and jointly controlled entities, amounted to €146€544 million. Those loans and credits represented 0.02%0.08% of our total net loans and credits and 0.19%0.73% of our total stockholders’ equity as of December 31, 2011.2012.
For more information, see Notes 3 and 53 to our consolidated financial statements.
C. Interests of experts and counsel
Not Applicable.
189
Item 8. Financial8.Financial Information
A.ConsolidatedA. Consolidated statements and other financial information
Financial Statements
See Item 18 for our consolidated financial statements.
(a) | Index to consolidated financial statements of Santander |
Legal Proceedings
i. Tax-relatedOur general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine amounts to be provided as our best estimate of the expenditure required to settle the corresponding claim based, among others, on a case-by-case basis based on the analysis and legal opinion of internal and external counsel or by considering the historical average amount of loss of such category of lawsuits.
At December 31, 2011,
i. | Tax-related proceedings |
As of the date of this report, the main tax-related proceedings concerning the Group were as follows:
“Mandados de Segurança” filed by Banco Santander (Brasil) S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008. “Mandados de Segurança” filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998. “Mandados de Segurança” filed by Banco Santander Brasil, S.A. (currently Banco Santander (Brasil) S.A.) and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander Brasil, S.A., the “Mandado de Segurança” was declared unwarranted and an appeal was filed at the Federal Regional Court. In September 2007 the Federal Regional Court found in favor of Banco Santander Brasil, S.A., but the Brazilian authorities appealed against the judgment at the Federal Supreme Court. In the case of Banco ABN AMRO Real, S.A. (currently Banco Santander (Brasil) S.A.), in March 2007 the court found in its favor, but the Brazilian authorities appealed against the judgment at the Federal Regional Court, which handed down a decision partly upholding the appeal in September 2009. Banco Santander (Brasil) S.A. filed an appeal at the Federal Supreme Court. Banco Santander (Brasil) S.A. and other Group companies in Brazil have appealed against the assessments issued by the Brazilian tax authorities questioning the deduction of loan losses in their income tax returns (IRPJ and CSLL) on the ground that the relevant requirements under the applicable legislation were not met. Banco Santander (Brasil) S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services. In addition, Banco Santander (Brasil) S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against the tax authorities in connection with the taxation for social security purposes of certain items which are not considered to be employee remuneration. In December 2008 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. in relation to income tax (IRPJ and CSL) for 2002 to 2004. The tax authorities took the view that Banco Santander (Brasil) S.A. did not meet the necessary legal requirements to be able to deduct the amortization of the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil) S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais (CARF), which on October 21, 2011 unanimously decided to render the infringement notice null and void. The tax authorities have appealed against this decision at a higher administrative level. In June 2010 the Brazilian tax authorities issued infringement notices in relation to this same matter for 2005 to 2007. Banco Santander (Brasil) S.A. filed an appeal against these procedures at CARF. Based on the advice of its external legal counsel and in view of the previous decision by CARF, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defence arguments to appeal against the infringement notice. Accordingly, the risk of incurring a loss is remote. Consequently, no provisions have been recognized in connection with these proceedings because this matter should not affect the consolidated financial statements. In May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM) and Banco Santander Brasil, S.A. (currently Banco Santander (Brasil), S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander Brasil, S.A. to DTVM in 2000, 2001 and the first two months of 2002. Both entities appealed against the infringement notices at CARF, with DTVM obtaining a favorable decision and Banco Santander Brasil,
In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros S.A. (Brasil), as the successor by merger to ABN AMRO Brasil Dois Participações, S.A., in relation to income tax (IRPJ and CSLL) for 2005. The tax authorities questioned the tax treatment applied to a sale of shares of Real Seguros, S.A. made in that year. The aforementioned entity filed an appeal against the infringement notice. As the former parent of Santander Seguros, S.A. (Brasil), Banco Santander (Brasil), S.A. is liable in the event of any adverse outcome of this proceeding. As of December 31, 2012, there is no provision in connection with this proceeding as it is considered a contingent liability. Also, the Brazilian tax authorities issued infringement notices against Banco Santander (Brasil) S.A. in connection with income tax (IRPJ and CSLL), questioning the tax treatment applied to the economic compensation received under the contractual guarantees provided by the sellers of the former Banco Meridional. The aforementioned entity filed an appeal against the infringement notice. On November 23, 2011, CARF unanimously decided to render null and void an infringement notice relating to 2002 with regard to the same matter. In February 2012 this decision was declared final in respect of 2002. The proceedings relating to the 2003 to 2006 fiscal years are still in progress. As of December 31, 2012, there is no provision in connection with this proceeding as it is considered a contingent liability.
A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. A favorable judgment at first instance was handed down in September 2006, although the judgment was appealed against by the tax authorities in January 2007 and the court found in favor of the latter in June 2010. Abbey National Treasury Services plc appealed against this decision at a higher court and in December 2011 the tax authorities confirmed their intention to file the related pleadings. The hearing took place in April 2012 and the court found for the tax authorities, upholding their appeal. No appeal may be filed against this judgment. In view of the existing provisions relating to this litigation there is no adverse impact on the consolidated financial statements.
Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right to take a foreign tax credit in connection with taxes paid outside the United States in fiscal years 2003 to 2005 in relation to financing transactions carried out with an international bank. Santander Holdings USA, Inc. continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe that Santander Holdings USA, Inc. is entitled to tax deductions for the related issuance costs and interest deductions based on tax laws. In addition, if the outcome of this legal action is favorable to the interests of Santander Holdings USA, Inc., the amounts paid over by the entity in relation to this matter with respect to 2006 and 2007 would have to be refunded. During the first quarter of 2013, the U.S. Tax Court issued an adverse opinion in a case between a US taxpayer and the IRS involving a transaction with a structure similar to Santander Holdings USA, Inc.’s financing transactions. The US taxpayer has indicated it intends to appeal the decision. Santander Holdings USA, Inc. has confidence in its position because, among other reasons, Santander Holdings USA, Inc. will raise arguments and issues in its case that were not considered by the Tax Court. The trial of this litigation is expected to take place in the last quarter of 2013. At the date of approval of this annual report on Form 20-F certain other less significant tax-related proceedings were also in progress. ii. Non-tax-related proceedings
Payment protection insurance is a UK insurance product offering payment protection on unsecured personal loans (and credit cards). The product was sold by all UK banks. The mis-selling issues are predominantly related to business written before 2009. The nature and profitability of the product has changed materially since 2008, in part due to customer and regulatory pressure. On July 1, 2008, the UK Financial Ombudsman Service Policy Statement on August 10, 2010, setting out On October 8, 2010, the British Bankers’ Association Santander UK did not participate in the legal action undertaken by other UK banks and has been consistently making A detailed review of the provision was performed by Santander UK in the first half of
A number of uncertainties
Claim volumes—the estimated number of customer complaints received, Uphold rate—the estimated percentage of complaints that are, or will be, upheld in favor of the customer, and Average cost of redress—the estimated payment to customers, including compensation for any direct loss plus interest. The assumptions have been based on the following: Analysis completed of the causes of complaints, and uphold rates, and how these are likely to vary in the future, Actual claims activity registered to date, The level of redress paid to customers, together with a forecast of how this is likely to change over time, The impact on complaints levels of proactive customer contact, and The effect of media coverage on the issue. The assumptions are kept under review, and regularly reassessed and validated against actual customer data, e.g. claims received, uphold rates, the impact of any changes in approach to uphold rates etc, and any re-evaluation of the estimated population. The most critical factor in determining the level of provision is the volume of claims. The uphold rate is a reasonably consistent function of the sales process and the average cost of redress can be predicted reasonably accurately given that management is dealing with a high volume and reasonably homogeneous population. In setting the provision, management estimated the total claims that The table below sets out the actual claims received to date. Movements in the number of PPI claims
As anticipated, PPI complaints rose significantly in 2012, due to higher press coverage and increased focus by CMCs. The increase was partly driven by invalid complaints (which also drove an increase in the level of claims rejected) and claims originated by CMCs. In addition, Santander UK proactively contacted more than 300,000 customers during the year, which led to an increase in claims received. The number of claims settled in 2012 increased, reflecting both the increase in claims received and continued prompt settlement of claims. Press coverage on PPI reached significant levels in 2011, following the High Court‘s dismissal of the BBA’s application for a judicial review, as highlighted above. The focus of the CMCs also started to be directed at PPI in 2011. This led to a marked increase in complaints in 2011. Complaint volumes were also driven by pro-active customer contact made by Santander UK. The number of claims settled in 2011 increased as well, reflecting both the increase in claims received and prompt settlement of claims. Management reassess the level of provision required at each reporting period, taking account of the latest available information as well as past experience. The provision necessarily incorporates predictions of complaint levels for a number of periods into the future. Although complaint levels rose substantially in 2012, this increase was consistent with management’s estimates which reflected previous conduct remediation experience. Consequently, no change to the provision was required in 2012. This will continue to be kept under review. The assumptions and consequent level of provision remain subjective. This relates particularly to the uncertainty associated with the level of future claims. It is therefore possible that the level of payments to be made may differ from current estimates, resulting in an increase or decrease to the required provision. Lanetro, S.A. (currently Zed Worldwide, S.A.): claim (ordinary lawsuit no. 558/2002) filed by Lanetro, S.A. against Banco Santander, S.A. at Madrid Court of First Instance no. 34, requesting that the Bank comply with the obligation to subscribe to €30.05 million of a capital increase at the plaintiff. On December 16, 2003, a judgment was handed down dismissing the plaintiff’s request. The subsequent appeal filed by Lanetro, S.A. was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006. In a decision handed down on March 30, 2010, the Supreme Court dismissed an extraordinary appeal against procedural infringements and partly upheld a cassation appeal filed in both cases by the Bank against the decision of the Madrid Provincial Appellate Court. Zed Worldwide, S.A. requested the court-ordered enforcement of the decision. On January 25, 2011, the court issued an order to enforce the decision handed down by the Madrid Provincial Appellate Court, whereby the Bank Following this order, an agreement was reached for the out-of-court enforcement of the decision whereby the Bank would subscribe and
The damages claimed are broken down as follows: (i) €18,428,076.43 relating to the value of the property auctioned; (ii) €32,608,895 relating to the loss of profit on the properties lost by the plaintiff, which was prevented from continuing its business activity as a property developer; and (iii) €360,000 relating to loss of rental income. On March 2, 2010, the court of first instance handed down a decision partly upholding both the claim filed against the Bank and the counterclaim, ordering the Bank to pay the plaintiff €4,458,960.61, and Galesa Promociones, S.A. to pay the Bank €1,428,075.70, which resulted in a net loss of €3,030,874.91 for the Bank. Two appeals against this decision were filed on May 31, 2010, one by Galesa and the other by the Bank. On November 11, 2010, the Alicante Provincial Appellate Court handed down a decision upholding the appeal filed by the Bank and dismissing the appeal brought by Galesa de Promociones S.A., as a result of which and by way of offsetting the indemnity obligations payable by each party, the Bank became a creditor of Galesa in the amount €400,000. Galesa de Promociones S.A. filed a cassation appeal with the Supreme Court against this decision, which was given leave to proceed in an order dated October 11, 2011, and the Bank submitted a notice of opposition.
The Arbitration Court, in strict obedience with the decision of the Commercial Court, agreed in a decision dated In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party due to the potential creditor’s rights to which it might be entitled as a result of the arbitration proceeding relating to Delforca 2008 S.A, with a view to having the claim recognized as a contingent ordinary claim without specified amount. The insolvency proceeding is in the common phase and on November 5, 2012, the insolvency manager submitted the report referred to in Articles 74 and 75 of the Insolvency Law, accompanied by the inventory and provisional list of creditors. The insolvency manager opted to exclude Banco Santander, S.A.’s claim from the provisional list of creditors and, accordingly, on January 2, 2013, Banco Santander, S.A. filed an ancillary claim contesting the document and seeking the aforementioned claim’s recognition on the
Additionally, in April 2009 Mobilaria Monesa, This proceeding was stayed by the Santander Provincial Appellate Court in an order dated December 20, 2010 due to the Court admitting the preliminary civil ruling grounds claimed by the Bank. The above stay
The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.
Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s bylaws in the event that the entity obtained a profit and that the distribution of this profit, in the form of this bonus, were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000 in variable percentages as agreed by the board of directors, and the relevant clause was eliminated from the bylaws in 2001. In September 2005 the Regional Labour Court ordered Banco Santander Banespa, Cia. de Arrendamiento Mercantil (currently Banco Santander (Brasil) S.A.) to pay the half-yearly bonus and the bank subsequently lodged an appeal at the High Labour Court. A decision was handed down on June 25, 2008 which ordered the bank to pay the half-yearly bonus from 1996 onwards for a maximum amount equivalent to the share in the profits. Appeals against this decision were filed at the High Labour Court and the Supreme Federal Court. The High Labour Court ordered the aforementioned half-yearly bonus to be paid. The Supreme Federal Court subsequently dismissed the extraordinary appeal filed by the Bank by means of a monocratic decision (adopted by only one of the judges of the court), thereby upholding the aforementioned judgment. As a result, the Bank filed a special appeal called an “Agravo Regimental” and the 1st Chamber of the Supreme Federal Court upheld the Extraordinary Appeal filed by the Bank and denied the Association’s Appeal. Thus, the Extraordinary Appeal filed by the Bank now follows for the plenary session of the Supreme Court for decision about general repercussion and the main matters. “Planos económicos”: Like the rest of the banking system, Santander Brasil has been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason by consumer protection associations and the public prosecutor’s office, among others, in connection with the possible effects of certain legislative changes relating to differences in the monetary adjustments to interest on bank deposits and other inflation-linked contracts (planos económicos). The plaintiffs considered that their vested rights in relation to the inflationary adjustments had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice set the limitation period for these class actions at five years, as claimed by the banks, rather than twenty years, as sought by the claimants, which will significantly reduce the number of actions of this kind brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been adverse for the banks, although two proceedings have been brought at the High Court of Justice and the Supreme Federal Court with which the matter is expected to be definitively settled. In August 2010, the High Court of Justice handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the “planos” from the claim, thereby reducing the claimed amount, and confirming the five-year statute of limitations period for these class actions at civil law. Shortly thereafter, the Supreme Federal Court issued an injunctive relief order whereby all the proceedings in progress in this connection were stayed until this court issues
Proceeding under Civil Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for US$ 150,000,000 in principal plus US$ 4,656,164 in interest, upon alleged termination of an escrow contract. On October 7, 2010, the Bank was served notice of a decision dated October 1, 2010 which upheld the claim filed by Banco Occidental de Descuento, Banco Universal, C.A. without a ruling being issued in relation to costs. Both the plaintiff and the defendant filed appeals to a superior court: the plaintiff in connection with the decision not to award costs and the Bank in connection with the other decisions. Both parties also filed notices of opposition against the appeal filed by the other party. Also, on March 29, 2011, the Bank filed a notice of opposition against the specific provisional enforcement measures of the court. The Bank’s opposition to the aforementioned measures was upheld in a decision dated September 5, 2011. A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A., dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. A cassation appeal was filed by Banco Occidental de Descuento, Banco Universal, C.A. against the Madrid Provincial Appellate Court judgment and the parties have appeared before the Supreme Court.
On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group S.A. at Murcia Commercial Court no. 2. The aim of the principal action is to request annulment of the application of the proceeds obtained by the company undergoing insolvency from an asset sale and purchase transaction involving €31,704,000 in principal and €2,711,567.02 in interest. On November 24, 2011, the hearing was held with the examination of the proposed evidence. Upon completion of the hearing, it was resolved to conduct a final proceeding which was held on February 29, 2012, and a decision is yet to be issued thereon.
The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying. On November 12, 2008, the Group announced the implementation of a solution (which was of a strictly commercial, exceptional nature and did not imply any admission of mis-selling) for holders of one of the products The solution involved replacing the Lehman issuer risk with the issuer risk of Santander Group subsidiaries. The exchange period ended on December 23, 2008. As a result of the exchange, at 2008 year-end a loss of €46 million was recognized in the consolidated income statement (€33 million after tax). In February 2009 the Group offered a similar solution to other customers affected by the Lehman bankruptcy. The cost of this transaction, before tax, was €143 million (€100 million after tax), which were recognized in the consolidated income statement for 2008.
On January 27, 2009, the Group announced its decision to offer a solution to those of its private banking customers who had invested in Optimal Strategic and had been affected by the alleged fraud. This solution, which was applied to the principal amount invested, net of redemptions, totaled €1,380 million. It consisted of a replacement of assets whereby the private banking customers could exchange their investments in Optimal Strategic US for preference shares to be issued by the Group for the aforementioned amount, with an annual coupon of 2% and a call option that could be exercised by the issuer in year ten. At December 31, 2008, the Group determined that these events had to be considered to be adjusting events after the reporting period, as defined in IAS 10.3, because they provided evidence of conditions that existed at the end of the reporting period and, therefore, taking into account IAS 37.14, it recognized the pre-tax cost of this transaction for the Group (€500 million -€350 million after tax-) under Gains/Losses on financial assets and liabilities in the consolidated income statement for 2008. The Group has at all times exercised due diligence in the management of its customers’ investments in the Optimal Strategic fund. These products have always been sold in a transparent way pursuant to applicable legislation and established procedures and, accordingly, the decision to offer a solution was taken in view of the exceptional circumstances attaching to this case and based on solely commercial reasons, due to the interest the Group has in maintaining its business relationship with these customers. At the time of On March 18, 2009, the Group issued the preference shares earmarked for the replacement of assets offered to the private banking customers affected by the intervention of Madoff On May 26, 2009, two funds managed by Optimal Investment Services, S.A. (“OIS”), an indirect subsidiary of Banco Santander, S.A., announced that they had entered into an agreement with Irving H. Picard, the court-appointed trustee for the liquidation of Madoff Securities. Under the agreement, the trustee allowed the funds’ claims in the liquidation proceeding and reduced his clawback demands on the funds by the amounts withdrawn by the latter from Madoff Securities, in the 90 days prior to bankruptcy, which US legislation allows him to claim, in exchange for the partial payment of those demands by the funds. The funds are Optimal Strategic U.S. Equity Limited and Optimal Arbitrage Limited. These are the only Optimal funds that had accounts at Madoff Securities. Pursuant to the agreement, the funds’ claims against Madoff Securities’ estate were allowed in their full amounts, calculated on a cash-in, cash-out basis, of The funds agreed not to file any other claims against Madoff Securities’ estate (in liquidation). The agreement also contains an “equal treatment” provision, so that if the trustee settled similar clawback claims for less than 85%, the funds would receive a rebate of a portion of their payments to make the percentages applied to the funds equal to those applied to other investors in comparable situations.
The agreement The agreement contains The agreement between the trustee and the aforementioned Optimal funds was approved by the United States Bankruptcy Court in New York on June 16, 2009. Madoff Securities is currently in liquidation in accordance with the Securities Investor Protection Act of 1970 at the United States Bankruptcy Court in New York. Bernard L. Madoff, the chief executive of Madoff Securities, pleaded guilty to perpetrating what was probably the In April 2011, by means of a corporate operation, the funds Optimal This arrangement enabled the investors who so wished to take direct control of their proportional part of the claim against the insolvency estate of Madoff Securities and also
The price reached in the auction of the SPV shares was equal to 72.14% of the amount of the claim against
In the second half of 2012 the Group made additional sales of its interest in the SPV and, accordingly, at December 31,
If the acquisition The increased rate in the event of a “change of control” is defined in the indenture as the greater of (i) 7.41% per annum; and (ii) the rate determined by a reference agent in accordance with a process established in the indenture. There is no “change of control” under the Trust PIERS indenture, among other reasons, if the consideration for the acquisition consisted of shares of common stock listed on a national securities market. Banco Santander issued American Depositary Shares (ADSs) in relation to the acquisition that were traded and continue to be traded on the New York Stock Exchange.
On December 13, 2011, the On September 12, 2012, the judge in charge of the investigation issued a report recommending that the interest rate of the Trust PIERS be set at 13.61% from January 31, 2009 and that the holders of Trust PIERS should be compensated with US$ 305,626,022 for unpaid interest, US$ 3,160,012.31 for lawyers’ fees and US$ 130,150.23 for the interest on On November 23, 2012, Sovereign signed a “ Settlement Agreement” with the Trustee resolving all the disputes between the Trustee and Sovereign with respect to the claim filed. The Settlement Agreement (i) acknowledges that a “change of control” occurred in accordance with the Trust indenture as a result of the acquisition, (ii) provides that the annual interest rate on the distributions made to the Trust PIERS holders from November 15, 2012 shall be 12.835%, (iii) requires Sovereign to carry out a takeover bid for all the Trust PIERS at a purchase price of US$ 78.95 in cash per US$ 50.00 and (iv) establishes that Sovereign may redeem the issue in full at any time from January 30, 2014. The Settlement Agreement also requires Sovereign to make additional offers to purchase the Trust PIERS within ten business days following each quarterly distribution from the settlement date until no Trust PIERS remain outstanding, at the same purchase price mentioned above. On November 26, 2012, Sovereign announced to the Trust PIERS holders an offer in accordance with the requirements of the Settlement Agreement indicated in point (iii) of the preceding paragraph, which was completed on December 26, 2012, and approximately 40.4% of the outstanding aggregate liquidation amount of the Trust PIERS was accepted for purchase. In addition, under the Settlement Agreement, on December 26, 2012, the parties applied to discontinue proceedings at the US District Court for the Southern District of New York and, accordingly, this litigation is At December 31, 2011, the Group had recognized
The Bank and
The total amount of payments made by the Group arising from litigation in 2012, 2011 In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early stages of discovery, the
We have normally paid an annual dividend in quarterly installments. The table below sets forth the historical per share and per ADS (each of which represents the right to receive one of our shares) amounts of interim and total dividends in respect of each fiscal year indicated.
The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a dividend of €0.6508 per share to be paid out of our profits for 2008. In accordance with IAS 33, for comparative purposes, dividends per share paid, as disclosed in the table above, take into account the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008. As a result of this adjustment, the dividend per share for 2008 amounts to €0.6325. The shareholders also approved a new remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the Banco Santander paid on account of
A scrip dividend of €0.15 per share equivalent to the first interim dividend
A scrip dividend of
A scrip dividend of
Following the increase of capital of the third interim dividend, the Bank’s share capital at the date of this annual report on Form 20-F was Banco Santander assigned For a discussion of regulatory and legal restrictions on our payments of dividends, see “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends” herein. For a discussion of Spanish taxation of dividends, see “Item 10. Additional Information—E. Taxation—Spanish tax considerations—Taxation of dividends” herein. The dividends paid on the guaranteed non-cumulative preference stock of certain of our subsidiaries are limited by our Distributable Profits in the fiscal year preceding a dividend payment. “Distributable Profits” with respect to any year means our reported net profits after tax and extraordinary items for such year as derived from the Parent bank’s non-consolidated audited profit and loss account prepared in accordance with Bank of Spain requirements and guidelines in effect at the time of such preparation. Such requirements and guidelines may be expected to reflect the Bank of Spain regulatory policies applicable to us, including without limitation those relating to the maintenance of minimum levels of capital. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements” and “—Restrictions on Dividends” herein. According to our interpretation of the relevant Bank of Spain requirements and guidelines, Distributable Profits during the preceding five years were:
The portion of our net income attributable to our subsidiaries has increased steadily in recent years as our subsidiaries have grown and we have acquired new subsidiaries. Such profits are available to us only in the form of dividends from our subsidiaries and we are dependent to a certain extent upon such dividends in order to have Distributable Profits sufficient to allow payment of dividends on our guaranteed preferred stock of our subsidiaries as well as dividends on our shares (although the payment of dividends on the shares is limited in the event of the non-payment of preference share dividends). We generally control a sufficient proportion of our consolidated subsidiaries’ voting capital to enable us to require such subsidiaries to pay dividends to the extent permitted under the applicable law. As a result of our growth, the Bank, as the holding entity of the shares of our various companies, has added investments in our subsidiaries, the financial costs of which are borne by us.
Item Market Price and Volume Information Santander’s Shares In At December 31, Our shares are traded on Spain’s automated “continuous market”, the national, centralized market which integrates by computer quotations originating in the four Spanish stock exchanges (Madrid, Barcelona, Valencia and Bilbao) (the “Automated Quotation Systems”). Our shares are also listed on the New York (in the form of American Depositary Shares), London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges. At December 31, The table below sets forth the high, low and last daily sales prices in euros for our shares on the Spanish continuous market for the periods indicated.
On April American Depositary Shares Our ADSs have been listed and traded on the New York Stock Exchange since July 30, 1987. Each ADS represents one of our shares and is evidenced by an American Depositary Receipt or “ADR.” The deposit agreement, pursuant to which ADRs have been issued, is among us, JP Morgan Chase, as depositary, and the holders from time to time of ADRs. At December 31,
The table below sets forth the reported high, low and last sale prices for our ADSs on the New York Stock Exchange for the periods indicated.
On April Not Applicable General Spanish Securities Market The Spanish securities market for equity securities (the “Spanish Stock Exchanges”) consists of four stock exchanges located in Madrid, Barcelona, Bilbao and Valencia (the “local exchanges”). The majority of the transactions conducted on them are done through the Automated Quotation System (
Automated Quotation System The Automated Quotation System was introduced in 1989 and links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates most of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by the Sociedad de Bolsas, a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish stock exchange directly. There is a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day on which orders are placed at that time. The computerized trading hours are from 9:00 a.m. to 5:30 p.m. Each session will end with a 5 minute auction, between 5:30 and 5:35 p.m., with a random closedown of 30 seconds. The price resulting from each auction will be the closing price of the session. From May 14, 2001, new rules came into effect regarding the maximum price fluctuations in the price of stocks. Under the new rules, each stock in the continuous market is assigned a static and a dynamic range within which the price of stocks can fluctuate. The price of a stock may rise or fall by its static range (which is published once a month and is calculated according to the stock’s average historic price volatility) above or below its opening price (which shall be the closing price of the previous session). When the stock trades outside of this range, the trading of the stock is suspended for 5 minutes, during which an auction takes place. After this auction, the price of the stock can once again rise or fall by its static range above or below its last auction price (which will be considered as the new static price before triggering another auction). Furthermore, the price of a stock cannot rise or fall by more than its dynamic price range (which is fixed and published once a month and is calculated according to the stock’s average intra-day volatility), from the last price at which it has traded. If the price variation exceeds the stock’s dynamic range a five minute auction is triggered. Moreover, there is a block market ( Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization of the Sociedad de Bolsas, at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day, if there are no outstanding bids or offers, as the case may be, on the system matching or bettering the terms of the proposed off-system transaction, and if the trade involves more than the trade involves more than €1.5 million and more than 40% of average daily trading volume of the stock during the preceding quarter;
relates to a merger or spin-off of a listed company;
relates to the reorganization of a business group;
the transaction is executed for the purposes of settling litigation;
involves certain types of contracts or complex transactions; or
the Sociedad de Bolsas finds other justifiable cause. Information with respect to computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas and published in theBoletín de Cotización and in the computer system by the next trading day.
Clearance and Settlement System Until April 1, 2003, transactions carried out on the regional Spanish stock exchanges and the continuous market were cleared and settled through the Servicio de Compensación y Liquidación de Valores, S.A. (the “SCL”). Since April 1, 2003, the settlement and clearance of all trades on the Spanish stock exchanges, the Public Debt Market Book-Entry System Ownership of shares listed on any Spanish stock exchange is required to be represented by entries in a register maintained by Iberclear, which is the Spanish Central Securities Depositary, and transfers or changes in ownership are effected by entries in such register. The securities register system is structured in two levels: the central registry managed by Iberclear which keeps the securities balances of the participants, and a detailed registry managed by the participants where securities are listed by holder’s name. Securities Market Legislation The Spanish Securities Markets Act, which came into effect in 1989, among other things:
established an independent regulatory authority, the CNMV, to supervise the securities markets;
established a framework for the regulation of trading practices, tender offers and insider trading;
required stock exchange members to be corporate entities;
required companies listed on a Spanish stock exchange to file annual audited financial statements and to make public quarterly financial information;
established a framework for integrating quotations on the four Spanish stock exchanges by computer;
exempted the sale of securities from transfer and value added taxes;
deregulated brokerage commissions as of 1992; and
provided for transfer of shares by book-entry or by delivery of evidence of title. The Securities Markets Act was amended by Law 37/1998, which implemented two European Union directives into Spanish law. The first is Directive 93/22/CE, relating to investment services within securities, later amended by Directive 95/26/CE of the European Parliament and Council. The second is Directive 97/9/CE of the European Parliament and Council, relating to indemnity systems. Law 37/1998 introduced some innovations to the Securities Markets Act. The first was the recognition that both Spanish and other European Union Member State companies authorized to provide investment services have full access to the official secondary markets, with full capacity to operate, thereby enabling the direct admission of banking entities into the stock exchange area. The second innovation was that the scope of the Securities Markets Act was enlarged to include a list of financial instruments, such as financial exchange contracts, or installment financial contracts, which expanded the categories of securities included. The Securities Markets Act has been further amended by Law 44/2002 (November 22, 2002) on reform measures of the financial system, which introduced certain modifications to the laws governing financial markets and corporations, generally, including:
provisions regarding market transparency such as: requiring listed companies to establish an audit committee, redefining the reporting requirements for material facts, rules relating to the treatment of confidential and insider information and related party transactions, and prevention of manipulative and fraudulent practices with respect to market prices;
the establishment of Iberclear; and
the authorization of the Minister of Economy and Competitiveness to regulate financial services electronic contracts. On July 17, 2003, the Securities Market law was amended by Law 26/2003 in order to reinforce the transparency of listed companies. It introduced:
information and transparency obligations including detailed requirements of the contents of the corporate website of listed companies and the obligation to file with the CNMV an annual corporate governance report; and
the obligation to implement a series of corporate governance rules including, among others, regulations regarding the boards of directors and the general shareholders’ meetings. On March 11, 2005, Royal Decree Law 5/2005 was approved, modifying the Securities Market Law in order to implement the Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. The Directive: (i) harmonizes the requirements for the process of approval of prospectuses, which enables a prospectus to be valid throughout the European Union; and (ii) incorporates the application of the country of origin principle. On April 22, 2005, the Securities Market Law was amended by Law 5/2005 on supervision of financial conglomerates in order to make the sectoral rules applicable to investment firms more consistent with other sectoral rules applicable to other groups with similar financial activities, such as credit institutions and insurance undertakings. On November 14, 2005, the Securities Market Law was further amended by Law 19/2005, which refers to the European public limited-liability companies with registered offices in Spain and, on November 24, 2005, by Law 25/2005, of November 24, 2005, which regulates the capital risk entities. Royal Decree 1310/2005 (November 4) partially developed the Securities Market Law 24/1988, in relation to the admission to trading of securities in the official secondary markets, the sale or subscription public offers and the prospectus required to those effects. Royal Decree 1333/2005 (November 11), which developed the Securities Market Law 24/1988, in relation to market abuse. Law 12/2006 (May 16) amended the Securities Market Law by (i) introducing a new article relating to notifications to the CNMV of transactions that might constitute insider dealing or market manipulation, (ii) completing the regulation of Bolsas y Mercados Españoles, and (iii) clarifying the regulation of significant participations on the entities which manage the clearing and settlement of securities and the Spanish secondary markets. Law 36/2006 (November 30), relating to measures to prevent the tax fraud, among others, amends article 108 of the Securities Market Law. Law 6/2007 (April 12) amends the Securities Market Law, in order to modify the rules for takeover bids and for issuers transparency. This Law came into effect on August 13, 2007, and partially integrates into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids and Directive 2004/109/EC of the European Parliament and of the Council of December 15, 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. This Law has been further developed by Royal Decree 1066/2007 (July 27) on rules applicable to takeover bids for securities and by Royal Decree 1362/2007 (October 19) on transparency requirements for issuers of listed securities. For a brief description of the provisions of Law 6/2007 as regards the rules applicable to takeover bids see “Item 10. Additional Information—B. Memorandum and Articles of Association—Tender Offers”.
Law 6/2007 (i) introduces several changes to the periodical financial information, annual, biannual and quarterly, to be published by issuers of listed securities; and (ii) introduces new developments to the system which establishes the duty to notify significant stakes in an enterprise, such as:
Anyone with a right to acquire, transfer or exercise voting rights granted by the shares, regardless of the actual ownership of the shares; and anyone owing, acquiring or transferring other securities or financial instruments which grant a right to acquire shares with voting rights, will also have to notify the holding of a significant stake in accordance with the developing regulations;
Directors of listed companies, in addition to notifying any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, will have to inform the CNMV of their stake upon appointment or resignation; and
Listed companies will be required to notify transactions concerning their treasury shares in certain cases, which will be established in the developing regulations. Law 47/2007 (December 19) amends the Securities Market Law in order to adapt it to Directive 2004/39/EC on markets in financial instruments (MiFID), Directive 2006/73/EC implementing Directive 2004/39/EC with respect to the organizational requirements and operating conditions for investment firms and defining terms for the purpose of that Directive, and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. The amendments introduced by Law 47/2007 represent important reforms of the Securities Market Law and serve to (i) increase the number of investment services that can be performed by the entities; (ii) reinforce the measures for the protection of investors; (iii) establish new organizational procedures for investment firms; and (iv) reinforce the supervisory powers of the CNMV, establishing cooperation mechanisms among supervisory authorities. Directive 2006/49/EC and MiFID implementation have been introduced by Royal Decrees 216/2008 and 217/2008 (both of February 15), respectively. Law 32/2011 of October 4, 2011, amending Law 24/1988 of July 28, 1988, on the securities market, introduced a central counterparty for equity transactions imposing the obligation to carry out all equity transactions traded through a central counterparty. Other relevant amendments of Law 32/2011 of October 4, 2011, include the introduction of a right of withdrawal in the event of insolvency of the entities in charge of keeping the registry and of participating entities and the pro rata rule. Modifications were also made to the regulatory regime of Iberclear, which is in charge of both the register of securities held in book-entry form and their clearing and settlement. Specifically, the new rules facilitate the relationship between Iberclear and the other agents of the trading and post-trading system and regulate the agreements that Iberclear may carry out to provide a better integration with to the TARGET2-Securities project, which aims to establish a Royal Decree-Law 20/2012 of July 13, 2012 on measures to ensure budgetary stability and the promotion of competitiveness which, among other reforms, amended Law 24/1988 of July 28, 1988 on the Securities Market (and Law 44/2002 of November 22, 2002 on financial system reform measures) to include a new financial instrument in the Spanish legal system, the so-called “internationalization covered bonds” (“cédulas de internacionalización”). These bonds are similar to “territorial covered bonds” (“cédulas territoriales”), introduced by Law 44/2002 and are fixed-income securities that may be issued by credit institutions, whose capital and interest are especially secured by loans and credits granted for the internationalization of companies. The total amount of internationalization covered bonds issued by a credit institution may not exceed 70% of the amount of the unrepaid “eligible” loans and credits. The Royal Decree-Law 20/2012 also introduces new tax measures on a range of taxes which, in some cases, amends or expands the reforms previously introduced by the Royal Decree-Law 9/2011, 20/2011 and 12/2012. The following are the most important tax measures in the Corporate Income Tax: (i) In 2012 and 2013 the offsetting of negative tax bases generated in previous years will be restricted to 50% for those entities whose turnover during the previous year was between €20 million and €60 million (the figure was previously 75%) and to 25% if the turnover exceeds €60 million (previously 50%). Over this same period, the deduction for goodwill arising from acquisitions of businesses will be subject to the maximum annual limit of 1% of the related amount (5% previously) (ii) Likewise, for fiscal years 2012 and 2013, the ceiling on the tax deduction for intangible fixed assets with an indefinite useful life is reduced from 10% to 2%. Regarding indirect taxation, as from September 1, 2012, the Royal Decree-Law also sets up that the standard rate of VAT increases from 18% to 21%, the reduced rate from 8% to 10%, and the super-reduced rate is held at 4%, which is applicable to staple goods and services. Certain goods and services hitherto taxed at the reduced rate (8%) will now be taxed at the standard rate (21%). Finally, the tax rate applicable to the delivery of housing units is maintained at 4% until December 31, 2012. The Law 11/2012 of December 19, 2012 on urgent measures relating to the environment, which included transposition into Spanish legislation of the provisions of the Commission Regulation 1031/2010 of November 12, 2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances, amended by the Commission Regulation 1210/2011 of November 23, 2011, also amended Law 24/1988 of July 28, 1988 on the Securities Market to define the financial institutions that can participate in these auctions and grant the CNMV supervisory, inspection and sanctioning powers in relation to the aforementioned misconduct. It established that investment firms and credit institutions authorized to provide investment services may submit bids to greenhouse gas emission allowance auctions on their customers’ behalf, as well as conduct the activities envisaged in Law 24/1988. Trading by Santander’s Subsidiaries in the Shares Some of our subsidiaries, in accordance with customary practice in Spain, and as permitted under Spanish law, have regularly purchased and sold our shares both for their own account and for the accounts of customers. Our subsidiaries have intervened in the market for our shares primarily in connection with customer transactions and, occasionally, in connection with transactions by non-customers that are undertaken for commercial purposes or to supply liquidity to the market when it is reasonable to do so. Such trading activity also has provided a mechanism for accumulating shares that were used to meet conversions into our shares, of bonds issued by us and other affiliated companies and to make offerings of shares. We expect that our subsidiaries may continue to purchase and sell our shares from time to time. Our trading activities in our shares are limited to those set forth above. The continuous market is driven by orders, which are matched by the market’s computer system according to price and time entered. Santander and Banesto’s broker subsidiaries, Santander Investment Bolsa, S.V., S.A., and Banesto Bolsa, S.A., S.V.B., and the other brokers authorized to trade on the continuous market (“Member Firms”) are not required to and do not serve as market makers maintaining independently established bid and ask prices. Rather, Member Firms place orders for their customers, or for their own account, into the market’s computer system. If an adequate counterparty order is not available on the continuous market at that time, the Member Firm may solicit counterparty orders from among its own clients and/or may accommodate the client by filling the client’s order as principal. Under the Spanish Corporate Enterprises Act, a company and its subsidiaries are prohibited from purchasing shares of the company in the primary market. However, purchase of the shares is permitted in the secondary market provided that: (1) the aggregate nominal value of such purchases (referred to as “treasury stock” or “autocartera”) and of the shares previously held by the company and its subsidiaries does not exceed 10% of the total outstanding capital stock of the company, (2) the purchases are authorized at a meeting of the shareholders of the acquiring company and, if the acquisition relates to shares in the parent company, the acquiring company’s parent, and (3) such purchases, together with the shares previously held by the company and its subsidiaries, do not result in a net equity less than the company’s stock and its legal or by-laws undisposable reserves.
The law requires that the CNMV be notified each time the acquisition of treasury stock made since the last notification reaches 1% of the voting rights of the company, regardless of any other preceding sales. The Spanish Corporate Enterprises Act establishes, in relation to the treasury stock shares (held by us and our affiliates), that the exercise of the right to vote and other non-financial rights attached to them shall be suspended. Financial rights arising from treasury stock held directly by us, with the exception of the right to allotment of new bonus shares, shall be attributed proportionately to the rest of the shares. The portion of overall trading volume in Santander ordinary shares transacted by Group subsidiaries continues to vary from day to day and from month to month, and is expected to continue to do so in the future. In Not Applicable. Not Applicable. Not Applicable. Item Not Applicable. B. Memorandum and articles of association The following summary of the material terms of our Bylaws is not meant to be complete and is qualified in its entirety by reference to our Bylaws. Because this is a summary, it does not contain all the information that may be important to you. You should read our Bylaws carefully before you decide to invest. Copies of our Bylaws are incorporated by reference. The Bylaws of Banco Santander, S.A. were approved by our shareholders acting at the annual general shareholders’ meeting held on June 21, 2008 and incorporated with the office of the Mercantile Registry on August 11, 2008. Subsequently, At the 2011 annual general meeting, our shareholders resolved to amend our Bylaws primarily to bring them into line with legislative amendments affecting capital corporations in Spain, including, specifically, those arising from the following sets of legal provisions:
In addition, some other provisions aimed at improving or refining the Bank’s rules on corporate governance (in particular, the reduction of the directors’ term of office from five to three years) and at making other technical improvements were passed by our shareholders at the 2011 annual general meeting to amend our Bylaws. At the 2012 annual general meeting, held on March 30, 2012, our shareholders resolved to amend our Bylaws primarily to bring them into line with recent statutory amendments affecting Spanish Corporate Enterprises Act, including, specifically, those arising from Act 25/2011, of August 1, partially amending the Spanish Corporate Enterprises Act, and from the adoption of Directive 2007/36/EC, of the European Parliament and of the Council, of July 11 2007, on the exercise of certain rights of shareholders in listed companies. At the 2013 annual general meeting, held on March 22, 2013, our shareholders resolved to amend our Bylaws to achieve two separate goals: (i) on the one hand, modify the rules on directors’ remuneration to conform them to the Bank’s practices; and (ii) on the other, adjust the Bylaws to recent statutory amendments regarding capital companies (Ley de sociedades de capital) by Law 1/2012, of 22 June, on the simplification of the obligations to provide information and documentation regarding mergers and split-offs of capital companies (“Law 1/2012”). The first goal was achieved by amending section 2 of article 58 of our Bylaws regarding the rules for the remuneration of directors for their duties of supervision and collective decision-making, which has changed from a system of profits participation to one of fixed amount remuneration. For more information on the amendment of section 2 of article 58 of our Bylaws, see below, “Certain Powers of the Board of Directors”. The second goal was achieved by amending the title and sections 1 and 2 in article 61 of our Bylaws to conform the provision to the latest amendment of article 11 bis of the Spanish Corporate Enterprises Act pursuant to Law 1/2012. First, the amendment of the title of the article was intended to specify the corporate nature of the website, in line with the nomenclature used by the law. Second, section 1 includes now a new rule that gives the shareholders at the General Shareholders’ Meeting the power to create the corporate website, for which purpose the corresponding item should expressly appear in the agenda of the meeting. Legal provisions have also been included regarding the manner in which such resolution will be announced. The power to amend, relocate or remove the website still belongs to the board of directors, in line with the legal rule applicable by default. Third, in section 2, apart from including certain improvements to the text, the reference to “registration with the Commercial Registry” of the approval of the amendment, removal or relocation of the website is replaced with a reference to its “record on the Bank’s page maintained with the Commercial Registry”, thus conforming the text of the Bylaws to the tenor of the new text of article 11 bis of the Spanish Corporate Enterprises Act. Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of Our current Bylaws are included as Exhibit 1.1. The Bylaws are also available on the Group’s website, which does not form part of this annual report on Form 20-F, atwww.santander.com, The board of directors, at its meeting held on April 25, 2011, agreed to amend the Rules and Regulations of the Board in order, among others, to bring some aspects of its internal regulations into line with applicable recent legislative amendments affecting capital corporations in Spain. All references to the Rules and Regulations of the Board in this annual report on Form 20-F are references to the current text. The Rules and Regulations of the Board are available on the Group’s website, which does not form part of this annual report on Form 20-F, atwww.santander.com, General As of December 31, All of our shares are fully paid and non-assessable. Spanish law requires that bank-listed equity securities be issued in book-entry form only. Register Santander is registered with the Commercial Registry of Santander (Finance Section). The Bank is also recorded in the Special Registry of Banks and Bankers with registration number 0049, and its fiscal identification number is
Corporate Object and Purpose Article 2 of our Bylaws states that the corporate objective and purpose of Santander consists of carrying-out all types of activities, operations and services specific to the banking business in general and which are permitted under current legislation and the acquisition, holding and disposal of all types of securities. Certain Provisions Regarding Shareholder Rights As of the date of the filing of this report, Santander’s capital is comprised of only one class of shares, all of which are ordinary shares and have the same rights. Santander may issue non-voting shares for a nominal amount of not more than one-half of the paid-up share capital, and redeemable shares for a nominal amount of not more than one-fourth of its share capital. Our Bylaws do not contain any provisions relating to sinking funds. Our Bylaws do not specify what actions or quorums are required to change the rights of holders of our stock. Under Spanish law, the rights of holders of stock may only be changed by an amendment to the Bylaws of the company that complies with the requirements explained below under “—Meetings and Voting Rights.” Meetings and Voting Rights We hold our annual general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the board of directors. Extraordinary meetings may be called from time to time by the board of directors whenever the board considers it advisable for corporate interests, and whenever so requested by shareholders representing at least 5% of the outstanding share capital of Santander. Each Santander share entitles the holder to one vote. Registered holders of any number of shares who are current in the payment of capital calls will be entitled to attend shareholders’ meetings. Our Bylaws do not contain provisions regarding cumulative voting. Any Santander share may be voted by proxy. Subject to the limitations imposed by Spanish law, proxies may be given to any individual or legal person, must be in writing or by remote means of communication and are valid only for a single meeting. According to Spanish law, if a director or another person solicits a proxy for a director thus obtaining more than three proxies and the director is subject to a conflict of interest, the director holding the proxies may not exercise the voting rights attaching to the represented shares in connection with decisions relating to:
his appointment or ratification, removal, dismissal or withdrawal as director;
the institution of a derivative action against him; or
the approval or ratification of transactions between Santander and the director in question, companies controlled or represented by him, or persons acting for his account. In accordance with the Rules and Regulations for the General Shareholders’ Meeting and in the manner established by such Rules and Regulations, the Group’s website includes from the date when the call of the general shareholders’ meeting is published, the text of all resolutions proposed by the board of directors with respect to the agenda items and the details regarding the manner and procedures for shareholders to follow to confer representation on any individual or legal entity. The manner and procedures for electronic delegation and voting via the Internet are also indicated.
At both general shareholders’ meetings held in 2004 (the annual shareholders’ meeting of June 19, 2004 and the extraordinary general meeting of October 21, 2004) our shareholders could exercise their voting and representation rights prior to the meetings by electronic means (via the Internet). In addition, at the extraordinary general shareholders’ meeting of October 21, 2004, our shareholders could vote by mail and in the annual general shareholders’ meetings held on June 18, 2005, June 17, 2006, June 23, 2007, June 21, 2008, June 19, 2009, June 11, 2010, June 17, 2011, Only registered holders of Santander shares of record at least five days prior to the day on which a meeting is scheduled to be held may attend and vote at shareholders’ meetings. As a registered shareholder, the depositary will be entitled to vote the Santander shares underlying the Santander ADSs. The deposit agreement requires the depositary to accept voting instructions from holders of Santander ADSs and to execute such instructions to the extent permitted by law. In general, resolutions passed by a general meeting are binding upon all shareholders. In certain circumstances, Spanish law gives dissenting or absent shareholders the right to have their Santander shares redeemed by us at prices determined in accordance with established formulae or criteria. Santander shares held by the Bank or its affiliates are counted for purposes of determining quorums but may not be voted by the Bank or by its affiliates. Resolutions at general meetings are passed provided that, regarding the voting capital present or represented at the meeting, the number of votes in favor is higher than the number of votes against or blank and abstentions. In accordance with Spanish law, a quorum on first call for a duly constituted ordinary or extraordinary general meeting of shareholders requires the presence in person or by proxy of shareholders representing at least 25% of the subscribed voting capital. On the second call there is no quorum requirement. Notwithstanding the above, a quorum of at least 50% of the subscribed voting capital is required on the first call of the ordinary or extraordinary general meeting of shareholders to validly approve any of the following actions:
issuance of bonds;
increase or reduction of share capital;
rescission or limitation of the preferential right to subscribe new issuance of shares;
change of the registered address of Santander to a foreign country;
transformation of Santander, or merger, or spin-off, or global assignment of assets and liabilities; and
any other amendment of our Bylaws. A quorum of 25% of the subscribed voting capital is required to vote on such actions on the second call. A two-third majority of the present or represented voting capital is required to approve all of the above listed actions when the shareholders’ meeting is held on second call and less than 50% of the subscribed voting capital is present or represented. For purposes of determining the quorum, those shareholders who vote by mail or through the Internet are counted as being present at the meeting, as provided by the Rules and Regulations of the Bank’s general shareholders’ meetings. Changes in Capital Any increase or reduction in share capital must be approved at the general meeting in accordance with the procedures explained above in the section entitled “Meetings and Voting Rights”. However, the shareholders acting at the general shareholders’ meeting may delegate to the board of directors the power to increase share capital.
The capital increase may be effected by issuing new shares or by increasing the par value of existing shares. Capital reduction may be effected by reducing the par value of existing shares, by repurchasing them, or dividing them into groups for exchange. Unpaid subscription amounts on partially paid-up shares must be paid by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase. At the Bank’s annual general shareholders’ meeting held on March At the Bank’s annual general shareholders’ meeting held on March At the Bank’s annual general shareholders’ meeting held on March 22, 2013, our shareholders also passed a resolution by which they authorized the board of directors to issue, on one or more occasions, up to €50 billion euros, or the equivalent thereof in another currency, in fixed-income securities in any of the forms admitted by Law, including bonds, certificates, promissory notes, debentures and preferred interests or debt instruments of a similar nature (including warrants payable by physical delivery or set-off). This power may be exercised by the board of directors within a maximum period of five years from the date of adoption of this resolution by the shareholders, at the end of which period it shall be cancelled to the extent of the unused amount. Dividends We normally pay Once the annual accounts have been approved, the shareholders at the general shareholders’ meeting will resolve on the allocation of the results for the fiscal year. Dividends may only be distributed out of the earnings for the fiscal year or with a charge to unappropriated reserves, after the payments required by the law and the Bylaws have been made, provided that the stockholders’ equity disclosed in the accounts is not reduced to less than the share capital as a result of the distribution. If there are any losses from prior fiscal years that reduce the Bank’s stockholders’ equity below the amount of the share capital, the earnings must be used to offset such losses. The amount, time and form of payment of the dividends, to be distributed among the shareholders in proportion to their paid-in capital will be established by resolutions adopted at the general meeting. The shareholders at the general shareholders’ meeting and the board of directors may make resolutions as to the distribution of interim dividends, subject to limitations and in compliance with the requirements established by the law. A shareholder’s dividend entitlement lapses five years after the dividend payment date. The shareholders at the annual general shareholders’ meeting may resolve that dividends in kind can be paid, provided that:
the property or securities to be distributed are of the same nature;
the property or securities have been admitted to listing on an official market as of the effective date of the resolution, or liquidity is guaranteed by Santander within a maximum period of one year; and
the property or securities are not distributed for a value that is lower than the value at which they are recorded on Santander’s balance sheet. Preemptive Rights In the event of a capital increase each shareholder has a preferential right by operation of law to subscribe for shares in proportion to its shareholding in each new issue of Santander shares. The same right is vested on shareholders upon the issuance of convertible debt.
capital increases following conversion of convertible bonds into Santander shares;
capital increases due to the absorption of another company or of part of the spun-off assets of another company, when the new shares are issued in exchange for the new assets received; or
capital increases due to Santander’s tender offer for securities using Santander’s shares as all or part of the consideration. If capital is increased by the issuance of new shares in return for capital from certain reserves, the resulting new Santander shares will be distributed pro rata to existing shareholders. Redemption Our Bylaws do not contain any provisions relating to redemption of shares except as set forth in connection with capital reductions. Nevertheless, pursuant to Spanish law, redemption rights may be created at a duly held general shareholders’ meeting. Such meeting will establish the specific terms of any redemption rights created. Registration and Transfers The Santander shares are in book-entry form in the Iberclear system. We maintain a registry of shareholders. We do not recognize, at any given time, more than one person as the person entitled to vote each share in the shareholders meeting. Under Spanish law and regulations, transfers of shares quoted on a stock exchange are normally made through aSociedad o Agencia de Valores, credit entities and investment services companies, that are members of the Spanish stock exchange. Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures of Iberclear. Transfers executed “over the counter” are implemented pursuant to the general legal regime for New shares may not be transferred until the capital increase is registered with the Commercial Registry. Liquidation Rights Upon a liquidation of Santander, our shareholders would be entitled to receive pro-rata any assets remaining after the payment of our debts, taxes and expenses of the liquidation. Holders of non-voting shares, if any, are entitled to receive reimbursement of the amount paid before any amount is distributed to the holders of voting shares.
Change of Control Our Bylaws do not contain any provisions that would have an effect of delaying, deferring or preventing a change in control of the company and that would operate only with respect to a merger, acquisition or corporate restructuring involving Santander or any of our subsidiaries. Nonetheless, certain aspects of Spanish law described in the following section may delay, defer or prevent a change of control of the Bank or any of our subsidiaries in the event of a merger, acquisition or corporate restructuring. Legal Restrictions on Acquisitions of Shares in Spanish Banks Certain provisions of Spanish law require notice to the Bank of Spain prior to the acquisition by any individual or corporation of a substantial number of shares of a Spanish Any individual or corporation that wishes to acquire, directly or indirectly, a significant holding ( In addition, prior notice must be given to the Bank of Spain of any increase, direct or indirect, in any significant holding resulting in percentage equity interest or voting rights reaching or surpassing one of the following percentages: 20%, 30% or 50%. Notice to the Bank of Spain is also required from anyone who, as a result of the contemplated acquisition, may attain sufficient power to control the credit entity. Any acquisition mentioned in the preceding sentence to which the required notice was not given or even if given, a three month period after receipt of notice has not yet elapsed, or that is opposed by the Bank of Spain will have the following effects: (1) the acquired shares will have no voting rights, (2) the Bank of Spain may seize control of the bank or replace its board of directors, and (3) a fine may be levied on the acquirer. The Bank of Spain has sixty business days after the receipt of notice to object to a proposed transaction. Such objection may be based on finding the acquirer unsuitable on the basis, among others, of its commercial or professional reputation, its solvency or the transparency of its corporate structure. If sixty business days elapse without any word from the Bank of Spain, its authorization is deemed granted. However, absent objection by the Bank of Spain, it may set forth a different maximum period for closing the proposed transaction. Any individual or institution that plans to sell its significant holding, or reduce it to one of the above-mentioned levels of ownership, or because of any sale will lose control of the entity, must provide advance notice to the Bank of Spain indicating the amount of the transaction and its anticipated closing date. Failure to comply with these requirements may subject the offending party to penalties. Any individual or corporation which acquires, directly or indirectly, a participation in a Spanish financial institution and as a consequence the percentage of its share capital or voting rights reaches or exceeds 5%, must notify the Bank of Spain and the relevant financial institution, indicating the amount of the participation reached. Credit entities must notify the Bank of Spain as soon as they become aware of any acquisition or transfer of significant shares of its capital stock that exceeds the above-mentioned percentages. Furthermore, banks are required to inform the Bank of Spain as soon as they become aware, and in any case not later than 15 days after, any acquisition by a person or a group of at least 1% of such a bank’s total equity. The Bank of Spain also requires each bank to notify the Bank of Spain of a list, dated on the last day of each quarter and during April, July, October and January of all its shareholders that are financial institutions and all other shareholders that own at least 0.25% of the bank’s total equity. If the Bank of Spain determines at any time that the influence of a person who owns a significant participation of a bank may adversely affect that bank’s financial situation, it may request that the Ministry of Economy and Competitiveness: (1) suspend the voting rights of such person’s shares for a period not exceeding 3 years; (2) seize control of the bank or replace its board of directors; or (3) revoke the bank’s license in exceptional circumstances. A fine may also be levied on the relevant person. Tender Offers Law 6/2007, of April 12, which amends the Securities Market Law, has modified the rules for takeover bids. This Law, which came into effect on August 13, 2007, partially transposes into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids.
The rules replaced the traditional system where launching a takeover bid was compulsory prior to acquiring a significant shareholding in the target company and partial bids were permitted for a regime where takeover bids must be made for all the share capital after obtaining the control of a listed company (i.e. 30% of the voting rights or appointment of more than one-half of the members of the company’s board of directors) whether such control is obtained by means of an acquisition of securities or an agreement with other holders of securities. The above does not prevent parties from making voluntary bids for a number that is less than the totality of securities in a listed company. Law 6/2007 also regulates, among other things: (i) new obligations for the board of directors of the offeree company in terms of preventing the takeover bid (passivity rule); and (ii) the squeeze-out and sell-out rights when the offeror is a holder of securities representing at least 90% of the voting capital of the offeree company and the prior takeover bid has been accepted by holders of securities representing at least 90% of the voting rights covered by the bid. Royal Decree 1066/2007 on rules applicable to takeover bids for securities further developed the regulations on takeover bids established by Law 6/2007, completing the amendments introduced by Law 6/2007, in order to ensure that takeover bids are carried out within a comprehensive legal framework and with absolute legal certainty. The Royal Decree contains provisions regarding: (i) the scope and application to all takeover bids, whether voluntary or mandatory, for a listed company; (ii) the rules applicable to mandatory takeover bids when control of a company is obtained; (iii) other cases of takeover bids, such as bids for de-listing of securities and bids that must be made when a company wishes to reduce capital through the acquisition of its own shares for subsequent redemption thereof; (iv) the consideration and guarantees offered in a bid; (v) stages of the procedure that must be followed in a takeover bid; (vi) the mandatory duty of passivity of the offeree company’s board of directors and the optional regime of neutralization of other preventive measures against bids; (vii) changes to, withdrawal of, and cessation of effects of the bid; (viii) the acceptance period, the calculation of the acceptances received and the settlement of the bid; (ix) the procedures applicable to competing offers; (x) the rules for squeeze-outs and sell-outs; and (xi) certain rules on supervision, inspection and sanctions applicable with respect to the regulations on takeover bids. Reporting Requirements Royal Decree 1362/2007 requires that any entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or is below the threshold of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%, of the voting rights of a company, for which Spain is the member state of origin, listed on a Spanish stock exchange or on any other regulated market in the European Union, must, within 4 days after that acquisition or transfer, report it to such company, and to the CNMV. This duty to report the holding of a significant stake is applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the percentage of an individual’s voting rights exceeds, reaches or is below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer. Similar disclosure obligations apply, among others, in the event of: (i) the acquisition or disposal of any financial instruments entitling the holder to acquire the company’s shares (such as options, futures, swaps, etc.); (ii) certain voting, deposit, temporary transfer or other agreements regarding the relevant shares; or (iii) custodians or proxy-holders who can exercise with discretion the voting rights attached to the relevant shares. The above mentioned threshold percentage will be 1% or any multiple of 1% whenever the person who has the duty to notify is a resident of a tax haven or of a country or territory where there is no taxation or where there is no obligation to exchange tax information (in accordance with Spanish law). In addition, any Spanish company listed on the Spanish stock exchanges must report any acquisition by such company (or a subsidiary) of the company’s own shares if the acquisition, together with any acquisitions since the date of the last report and without deducting sales of its own shares by the company or by its subsidiaries, causes the company’s ownership of its own shares to exceed 1% of its voting rights. See “Item 9. The Offer and Listing—C. Markets—Trading by Santander’s Subsidiaries in the Shares” herein. Members of the board of directors of listed companies, in addition to notifying the CNMV of any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, are required to inform the CNMV of their ratio of voting rights upon appointment or resignation. In addition, top managers of any listed company must report to the CNMV the acquisition or disposal of shares or other securities or financial instruments of the issuer which are linked to these shares.
Board of Directors Our board of directors may be made up of a minimum of 14 and a maximum of 22 members, appointed by our shareholders acting at the general meeting of shareholders. Members of the board of directors are elected for an initial term of three years but can be re-elected. One third of the members of the board are elected each year. A director could serve for a term shorter than the one for which he or she has been initially elected if the shareholders acting at a duly called general meeting decide that that director be replaced before completing his or her term. Although there is no provision in Spanish law regarding the composition of a board of directors, the Rules and Regulations of the Board provide that in exercising its powers to make proposals at the general shareholders’ meeting and to designate directors by interim appointment to fill vacancies (co-option), the board shall endeavor to ensure that the external or non-executive directors represent a wide majority over the executive directors and that the former include a reasonable number of independent directors. In addition, in all events, the board of directors shall endeavor such that the number of independent directors represent at least one-third of all directors. Article 42.1 of our Bylaws also provides that the shareholders at the general shareholders’ meeting shall endeavor to ensure that external or non-executive directors represent a large majority of the board of directors, and that a reasonable number of the board of directors are independent directors. In addition, the shareholders at the general shareholders’ meeting shall likewise endeavor to ensure that independent directors represent at least one-third of the total number of directors. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. See Item 16G of Part II, “Corporate Governance—Independence of the directors on the board of directors” herein. Certain Powers of the Board of Directors The actions of the members of the board are limited by Spanish law and certain general provisions contained in our Bylaws. For instance, Article 57 of our Bylaws states that the directors will be liable to Santander, to our shareholders and to our corporate creditors for any damages that they may cause by acts or omissions which are contrary to law or to the Bylaws or by acts or omissions contrary to the duties inherent in the exercise of their office. A director’s power to vote on a proposal, arrangement or contract in which such director is materially interested is not regulated by our Bylaws. Conflicts of interest are regulated by Article 30 of the Rules and Regulations of the Board. Under Article 30, a director is obliged to inform the board of any direct or indirect conflict of interest which may exist with the Bank. If such a conflict relates to a particular transaction with the Bank, then the director (i) may not undertake the transaction without the board’s authorization (such authorization can only be granted following a report of the appointments and remuneration committee); and (ii) the director may not take part in the discussion or voting regarding the transaction to which the conflict relates. According to our Bylaws, unpaid subscription amounts on partially paid-up shares shall be paid up by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase. The manner and other details of such payment shall be determined by the resolution providing for the capital increase. Without prejudice to the effects of default as set forth by law, any late payment of unpaid subscription amounts shall bear, for the benefit of the Bank, such interest as is provided by law in respect of late payments, starting from the day when payment is due and without any judicial or extra-judicial demand being required. In addition, the Bank shall be entitled to bring such legal actions as may be permitted by law in these cases. Our current Bylaws provide that the members of the board of directors are entitled to receive compensation for performing the duties entrusted to them by reason of their At the Bank’s annual general shareholders’ meeting held on March 22, 2013, our shareholders passed a resolution to amend section 2 of article 58 of our Bylaws regarding the rules for the remuneration of directors for their duties of supervision and collective-decision making, which changed from the system of profits participation to one of fixed annual remuneration determined by the shareholders at the general shareholders’ meeting. Such amount shall remain in effect to the extent that the shareholders at the general shareholders’ meeting do not resolve to change it, although the board may reduce the amount thereof in those years in which it so believes justified. Such compensation shall have two components: (i) an annual amount, and (ii) attendance fees. The specific amount payable for the above-mentioned items to each of the directors Our amended Bylaws have not yet been filed with the
Regardless of the limit set above, the directors are entitled to receive compensation that the board of directors consider appropriate, for the performance of duties in Santander other than the duties of supervision and collective decision-making that the directors perform as members of the board. Directors may also receive compensation in the form of shares of the Bank or options over the shares, or other remuneration linked to share value following a resolution adopted by the shareholders at the general shareholders’ meeting (conducted in accordance with our Bylaws and applicable Spanish legislation). According to our Bylaws, the board of directors must, on an annual basis, approve a report on directors remuneration policy, which shall include complete, clear and understandable information regarding: (i) the overall summary of the application of such policy during the last fiscal year, including a breakdown of the individual compensation accrued by each director during such fiscal year, (ii) the policy approved by the board for the current year and (iii) the policy, if any, planned for future years. This report must be made available to the shareholders when the annual general shareholders’ meeting is called and must be submitted to a non-binding vote thereof as a separate item on the agenda. Board of Directors Qualification There are no mandatory retirement provisions due to age for board members in our Bylaws or in the regulations of our board of directors. These regulations contain provisions relating to the cessation of directorship for other reasons. In addition, there are no share ownership requirements in our Bylaws or in the Rules and Regulations of the Board of Directors. Pursuant to Spanish law, directors appointed by the board but whose appointment remains subject to ratification by the shareholders must be a shareholder of the Bank and, pursuant to the Rules and Regulations of the Board, proprietary directors must submit their resignation proportionately when the shareholder that they represent parts with its shareholdings or reduces them in a significant manner. Our Bylaws and Rules and Regulations of the Board do not otherwise require ownership of Santander shares for a director’s qualification. During the past two years, the Bank was not a party to any contract outside its ordinary course of business that was material to the Group as a whole. Restrictions on Foreign Investments Under present regulations, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation on the amount other than applicable taxes. See “—Taxation”. On July 4, 2003, Law 19/2003 was approved which updates Spanish exchange control and
The following is a discussion of the material Spanish and The discussion of Spanish tax consequences below applies to you only if you are a non-resident of Spain and your ownership of ADSs or shares is not effectively connected with a permanent establishment or fiscal base in Spain and you are a On January 14, 2013, the United States of America and the Kingdom of Spain signed a protocol amending the Treaty, which needs to be ratified by both countries, and will become effective three months following the date on which notice is provided by the later of the countries to provide notice that its internal procedures for effectiveness have been fulfilled. When this protocol becomes effective, taxation described under the Treaty in this section may be altered. You should consult your own tax adviser as to the particular tax consequences to you of owning the shares or ADSs including your eligibility for the benefits of any treaty between Spain and the country of your residence for the avoidance of double taxation, the applicability or effect of any special rules to which you may be subject, and the applicability and effect of state, local, foreign and other tax laws and possible changes in tax law. Spanish tax considerations The following is a summary of material Spanish tax matters and is not exhaustive of all the possible tax consequences to you of the acquisition, ownership and disposition of ADSs or shares. This discussion is based upon the tax laws of Spain and regulations thereunder, which are subject to change, possibly with retroactive effect. Taxation of dividends Under Spanish law, dividends paid by a Spanish resident company to a holder of ordinary shares or ADSs not residing in Spain for tax purposes and not operating through a permanent establishment in Spain are subject to Spanish Non-Resident Income Tax at a 21% rate. Royal Decree-Law 20/ In addition, according to the Spanish Non-Resident Income Tax Law, if you are resident in the European Union or in a country, such as the United States, with which there is an effective exchange of information for tax purposes as defined in Spanish Law 36/2006 and you do not operate in Spain through a permanent establishment, dividends up to 1,500 euros, considering all Spanish-source dividends you may obtain in the calendar year, are exempt from Spanish taxation. However, Spanish withholding tax will nevertheless be required to be deducted from the gross amount of the dividends, and you will have to seek a refund of such withholding taxes from the Spanish tax authorities, following the standard refund procedure described below. We will To benefit from the Treaty’s reduced rate of 15%, you must provide our depositary, JPMorgan Chase Bank, N.A., with a certificate from the U.S. Internal Revenue Service (the “IRS”) stating that to the knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty. The IRS certificate is valid for a period of one year. According to the Order of April 13, 2000, to get a direct application of the Treaty-reduced rate of 15%, the certificate referred to above must be provided to our depositary before the tenth day following the end of the month in which the dividends were distributable by us. If you fail timely to A scrip dividend (such as a dividend described in Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events”) will be treated as follows:
If the holder of ordinary shares or ADSs elects to receive newly issued ordinary shares or ADSs it will be considered a delivery of fully paid-up shares free of charge and, hence, will not be considered income for purposes of the Spanish Non-Resident Income Tax. The acquisition value, both of the new ordinary shares or ADSs received in the scrip dividend and of the ordinary shares or ADSs from which they arise, will be the result of dividing the total original cost of the shareholder’s portfolio by the number of shares, both old and new. The acquisition date of the new shares will be that of the shares from which they arise.
If the holder of ordinary shares or ADSs elects to sell the rights on the market, the amount obtained from the sale of rights will be deducted from the acquisition value of the shares from which the rights arose. If the amount obtained from such sale is higher than the acquisition value of the shares from which the rights arose, the excess amount will be treated as a capital gain for the holder
If the holder of ordinary shares or ADSs elects to receive the proceeds from the sale of rights back to us at a fixed price, the tax regime applicable to the amounts received will be that applicable to cash dividends described above.
Spanish refund procedure According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004, dated July 30, 2004, as amended, a refund of the amount withheld in excess of the rate provided by the Treaty can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a
a Spanish 210 Form,
the certificate referred to in the preceding section, and
evidence that Spanish Non-Resident Income Tax was withheld with respect to you. The refund claim must be filed within four years of the date on which the withheld tax was collected by the Spanish tax authorities. According to Order EHA/3316 of December 17, 2010, the 210 Form may be filed on or after You are urged to consult your own tax adviser regarding refund procedures and any Taxation of capital gains Under Spanish law, any capital gains derived from securities issued by persons residing in Spain for tax purposes are considered to be Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is a resident of a country that has entered into a treaty for the avoidance of double taxation with Spain containing an “exchange of information” clause will be exempt from taxation in Spain. In addition, under the Treaty, if you are a U.S. resident, capital gains realized by you upon the disposition of ADSs or shares will not be taxed in Spain provided you have not held, directly or indirectly, 25% or more of our stock during the twelve months preceding the disposition of the stock. You are required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities an IRS certificate of residence in the United States, together with the appropriate Spanish 210 Form, between January 1st and January Spanish wealth tax Individuals not residing in Spain who hold shares or ADSs located in Spain are subject to the Spanish wealth tax (Spanish Law 19/1991), which imposes a tax on property located in Spain on the last day of any year. The Spanish tax authorities Law 4/2008 As a result of Royal Decree-Law 13/2011 and Law 16/2012, non-residents of Spain who held shares, ADSs, or other assets or rights located in Spain according to Spanish wealth tax
Spanish inheritance and gift taxes Transfers of shares or ADSs upon death or by gift are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987) if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of gift or death, or the rights attached thereto could be exercised or have to be fulfilled in the Spanish territory, regardless of the residence of the beneficiary. In this regard, the Spanish tax authorities Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at a 21% tax rate on the fair market value of the shares as a capital gain. Royal Decree-Law 20/2011 Expenses of transfer Transfers of ADSs or shares will be exempt from any Spanish transfer tax or value-added tax. Additionally, no Spanish stamp tax will be levied on such transfers.
The following summary describes the material
financial institutions;
insurance companies;
dealers and traders in securities that use a mark-to-market method of tax accounting;
tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;
partnerships or other entities classified as partnerships for
If an entity that is classified as a partnership for
This summary is based As used herein, a
a citizen or individual resident of the United States; a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. In general, for The Taxation of Distributions Subject to the discussion of the passive foreign investment company rules below, to the extent paid out of our current or accumulated earnings and profits (as determined in accordance with A scrip dividend (such as a dividend described in Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events”) will be treated as a distribution of cash, even if a U.S. Holder elects to receive the Subject to generally applicable limitations that may vary depending upon a
Subject to certain generally applicable limitations that may vary depending upon A Sale or Exchange of ADSs or Shares
Passive Foreign Investment Company Rules We believe that we were not a “passive foreign investment company” (“PFIC”) for If we were a PFIC for any taxable year, any gain recognized by a In addition, if we were a PFIC in a taxable year in which we paid a dividend or the prior taxable year, the Information Reporting and Backup Withholding Payment of dividends and sales proceeds that are made within the United States or through certain Certain F. Dividends and paying agents Not Applicable.
Not Applicable. We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 100 F Street, N.E., Washington, D.C. 20549, and at the SEC’s regional offices at 233 Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which our ADSs are listed. In addition, the SEC maintains a website that contains information filed electronically with the SEC, which can be accessed on the internet athttp://www.sec.gov. The information contained on this website does not form part of this annual report on Form 20-F. Not Applicable.
Item Our risk management activities involve the integrated qualification and quantification of the different types of risk (credit risk, operational risk, reputational risk and market risk) which are assumed by our business units in their activities. We have divided this section into the following
Corporate principles of risk management, control and risk appetite;
Corporate governance of the risk function;
Credit risk;
Liquidity risk and funding; Operational risk;
Market risk. Part 1. Corporate principles of risk management, control and risk appetite
Our risk policy focuses on maintaining a medium-low and predictable profile for all our risks. Our risk management model is a key factor for achieving our strategic objectives. The economic downturn in 2012 severely affected some of the main markets in which we operate. This situation particularly tested all our risk admission, monitoring and recovery models. In this context, management of different risks was positive when compared to the performance of the banking sector in these markets, which, combined with the high international diversification of the Group’s businesses, enabled it to produce globally satisfactory results. Our banking business model from the risk standpoint Our risk management and control systems are adapted to the risk appetite framework approved by the Bank’s top governance bodies and to its banking business model: Santander focuses on retail banking, ensuring an internationally diversified presence characterized by high market shares (more than 10%) in the main markets where it operates. Wholesale banking is carried out particularly in core markets. Santander operates through subsidiaries which are autonomous in terms of capital and liquidity, but are ultimately controlled by the Bank. The corporate structure is simple, minimizing the use of instrumental companies. The business model enables a high degree of recurrence in results and its development is backed by a strong capital and liquidity base. Santander develops its operational and technological integration model via corporate platforms and tools. This allows information to be steadily aggregated. All our activity is conducted within its social and reputational commitment, in accordance with its strategic objectives. The economic capital distribution among the Group’s businesses reflects the diversified nature of Santander’s activity. The risk of corporate activities mainly emanates from the capital assigned to goodwill and, to a lesser extent, market risk (structural exchange rate and non-trading portfolio of equities). The operating areas account for most of the credit risk, as befits the nature of the Group’s retail banking. For further details of capital see Part 8 of this Item. Our risk management model, underpinning the business model, is based on the following principles:
Independence of the risk function from the business areas.
Direct involvement of senior management in all decisions taken.
Committee decision-making,
Delegated authorities. Each risk
Set risk appetite. The purpose is to delimit, synthetically and explicitly, the levels and types of risk that the
Establish risk policies and procedures. They constitute the basic framework for regulating risk activities and processes. At the local level, the risk units, through “mirror” structures they have established, incorporate the corporate risk rules to their internal policies.
Building, independent validation
Execute a system to monitor and control risks, which verifies, Risk culture The importance and attention attached by senior management to risk management is deeply rooted in Santander’s DNA. This risk culture is based on the principles of Santander’s risk management model and is Our risk function is independent of the business units. This enables their criteria and
Our structure for delegating powers requires a large number of
Santander has detailed risk management manuals and
Risk limits plan. Santander has established a full system of risk limits which is updated at least annually and covers both credit risk as well as the different market risk exposures, including trading, liquidity and structural (for each business unit and risk factor). Credit risk management is supported by credit management programmes (individuals and small businesses), rating systems (exposures to medium and large companies) and pre-classification (large corporate clients and financial counterparties). Santander’s information systems and aggregation of exposures’ systems enable daily monitoring of exposures, verifying systematic compliance with the limits approved, as well as adopting, where necessary, the pertinent corrective measures. Main risks are not only analyzed at the time of their origination or when irregular situations arise in the process of ordinary recovery. They are overseen permanently for all clients. In addition, the Group’s main portfolios are monitored systematically during the month of August. Other procedures supporting the dissemination of Santander’s risk culture are the training sessions carried out by the risks corporate school, the remuneration and incentives policy, which includes performance variables that take into account the Risk training activities The aim of Santander’s corporate school of risk management is to Furthermore, the risks corporate school trains professionals from other business areas, particularly retail banking, to align the demanding risk management criteria to business goals.
The board is responsible for Senior management is responsible for achieving the desired risk These structures of limits for each risk are in addition to the risk appetite and are essential for articulating effective risk management in the daily course of business. In the event that risk appetite levels set are met and once the board is informed, the necessary management measures have to be adopted for effectively adjusting the risk profile. The board’s risk committee and the Group’s executive committee verify compliance with the risk appetite at Group and business units on a Effective implementation of the risk appetite
Risk appetite framework Santander’s risk appetite framework
The
The minimum liquidity position These metrics are calculated using severe stress scenarios, which are unlikely to occur, but possible. In addition, the
Losses One of the three
These scenarios mainly affect both (i) losses resulting from the exposure to retail and wholesale credit risk (both the direct credit loss as well as the reduced revenue) and (ii) the potential unfavorable impact resulting from the exposure to market risk. After applying these credit and market impacts to budgeted results, in the context of monitoring risk appetite, senior management ensures that the resulting spread is sufficient to absorb the unexpected impacts from technological and operational risk, and from compliance and reputational risk. The time frame As regards the metric of losses, according to Santander’s risk appetite the combined impact in all risks resulting from these scenarios must be less than net operating income after ordinary provisions (i.e. ordinary profit before tax). Capital position Santander
This capital focus included in the risk appetite is consistent with the Group’s capital objective approved within the capital planning process (Pillar II) implemented in the Liquidity position The Group’s liquidity management model is based on the following principles:
Decentralized liquidity Needs derived from medium and long term activity must be funded by medium and long term instruments. High contribution of
Diversification of wholesale funding
Bearing in mind the Group’s Santander’s risk appetite establishes, as regards the liquidity metric, a structural funding ratio of more than 100% (customer deposits, equity and medium and long term issues have to be higher than the structural funding needs defined as lending and stakes in Group companies), as well as demanding objectives of liquidity position and time frames in the face of short term, systemic and idiosyncratic stress scenarios.
Santander wants to maintain a Concentration risk: this is measured
Client (as a proportion of equity): (i) net individual maximum exposure to corporate clients (additionally, clients with internal ratings below investment grade and exceeding a certain exposure are also monitored); (ii) net maximum aggregate exposure to the Bank’s 20 largest corporate clients
Sector: maximum
Portfolios with high risk profile (defined as those retail portfolios with a percentage of risk premium that exceed an established threshold): maximum percentages of exposure to this type of portfolio in proportion to lending (at both the total and retail levels) and for different business units. Qualitative elements of the risk appetite
A medium-low and
A rating objective in the range of
A stable and
An independent risk function with very active involvement of senior management which guarantees a strong risk culture focused on protecting and ensuring an adequate return on capital. A management model that ensures a global and interrelated view of all risks, through an environment of control and robust monitoring of risks, with global responsibilities: all risk, all businesses, all countries. Focus in the business model on those products that the Group knows sufficiently well and has the management capacity in (systems, processes and equity). The confidence of clients, shareholders, employees and professional counterparties, ensuring that activity is carried out in line with Santander’s social and reputational commitment, in accordance with the Group’s strategic objectives. Adequate and sufficient availability of staff, systems and tools that guarantee maintaining a risk profile compatible with the established risk appetite, both at the global and local levels. A remuneration policy that has the necessary incentives to ensure that the individual interests of employees and executives are aligned with the corporate framework of risk appetite and that these are consistent with the Bank’s long-term results. The Group’s risk appetite framework also covers other specific qualitative objectives for the various types of risk. Risk appetite and living wills The Group has an organizational structure based on subsidiaries which are autonomous and self-sufficient in terms of capital and liquidity, ensuring that no subsidiary reaches a risk profile that could jeopardize the Group’s solvency.
Grupo Santander was the first of the international financial institutions considered globally systemic by the Financial Stability Board to present (in 2010) to its consolidated supervisor (the Bank of Spain) its corporate living wills including, as required, a viability plan and all the information needed to plan a possible liquidation (resolution plan). Furthermore, and even though not required, A third version of the corporate
Part 2. Corporate governance of the risks function The board’s risk committee is responsible for proposing to the board the Group’s risk The committee is of an executive nature and takes decisions in the sphere of the powers delegated in it by the board. It is chaired by the third vice-chairman of Grupo Santander and four other board members are also members of the committee. The committee met The main responsibilities of the board’s risk committee
Propose to the board the Group’s risk policy,
The different types of risk (operational, technological, financial, legal and reputational, among others) facing the Group.
The information and internal control systems used to control and manage these risks.
Set the level of risk considered acceptable.
Identify the measures envisaged to mitigate the impact of identified risks, in the event that they materialize.
Systematically review exposures
Authorize
Ensure that the Group’s actions are consistent with the previously decided risk appetite level.
Know, assess and monitor the observations and recommendations periodically formulated by the supervisory authorities in the exercise of their function.
Resolve operations beyond the powers delegated to bodies lower down the hierarchy, as well as the global limits of pre-classification of economic groups or in relation to exposures by classes of risk. The board’s risk committee delegates some of its powers
The Group’s third vice-chairman is the maximum executive in risk management. He is a member of the board and chairman of the risk committee. Two
The GDR is
A corporate structure with global scope responsibilities (“
A business structure,
Between these two blocks is the corporate area of integration in management whose purpose is to intensify and systemize the use of corporate risk management models (credit, market and structural risk), speed up its establishment and ensure integration in the management of all the Group’s units. Complementing this structure is a global governance and These functions have a global action sphere, i.e. they intervene in all the units where the risk division acts and Generally speaking it is possible to distinguish the main functions developed respectively by the GDR’s global areas and by the units:
The GDR establishes risk policies and criteria, the global limits and the decision-making and control processes; it generates management frameworks, systems and tools; and
The local units apply the policies and systems to the local market: they adapt the organization and the management frameworks to the corporate
General directorate of integral control and internal validation of
Internal validation of credit, market and economic capital risk models in order to assess their suitability for management and regulatory purposes. Validation involves reviewing the
Integral control of risks,
Part 3. The functions of integral control and internal validation of risks are located at the corporate level in the general directorate of integral control and internal validation of risks, which reports directly to the Group’s third vice-chairman and chairman of the risk committee, and is configured as a support for the Group’s governance bodies in the sphere of control and risk management. Function of integral control of Grupo Santander launched
Integral control of risks is based on three complementary activities:
The
Methodology and tools This function is backed by an internally developed methodology and a series of tools that support it, in order to systemize the exercise of it and adjust it to Santander’s specific needs. This enables application of the methodology to be formalized and traceable. The methodology and the tools of the three activities are articulated through the following modules: Module 1 A Applying the tests and obtaining the relevant evidence, which in the process is assessed and enables the parameters of control of the various risks to be homogenized, is done every 12 months. New tests are incorporated
regulators. The support tool Module 2 Senior management is able to monitor the integral vision of the various risks assumed and their adjustment to the previously formulated risk appetites. Module 3
The Bank of Spain can access these tools if it so wishes and thus also the work papers used to develop the function of integral control of risks.
(a) The (b) The board and (c) Work continued on extending the integral control of risks model to the Group’s main units, also coordinating the initiatives in this sphere in the various (d) There was also participation, in coordination with the public policy area and other areas, in representing the Group in forums such as the Financial Stability Board (FSB), IIF, Eurofi and Internal independent validation of risk models As well as being a regulatory requirement, the function of internal validation of risk models constitutes a fundamental support for the risk committee, and for local and corporate risk committees, in their responsibilities of authorization of the use (management and regulatory) of models and their regular review. Internal validation of models consists of a specialized unit with sufficient independence, obtaining a technical opinion on the adequacy of the internal models for the purposes used, whether they be internal management and/or of a regulatory nature (calculation of the regulatory capital, levels of provisions, etc.), and concluding on their robustness, use and effectiveness. Santander’s internal validation of models covers credit risk models, market risk models and those for setting the price of financial assets as well as the economic capital model. The scope of validation includes not only the most theoretical or methodological aspects but also the technological systems and the quality of the data that enable and support their effective functioning and, in general, all relevant aspects (controls, reporting, uses, involvement of senior management, etc.). The function is global and corporate. In order to ensure homogeneous application, it is conducted via four regional centers in Madrid, London, Sao Paulo and New York. These centers have full functional and hierarchical dependence on the corporate center, which ensures uniformity in the development of its activities. This facilitates implementation of a corporate methodology that is supported by a series of tools developed internally in Santander, which provide a robust corporate framework for all the Group’s units, computerizing certain verifications in order to ensure that the reviews are carried out efficiently. This corporate framework of internal validation is fully aligned with the criteria on internal validation of the advanced models issued by the Bank of Spain and by the rest of supervisors to whom the Group is subjected. In this respect, the criterion of separating functions between the units of internal validation and internal auditing is maintained, which is the last layer of control in the Group charged with reviewing the methodology, tools and work conducted by internal validation and expressing its opinion on its degree of effective independence. Following is an analysis of the Group’s main types of risk: credit, liquidity and funding, operational, compliance and reputational and market risks.
4.1 Introduction to the treatment of credit risk Credit risk is the possibility of losses stemming from the failure of clients or counterparties to meet their financial obligations with the Group.
Those under individualized management are assigned The segment of
The following chart shows the distribution of credit risk on the basis of the management model. The Group’s risk profile is mainly retail, accounting for over 80% of total risk. 4.2 Main
Credit exposure in 2012 was €1,231,398 million, most of it with customers and credit entities (87% of the total). Risk is
Excluding the exchange-rate impact of the main currencies against the euro, the increase was 2%. The following table GRUPO SANTANDER - GROSS EXPOSURE TO CREDIT RISK CLASSIFIED IN ACCORDANCE WITH LEGAL COMPANY CRITERIA
4.2.2 Performance of magnitudes in 2012 The
At the end of 2012, non-performing loans amounted to €36.1 billion and the Group’s NPL ratio stood at 4.54% (+65 basis points), mainly due to the situation in Spain. It is important to point out that this ratio is below the sector’s average in almost all the countries in which the Group operates. These NPLs are covered by €12,574 million of specific loan-loss provisions net of insolvencies. Total loan-loss provisions were €26,194 million. The Group’s coverage ratio was 72.6%, up from 61.4% in 2011. It is important to note that this ratio is affected by the weight of mortgages (particularly in the U.K. and Spain), which require fewer provisions as they have collateral. The structure of the main magnitudes by geographic area: Continental Europe Spain’s NPL ratio was 6.74% (+125 basis points) while the ratio for the whole banking system was 10.58%. The provisions for the real estate sector brought the coverage level to 70.6%. Portugal’s NPL ratio was 6.56% and coverage was 53.1%. Santander Totta was positively viewed in the programme of special inspections by the Bank of Portugal and the troika. It was the only bank that did not require additional provisions. Poland’s NPL ratio was 4.72% (-17 basis points) and coverage was 68.3%. The U.K. recorded a NPL ratio of 2.05% (+21 basis points) and a coverage ratio of 45.4%. Brazil’s NPL ratio was 6.86% (+148 basis points) and coverage was 90.2%. Latin America excluding Brazil The overall NPL ratio was 3.62% and coverage 81.2%. Lending in Chile accounted for 4.1% of the Group’s total, with a mix of diversified portfolio and balanced between individual borrowers and companies. The NPL ratio was 5.17% and coverage 57.7%. Mexico’s lending grew 13.3% in 2012, driven by the macroeconomic scenario. This growth went hand in hand with good credit quality indicators. The NPL ratio was 1.94%, one of the lowest in the region, and coverage was 157.3%, also well above the banking system’s average. Sovereign’s NPL ratio was 2.29% (-56 basis points). Coverage rose by 9.7 percentage points to 105.9%.
The
The
Grupo Santander follows very rigorous definitions and policies in this
There must be
The aim is to The restructuring must always maintain the existing guarantees and, wherever possible, improving them and/or increasing the coverage. Effective guarantees not only serve to mitigate the severity, but also can reduce the probability of default. This practice should not mean granting additional financing to the client, nor serve to refinance the debt of other banks, nor be used as an It is
The new operation cannot mean an improvement in the classification as long as a satisfactory experience with the client does not exist. All Grupo Santander’s institutions apply these principles, adapting them to meet local needs and rules, and are always subordinated to complying with any stricter local rule that has to be implemented.
Those Operations that arise from a doubtful situation whether for subjective or objective reasons, when at least three months have passed since the first non-payment. These operations
These operations are
Doubtful: those restructurings in a process of normalization or which, being classified as normal or substandard, during the Substandard: those restructurings emanating from doubtful loans which have met sustained payment for a In the particular case of those operations with a grace period on capital payments, the restructuring will be classified as substandard risk, if it is not already classified as doubtful risk, and must be maintained as such until the grace period ends Normal: those restructurings emanating from doubtful or substandard loans which have exceeded a period of observation which shows the re-establishment of the payment capacity in accordance with the periods established in the corporate policy. According to this policy, the operations in a normal situation must be kept under this special watch for a minimum, precautionary period of two years and have amortized 20% of the principal of the loan, except for those articulated via some type of hair cut which will be maintained until its extinction. The
A more detailed breakdown of this portfolio can be found in Note 54 to our consolidated financial statements. From the credit classification standpoint, 67% of the total is classified in a non-doubtful status, while the other 33% which was in a doubtful situation, had a specific coverage of 43%. In this portfolio, 77% comes from a non-doubtful origin, while doubtful situations only account for 1.5% of the Group’s total credit risk with clients. From the standpoint of its guarantees, more than 70% of the total portfolio has real guarantees (more than 92% in the case of the portfolio of companies with real estate purpose). Of the Group’s total restructured/refinanced portfolio, Spain’s accounts for 59% (€32,867 million) with the following features: The amount corresponding to companies with a real estate purpose was €11,256 million, 72% of which is classified as doubtful or substandard with specific coverage of 46%. Total coverage of this portfolio, including the provisions set aside for the normal portfolio which correspond to it, is 44%. Of the total portfolio in Spain, 34% was in a doubtful situation with coverage of 42%. From a management standpoint, it is important to highlight the preventative management of risk together with the high level of existing guarantees: 89% (€29,380 million) emanates from operations that come from a non-doubtful situation and 82% have real guarantees. Only the remaining 11% (€3,487 million) emanates from doubtful situation operations and 84% have real guarantees. In the rest of the countries where the Group operates, the restructured/refinanced portfolio does not account in any of them for more than 1% of the Group’s total Management metrics8 Credit risk management uses other metrics to those already mentioned, particularly management of non-performing loans variation plus net write-offs (known in Spanish as VMG), and
Unlike non-performing loans, the VMG refers to the total portfolio deteriorated over a period of time, regardless of the situation in which it finds itself (doubtful loans and write-offs). This makes the metric a main driver when it comes to establishing measures to manage the portfolio. The VMG is frequently considered in relation to the average loan that generated it, giving rise to what is known as the risk premium, whose evolution can be seen below. Despite the unfavorable economic environment, the Group’s risk premium was virtually unchanged over 2011, due to the geographic distribution. The expected loss is the estimate of the economic loss during the following year of the portfolio existing at any given moment. Its forward-looking component complements the view provided by the VMG when analyzing the portfolio and its evolution. The expected loss reflects the portfolio’s features as regards the exposure at default (EaD), the probability of default (PD) and the severity or recovery once the default occurs (loss given default, LGD). The table below sets out the distribution by segments in terms of EaD, PD and LGD. For example, it can be seen how the consideration of the LGD in the metrics makes the portfolios with a mortgage guarantee generally produce a lower expected loss, the result of the recovery that occurs in the event of a default via the mortgaged property. The expected loss of the exposure with clients is 1.27% (1.30% in 2011) and 0.99% for the whole of the Group’s credit exposure (1.05% in 2011), which underscores the medium-low risk profile assumed.
Data at December 2012.
4.3 Geographic areas with the largest concentration of risk The 4.3.1 United Kingdom 4.3.1.1 General view of the Santander UK’s loans amounted to €255,519 million at the end of 2012 (32.1% of the Group’s total), with the following distribution by segments: 4.3.1.2 Mortgage portfolio Santander UK’s mortgage portfolio at the end of
This portfolio consists of first The mortgaged property must always be located within U.K. territory, regardless of the destiny of the financing. Mortgages can be granted for properties outside the U.K., but the collateral for such mortgages must consist of a property in the U.K. Most of the mortgages are in Greater London, where housing prices are more stable All the properties are assessed Mortgages that have already been granted are subject to a quarterly update of the value of the property in guarantee, by an independent agency, using an automatic valuation system in accordance with the market’s usual practices and in In 2012, the
This growth is due to the following reasons: fall in As regards the reduction in NPL exits during the year, this was mainly due to implementing new collection procedures, within the framework of the regulatory initiative known as As for the portfolio’s profile, applying strict credit policies The
The credit risk policies explicitly forbid There are various types of products with different risk profiles, all of them subject to the
Flexible Loans (11.4%): This type of loan contractually enables the customer to modify the monthly payments or make additional provisions of funds up to a pre-established limit, as well as Buy to Let (1.31%): Buy to let mortgages
The following table shows the distribution by type of loan:
An additional indicator of the portfolio’s good performance is the small volume of foreclosed homes (€
As shown in the chart on the segmentation of the portfolio at the beginning of this section, lending to SMEs and companies (€42,176 million) represented 18% of the total at Santander UK. SMEs: This segment includes those small firms which, from a risk management standpoint, are in the standardized model. Specifically, those belonging to the business lines of small business banking and regional business centers. Total lending at the end of 2012 amounted to €4,248 million, with a NPL ratio of 7.1% (7.4% at the start of the year). Companies: This segment includes those under individualized risk management (i.e. have a risk analyst assigned). Also included are portfolios considered as not strategic (legacy and noncore). Lending at the end of 2012 amounted to €23,389 million, with a NPL ratio of 5.8% (6.2% at the beginning of the year). SGBM: This segment includes companies under the risk management model of Global Wholesale Banking. Lending was €4,865 million at the end of 2012 and there were virtually no NPLs. Social housing: This segment includes lending to companies that build, sell and rent social housing. This segment is supported by local governments and the central government and has no NPLs. Lending stood at €9,674 million at the end of 2012. In line with the objective of becoming the reference bank for SMEs and companies, the most representative portfolios of this segment grew by around 18% in 2012 (excluding legacy and non-core portfolios). 4.3.2 Spain 4.3.2.1 General view of the portfolio The Lending declined as a result of the fall in demand for credit, the economic situation and, regarding real estate balances, the active policy of reducing these exposures. Million euros Total credit risk* Home mortgages Rest of loans to individuals Companies without real estate purpose** Real estate purpose Public administrations
The NPL ratio for the total portfolio increased during the Excluding the portfolio with real estate purpose, the NPL ratio was 4.0% (+65 basis points), mainly due to the reduction in lending. At the end of 2012, provisions covered 70.6% of doubtful loan balances, up from 45.5% at the end of 2011 mainly due to increased provisioning of the real estate portfolio, as shown below. Below are the main portfolios. 4.3.2.2 Home mortgages Lending to households to buy a home by the main businesses in Spain amounted to €55,997 million at the end of 2012 (22.4% of total credit), of which 98.9% had a mortgage guarantee.
The NPL ratio of the portfolio with a mortgage guarantee was slightly lower than in 2011 and ended 2012 at 2.6%, well below that for the other businesses in Spain. The portfolio of mortgages for homes in Spain kept its medium-low profile and with limited expectations of a further deterioration: All mortgages pay principle right from the start. Early amortization is usual and the average life of the operation is well below that in the contract. The borrower responds with all his assets, not just the home. The high quality of collateral was concentrated almost exclusively in financing the first home. 89% of the portfolio has a loan-to-value of less than 80% (total risk/latest available value of the home). The average affordability rate was close to 29%. Million euros Gross amount with mortgage guarantee LTV< 40% LTV between 40% y 60% LTV between 60% y 80% LTV between 80% y 100% LTV > 100% of which doubtful LTV < 40% LTV between 40% y 60% LTV between 60% y 80% LTV between 80% y 100% LTV > 100% Million euros Gross amount at origination Gross amount updated (*) Of which: Doubtful
For internal management purposes, the Group updates the LTV ratios at least once a year, taking into consideration published house price indices. Also, if a debtor becomes doubtful, the Group updates the appraisals undertaken by valuers, which are taken into account in the estimate of impairment losses. Despite the economic situation and the gradual deterioration over the last few years, the loan admission measures produced a good evolution of vintages. For example, for the years 2008-2012 in the Santander branch network in Spain, the maturity of mortgage vintages was as follows: As of August 1, 2011, Grupo Santander in Spain offered a three-year suspension on payments of principal to alleviate the situation of clients, including the self-employed, for those presenting objective causes of economic problems, such as being unemployed or having suffered a fall in income of more than 25%, and thus facing temporary difficulties in paying the mortgage on their usual home. Customers who take advantage of this measure have the possibility of extending the maturity of their loan in order to compensate for the grace period, but without changing the loan’s financial conditions either during the grace period or at the end of it. This measure served to mitigate the social impact of the economic crisis, while preserving the good culture of payment, one of the elements that distinguishes the Spanish mortgage market. At the end of 2012, more than 21,000 clients had taken advantage of this measure. 4.3.2.3 Portfolio of companies without real estate purpose Lending to companies without a real estate purpose by Santander’s businesses in Spain amounted to €139,851 million at the end of 2012. More than 90% of the lending in this segment was to clients under individualized management who, for reasons of the risk assumed, have a risk analyst assigned who continuously monitors the client during all phases of the risk The portfolio is well diversified, with more than 250,000 active clients and no significant concentrations by sector. The NPL ratio of this portfolio remained at levels lower than the 4.3.2.4 Portfolio with real estate purpose The exposure, net of provisions, dropped by €12,383 million in 2012 to €12,509 million and represented 1.7% of the Group’s total credit portfolio. This decline was due to the effort made to reduce the portfolio As for the
As a result Regarding coverage, the Group set aside €6,140 million of Coverage by the type of real estate that guarantees the loans (regardless of their classification by credit quality as doubtful, sub-standard or normal) or by foreclosed properties is as follows:
4.3.3 Brazil Brazil’s lending rose 9.58% in 2012 (excluding the exchange rate impact) to €89,142 million (11% of the The portfolio is diversified by customers and
Lending to individuals grew 11%. The Lending by Santander Financiamentos, specialized in
The NPL ratio was 6.86% at the end of 2012, up from 5.38% a year earlier, against a backdrop of a slowdown in
4.4. Other credit risk
This section covers credit risk generated in treasury activities with clients, mainly with credit institutions. This is developed through financing products in the money market with different financial institutions, as well as derivatives to provide service to the Group’s clients. Risk is controlled through an integrated system and in real time, Risk is measured by its prevailing market as well as potential value (value of risk positions taking into account the future variation of underlying market factors in contracts). The equivalent credit risk (ECR) is the net replacement value plus the maximum potential value of these contracts in the future. The capital at risk or unexpected loss is also calculated (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recovery). Exposure in derivatives The total exposure to credit risk from activities in the financial markets
The distribution of risk in derivatives by type of counterparty was As regards the geographic distribution of risk, OTC derivatives, organized markets and clearing houses. The Group’s policies seek to anticipate, wherever possible, the implementation of measures resulting from new regulations regarding operations of OTC derivatives, both if settled by clearing house or if remaining bilateral. Since 2011, there has been a gradual standardization of OTC operations in order to conduct clearing and settlement via houses of all new trading operations required by the new rules, as well as foster internal use of the electronic execution systems. Regarding the operations of organized markets, credit risk is not considered as incurred because this risk is eliminated by the organized markets acting as counterparty in the operations, given that they have mechanisms that enable them to protect their financial position via systems of deposits, improved guarantees and processes that ensure the liquidity and transparency of transactions. The following tables show the relative share in total derivatives of new operations settled by clearing house at the end of 2012 and the significant evolution of operations settled by clearing house since 2011. Nominal in million euros Credit derivatives Equity derivatives Fixed-Income derivatives Exchange rate derivatives Interest rate derivatives Commodities derivatives Total
The Group actively manages operations not settled by clearing house and seeks to optimize their volume, given the requirements of spreads and capital that the new regulations impose on them. In general, the operations with financial institutions are done under netting and collateral agreements, and a continued effort is being made to ensure that the rest of operations are covered under this type of agreement.
In general, the collateral contracts that the Group signs are bilateral. There are some exceptions mainly with multilateral entities and securitization funds. Activity in credit derivatives Grupo Santander uses credit derivatives to cover loans, customer business in financial markets and The risk of these activities is controlled via a broad series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by individual In notional terms, the CDS position incorporates At 31 December
Control of concentration risk is a vital part of management. The Group continuously tracks the degree of concentration of its credit risk portfolios using various criteria, including geographic areas and countries, economic sectors, products and groups of clients. The board’s risk committee establishes the policies and reviews the appropriate exposure limits for appropriate management of the degree of concentration of credit risk portfolios10. The Group is subject to the Bank of Spain regulation on large risks. In accordance with Circular 3/2008 (regarding determining and control of minimum equity) and subsequent changes, the value of all the risks that a credit institution contracts with the same person, entity or economic group, including that in the part which is nonconsolidatable, cannot exceed 25% of its equity. The risks maintained with the same person, whether an individual, company or economic group, are considered large risks when their values exceeds 10% of the equity of the credit institution. The exception is exposure to OECD governments and central banks. On December 31, 2012, there were several financial groups initially exceeding 10% of shareholders’ funds: three EU financial institutions, two U.S. financial entities, an oil company and a EU central counterparty entity. After applying risk mitigation techniques and the rules for large risks, all of them were below 5.5% of eligible equity. On December 31, 2012, the 20 largest economic and financial groups, excluding AAA governments and sovereign securities denominated in local currency, represented 5.0% of the outstanding credit risk of the Group’s clients (lending plus guarantees), the same level as in 2011. The distribution of the portfolio of companies by sectors is adequately diversified. The Group has no exposure with any international financial institution which is more than 5% of equity. An EU bank has the largest exposure. The Top 10 of IFIs account for €15,713 million. The Group’s risks division works closely with the financial division to actively manage credit portfolios. Its activities include reducing the concentration of exposures through various techniques, including using credit derivatives and securitization to optimize the risk-return relation of the whole portfolio. 4.4.3 Country risk Country risk is a credit risk component in all cross-border credit The exposure susceptible to country-risk provisions at the end of
The exposure is moderate and has been on a downward trend in recent years. The only exception was in 2008 when there was a significant increase due to the incorporation of transactions with Brazilian clients resulting from the purchase of ABN/Banco Real. This increase was reduced in 2009, with the reclassification of Brazil to Group 2. The principles of country risk management
As a general criterion, sovereign risk is that contracted in transactions with a central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or the Republic (portfolio of
% AAA AA A BBB Under BBB As expected, the distribution of sovereign risk by rating level was affected by many rating revisions of sovereign issuers in the last few years, mainly Spain, Portugal, the U.S.and Chile. 4.4.5 Environmental risk Analysis of the environmental risk of credit operations is one of the main aspects of the strategic plan of corporate social responsibility. It revolves around the following two large points:
Equator principles: this is an initiative of the World Bank’s International
For operations with an amount equal to or more than $10 million, an initial questionnaire is filled out, of a generic nature, designed to establish the project’s risk in the
For those projects classified within the categories of greater risk (categories A and
VIDA tool: used since 2004, its main purpose is to assess the environmental risk of corporate clients, both current and potential, through a system that classifies in seven categories each of the companies on the basis of the environmental risk contracted. In
Low or very low environmental risk accounts for 4.5. Credit risk cycle The process of credit risk management consists of identifying, analyzing, controlling and deciding on the risks incurred by the Group’s operations. The business areas, senior management and the risk areas are all involved. The board and the executive committee participate in the process, as well as the risk committee, which sets the risk policies and procedures, the limits and delegation of powers, and approves and supervises the framework of the risk function. The risk cycle has three phases: pre-sale, sale and aftersale. The process is constantly revised, incorporating the results and conclusions of the after-sale phase to the study of risk and pre-sale planning.
4.5.1 Study of risk and credit rating process Risk study consists of analyzing a customer’s capacity to meet his contractual commitments with the bank. This entails analyzing the customer’s credit quality, risk operations, solvency and profitability to be obtained on the basis of the risk assumed. With this objective, since 1993 the Group has used models for assigning solvency ratings. These mechanisms are used in all individualized management segments, both wholesale (sovereign, financial institutions and corporate banking), as well as the rest of companies and institutions in this category. The rating is the result of a quantitative model based on balance sheet ratios or macroeconomic variables, which is supplemented by the expert advice of the analyst. The ratings given to customers are regularly reviewed, incorporating the latest available financial information and experience in the development of banking relations. The regularity of the reviews increases with customers who reach certain levels in the automatic warning systems and those classified as special watch. The rating tools are also revised in order to adjust the accuracy of the granted rating. While ratings are used for companies under individualized management, scoring techniques are used for the standardized segment, which automatically assign a score to operations, as set out in the section “decisions on operations.” 4.5.2 Planning and setting limits The purpose of this phase is to efficiently and comprehensively limit the risk levels assumed by the Group. The credit risk planning process serves to set the budgets and limits at portfolio or customer level on the basis of the segment. In the sphere of standardized risk, the planning and setting of limits is done through credit management programmes (CMPs), a document reached by consensus between the business and risk areas and approved by the risk committee or committees delegated by it. The CMPs set out the expected results of business in terms of risk and return, as well as the limits to which activity is subject and management of the associated risks. The most basic level in the individualized management sphere is the customer and when certain features are present - generally of relative importance – an individual limit (pre-classification) is set. A pre-classification model based on a system for measuring and monitoring economic capital is used for large corporate groups. The result of pre-classification is the maximum risk level that a client or group can assume in terms of amount of maturity. A more streamlined version is used for those companies who meet certain requirements (high knowledge, rating, etc.). Analysis of scenarios An important part of planning is to consider the volatility of macroeconomic variables that help to support the budgetary process. The Group conducts simulations of its portfolio using various adverse scenarios and stress tests to assess the Group’s solvency in the face of certain situations in the future. These simulations cover all the Group’s most relevant portfolios and are done systematically using a corporate methodology which: Determines the sensitivity of risk factors (PD, LGD) to certain macroeconomic variables. Defines reference scenarios (at the global level as well as for each of the Group’s units). Identifies rupture scenarios (levels as of which the sensitivity of risk factors to macroeconomic variables is more accentuated) and the distance of these scenarios from the current situation and the reference scenarios. Estimates the expected loss of each scenario and the evolution of the risk profile of each portfolio in the face of movements in certain macroeconomic variables. The simulation models use the data of a complete economic cycle to measure the performance of risk factors in the face of changes in macroeconomic variables. The scenarios take into account the vision of each unit as well as the global vision. The macroeconomic variables in these scenarios include: The unemployment rate Property prices GDP Interest rates Inflation The analysis of scenarios enables senior management to better understand the foreseeable evolution of the portfolio in the face of market conditions and changing situations, and it is a key tool for assessing the sufficiency of the provisions established for stress scenarios. Definition of suppositions and scenarios (baseline/acid) The projections of the risk and loss parameters, usually with a time frame of three years are executed under different economic scenarios. The scenarios defined are supported in different levels of stress, from the central (baseline) one, the most likely, to the most acid scenarios which are unlikely but possible. These scenarios are set by the Group’s research department in coordination with the research service of each unit and use as their reference the figures published by the main international institutions. A global acid (stress) scenario is always defined. It describes a world crisis situation and the way in which it would affect each of the countries where Grupo Santander operates. A local stress scenario is also defined where it would only affect some of the Group’s main units and with a greater degree of stress than the global stress one. In the capital coordination committee, senior management studies the situation, proposes the changes and formally approves the set of definitive scenarios to be used in the Group’s stress test. Stress test uses and integration in the management of scenario analysis Analysis of scenarios is a useful tool throughout the credit risk cycle. Grupo Santander has different uses for the stress test and analysis of scenarios: Internal uses, for example, dealing with risk appetite and the drawing up of risk, business plans and budgets. It integrates the corporate stress test methodology into the management of the Group’s different areas and informs senior management of the results from the following angles: Impact on the income statement and capital. Evolution of the cost of credit for the next three years with the strategy of business planned. Sufficiency of funds and provisions. Measures the level of sensitivity of each portfolio to the economic environment. Diversification of the portfolio in acid scenarios. Contrast with other locally made estimates. External uses, including the European Banking Authority’s stress tests, annual ICCAP and bottom up and top down stress tests of the Spanish system. With these uses, an external or regulatory agent would request the results of the stress test after execution of the Group’s corporate methodology. In other cases, details of the performance of the portfolio can be requested so that the risk parameters can be exercised under defined scenarios. Results obtained and impact on capital The various stress test exercises, from both an internal and external standpoint, underlined the strength and validity of Grupo Santander’s business model, as can be seen in the results published by the Bank of Spain of the bottom up test conducted in September 2012 and led by Oliver Wyman. The analyses conducted, in both baseline and acid scenarios, for the whole Group and for each of its units, with a time frame of three years, shows the strength of the balance sheet to different market and macroeconomic situations. As well as these results, after the latest updating of risk appetite13 presented to the board, it was concluded that Grupo Santander would maintain positive results and solvency even in the most adverse scenarios, with conservative assumptions. 4.5.3 Decisions on operations The sales phase comprises decision-taking, giving support to the business units that need analysis and approval of risks in order to be able to conduct an operation. The decision-taking process involves analyzing and resolving operations. Approval by the risks areas is a requirement before contracting any risk operation. This process must take into account the policies defined for approving operations and take into consideration both the risk appetite as well as those elements of the operation that are relevant in the search for the right balance between risk and profitability. In the sphere of clients under standardized management, the administration of large volumes of credit operations with the use of automatic decision models is facilitated, which classifies the client/operation as binomial. Investment is classified into homogeneous risk groups, on the basis of the information on features of the operation and of its owner. These models are used in banking with individuals, businesses and standardized SMEs. As already indicated, the prior phase of setting limits can follow two different paths, giving rise to different types of decisions in the sphere of clients under individualized management: Automatically verifying if there is capacity for the proposed operation (in amount, product, maturity and other conditions) within the limits authorized under the framework of pre-classification. This process is generally applied to corporate pre-classifications. The authorization of the analyst is always required, even if the operation meets the amount, maturity and other conditions set forth in the pre-classified limit. This process applies to the pre-classification of companies under individualized management of retail banking.
Credit risk mitigation techniques Although they are relevant in all phases of the credit risk cycle, mitigation techniques play a particularly important role in making decisions on operations. Grupo Santander applies various forms of credit risk reduction on the basis of the type of client and product, among other factors. As we will later see, some are inherent in specific operations (for example, real estate guarantees) while others apply to a series of operations (for example, netting and collateral). The various mitigation techniques can be grouped into the following categories: Settlement of positions The concept of netting is the possibility of settling operations of the same type, under the umbrella of a framework agreement such as ISDA. It consists of settling the positive and negative market values of derivative transactions that we have with a certain counterparty, so that in the event of its default it owes us (or we owe it, if the net is negative) a single net figure and not a series of positive or negative values corresponding to each operation we have closed with the counterparty. An important aspect of the framework contracts is that they represent a single legal obligation that covers all operations. This is fundamental when it comes to settling the risks of all operations covered by said contract with a same counterparty. Real guarantees These are those goods that are subject to compliance with the guaranteed obligation and which can be provided not only by the client but also by a third party. The real goods or rights that are the object of the guarantee can be: Financial: cash, deposit of securities, gold, etc. Non-financial: real estate (both properties as well as commercial premises, etc.) or other property goods. From the standpoint of risk admission, the highest level of real guarantees is required. From the position of the regulatory capital calculation, not all can be considered as reduction factors, only those which meet the minimum qualitative requirements set out in the Basel agreements. An important case of a real financial guarantee are collateral agreements. These are a series of instruments with economic value that are deposited by a counterparty in favor of another in order to guarantee/reduce the credit risk of the counterparty that could result from portfolios of transactions with risk existing between them. The nature of these agreements is diverse, but whatever the specific form of collateralization, the final purpose, regarding the netting technique, is to reduce the counterparty risk through recovering part or all of the profits/benefits (credit granted to the counterparty) generated over a period of time by the operation (valued at market prices). The operation subject to the collateral agreement is regularly valued (normally day to day) and, on this valuation, the parameters defined in the contract are applied so that a collateral amount is obtained (normally cash) which is to be paid to or received from the counterparty. Regarding real estate guarantees, there are regular re-appraisal processes, based on the real market values which for the different types of property are provided by valuation agencies, which meet all the requirements set by the regulator. Implementing the mitigation techniques follows the minimum requirements established in the manual of credit risk management policies, and consists of ensuring: Legal certainty. The possibility of legally requiring the settlement of guarantees must be examined and ensured at all times. The non-existence of substantial positive correlation between the counterparty and the value of the collateral. The correct documentation of all guarantees. The availability of documentation of the methodologies used for each mitigation technique. Adequate monitoring and regular control. Personal guarantees and credit derivatives This type of guarantee corresponds to those that place a third party in a position of having to respond to obligations acquired by another to the Group. Including sureties, guarantees, stand-by letters of credit, etc. The only ones that can be recognized, for the purposes of calculating capital, are those provided by third parties that meet the minimum requirements set by the supervisor. Credit derivatives are financial instruments whose main objective is to cover credit risk by acquiring protection from a third party, through which the bank transfers the issuer risk of the underlying asset. Credit derivatives are over the counter (OTC) instruments that are traded on non-organized markets. The coverage with credit derivatives, mainly through credit default swaps, is contracted with front line banks. The information on mitigation techniques is in Part 6.6.Mitigation measures. There is also more information on credit derivatives in the section “Activity in credit derivatives” in Part “4.4.1. Credit risk by activities in financial markets” of this Item. 4.5.4 Monitoring Monitoring is a continuous process, of constant observation, which allows changes that could affect the credit quality of clients to be detected early on, in order to take measures to correct the deviations that have a negative impact. Monitoring is based on the segmentation of customers, and is carried out by local and global risk dedicated teams, backed by internal auditing. The function consists, among other things, of identifying and tracking clients under special watch, reviewing ratings and continuous monitoring of indicators of standardized clients. The system called companies in special watch (FEVE) identifies four levels on the basis of the degree of concern arising from the circumstances observed (extinguish, secure, reduce, monitor). The inclusion of a company in FEVE does not mean there have been defaults, but rather the advisability of adopting a specific policy toward that company and establishing the person and time frame for it. Clients in FEVE are reviewed at least every six months, and quarterly for the most serious cases. A company can end up in special watch as a result of monitoring, a review conducted by internal auditing, a decision of the person responsible for the company or the entry into functioning of the system established for automatic warnings. Ratings are reviewed at least every year, but if weaknesses are detected, or on the basis of the rating, it is done more regularly. Regarding the risks of standardized clients, the main indicators are monitored to detect shifts in the performance of the loan portfolio with respect to the forecasts made in the credit management programmers. 4.5.5 Measurement and control Grupo Santander monitors clients’ credit quality and establishes the control procedures needed to analyze the current credit risk profile and its evolution, through different credit risk phases. The function is developed by assessing the risks from various perspectives that complement one another, establishing as the main elements control by countries, business areas, management models, products, etc., facilitating early detection of points of specific attention, as well as drawing up action plans to correct any deteriorations. Each element of control admits two types of analysis: 1. Quantitative and qualitative analysis of the portfolio. Analysis of the portfolio controls, permanently and systematically, the evolution of risk with respect to budgets, limits and standards of reference, assessing the impacts of future situations, exogenous as well as resulting from strategic decisions, in order to establish measures that put the profile and volume of the risks portfolio within the parameters set by the Group. The credit risk control phase uses, among others and in addition to traditional metrics, the following metrics: Management of non-performing loans variation plus net write-offs (VMG) The VMG measures how NPLs change during a period, discounting write-offs and taking loan loss recoveries into account. It is an aggregate measure at portfolio level which allows a response to deteriorations observed in the evolution of NPLs. It is the result of the final balance less the initial balance of non-performing loans of the period under consideration, plus the write-offs of this period less loan loss recoveries for the same period. The VMG and its components play a key role as monitoring variables. Expected loss (EL) and regulatory capital The expected loss is the estimate of the economic loss that would occur during the next year of the portfolio existing at that time. It is one more cost of activity, which must have a repercussion on the price of operations. Its calculation is mainly based on three parameters: Probability of default (PD): the maximum amount that could be lost as a result of a default. Exposure at default (EaD): the probability of a client’s default during the next year. Loss Given Default (LGD): this reflects the percentage of exposure that could not be recovered in the event of a default. It is calculated by discounting, at the time of the default, the amounts recovered during the whole recovery process and this figure is compared in percentage terms with the amount owed by the client at that moment. Other relevant aspects regarding the risk of operations are covered, such as quantification of off-balance sheet exposures or the expected percentage of recoveries, related to the guarantees associated with the operation as well as other issues such as the type of product, maturity, etc. The risk parameters also enable economic and regulatory capital to be calculated. The integration in management of the metrics of capital is vital for rationalizing its use. More detail is available in section 10 on capital. 2. Evaluation of the control processes Evaluation of the control processes includes systematic and regular revision of the procedures and methodology, developed throughout the credit risk cycle, in order to guarantees their effectiveness and validity. In 2006, within the corporate framework established in the Group for compliance with the Sarbanes Oxley law, a corporate tool was established in the Group’s intranet to document and certify all the sub processes, operational risks and controls that mitigate them. The risks division assesses the efficiency of internal control of its activities every year. The directorate general of integral control and internal validation of risks, within its mission of supervising the quality of the Group’s risk management, guarantees that the management and control systems of the different risks inherent in its activity fulfill the most demanding requirements and the best practices observed in the industry and/or required by regulators. In addition, internal auditing is responsible for ensuring that the policies, methods and procedures are adequate, effectively implemented and regularly reviewed. 4.5.6 Recovery management Recovery management is a strategic element in the Bank’s risk management. In order to conduct recovery management adequately, it is done in four main phases: (i) irregularity or early non-payment, (ii) recovery of non-performing loans, (iii) recovery of write-offs, and (iv) management of foreclosed assets. Indeed, the recovery function begins before the first non-payment when the client shows signs of deterioration and ends when the debt has been paid or regularized. The function aims to anticipate noncompliance and is focused on preventative management. The current macroeconomic environment directly impacts the non-payment index and customers’ bad loans. The quality of portfolios is thus fundamental for the development and growth of our businesses in different countries where great importance is attached to debt recovery in order to ensure that this quality always remains within expected levels. The Group has a corporate management model that sets the guidelines and general pattern of actions applied to the various countries, always taking into account the local features that recovery activity requires, including the economic environment, the business model or a mixture of both. This model is constantly reviewed and the processes and management methodology that sustains it improved. Recovery management for Santander, which directly involves all the management areas (commercial staff, technology, operations, human resources and risks), has helped to incorporate solutions that improve the model’s effectiveness and efficiency. The diverse features of our customers make segmentation necessary in order to manage recoveries adequately. Massive management for large collectives of clients with similar profiles and products is done through processes with a high technological component, while personalized management focuses on customers that, because of their profile, require more individualized analysis. Recovery activity has been aligned with the socio-economic reality of various countries and different risk management mechanisms have been used on the basis of their age, guarantees and conditions, always ensuring, as a minimum, the required classification and provision. Particular emphasis in the recovery function is placed on management of the aforementioned mechanisms for early management, in line with corporate policies, taking account of the various local realities and closely tracking vintages, stock and performance. These policies are reviewed and regularly adopted in order to reflect both the better management practices as well as the regulatory changes that are applied. Recovery management focuses on adapting operations to the client’s payment capacity, and is also noteworthy in seeking solutions, other than judicial ones, for the advance payment of debts. One of the ways to recover debt from clients who have suffered a severe deterioration in their repayment capacity is repossession (judicial or in lieu of payment) of the real estate assets that guarantee the loans. In countries with a high exposure to real estate risk, such as Spain, there are strong mechanisms for the evacuation of properties which, with their sale, enable the capital to be returned to the bank and reduce the worrying stock in the balance sheet at a much faster speed than those of its competitors. Part 5. Liquidity risk and funding 5.1 Introduction to the treatment of liquidity risk and funding Santander developed a funding model based on autonomous subsidiaries responsible for covering their own liquidity needs. This structure makes it possible for Santander to take advantage of its solid business model in order to maintain comfortable liquidity positions at Group level. In the last few years, it has been necessary to adapt the funding strategies to the new commercial business trends and the markets’ conditions. In 2012, a very demanding environment, the Group strengthened its liquidity situation and that of its subsidiaries, enabling it to tackle 2013 from a good starting point. Liquidity management and funding have always been basic elements in Banco Santander’s business strategy and, together with capital, a fundamental pillar in supporting its balance sheet strength. Relegated during the expansion period to a second level importance, liquidity has recovered its importance in the last few years because of the rising tensions in financial markets against the backdrop of a global economic crisis. This scenario has enhanced the importance for banks of having appropriate funding structures and strategies to ensure its intermediation activity. During this period of stress, Santander has enjoyed an appropriate liquidity position, higher than that of its peers, which has given it a competitive advantage to develop and expand its activity in an increasingly demanding environment. This better position for the whole Group has been supported by a decentralized funding model consisting of autonomous subsidiaries, self-sufficient in liquidity. Each subsidiary is responsible for covering the liquidity needs of its current and future activity, either through deposits captured from its customers in its area of influence or through recourse to the wholesale markets in which it operates, within a framework of management and supervision coordinated at the Group level. The funding structure is one that shows its greatest effectiveness in situations of high levels of market stress as it prevents the difficulties of one area from affecting the funding capacity of the Group and of other areas, as could happen in the case of a centralized funding model. This funding structure also benefits from the opportunities of a solid retail banking model: with a significant presence (market shares of around 10% or more) in 10 high potential markets, focused on retail clients and high efficiency. All of this gives our subsidiaries a big capacity to attract stable deposits, as well as a strong issuance capacity in the wholesale markets of these countries, generally in their own currency, and backed by the strength of their franchise and belonging to a leading group. At the end of 2012, the Group’s large management units, from the standpoint of funding, were self-financing except for Santander Consumer Finance because of the nature of its business. The main balance sheet items were as follows:
Santander’s management of funding and liquidity risk, both theoretical and practical, is set out in the following sections: Liquidity management framework – monitoring and control of liquidity risk. Funding strategy and evolution of liquidity in 2012. Outlook for 2013. 5.2 Liquidity management framework monitoring and control of liquidity risk Management of structural liquidity aims to fund the Group’s recurring activity in optimum conditions of term and cost, avoiding the assumption of undesired liquidity risks. Santander’s liquidity management is based on the following principles: Decentralized liquidity model. Needs derived from medium and long term activity must be financed by medium and long term instruments. High contribution from customer deposits, derived from the retail nature of the balance sheet. Diversification of wholesale funding sources by instruments/investors, markets/currencies and terms. Limited recourse to short-term funding. Availability of a sufficient liquidity reserve, which includes the discount capacity in central banks to be used in adverse situations. The effective application of these principles by all the entities that comprise the Group required development of a unique management framework built around three essential pillars: A solid organizational and governance model that ensures the involvement of the senior management of subsidiaries in decision-taking and its integration into the Group’s global strategy. Deep balance sheet analysis and measurement of liquidity risk, which supports decision-making and its control. Management adapted in practice to the liquidity needs of each business. 5.2.1 Organizational model and governance Decision-making process regarding structural risks, including liquidity risk, is carried out by local asset and liability committees (ALCOs) in coordination with the markets committee. The markets committee is the main body at Group levels, which coordinates and supervises all the global decisions that influence measurement, management and control of liquidity risk. It is headed by the chairman of the bank and comprises the 2nd vice-chairman and chief executive officer, the third vice-chairman (who is, in turn, the chairman of the delegated risk committee), the chief financial officer and the senior vice chairman for risk and those responsible for the business and analysis units. In line with these principles, the local ALCO sets the strategies that ensure and/or anticipate the funding needs of their business. They are supported by the financial management and market risk areas, which present analysis and proposals for a correct management and control compliance with the limits set. In line with best governance practices, the Group establishes a clear division between executing the financial management strategy (the responsibility of the financial management area) and monitoring and control (the responsibility of market risks). 5.2.2 Balance sheet analysis and measurement of liquidity risk Making decisions on funding and liquidity is based on a deep understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of future liquidity needs generated from businesses (projection of liquidity), as well as from expected access to and current situation of funding sources in the wholesale markets. The objective is to ensure the Group maintains optimum levels of liquidity to cover its short and long-term needs with stable sources of funding, optimizing the impact of its cost on the income statement. This requires monitoring of the structure of balance sheets, forecasting short and medium-term liquidity and establishing the basic metrics. At the same time, various stress tests are also conducted taking into account the additional needs that could arise from various extreme, although possible, events. These could affect the various items of the balance sheet and/or sources of financing differently (degree of renewal of wholesale financing, deposit outflows, deterioration in the value of liquid assets, etc.), whether for global market reasons or specific ones of the Group. The inputs for drawing up the various contingency plans for the Group are obtained from the results of the analysis of balance sheets, forecasts and scenarios which, in turn, enable a whole spectrum of potentially adverse circumstances to be anticipated. All these actions are in line with the practices being fostered by the Basel Committee in order to strengthen the liquidity of banks, whose objective is to define a framework of principles and metrics that is still under observation. Greater detail on the measures, metrics and analysis used by the Group and its subsidiaries to manage and control liquidity risk is set out below: Methodology for monitoring and controlling liquidity risk The objectives of the Group’s liquidity risk measures are: To achieve greater efficiency in measuring and controlling liquidity risk. To support financial management, for which the measures are adapted to the form of managing the Group’s liquidity. Alignment with BIS III to avoid “conflicts” between different limits and facilitate their management. Be an early warning system, anticipating potential risk situations by monitoring certain indicators. Attain the involvement of countries. The metrics are developed on the basis of common and homogeneous concepts that affect liquidity, but the analysis and adaptation of each unit is needed. There are two types of basic metrics used to control liquidity risk: dynamic and static ones. The first category basically includes the liquidity gap and the second one the balance sheet’s net structural position. As an additional element, the Group develops various stress scenarios. These three metrics are as follows: a) Liquidity gap The liquidity gap provides information on the contractual and estimated (by hypothesis) cash inflows and outflows for a certain period of time, for each of the main currencies in which the Group operates. The gap provides information on the sources and uses of funds expected in specific time periods, in relation to the total on- and off-balance sheet items. This analysis tool is obtained from the net of the structure of maturities and flows for each period established. The liquidity available is contrasted with the needs arising from maturities. In practice, and given the different performances of a same item in the Group’s subsidiaries, there are common standards and methodologies to homogenize the building of liquidity risk profiles for each unit as well as be presented in a comparable way to the bank’s senior management. In the Group’s case, a consolidated look at the liquidity gaps is of limited use for managing and understanding liquidity risk. This use is reduced if the gaps result from the use of contractual maturities. Of note in the various analysis made using the liquidity gap is that for wholesale funding. On the basis of this analysis, a metric has been defined whose objective is to guarantee that sufficient liquid assets are maintained in order to attain a minimum liquidity horizon, in a scenario in which wholesale funding is not renewed at its maturity. The minimum liquidity horizons are determined in a corporate and homogeneous way for all units/countries, which must calculate their wholesale liquidity metric in the main currencies in which they operate. Considering the market tensions in 2012, this wholesale liquidity gap is closely monitored in the parent bank and in the eurozone units. At the end of 2012, all units were within the horizons established for this scenario. b) Net structural position The objective of this metric is to determine the reasonability of the financing structure of the balance sheet. The Group’s criterion is to ensure that the structural needs (customer loans, fixed assets, etc.) are covered by an adequate combination of wholesale funding sources and a stable base of retail deposits. Each unit draws up its liquidity balance sheet in accordance with the features of their businesses and compare them with the various funding sources they have. The main factors taken into account when determining this metric are the recurrence of the businesses to be financed, the stability of funding sources and the capacity of assets to become liquid. In practice, each subsidiary draws up its liquidity balance sheet (different from the accounting one) by classifying the various asset, liability and off-balance sheet items on the basis of their nature for the purposes of liquidity. This determines the financing structure that must comply at all times with a key premise: basic businesses must be financed with stable funds and medium and long term funding. This guarantees a sound financial structure and the sustainability of business plans. As of December 31, 2012, the Group’s structural liquidity surplus stood at €157 billion on a consolidated basis. This surplus is based mainly on fixed income securities (€114 billion), equities (€5 billion) and net deposits at central banks (€56 billion). c) Analysis of scenarios As an additional element to the metrics, the Group develops various stress scenarios. The main objective is to identify the critical aspects in each potential crisis and define the most appropriate management measures to tackle each of these situations. Generally speaking the units take into account three scenarios in their liquidity analysis: systemic, idiosyncratic and hybrid. These represent the minimum standard analysis established for all the Group’s units and which are provided to senior management. Each of the units also develops ad hoc scenarios that replicate significant historic crises or specific liquidity risks of their environment. The main features of the three basic scenarios are: An idiosyncratic crisis only affects a bank but not its environment. This is basically reflected in wholesale funds and in retail deposits, with various percentages of outflows depending on the severity defined. Within this category a specific crisis scenario that a local unit could suffer as a result of a crisis in the parent bank (Banco Santander) is studied. This scenario was particularly relevant in 2012 because of tensions suffered by countries on the periphery of the eurozone. A systemic crisis is an attack by the international financial markets on the country where the local unit is located. Each unit would be affected to varying degrees, depending on its relative position in the local market and the image of soundness it has. Among other factors which would be affected in this scenario are, for example, the wholesale funding lines from the closure of markets or the liquid assets linked to the country whose market value would be significantly reduced. In a hybrid crisis scenario, some of the factors mentioned in the scenarios above are stressed. Particular attention is paid to the most sensitive aspects from the standpoint of the unit’s liquidity risk. These metrics and scenarios are directly linked to the process of drawing up and executing the liquidity contingency plan by the financial management area. At the end of 2012, and in a scenario of a potential systemic crisis affecting the wholesale funding of units in Spain, Grupo Santander had an appropriate liquidity position. The wholesale liquidity metric horizon in Spain (included within the liquidity gap measures) showed levels of more than 90 days during which the liquidity reserve would cover all the maturities of wholesale financing. As well as these three metrics, a series of internal and market variables were defined as early warning indicators of possible crises, which can also state their nature and severity. Their integration in daily liquidity management enables situations that could affect the Group’s liquidity risk to be anticipated. Although these alerts vary from country to country and from bank to bank on the basis of specific determinants, some of the parameters used are common in the Group such as Banco Santander’s level of CDS, the evolution of deposits from customers and the interest rate trend of central banks. 5.2.3 Management adapted to business needs In practice, and in line with the financing principles set out, Grupo Santander’s liquidity management consists of: Drawing up a yearly liquidity plan based on the funding needs derived from the budgets of each business and the methodology already described. On the basis of these liquidity needs and taking into account prudent limits of recourse to short-term markets, an issuance and securitization plan for the year for each subsidiary/global business is established by the financial management area. Monitoring, during the year, the evolution of the balance sheet and of the financing needs of the subsidiaries/businesses, which gives rise to updating the plan. Maintain an active presence in a large number of wholesale funding markets that enables an appropriate structure of issues to be sustained, diversified by products and with an average conservative maturity. The effectiveness of this management is based on implementation in all subsidiaries. Each subsidiary budgets the liquidity needs based on its activity of intermediation and assesses its capacity of recourse to wholesale markets in order to establish an issuance and securitization plan, in coordination with the Group. The Group’s main subsidiaries are self-sufficient regarding their structural financing. The exception is Santander Consumer Finance which needs the support of other Group units, particularly that of the parent bank, given its nature as a consumer finance specialist operating mainly via dealers. This financing is always done at market prices on the basis of the maturity term and the internal rating of the borrower. In any case, the parent bank’s support for Santander Consumer Finance has been reduced to less than a third in the last three years (from €15 billion in 2009 to around €4.5 billion). The developments underway to attain self-financing levels similar to those of the rest of the subsidiaries, through recourse to retail clients as well as wholesale funding, are successfully covering their phases and will be completed in the short term. 5.3 Financing strategy and evolution of liquidity in 2012 5.3.1 Funding strategy Santander’s financing activity over the last few years has achieved its objective of adequately funding the Group’s recurring activity in a very demanding environment characterized by a greater perception of risk, scarce liquidity in certain maturity terms and their higher cost. This good performance was supported by extending the management model to all the Group’s subsidiaries, including new ones, and, on top of that, adapting the subsidiaries’ strategy to the increasing requirements of markets. These requirements have not been the same for all markets and have attained much higher levels of difficulty and pressure in some areas such as on the periphery of Europe. It is possible, however, to extract a series of general trends implemented by Santander’s subsidiaries in their funding and liquidity management strategies in the last three years. They are the following: Lower growth in lending because of the environment, particularly in countries such as Spain and Portugal undergoing adjustments. On the other hand, growth in emerging markets (Latin America) and in units and businesses under development (U.S., Germany, Poland and U.K. SMEs). Group loans, excluding repos, increased by around €40 billion since the end of 2009 (+6%), including those by new units incorporated to the Group (Poland and Germany). Priority focus on capturing customer funds. Group deposits excluding repos but including retail paper rose by €122 billion (+26%), a growth three times greater than that of lending. All countries increased deposits, particularly those units that grew the most in lending and those under higher stress from the markets. Among the first group are Brazil, Mexico and Chile with a combined rise in deposits of 31% in local currency, and among the second, Spain and Portugal whose deposits grew by 33% in the last three years. Maintain adequate and stable levels of medium and long term wholesale funding at the Group level (22% of balance sheet for liquidity management purpose at the end of 2012 vs. 23% in 2009). The decentralized model for subsidiaries helped maintain a high level of activity in wholesale markets in a more demanding period. Of note was the greater activity in the U.K. resulting from the change in regulatory conditions, and of the main Latin American countries (Brazil, Mexico and Chile) because of their strong growth in lending. In Europe, the securitization activity of Santander Consumer Finance was extended to new markets such as Finland, Sweden and Norway, converting their units into pioneers in securitization of auto finance. Also noteworthy was the incorporation in 2012 of SHUSA, Santander Group’s holding in the US, to the pool of the Group’s significant issuers. Lastly, in Spain, where business required reduced liquidity needs in the last three years, the Group maintained a conservative issuance policy (€54 billion of medium and long term debt in 2010-2012, close to 80% of maturities and amortizations), taking advantage of the strength of the Santander brand and credit quality. Ensure a sufficient volume of assets eligible for discount in central banks and other public institutions as part of the liquidity reserve to meet stress situations in wholesale markets. The Group increased its total discounting capacity in 2012 to around €130 billion (it was close to €100 billion in 2010 and 2011). This required a continuous strategy from the subsidiaries to generate assets eligible for discount in order to compensate for the reduction in the value of guarantees as a result of the downgrading of ratings in the period, particularly of sovereign debt and related assets. A large part of this total discounting capacity was generated by the units in the eurozone. These benefited from the quality of their assets and from the extraordinary monetary policy measures implemented by the European Central Bank (ECB) at the end of 2011 and the beginning of 2012 (basically, widening of collateral and three-year liquidity auctions) in order to boost its liquidity buffer notably. At the end of 2012, Santander had a total volume eligible for discounting that comfortably exceeded the commercial gap (i.e. the difference between net loans and deposits) at Group level. It represents more than 160% of the gap after the dynamics of the aforementioned volumes, which were developed more intensely in 2012. During 2012, faced with the situation in the euro markets, Santander followed a prudent policy of depositing in the same central banks included in the Eurosystem most of the funds raised from them, as an immediate liquidity reserve, making its global net position virtually zero. In January 2013, the improvement in the Group’s liquidity position and that of the units in Spain, combined with an easing in the wholesale funding markets, led Santander to return all of the funds taken by Banco Santander and Banesto in the first auction of Long Term Refinancing Operations (LTROs) conducted by the ECB in December 2011. Santander returned €24 billion deposited in the Eurosystem central banks, the maximum allowed in the first repayment window offered by the ECB. All of these developments, made on the foundations of a solid liquidity management model, made it possible for Santander to enjoy a very robust financing structure that sets it apart from most of its international peers. The basic features of this structure are: High relative share of customer deposits in an essentially retail banking balance sheet. Customer deposits are the main source of the Group’s financing. Including retail commercial paper (given its role as replacing time deposits in Spain), they accounted for around two-thirds of the Group’s funding and 89% of net loans at the end of 2012. They are also very stable funds given their retail origin (more than 85% of the deposits come from retail banking). Diversified wholesale funding focused on the medium and long term and with a very small relative share of short term. Medium and long term funding accounts for less than one quarter of the Group’s funding and comfortably covers the rest of net loans not financed by customer deposits (commercial gap). This funding is well balanced by instruments (approximately 1/3 senior debt, 1/3 covered bonds, 1/3 securitizations and the rest) and also by markets so that those with the highest shares in issues are those where investor activity is the strongest. The charts showing the geographic distribution of gross loans and of medium and long term funding are shown below so that their similarity can be appreciated. The bulk of medium and long term wholesale funding consists of debt issues. Their outstanding balance at the end of 2012 was €153 billion nominal, with an average maturity of 3.8 years and an appropriate distribution profile. The distribution by instruments, the evolution over the last three years and their maturity profile were as follows:
Note: the entire senior debt issued by the Group’s subsidiaries does not have additional guarantees. As well as debt issues, the medium and long term wholesale funding is completed by lines from the Federal Home Loan Banks in the U.S.(€10 billion at the end of 2012) and by funds obtained from securitization activities. The latter includes securitization bonds placed in the market, other collateralized financing and other special ones for a total amount of €50 billion and an average maturity of around 2.5 years, which compares well with market standards. The wholesale funding of short term issuance programmes is a marginal part of the structure as it accounts for less than 2% of financing (excluding the aforementioned retail commercial paper) and is well covered by liquid financial assets. The outstanding balance at the end of 2012 was €17 billion, mainly due to the U.K. unit and the parent bank through existing issuance programmes: various programmes of CDs and commercial paper of the U.K. (60%), European commercial paper and U.S. commercial paper of the parent bank (25%), and from other units (15%). In short, Santander enjoys a very solid and robust financing structure based on an essentially retail banking balance sheet that enables the Group to cover comfortably its structural liquidity needs (loans and fixed assets) with permanent structural funds (deposits, medium and long term funding and equity), which generates a large surplus of structural liquidity. This robustness at the Group level is also distinctive of the balance sheets of the countries in which we operate and of the main subsidiaries, except for Santander Consumer Finance. The commercial gap of these subsidiaries is amply covered by issues and medium and long term financing, the recourse to short-term funds is very small and, as a result, there is a structural liquidity surplus. 5.3.2 Evolution of liquidity in 2012 Further improvement in liquidity ratios (Group LTD: 113%), backed by deleveraging in key markets and by issuance of the main subsidiaries (€43 billion of medium and long term issues and securitizations). Strengthened position with a high liquidity reserve (€217 billion). Facing 2013 from a comfortable position enabled the repayment of the €24 billion borrowed from the ECB (100% of funds borrowed by Banco Santander and Banesto in the first LTROs auction). From a funding standpoint, 2012 was the most demanding of the last few years. The intensified Greek crisis and doubts regarding the euro’s survival sharply pushed up the risk premiums of the sovereign debt of many European countries to their highest levels since the creation of the single currency. This tension led to the narrowing of wholesale markets for most of the year, particularly in countries on the periphery, with reduced issuing “windows” at the start and the end of the year only for the best credit quality companies. This issuance difficulty increased the appetite for retail deposits even further; they had already been the object of strong competition in most European markets. In this context Santander managed to improve its liquidity position as reflected in two basic aspects: 1. Improvement in basic liquidity ratios The table shows the evolution in the last few years of the basic metrics for monitoring liquidity at the Group level:
Note: In 2011 and 2012, customer deposits include retail commercial paper in Spain (excluding short term wholesale funding). At the end of 2012, and compared to 2011, Grupo Santander registered: A fall in the ratio of loans/net assets (total assets less trading derivatives and interbank balances) to 74% due to the decline in lending in the environment of deleveraging. The ratio reflects the retail nature of Santander’s balance sheet. An improvement in the net loan-to-deposit ratio to 113% (including retail commercial paper) from 117% in 2011. This continued the downward trend started in 2008 (150%), the result of the effort made to capture retail deposits throughout the Group. The ratio of customer deposits and medium and long term financing/lending also improved, combining the improvement in liquidity from business management with the Group’s issuance capacity. The ratio was 118% (113% in 2011), well above 104% in 2008. Recourse to short-term wholesale funding was also reduced (below 2%), in line with that in 2011. Lastly, the Group’s structural surplus (i.e., the excess of structural financing funds -deposits, medium and long term funding and capital- over structural liquidity needs -net loans and fixed assets-) rose significantly in 2012 to €157 billion, basically due to the reduction in the commercial gap. This improvement in the Group’s liquidity position is the result of the evolution of several subsidiaries. Of note were Spain and Portugal with a combined loan-to-deposit ratio (including retail commercial paper) of 97% at the end of 2012 (118% in 2011), which improved the Group’s average ratio. The table below sets out the most frequently used liquidity ratios for Santander’s main units at the end of 2012.
Note: In Spain, including retail commercial paper in deposits. The drivers behind the improvements in the liquidity ratios in 2012, at Group level and in the subsidiaries, were: A generalized reduction in the commercial gap, taking advantage of the capacity to capture customer funds and the deleveraging trends in some countries, and; A high issuance capacity in wholesale markets. As regards the first factor, many units in 2012 focused on increasing their customer deposits as the basis for financing growth in lending. The greater growth was concentrated in Spain (+€22 billion) where Santander took advantage of customers searching for quality to gain market share (via deposits and retail commercial paper) in a market undergoing restructuring. The combination of this trend with the decline in lending because of deleveraging explains the significant improvement in liquidity ratios. Portugal shows similar, but not as strong, trends. Overall, these trends enabled the units in Spain and Portugal to reduce their commercial gap by more than €42 billion, a volume almost double that of the maturities in their issues of medium and long term debt during the year. In the U.K., the U.S.and Latin America, where there is increasing access to more normalized medium and long term wholesale markets, the evolution of deposits in the various units was limited to accompanying growth in lending. In the case of Santander Consumer Finance and Poland’s BZ WBK (the latter with a surplus of deposits over loans) management was more focused on optimizing the cost of funds. Regarding issuance, the Group was supported by market and currency diversity, and by the “windows” offered by euro markets, to maintain high levels of fund raising even in unfavorable scenarios. The Group captured €43 billion in medium and long term issues of fixed income and securitizations in 2012. The chart below sets out their distribution by instruments and geographic areas. Issues were made in 10 currencies, involving 13 issuers in 10 countries, with an average maturity of around 4.3 years. Medium and long term issues (senior debt and covered bonds) raised €31 billion. Two points are worth mentioning: The parent bank’s issuance capacity (almost €16 billion with Banesto) in a scenario as adverse as that in 2012, which underscored Santander’s financial strength for international investors. The jump made by Latin American units both in quantitative (more than €8 billion issued) and qualitative terms: the four main countries (Brazil, Mexico, Chile and Argentina) made issues. Furthermore, Mexico and Chile made benchmark issues in the region (10-year senior debt in dollars with a high quality international demand). In securitizations, the Group’s subsidiaries placed in the market close to €12 billion of securitization bonds and medium and long term structured funding collateralized by securitization bonds or covered bonds. Along with the U.K. market which took 84% of the Group’s placements, also noteworthy was the securitization activity of Santander Consumer Finance backed by investors’ appetite for its assets. This demand enabled two new units of Santander Consumer Finance to access new wholesale markets (Finland and Sweden). In both cases, the Group made the first securitization of auto finance loans. Regulatory ratios Finally, regarding regulatory ratios, in 2013 the Basel Committee approved the definitive implementation of the liquidity coverage ratio (LCR), both as regards to defining the eligible assets to include in the liquidity buffer, as well as the period for their gradual introduction. Implementation will begin on 1 January 2015, with 60% coverage, gradually raised by 10 points a year to 100% in 2019. At the end of 2012, Grupo Santander comfortably met the full requirements of the new LCR ratio regarding its complete application. 2. Increase in the liquidity reserve This is the second main aspect which reflects the improvement in the Group’s liquidity position during 2012. The liquidity reserve is the total of the highly liquid assets of the Group and its subsidiaries. It serves as a last resort recourse at times of maximum stress in the markets, when it is impossible to obtain funding with adequate maturity terms and prices. As a result, this reserve includes deposits in central banks and cash, unencumbered sovereign debt, undrawn credit lines granted by central banks, as well as other assets eligible as collateral and other undrawn credit lines in official institutions (FHLB, etc.), all of which reinforce the solid liquidity position of the Group and its subsidiaries. At the end of 2012, Grupo Santander’s liquidity reserve amounted to more than €217 billion (over 20% of the total Group’s external financing). The structure of this volume by type of asset, according to the effective value (net of haircuts), was as follows:
Note: the reserve excludes other assets of high liquidity such as listed fixed income and equity portfolios. As of December 31, 2012, the liquidity reserve was located as follows: €107 billion in the U.K., €90 billion in the rest of the units in the convertible currencies area, and the remaining €20 billion mainly in Latin America and Poland. In 2012, the Group was particularly active in generating eligible assets generally linked to the development of business with customers. This enabled both the maturities of existing assets as well as cuts in credit ratings and in the value of guarantees to be offset when obtaining liquidity from central banks. At the same time, the extraordinary liquidity measures put into effect by central banks have increased the discounting capacity of the banking sector as a whole. In the case of Grupo Santander, and backed by the quality of its assets, this capacity rose from around €100 billion in 2010 and 2011 to around €130 billion at the end of 2012. Encumbered assets-funding Finally, it is worth mentioning the moderate weight of secured funding in the Group’s liquidity position, either in raising medium and long term wholesale funds, or in the central bank funding via discounts of eligible assets, as well as by capturing customer deposits via fixed income repos. Regarding wholesale funding, of note are issues of covered bonds (mortgage and public sector), as well as the placement of securitizations and other secured funding (structured, FHLB lines). At the end of 2012, the Group had placed in the market more than €67 billion of covered bonds in nominal value (€3.5 billion public sector and the rest mortgage-backed), as well as €57 billion of securitizations and other collateralized funding. With respect to the generation of eligible assets, the various subsidiaries issue central bank eligible covered bonds and securitizations that they retain in portfolio to be used as collateral in the financing facilities of central banks with whom they operate. The Group also has loans eligible for direct discounting in central banks, part of which are pledged in various facilities. At the end of 2012, the Group had obtained €49 billion of financing through central bank discounting. Most of these funds are deposited back in central banks, increasing the liquidity reserve, and so they barely contributed to net financing. Lastly, around €48 billion of the total customer deposits relate to repos, secured by fixed income portfolios. The rest of repos related to market activities did not contribute to financing the Group’s commercial activity so that they are netting off the fixed-income portfolios in the balance sheet for liquidity management purposes. At the end of 2012, the Group had in net terms €174 billion of financing of its activity (18% of its net liabilities, i.e. of the liquidity balance sheet) collateralized via the aforementioned items. 5.4 Funding outlook for 2013 Grupo Santander began 2013 with a comfortable liquidity position and lower issuance needs in the medium and long term due to the deleveraging process, which allowed the Group to return €24 billion, borrowed in 2011, to the ECB at the end of January 2013. It does not have any relevant concentration of maturities in the coming years and, furthermore, the various dynamics of the business areas and markets make it unnecessary to cover all the maturities. This will lead the Group to develop differentiated strategies in each of them. In Spain and Portugal, as in 2012, the units are expected to generate sufficient liquidity in commercial businesses to cover medium and long term maturities, whose total volume will not be very different to the maturities in 2012. Of note among the rest of the European units is the ongoing Santander Consumer Finance strategy of securitizations to achieve its self-financing in the short term. In the U.K., part of the liquidity surplus accumulated in 2012 was used to finance the growth of the unit and part of the maturities of issues while reinforcing and optimizing its deposits base. Deposits in the U.S. will continue to accompany lending growth. In Latin America, where activity is more dynamic, the emphasis will be maintained on growth in deposits in order to finance commercial activities, while strengthening issuance in wholesale markets opened to the Group’s large units. In any case, while current uncertainty persists, Santander will continue its conservative issuance policy in order to strengthen its solid position. The issues made by the parent bank in Spain in January 2013 are a good example of this strategy. Taking advantage of the reduced market tensions and the lower risk premium of Spanish sovereign debt, Banco Santander made two issues of senior debt and covered bonds and captured €3 billion at a maturity term well above the previous year (7 and 5 years, respectively, compared to an average of 4.3 years in 2012) and significantly lower costs (in the case of the senior debt, 20% less than the average cost in 2012 despite more than doubling the average maturity of the previous year). 6.1 Definition and objectives Grupo Santander defines operational risk (OR) as the risk of losses from defects or failures in its internal processes, employees or systems, or those arising from unforeseen circumstances. They are, in general, purely operational events, which makes them different from market or credit risks, although they also include external risks, such as natural disasters. The objective in control and management of operational risk is to identify, measure/ The Group’s priority, is to identify and eliminate risk focuses, regardless of whether they produce losses or not. Measurement also helps to establish priorities in management of operational risk. Grupo Santander opted, from the beginning, to use the standard method for calculating regulatory capital by operational risk, envisaged in the
The organizational model for controlling and managing risks is in line with the
First level: control
Second level:
Third level: integral control functions by the This model is constantly reviewed by the internal auditing division.
The Group believes it is convenient for the first and second layer of control functions to be developed within this division, where operational risk is managed more directly and which has the most appropriate resources and staff to identify, measure, assess and mitigate this risk. All of this is conducted within a recurring supervision of the Group’s bodies of control, in accordance with its strong risk management culture. All local areas are responsible for the implementation, integration and local adjustment of the policies and guidelines established by This The two committees for managing and controlling technological and operational risk (TOR) are: Corporate Committee of TOR, which comprises executives Corporate Committee of CATOR: it meets twice a month. This committee monitors CATOR’s projects and the Group’s risk exposure. Local executives and those from integral control of risks also form part of the committee. The Group monitors and controls technological and operational risk through its governance bodies. The board, the executive committee and the Group’s management committee regularly include treatment of relevant aspects in management and mitigation of operational risk. The Group, through approval in the risk committee, also establishes every year operational risk limits. A risk appetite is set which must be situated in low and medium-low profiles, which are defined on the basis of the level of the various ratios. Limits are set by country and for the Group on the basis of the gross loss/gross income ratio. Finally, the corporate governance structure was increased in 2012, by incorporating:
Committee of Local Information Security Officers (LISOs), which guarantees implementation of the corporate model of security in each country/unit and identifies and drives the measures for continuous improvement in the Group’s security. Monthly committee of review and continuous monitoring of issues related to management of TOR in the sphere of production and management of infrastructure, fostering global actions to mitigate risk. It is held with executives of the Group’s technology areas.
The Group’s operational risk management incorporates the following elements:
The
Identify the operational risk inherent in all activities, products, processes and banking systems.
Measure and assess the operational risk objectively, continuously and in line with the regulatory standards (Basel II, Bank of Spain) and the banking industry, establishing risk tolerance levels.
Continuously monitor the exposure of operational
Establish mitigation measures that eliminate or minimize operational risk.
Produce regular reports on the exposure to operational risk and the level of control for senior management and the Group’s areas/units, as well as inform the market and regulatory bodies.
Define and implement systems that enable operational risk exposures to be watched over and controlled and integrated into the Group’s daily management, taking advantage of existing technology and seeking the maximum computerization of applications.
Define and document operational risk management policies, and introduce methodologies for managing this risk in accordance with regulations and best practices.
Integral and effective management of operational risk (identification, measurement/assessment, control/mitigation and information).
Better knowledge of existing and potential operational risks and assigning responsibility for them to the business and support lines.
Operational risk information helps to improve the processes and controls, reduce losses and the volatility of revenues.
Facilitates the establishment of operational risk appetite limits. Implementing the model: global initiatives and results The main functions, activities and global initiatives adopted seek to
Define and implement the framework for corporate management of technological and operational risk management.
Designate coordinators and create operational risk departments.
Training and interchange of experiences: Foster mitigation plans: ensure control of implementation of corrective measures as well as ongoing projects.
Define policies and structures to minimize the impact on the Group of big disasters.
Maintain adequate control on activities carried out by third parties in order to meet potential critical situations.
Supply adequate information on this type of risk. The corporate function enhances management of technological risk (TR), strengthening the following aspects among others:
The security of the information systems.
The contingency and business continuity plans.
Management of risk associated with the use of technologies (development and maintenance of applications, design, implementation and maintenance of technology platforms, output of computer processes, etc.). Almost all
A series of quantitative and qualitative corporate techniques/tools have been defined to measure and assess technological and operational The quantitative analysis of this risk is carried out with tools that An internal database of events, whose objective is to capture all the Group’s losses from operational risk. The capturing of events related to operational risk is not restricted by setting thresholds (i.e. there are Accounting conciliation processes have been established that guarantee the The main events of the Group and of each operational risk unit are particularly documented and reviewed. An external database of events, as the Group participates in international consortiums, such as the Operational Risk Exchange (ORX). Capital calculation by the standard method (see the corresponding section in the report on Prudential Relevance Report/Pillar II). The tools defined for quantitative analysis seek to assess aspects (coverage/exposure) linked to risk profile. These tools are mainly:
A map of processes and risks and self-assessment questions. An adequate evaluation of the risks, on the basis of the expert criterion of the managers, enables a qualitative view of the Group’s
Corporate system of operational risk indicators, The
The exercise also incorporated 6.5. Evolution of the As regards the databases of events, and consolidating the total information received, the evolution of net losses by Basel risk category in The evolution of losses by category shows a reduction in relative terms of external fraud and execution, delivery and management of processes thanks to the The category of practices with clients, products and business – which includes customer complaints on erroneous marketing, incomplete information and inexact products – increased. Of note was the contribution of payment protection insurance for clients in the U.K.. It should be pointed out that the complaints raised with the Group relate to a general problem in the U.K. banking sector, and the volume of complaints against the bank is considered proportionate to its market share. Although these events were sufficiently provisioned in 2011 by the Group, the settlements for these clients increased in 2012, in accordance with the planning by the unit. The chart below sets out the evolution of the number of operational risk events by Basel category over the last three years. 6.6 Mitigation measures The Group has a stock of mitigation measures (more than 900 active ones, of which more than 400 started in 2012), established in response to the main risk sources. They have been identified by analyzing the tools used to manage operational risk, as well as The percentage of
The measures referred to are turned into action plans which are distributed in the following spheres: The main mitigation measures centered on improving the security of
Electronic fraud. Measures were established at the corporate and local levels, such as: Improvements in Increased security in confirming customers’ operations using strong procedures for the signature of operations. These measures are locally implemented in the Group’s various countries such as the OTP-SMS passwords or physical devices that generate access codes (physical token). Strengthening mechanisms to identify operations. Validation processes for activating telematics. Technical measures for detecting and warning of the theft of customers’ credentials (phishing). Fraud in the use of cards: Migration to card technologies with chip (EMV). Improvements in ATM security, including mechanisms to detect the falsification of cards (anti-skimming). These mechanisms are specifically orientated to prevent the cloning of cards or the capturing of PINs. The Group finished installing a new corporate system
It has the following
An application tool for all the Group’s
All operational risk management processes are automated.
In 2013, we will continue to
The different areas that
In addition, a corporate methodology of operational risk
6.7. Other aspects of control and
Analysis and monitoring of controls in market operations Due to the specific nature and complexity of financial markets,
Review of the valuation models and in general the
Processes to capture and
Adequate confirmation of
Review of cancellations/modifications of
Review and monitoring of the effectiveness of guarantees, collateral and risk mitigants. Corporate information The corporate area of technology and operational risk control has an integral management information system for operational risk, which consolidates every quarter the information available in each country/unit in the sphere of operational risk, so that it has a global view with the following features:
Two levels of information: corporate with consolidated information and the other individualized for each country/unit.
Dissemination of the best practices between Grupo Santander’s countries/units, obtained through a combined study of the results of qualitative and quantitative analysis of operational risk.
Additionally, we elaborate information on the following
Operational risk management model in Grupo Santander.
Human resources and perimeter of activity.
Analysis of the database of
Self-assessment
Mitigating/active management measures.
Regulatory framework: BIS II.
Insurance. This information is the basis for complying with the reporting needs to the risk committee, senior management, regulators, rating agencies, etc. Insurance in the management of operational risk
Cooperation in the exposure of the Group’s operational risk control and management model to insurance and reinsurance companies.
Analysis and monitoring of recommendations and suggestions to improve operational risks made by insurance companies, via prior audits conducted by specialized companies, as well as their subsequent implementation.
Exchange of information generated in both areas in order to strengthen the quality of the
Close cooperation between local operational risk executives and local coordinators of insurance to strengthen mitigation of operational risk.
Regular meetings on specific activities, states of situation and projects in both areas.
Active participation of both areas in the unit for global sourcing of insurance, the Group’s maximum technical body for defining coverage strategies and contracting insurance. Part
The compliance risk is the risk of receiving economic or other sanctions, or other types of disciplinary measures by supervisory bodies for not complying with laws, regulations, rules, standards of self-regulation or codes of conduct applicable to the activity developed. The reputational risk
7.2. Corporate governance and the organizational model In the exercise of its general function of supervision, the Bank’s board is responsible for approving the general policy of risks. In the sphere of compliance and reputational risk, the board is the owner of the Group’s The delegated risks committee proposes to the board the Group’s risk policy. Furthermore, as the body responsible for global risk management, it assesses the reputational risk The audit and compliance committee The compliance function reports constantly to the board and mainly via the audit and compliance committee. The head of the Group’s compliance informed this committee at the 11 meetings it held in 2012 and also once at a meeting of the delegated risks committee, without detriment to attending other sessions of this committee when submitting to it operations which might have an impact from the standpoint of reputational risk. The last stage of governance consists of corporate committees of rule compliance, of analysis and resolving and marketing (the latter two specialized in their respective matters: prevention of money-laundering and marketing of products and services), with a global scope (every country, every business) and which are replicated at the local level. From the risks division, the area of integral control and internal validation of risks (CIVIR) in the exercise of its functions of supporting the risks committee supervises the control framework applied for risk and reputational compliance, facilitating, in turn, information to the Group’s bodies of control. The organizational model revolves around the corporate area of compliance and reputational risk, integrated into the division of the general secretariat, which is entrusted with managing the Group’s compliance and reputational risks. Within the area, led by the head of the Group’s compliance, is the corporate office of reputational risk and the central department of prevention of money-laundering and financing of terrorism. This structure is replicated at the local level and also in global businesses, having established the opportune functional reports for the corporate area. 7.3. Risk management model The main responsibility of compliance and reputational risk management is shared between the compliance area and the different business and support units, which conduct the activities that give rise to risk. The responsibility for developing policies and implementing the corresponding controls lies with the compliance area, which is also responsible for advising senior management on these matters and fostering a culture of compliance, all of this in a framework of an annual programme whose effectiveness is regularly evaluated. The area directly manages some of these basic risks (money-laundering, codes of conduct, marketing of products, etc.) and ensures that the rest is duly tended to by the corresponding unit of the Group (responsible financing, data protection, customers’ complaints, etc.), having established the opportune control and verification systems. One of the functions of internal auditing is to carry out the tests and reviews required to ensure that the rules and procedures established in the Group are fulfilled. The area of integral control and internal validation of risk supervises the correct execution of the risk management model. Internal auditing, within its functions, conducts the necessary tests and reviews in order to check compliance with the rules and procedures established in the Group. Policies The general code of conduct is the central plank of the Group’s compliance program. This code, which enshrines the ethical principles and rules of conduct that must govern the actions of all Grupo Santander’s employees, is complemented in certain matters by the rules that are in the codes and manuals of the various sectors. The following form part of the codes and manuals of sectors: the Manual for the Prevention of Money-laundering and Financing of Terrorism, the Code of Conduct in the Securities Markets, the The code also establishes: (i) the functions and responsibilities in matters of compliance of the governance bodies and of the Group’s management areas affected; (ii) the rules that regulate the consequences of non-compliance; and (iii) a channel for formulating and handling communications for presumably illicit activity. Governance and organization The corporate office of compliance is responsible, under the supervision of the audit and compliance committee and the The rule compliance committee, chaired by the Group’s secretary general, has powers in all matters inherent in the compliance function, without detriment to It is made up of representatives of internal auditing, the general secretariat, financial management, human resources and the most directly affected business units. This committee held five meetings in 2012. The Group’s compliance management has the following functions as regards management of compliance and reputational risks: 1. Implement the Group’s general code of conduct and other codes and manuals for sectors. 2. Supervise the 3. Direct the investigations into the possible committing of acts of non-compliance. Help can be sought from internal auditing and 4. Cooperate with internal auditing in the regular reviews carried out on compliance with the general code and with the codes and manuals of sectors, without detriment to the regular reviews which, on matters of rule compliance, are conducted by compliance management directly. 5. Receive and handle the accusations made by employees or third parties via the relevant channel. 6. Advise on resolving doubts that arise from implementing codes and manuals. 7. Draw up an annual report on implementing the compliance program for the audit and compliance committee. 8. Regularly inform the general secretary, the audit and compliance committee and the board on implementation of the compliance policy and the compliance program. 9. On a yearly basis, assess the changes that need to be introduced into the compliance program, particularly in the event of detecting unregulated business areas and procedures susceptible to improvement, and propose the changes to the audit and compliance committee. The Group’s compliance management also manages the prevention of the penal risks model, which came into effect with the entry into force of Organic Law 5/2010, which introduced penal responsibility for institutions that commit crimes on their own behalf and for their
Prevention of money-laundering and the financing of terrorism. Marketing of products and services. Conduct in the securities markets. Relations with regulators and supervisors. Drawing up and disseminating the Group’s institutional information. Prevention of money-laundering and financing of terrorism Policies As a socially responsible organization, it is a strategic objective for Grupo Santander to have an advanced and effective system for the prevention of money-laundering and the financing of terrorism, constantly adapted to the latest international regulations and with the capacity to tackle the appearance of new techniques by criminal organizations. The function of the prevention of money-laundering and of the financing of terrorism revolves around policies that set minimum standards that Grupo Santander’s units must observe, and is formulated in accordance with the principles contained in the 40 recommendations of the Group of International Financial Action and the obligations and assumptions of directive 2005/60/EC of the European Parliament and of the Council, of October 26, 2005, on the prevention of using the financial system to launder money and finance terrorism. The corporate policy and rules that develop it have to be complied with in all the Group’s units in the world. By units we mean all the banks, subsidiaries, departments or branches of Banco Santander, both in Spain and abroad which, in accordance with their legal statute, must submit to the regulations regarding the prevention of money-laundering and the financing of terrorism. Governance and organization The organizational function of the prevention of money-laundering and of the financing of terrorism rests on three areas: the analysis and resolution committee (ARC), the central department for the prevention of money-laundering (CDPML) and prevention executives at various levels. The analysis and resolution committee is a collegiate body of corporate scope chaired by the Group’s general secretary and comprising representatives of internal auditing, the general secretariat, human resources and the business units most directly affected. The ARC held four meetings in 2012. The CDPML establishes, coordinates and supervises the systems and procedures for the prevention of money-laundering and the financing of terrorism in all the Group’s units. There are also prevention executives at four different levels: area, unit, branch and account. In each case their mission is to support the CDPML from a position of proximity to clients and operations. As of December 31, 2012, at the consolidated level, a total of 714 people (three quarters of them full time) work in prevention activities and tend to 182 units in 38 countries. Grupo Santander has established in all its units and business areas corporate systems based on decentralized IT applications. These enable operations and customers, who because of their risk need to be analyzed, to be directly presented to the branches of the account or customer relation managers. The tools are complemented by others of centralized use which are operated by teams of analysis from prevention units who, on the basis of certain risk profiles and changes in certain patterns of customer behavior, enable operations susceptible of being linked to money-laundering and/or the financing of terrorism to be analyzed, identified early on and monitored. Banco Santander is a founder member of the Wolfsberg Group, and forms part of it along with 10 other large international banks. The Wolfsberg Group’s objective is to establish international standards that increase the effectiveness of programmes to combat money-laundering and the financing of terrorism in the financial community. Various initiatives have been developed which have treated issues such as the prevention of money-laundering in private banking, correspondent banking and the financing of terrorism, among others. Regulatory authorities and experts in this area believe that the principles and guidelines set forth by the Wolfsberg Group represent an important step in the fight against money-laundering, corruption, terrorism and other serious crimes. Main actions The Group analyzed a total of 21.1 million operations in 2012 (24.8 million in 2011) both by the commercial networks as well as money-laundering prevention teams, of which more than one million were by the units in Spain. The CDPML and the local departments of prevention conduct annual reviews of all the Group’s units throughout the world. In 2012, 162 units were reviewed (172 in 2011), 26 of them in Spain and the rest abroad, and reports were issued, where for every case identified the corresponding recommendations and measures to be taken to improve and strengthen systems were registered. In 2012, 242 measures to be adopted were established (268 in 2011), which are being monitored until their full and effective implementation. In 2012, training courses were given for the prevention of money-laundering to a total of 105,664 employees (119,976 in 2011) and for 146,911 hours.
Marketing of products and services Policies At Grupo Santander, management of the reputational risk These corporate policies aim to set a single corporate framework for all countries, The Governance and organization
The
The
Each product or service is sold by
The product or service
Each product
client. The global consultative committee (GCC) is the advisory body
The corporate office of reputational risk management (CORRM) provides the governance bodies with the information needed for: (i) adequate analysis of risk in approvals, from the standpoint of the bank and the impact on the client; and (ii) monitoring of products throughout their life cycle. At the local level there are Main actions During 2012, the committee met 14 times (19 times during 2011, and 21 times during 2010) and analyzed 140 new products/services. The corporate office of reputational risk was presented with 61 products/services considered not new for approval and resolved 171 consultations from areas and countries. The products approved by the corporate office of reputational risk management were successive issues of products that had been previously approved by the CCM or the LCM, after being given this power. The GCC held three meetings in 2012 (3 in 2011, and 3 in 2010). Monitoring of products and services approved is done locally (local committee of monitoring of products or equivalent local body, such as the LCM). The conclusions are set out in reports every four months for the CORRM, which prepares integrated reports on all the Group’s monitoring for the CMC. The Both the audit and compliance committee and the rule compliance committee were informed during 2012 of Code of conduct in the securities markets Policy This is set by the code of conduct in the securities markets (CCSM), complemented, among others, by the code of conduct for analysis activity, the research policy manual and the procedure for detecting, analyzing and communicating operations suspected of market abuse. Governance and organization The organization revolves around the corporate office of compliance together with local compliance management and that of subsidiaries. The functions of compliance management with regard to the code of conduct in the securities markets are as follows: 1. Register and control sensitive information known and/or generated by the Group. 2. Maintain the lists of securities affected and related personnel, and watch the transactions conducted with these securities. 3. Monitor transactions with restricted securities according to the type of activity, portfolios or collectives to whom the restriction is applicable. 4. Receive and deal with communications and requests to carry out own account transactions. 5. Control own account transactions of the relevant personnel. 6. Manage failures to comply. 7. Resolve doubts on the CCSM. 8. Register and resolve, in the sphere of its responsibilities, conflicts of interest and situations that could give rise to them. 9. Assess and manage conflicts arising from the analysis activity. 10. Keep the necessary records to control compliance with the obligations envisaged in the CCSM. 11. Develop ordinary contact with the regulators. 12. Organize the training and, in general, conduct the actions needed to apply the code. 13. Analyze activities suspicious of constituting abuse of the market and, where appropriate, report them to the supervisory authorities. Main actions The compliance management of the parent bank together with the compliance executives of the subsidiaries ensure that the obligations contained in the CCSM are observed by around 8,500 Group employees throughout the world. The market abuse investigation unit continued to review many transactions that gave rise to the opportune communications to the National Securities Market Commission. Training actions were also taken, in accordance with the training plan approved by the rule compliance committee. Relations with the supervisory authorities and dissemination of information to the markets Compliance management is responsible for tending to the information requirements of the regulatory and supervisory bodies, both those in Spain as well as
Banco Santander made public in Spain 107 relevant facts in 2012, which are available on the Group’s web site and that of the National Securities Market Commission. Other actions Compliance management continued to carry out other activities in 2012 inherent to its sphere (reviewing the bank’s internal rules before their publication, ensuring treasury stock operations are in line with internal and external rules, maintaining the section on regulatory information on the corporate website, reviewing the vote recommendation reports for shareholders’ meetings drawn up by the leading consultancies in this area, The losses incurred by the Group derived from compliance and reputational risk
8.1 Adjusting to the new regulatory framework Grupo Santander participated during The new regulatory framework raised by Basel III will significantly increase the capital requirements, both from a quantitative standpoint (gradual rise in the basic minimum capital and Tier 1 capital requirements as well as qualitative (greater quality of the capital required). Santander currently has As regards credit risk, Grupo Santander has proposed The Group operates in countries where the legal framework among supervisors is the same as in Europe via the capital directive. However, in other jurisdictions, the same process is subject to the collaboration framework between the supervisor in the home country and that in the host country with different With this objective, Santander continued during As regards the rest of risks explicitly envisaged in Pillar 1 of Basel, in market risk we have authorization to use In operational risk, The Group As regards Pillar II, Grupo Santander uses an economic capital approach to quantify its global risk profile and its solvency position within the process of self-evaluation conducted at the consolidated level
Grupo Santander, in accordance with the capital requirements set out in the European Directive and the regulations of the Bank of Spain, publishes every year the Report with Prudential Relevance. This report As well as the process of implementing the advanced models in various of the Group’s units, Santander is carrying out an ambitious training process on Basel at all
The concept of economic capital has traditionally been contrasted with that of regulatory capital, as this is the one required for the regulation of solvency. The Basel capital framework clearly brings both concepts together. While Pillar 1 determines the minimum regulatory capital requirements, Pillar II quantifies, via economic capital, the Group’s global solvency position. The Group’s model of economic capital The internal definition of available capital, unlike the base of regulatory capital, does not deduct certain assets from the balance sheet (such as goodwill and others) to which the regulator does not accord value from a prudential standpoint, as in our model a risk and a capital requirement are also calculated for these assets. In the case of goodwill, for example, even though a hypothetical stress situation could leave at zero the value of the goodwill corresponding to an investment in some of the Group’s subsidiaries, it is highly unlikely that this situation would occur at the same time in all the countries in which the Group operates. The Group would retain, even in a stress situation, part of the value of these assets, which justifies that the capital needed is less than the book value of this goodwill and which, for management purposes, is not deducted from the capital base. This situation is possible due to the features of the Santander model, based on subsidiaries autonomous in capital and very diversified geographically. The concept of diversification is fundamental for
Economic capital is a key tool for the internal management and development of the Group’s strategy, from the standpoint of assessing solvency as well as risk management of portfolios and businesses. From the solvency standpoint, the Group uses, in the context of Basel Pillar II, its economic model for the capital self-evaluation process, including all the risks of activity, beyond those contemplated in the regulatory focus, and taking into account essential elements, not captured by the regulatory capital, such as concentration of portfolios or diversification between risks and countries. For this, the business evolution and the capital needs are planned under a central scenario and alternative stress scenarios. The Group is assured in this planning of maintaining its solvency objectives even in the most adverse scenarios. The metrics of economic capital Global risk profile analysis The Group’s risk profile at 31 December
The distribution of economic capital among the main business units reflects the diversification of the Group’s activity and risk. Continental Europe accounts for
The benefit of diversification envisaged in the economic capital model, including both the intra-risks (assimilated to geographic) as well as inter-risks, amounted to around
Return on Grupo Santander has been using RORAC methodology in its credit risk management since 1993 in order to:
Calculate the consumption of economic capital and the return on it of the Group’s business units, as well as segments, portfolios and customers, in order to facilitate optimum assigning of economic capital.
Budget the capital consumption and RORAC of the Group’s business units, including them in
Analyze and set prices RORAC methodology enables one to compare, on a The Group regularly assesses the level and evolution of value creation (VC) and the Value creation = The The minimum return on capital that an A positive return from an
The performance of the business units in The creation of value and the RORAC for the Group’s main business areas are shown below:
These figures do not include the losses of the corporate activities area, in which are recorded the extraordinary provisions set aside in 2012, as well as the results of equity stakes, the liquidity buffers and the coverage, among others. The return on risk-adjusted capital (RORAC) of the corporate center is -15.5%, and the Group’s RORAC These figures are clearly determined by the phase of the cycle that some of the Group’s units are undergoing, resulting in particular, in higher loan-loss provisions and a final result below the cost of capital considered, instead of the current level of loan-loss provisions. If so, the Group’s RORAC would improve to 12.8%, above the cost of capital
Part 9.
The market risk area has a perimeter for measuring, controlling and monitoring
Interest rate risk is the possibility that changes in interest rates could adversely affect the value of a financial instrument, a portfolio or the Group as a whole. It affects, among others, loans, deposits, debt securities, most assets and liabilities of trading portfolios as well as derivatives. The inflation rate risk is the possibility that changes in inflation rates could adversely affect the value of a financial instrument, a portfolio or the Group as a whole. It affects, among others, loans, debt securities and derivatives, whose yield is linked to inflation or to a real rate of variation. The exchange rate risk is the sensitivity of the value of a position in a currency different to the base currency to a potential change in exchange rates. A long position or one bought in a foreign currency would produce a loss in the event that the currency depreciated against the base currency. Among the positions affected by this risk are The equity risk is the sensitivity of the value of positions opened in equity markets to adverse movements in the market prices or in expectations of future dividends. Among other instruments, this affects positions in shares, stock market indices, convertible bonds and derivatives using shares as the underlying asset (put, call, and equity swaps). The credit spread risk is the risk or sensitivity of the value of positions opened in fixed income securities or in credit derivatives to movements in the credit spread curves or in recovery rates associated with issuers and specific types of debt. The spread is a differential between financial instruments that trade with a spread over other reference instruments, mainly the yield on government securities and interbank rates. The commodities price risk is the risk derived from the effect of potential change in prices. The Group’s exposure to this risk is not significant and is concentrated in derivative operations on commodities with clients. Volatility risk is the risk or sensitivity of the value of a portfolio to changes in the volatility of risk factors: volatility of interest rates, exchange rates, shares, credit spreads and of commodities. This risk is incurred by financial instruments which have volatility as a variable in their valuation model. The most significant case is portfolios of financial options. All these market risks can be partly or fully mitigated by using options, futures, forwards and swaps. There are other types of market risk, whose coverage is more complex. They are the following: Correlation risk is the sensitivity of the value of a portfolio to changes in the relation between risk factors, be they of the same type (for example, between two exchange rates) or of a different nature (for example, between an interest rate and the price of a commodity). Market liquidity risk is that of a Group entity or the Group as a whole finding itself unable to get out of or close a position in time without impacting on the market price or on the cost of the transaction. This risk can be caused by a fall in the number of market makers or institutional investors, the execution of large volumes of operations, market instability and increases with the concentration existing in certain products and currencies. Risk of prepayment or cancellation. When in certain operations the contract allows, explicitly or implicitly, cancellation before the maturity without negotiation there is a risk that the cash flows have to be reinvested at a potentially lower interest rate. This mainly affects loans or mortgage securities. Underwriting risk. This occurs as a result of an entity’s participation in underwriting a placement of securities or another type of debt, assuming the risk of partially owning the issue or the loan due to non-placement of all of it among potential buyers. On the basis of the origin of the risk, activities are segmented in the following
The Global Banking and The financial management area is responsible for implementing the management strategy for structural risks, applying standardized methodologies adapted to each market where the Group operates, either directly in the case of the parent bank or in coordination with the rest of units. The management decisions for these risks are taken by each country’s ALCO (ALM) committee in coordination with the Group’s markets’ committee. The aim is to inject stability and recurrence into the net interest margin of commercial activity and the Group’s economic value, while maintaining adequate levels of liquidity and solvency. Each of these activities is measured and analyzed with different metrics in order to show their risk profile in the most precise way.
The market and structural risks area is integrated into one of the Group’s two general risk directorates. The missions of the market risk function are: To define and supervise the market risk management model, which
These missions rest on five basic pillars, vital for correct management of market risks: Measurement, analysis and control of market and liquidity Calculation, analysis, explanation and conciliation of results. Defining, capturing, validating and distributing market data. Admission of limits, products and underlying assets. Consolidation of information. In turn, market risks management is guided by the following basic principles: Involvement of senior management. Independence of the risk function from business. Clear definition of powers. Risk measurement. Limiting risks. Analysis and control of risk positions. Establishing risk policies and procedures. Assessing risk methodologies. In the same way that the market risks function is structured at the corporate or global level, each local market risk unit has and arranges its functions, with the adjustments that arise in accordance with its specific business, operational and legal requirement features, etc. For the correct functioning of global policies and local execution, the global area of market risks and local units carry out different functions: Global market risk: Establish, propose and document risk policies and criteria, the global limits and the decision-making and control processes. Generate management frameworks, systems and tools. Promote and support their implementation and ensure they function effectively in all units. Know, assimilate and adapt the best practices inside and outside the Group. Promote activity for obtaining results. Consolidate, analyze and control the market risk incurred by all units of the perimeter. Local market risk units: Manage risks. Transfer, adapt and assume internally the corporate policies and procedures through local approval. Define and document policies and lead local sphere projects. Apply policies and decision-making systems to each market. Adapt the organization and management frameworks and corporate rules. Contribute critical and best practices, as well as local knowledge and proximity to customers/markets. Assume greater responsibilities in decisions, control and management of risks. Measure, analyze and control market risk within the sphere of responsibility.
The committees, by hierarchical order, which have powers in decision-making, control and The
The market risk limits used in Grupo Santander are established on different metrics and try to cover all activity subject to market risk from many perspectives, applying a conservative criterion. The main ones are: Trading limits: VaR limits. Limits of equivalent positions and/or nominal. Sensitivity limits to interest rates. Vega limits. Risk limits of delivery by short positions in securities (fixed income and equities). Limits aimed at reducing the volume of effective losses or protecting results already generated during the period: Loss trigger. Stop loss. Credit limits: Limit on the total exposure. Limit to the jump to default by issuer. Others. Limits for origination operations. Structural interest rate risk of the balance sheet: Sensitivity limit of net interest margin at 1 year. Sensitivity limit of equity value. Structural exchange rate risk: Net position in each currency (for positions of hedging results). These general limits are complemented by sub-limits. In this way, the market risk area has a structure of limits sufficiently granular to conduct an effective control of the various types of market risk factors on which an exposure is maintained. Positions are tracked daily, both of each unit as well as globally. An exhaustive control is made of the changes in the portfolios, in order to detect possible incidents for their immediate correction. Meanwhile, the daily drawing up of the income statement by the market risks area is an excellent indicator of risks, as it allows the impact that changes in financial variables have had on portfolios to be identified. Structure of limits The table below shows the levels of applying limits, the categories and the sphere of control in which they are classified and their levels of approval.
Global limits of global control: The Risks Committee approves the limits at the activity/unit level in the annual process of setting limits. Changes that are subsequently made can be These limits are requested by the relevant business
Compliance and control of limits Business units must comply with the approved limits. The possible excesses trigger a series of actions by the local and global market risk areas, risk management
If the
1. Trading activity
VaR model The standard methodology that Grupo Santander applied to trading
(VaR). As calculated by us, VaR is an estimate of the expected maximum loss in the market value of a given portfolio over a one-day time horizon at a 99% confidence interval. It is the maximum one-day loss that we estimate we would suffer on a given portfolio 99% of the time, subject to certain assumptions and limitations discussed below. Conversely, it is the figure that we would expect to exceed only 1% of the time, or approximately two or three days per year. VaR provides a single estimate of market risk that is comparable among different portfolios or instruments. The number of expected “exceptions” is an average number. Over a long period of time we would expect an average of two or three exceptions per year; however, there may be some years or periods where there are fewer exceptions than expected, as was the case in 2009 and 2010 when there were no exceptions, and other periods where there are more exceptions than expected. In The standard methodology used is based on historical simulation (520 days). In order to capture recent market volatility in the model, the reported VaR is the maximum between two different VaR figures, both of which use a historical window of two years (one applies an exponential decline factor which gives a higher weight to the observations closer in time and another gives the same weight to all the observations). This methodology makes our VaR numbers react very quickly to changes in current volatility, significantly reducing the likelihood of backtesting exceptions. In addition, backtesting exceptions in 2010 were further reduced as a consequence of inclusion of the 2008 financial crisis in the historical series used for calculating the VaR. We use VaR estimates to alert senior management whenever the statistically estimated losses in our portfolios exceed prudent levels.
Our VaR methodology should be interpreted in light of the limitations of our model, which include:
A one-day time horizon may not fully capture the market risk of positions that cannot be liquidated or hedged within one day.
At present, we compute VaR at the close of business and trading positions may change substantially during the course of the trading day.
Among these measures is analysis of scenarios, which consists of defining alternatives for the performance of different financial variables and obtain the impact on results by applying them to activities. These scenarios can replicate events that happened in the past (crisis) or determine possible alternatives that do not correspond to past events. The potential impact on results of applying different stress scenarios to all the trading portfolios and considering the same suppositions by risk factor is calculated and analyzed at least monthly. Three types of scenario are defined: possible, severe and extreme, obtaining along with the VaR a fuller spectrum of the risk profile. In addition, levels of warning (triggers) are set for global scenarios, on the basis of the historic results of these In order to calibrate our VaR model, we use back testing processes. Back testing (BT) is a comparative analysis between VaR estimates and the daily clean P&L (i.e. real profit or loss obtained at the end of the day on the portfolio analyzed at the end of the preceding day valued at the following day prices). The purpose of these tests is to verify and measure the precision of the models used to calculate VaR. Santander performs regular Whenever an anomaly is detected, we undertake a detailed examination of elements (such as “pricers”, inputs and configuration, among others, in order to correct such anomaly. Detailed results of our BT are regularly reported to Bank of Spain. The analyses of our Besides the ongoing and regular calibration of our VaR methodology, there were no significant changes during the periods presented nor are any such changes contemplated at this time.
The positions are traditionally used to quantify the net volume of the market values of the transactions in portfolio, grouped by main risk factor, and considering the delta value of the futures and options that could exist. All the risk positions can be expressed in the base currency of the unit and in the currency of homogenizing information. The market risk sensitivity measures are those that gauge the change (sensitivity) of the market value of an instrument or portfolio to changes in each of the risk factors. The sensitivity of the value of an instrument to changes in market factors can be obtained through analytical approximations by partial derivatives or through a full revaluation of the portfolio. The daily drawing up of the income statement is also an excellent indicator of risks, as it enables the impact that changes in financial variables have on portfolios to be
Regarding the credit risk
As well as the usual VaR, Santander began to calculate stressed VaR every day, as of October 2011, for the main portfolios. The methodology for calculation is the same as that used for the VaR, with the following two exceptions: Historic period of observation of factors: the stressed VaR uses a window of 250 figures, instead of one of 520 for the VaR. In order to All the other aspects regarding the methodology and the inputs for calculating the stressed VaR are the same as those for the VaR. As regards determining the period of observation, for each relevant portfolio, the methodology area has analyzed the history of a subseries of market risk factors that were chosen on the basis of expert criteria taking into account the most relevant positions of the Moreover. the expected shortfall (ES) has begun to be calculated in order to estimate the expected value of
The Group On the basis of the positioning of balance sheet interest rates, as well as the situation and outlook for the market, the financial measures are agreed to adjust the positioning to that desired by the The metrics used by the Group to control
Interest rate gap analysis focuses on lags or mismatches between changes in the value of asset, liability and off-balance sheet items. All on- and off-balance sheet items must be
The sensitivity of net interest margin measures the change in the short/medium term in the accruals expected over a particular period (12 months), in response to a shift in the yield curve. It is calculated by simulating the net interest margin, both for a scenario of a shift in the yield curve as well as for the current
Treatment of liabilities without defined maturity In the corporate model, the total volume of the balances of accounts without maturity is divided between stable and unstable balances.
The separation between the stable and unstable balances is obtained from a model that is based on the relation between balances and their own moving averages. From this simplified model the monthly cash flows are obtained and used to calculate the NIM and MVE sensitivities. The model requires a variety of inputs: Parameters inherent in the product. Performance parameters of the customer (in this case analysis of historic data is combined with the expert business view). Market data. Historic data of the portfolio. Pre-payment treatment for certain assets The pre-payment issue mainly affects fixed-rate mortgages in units where the relevant interest rate curves for the balance sheet (specifically for the portfolio of investment in fixed rate mortgages) are at low levels. In these units the risk is modelized and some changes can also be made to assets without defined maturity (credit card businesses and similar). The usual techniques used to value options cannot be applied directly because of the complexity of the factors that determine the pre-payment of borrowers. As a result, the models for assessing options must be combined with empirical statistical models which seek to capture the prepayment performance. Some of the factors are: Interest rate: the differential between the fixed rate of the mortgage and the market rate at which it could be refinanced, net of cancellation and opening costs; Seasoning: pre-payment trend downward at the start of the instrument’s life cycle (signing of the contract) and upward and stabilizing as time passes; Seasonality: the amortizations or early cancellations tend to take place at specific dates. Burnout: decreasing trend in the speed of pre-payment as the instrument’s maturity approaches, which includes: a) Age: defines low rates of pre-payment. b) Cash pooling: defines as more stable those loans that have already overcome various waves of interest rate falls. In other words, when a portfolio of loans has passed one or more cycles of downward rates and thus high levels of pre-payment, the “surviving” loans have a significantly lower pre-payment probability. c) Others: geographic mobility, demographic, social, available income factors, etc. The series of econometric relations that seek to capture the impact of all these factors is the probability of pre-payment of a loan or pool of loans and is denominated the pre-payment model. Value at Risk (VaR) The Value at Risk for balance sheet activity and investment portfolios is calculated with the same standard as for
1. Trading activity15 1.1. Value at Risk (VaR) analysis Grupo Santander stepped up its strategy of concentrating its trading activity in customer business, minimizing where possible, exposures of directional risk opened in net terms. This was reflected in the VaR16 evolution, which declined over previous years. EVOLUTION OF VaR 2010-2012 Million euros. VaR at 99%, with a time frame of one day
VaR during 2012 fluctuated between €9.4 million (the lowest in the last few years) and €22.4 million. It rose a little during the fourth quarter, because of the rise of risk in Brazil’s treasuries (in interest rates and exchange rates) and Madrid (in interest rate and credit spread). The VaR reported as of November 15, 2011 excludes the risk from changes in the credit spreads of securitizations and portfolios affected by credit correlation. For regulatory reasons (BIS 2.5), these exposures are considered as banking book for capital purposes. This change caused a decline in risk in VaR terms, both at the total level as well as by credit spread. The average VaR of the Group’s trading portfolio in
The histogram below shows the distribution of average risk in terms of VaR VaR RISK HISTOGRAM
Risk factor The minimum, average, maximum and year-end 2012 values in VaR terms are shown below: VaR Million euros. VaR at 99%, with a time frame of one day
The average VaR declined again in 2012 by €7.5 million over 2011. The reduction occurred in all risk
1.2.Distribution of risks and management results19
Geographic distribution In trading activity. The average contribution of Latin America
Below is the geographic contribution (by percentage), both in risks, measured in VaR VaR BINOMIAL-MANAGEMENT RESULTS: GEOGRAPHIC DISTRIBUTION Average VaR (at 99%, with a
Monthly distribution of risks and results The next chart shows the risk assumption profile, in terms of VaR, DISTRIBUTION OF RISK BY TIME AND RESULTS IN 2012: PERCENTAGES OF ANNUAL TOTALS Average VaR (at 99%, with a time frame of
The following histogram of frequencies shows the distribution of daily economic results on the basis of their HISTOGRAM OF THE FREQUENCY OF DAILY RESULTS (MTM) Daily results of management “clean” of commissions and intraday operations (million euros). Number of days (%) in each range
1.3.Risk management of structured derivatives
These transactions include options on equities, The units where this activity mainly takes place are: Madrid, Banesto, Santander UK and, to a lesser extent, Brazil and Mexico. The chart below shows the VaR Vega21 performance of structured derivatives business over the last three years. It fluctuated at around an average of €6.8 million. The periods with higher VaR levels related to episodes of significant rises in volatility in the markets (of equities in the eurozone, interest rates in Brazil, etc.).
EVOLUTION OF RISK (VaR) OF THE BUSINESS OF STRUCTURED DERIVATIVES Million euros. VaR Vega at 99%, with a time frame of one day. Regarding the VaR Vega by risk factor, the exposure was concentrated, in this order, in equities, interest rates, exchange rates and commodities. This is shown in the table below: STRUCTURED DERIVATIVES. RISK (VaR) BY RISK FACTOR Million euros. VaR at 99%, with a time frame of one day
Regarding the distribution by business unit, the exposure is concentrated, in this order, in the parent-holding, Banesto, Santander UK, Brazil and Mexico. STRUCTURED DERIVATIVES. RISK (VaR) BY UNIT Million euros. VaR at 99%, with a time frame of one day
The average risk in
Hedge funds: the total exposure is not significant (€
Conduits:
In short, the exposure to this type of Santander’s policy for Before
And provided these two points are
1.4.Gauging and contrasting measures In 2012, the Group continued to regularly conduct analysis and contrasting tests on the effectiveness of the Value at Risk (VaR) calculation model, obtaining the same conclusions that enable us to verify the model’s reliability. The objective of these tests is to determine whether it is possible to accept or reject the model used to estimate the maximum loss of a The most important test is backtesting, analyzed at the For the first case and the total portfolio, there were three exceptions in 2012 of VaR at 99% (days when the daily loss was higher than the VaR), as was previously commented23.
BACKTESTING OF BUSINESS PORTFOLIOS: DAILY RESULTS VERSUS PREVIOUS DAY’S VALUE AT RISK (Million euros)
Various stress scenarios were calculated and analyzed regularly in 2012 (at least every month) at the local and global levels for all the trading portfolios and using the same suppositions by risk factor. Maximum volatility scenario (Worst Case) This scenario is given particular attention as it combines historic movements of risk factors with an ad hoc analysis in order to reject very unlikely combinations of variations (for example, sharp falls in stock markets together with a decline in volatility). Regarding the variations, an historic volatility equivalent to six typical deviations is applied. The scenario is defined by taking each risk factor the movements which represents the greatest potential loss in the portfolio, rejecting the most unlikely combinations in economic-financial terms. For year-end, that scenario implied, for the global portfolio, interest rate rises in Latin American markets and falls in core markets (“flight into quality”), declines in stock markets, depreciation of all currencies against the euro, greater volatility and credit spreads. The table below shows the results of this scenario at the end of 2012. The stress test shows that the economic loss suffered by the Group in its trading portfolios, in terms of the Mark-to-Market (MtM) result, would be, if the stress movements defined in the scenario materialized, €147.9 million, a loss that would be concentrated in Latin America (interest rates and equities) and Europe (credit spreads, exchange rate and interest rate). MAXIMUM VOLATILITY STRESS SCENARIO (WORST CASE)
Other global stress test scenarios Various global scenarios (similar for all the Group’s units) are established: Abrupt crisis: ad hoc scenario with very sudden movements in markets. Rise in interest rate curves, sharp falls in stock markets, large appreciation of the dollar against the rest of currencies, rise in volatility and in credit spreads. Crisis 11S: historic scenario of the September 11, 2001 attacks with a significant impact on the U.S. and global markets. It is sub-divided into two scenarios: 1) maximum accumulated loss until the worst moment of the crisis, and 2) maximum loss in a day. In both cases, there are drops in stock markets and in interest rates in core markets and rises in emerging markets, and the dollar appreciates against the rest of currencies. Subprime crisis. Historic scenario of the U.S. mortgage crisis. The objective of the analysis is to capture the impact on results of the reduction in liquidity in the markets. The scenarios have two time frames (one day and 10 days): in both cases there are drops in stock markets and in interest rates in core markets and rises in emerging markets, and the dollar appreciates against the rest of currencies. Sovereign crisis: the severest historic scenario by the Committee of European Banking Supervisors (CEBS) to measure the market’s shock capacity between April 15 and September 1, 2010. Given the Group’s international sphere, four geographic zones are distinguished (US, Europe, Latin America and Asia), interest rate rises, falls in stock markets and volatilities are established, rises in credit spreads and depreciation of the euro and Latin American currencies and appreciation of Asian currencies against the dollar. Every month a consolidated stress test report is drawn up with explanations of the main changes in results for the various scenarios and units supervised by the global committee of market risks. An early warning mechanism has also been established so than when the loss of a scenario is high in historic terms and/or the capital consumed by the portfolio in question, the business executive is informed. Here we show the results of the global scenarios for 2011 and 2012. STRESS TEST RESULTS : COMPARISON OF THE 2011 AND 2012 (ANNUAL AVERAGES) 2. Non-Trading Activity24
Europe and the United States Generally, in these mature markets and in a context of low interest rates, the general positioning has been to maintain balance sheets with positive sensitivity to interest rate rises, both for the net interest margin (NIM) as well as for the economic value (market value of equity, MVE). In any case, the exposure level in all countries is very low in relation to the annual budget and the amount of equity. At the end of 2012, the sensitivity of the NIM at one year to parallel rises of 100 basis points was concentrated in the euro interest rate curve, the U.S. dollar and sterling, with the parent bank, the U.S. subsidiary and Santander At the same date, the main sensitivity of equity to parallel rises in the yield curve of 100 basis points was in the euro interest rate curve in the parent bank (€527 million). Regarding the dollar and sterling curves, the amounts were $297 million and £215 million, respectively. Latin America Due to differences in the macroeconomic context and the degree of maturity of these markets, the positioning with regard to the NIM was not homogeneous. There are countries with balance sheets positioned for interest rate rises and others for interest rate falls. With regard to MVE, the general positioning of the balance sheets was such that the average duration of the asset was higher than that of the liability (negative sensitivity to interest rate rises). In any case, the exposure level in all countries is very low in relation to the annual budget and the amount of equity. EVOLUTION OF THE LATIN AMERICA STRUCTURAL INTEREST RISK PROFILE Sensitivity of NIM and MVE to 100 basis points million euros
For Latin America as a whole, the consumption of risk as of December 2012, measured to 100 basis points of the financial margin25, stood at €89 million (€79 million at December 2011). It can be seen from the chart below that over 95% of the risk was concentrated in three countries: Brazil, Chile and Mexico. NIM SENSITIVITY BY COUNTRIES TO 100 BASIS POINTS % of the total At the end of December 2012, risk consumption for the region, measured to 100 basis points of asset value26, was €916 million (€957 million as of December 2011). Over 95% of the asset value risk was concentrated in the same three countries: Brazil, Chile y Mexico. MVE SENSITIVITY BY COUNTRIES TO 100 BASIS POINTS % of the total
The gap tables show the risk maturity structure in Latin America at the end of 2012. LATIN AMERICA: REPRICING GAP OF INTEREST RATES* (December 31, 2012) Million euros
Structural interest rate VaR of the balance sheet As well as sensitivity to interest rate movements, Santander uses other methods to monitor the structural interest rate risk of the balance sheet including analysis of scenarios and calculation of the VaR, using methodology similar to that used for the trading portfolios. The table below shows the average, minimum, maximum and year-end values of the VaR of structural interest rate risk. BALANCE SHEET STRUCTURAL INTEREST RATE RISK (VAR) VaR at 99%, with a time frame of one day. Million euros
The structural interest rate risk, measured in VaR terms at one day and at 99%, was an average of €446.4 million in 2012. The contribution to it of the balances of Europe and the U.S. was greater than that of Latin America. Of note was the high diversification between both areas. D.2. Structural exchange-rate risk/hedging of results Structural exchange rate risk arises from Group operations in currencies, mainly related to permanent financial investments, and the results and hedging of these investments. This management is dynamic and seeks to limit the impact on equity of currency depreciations and optimize the financial cost of hedging. As regards the exchange rate risk of permanent investments, the general policy is to finance them in the currency of the investment provided the depth of the market allows it and the cost is justified by the expected depreciation. One-off hedging is also done when a local currency could weaken against the euro beyond what the market estimates. At the end of 2012, the largest exposures of a permanent nature (with potential impact on equity value) were concentrated in Brazilian reales, followed by sterling, U.S. dollars, Mexican pesos, Chilean pesos and Polish zlotys. The Group covers part of these positions of a permanent nature with exchange rate derivatives. In addition, financial management at the consolidated level is responsible for exchange rate management of the Group’s expected results and dividends in those units whose currency is not the euro. D.3. Structural equity risk Santander maintains equity positions in its banking book in addition to those of the trading portfolio. These positions are maintained as portfolios available for sale (capital instruments) or as equity stakes, depending on their envisaged time in the portfolio. These positions are exposed to market risk. VaR calculations are made for these positions, using market price series for listed shares and proxies for those that do not. At the end of 2012, the VaR at 99% with a one day time frame was €281.4 million (€305.7 million and €218.5 million at the end of 2011
Figures in millions of EUR
The diversification effect is calculated as the sum of the individual or “stand alone” VaR of each portfolio minus the total VaR of the consolidated portfolio. We calculate the VaR for full revaluation (individual pricers for each position) or second-order Taylor approximation for the most complex portfolios. We include several individual factors such as each interest rate curve involved, individual share prices, currencies and volatility matrices. For reporting purposes, we group them based on the primary factor (interest rate, equity, foreign exchange, credit spread and commodities). Our daily VaR (considering each factor of interest rate risk, foreign exchange rate risk and equity price risk individually) were as set forth below.
Interest Rate Risk Figures in millions of EUR
Foreign Exchange Rate Risk Figures in millions of EUR
Equity Price Risk Figures in millions of EUR
The Group’s daily VaR estimates by activity were as set forth below. Figures in millions of EUR
Grupo Santander had, at the end of 2011, approval from the Bank of Spain for its internal market risk model for calculating regulatory capital in the trading portfolios of units in Spain, Chile, Mexico and Portugal. The Group’s objective is to gradually increase approval to the rest of units. The regulatory capital consolidated by the internal model of market risks for Grupo Santander is obtained by adding the regulatory capital of each of the units for which there is the corresponding Bank of Spain approval. A conservative criterion is used for consolidating the Group’s capital, as it does not take into account the savings in capital derived from the diversification impact among various countries. As a result of this approval, the regulatory capital of trading activity for the commented perimeter is calculated via advanced methods, using VaR as the fundamental metric, the stressed VaR and the incremental risk charge (IRC), in line with the new capital requirements demanded by the Basel agreements. We closely co-operate with the Bank of Spain in order to advance in the perimeter susceptible of entering into the internal model (at the geographic and operational levels), as well as in analysis of the impact of new requirements, in line with the documents published by the Basel Committee to strengthen the capital of banks. Item Not Applicable Not Applicable Not Applicable Our Depositary is J.P. Morgan Chase & Co., with its principal executive office located at 270 Park Avenue, New York, NY 10017-2070. Each ADS represents the right to receive one share of Capital Stock of Santander, par value €0.50 each.
Fees charged to investors as outlined in the deposit agreement are the following:
Fees received from our depositary in connection with the ADR program are the following: Contract amount: Fixed: $3,720,283.56 Variable: $1,156,594.70 Total: $4,876,878.26 Actually paid: Fixed: $3,720,283.56 Variable: $0 Total: $3,720,283.56 Waived fees: Ongoing program maintenance per contract year: $150,000 Annual meeting services: $15,000 Investor Relations advisory services: $185,000 Total: $350,000
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As of December 31, Based on such evaluation, Banco Santander, S.A.’s chief executive officer, chief financial officer and chief accounting officer concluded that Banco Santander, S.A.’s disclosure controls and procedures are effective in ensuring that information Banco Santander, S.A. is required to disclose in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to Banco Santander, S.A.’s management, including its disclosure committee, chief executive officer, chief financial officer and the chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.
The management of Banco Santander, S.A. is responsible for establishing and maintaining an adequate internal control over financial reporting as defined in Rule 13a-15 (f) under the Exchange Act. Our internal control over financial reporting is a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. For Banco Santander, S.A., generally accepted accounting principles refer to the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”). Our internal control over financial reporting includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We have adapted our internal control over financial reporting to the most rigorous international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission in its Enterprise Risk Management Integrated Framework. These guidelines have been extended and installed in our Group companies, applying a common methodology and standardizing the procedures for identifying processes, risks and controls, based on the Enterprise Risk Management Integrated Framework. The documentation, update and maintenance processes in the Group’s companies have been constantly directed and monitored by a global coordination team, which set the guidelines for its development and supervised its execution at the unit level. The general framework is consistent, as it assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes. Under the supervision and with the participation of the management of the Group, including our chief executive officer, our chief financial officer and our chief accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, Our independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, (c)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Banco Santander, S.A.: We have audited the internal control over financial reporting of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”) as of December 31, We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated financial statements as of and for the year ended December 31, /s/ Deloitte, S.L. DELOITTE, S.L. Madrid, Spain April
(d) Item 16A. Audit committee financial expert The audit and compliance committee has four members, all of whom are non-executive independent directors (as defined by Article 6.2 c) of the Rules and Regulations of the Board). All members of the audit and compliance committee also meet the independence criteria set by the NYSE for foreign private issuers. Our Rules and Regulations of the Board provide that all members of the audit and compliance must have knowledge, aptitude and experience in the areas of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Manuel Soto. Our standards for director independence may not necessarily be consistent with, or as stringent as, the standards for director independence established by the NYSE. Our board of directors has determined that Manuel Soto is an “Audit Committee Financial Expert” in accordance with SEC rules and regulations. We have adopted a code of ethics (the “General Code of Conduct”) that applies to members of the board and to all employees of Banco Santander, S.A. and of the Grupo Santander companies, notwithstanding the fact that certain persons are also subject to the Code of Conduct in Securities Markets or to other Codes of Conduct related specifically to the activity or lines of business in which they undertake their responsibilities. This Code establishes the principles that guide these officers’ and directors’ respective actions: ethical conduct, professional standards and confidentiality. It also establishes the limitations and defines the conflicts of interest arising from their status as senior executives or directors. In 2012, a new General Code of Conduct The current General Code of Conduct set an open door policy by which any Grupo Santander employee who becomes aware of an allegedly unlawful act or an act in breach of the General Code of Conduct or of our business specific codes and manuals may report such act directly to compliance management. This Code is available on our website, which does not form part of this annual report on Form 20-F, atwww.santander.comunder the heading “Information for shareholders and investors—corporate governance—codes of conduct”.
Item 16C. Principal Accountant Fees and Services Amounts paid to the firms belonging to the Deloitte worldwide organization, the Group’s principal auditor, for statutory audit and other services were as follows
The services commissioned from the Group’s auditors meet the independence requirements stipulated by the Legislative Royal Decree 1/2011, of 1 July, The audit and compliance committee is required to pre-approve the audit and non-audit services performed by the Group’s auditors in order to assure that the provision of such services does not impair the audit firm’s independence. In the first months of each year the audit and compliance committee proposes to the board the appointment of the independent auditor. At that moment, the audit and compliance committee pre-approves the audit and audit related services that the appointed auditors will be required to carry out during the year to comply with the applicable regulation. These services will be included in the correspondent audit contracts of the Bank and of any other company of the Group with its principal auditing firm. In addition, non-recurrent audit or audit-related services and all non-audit services provided by the Group’s principal auditing firm or other auditing firms are subject to case-by-case pre-approval by the audit and compliance committee. All services provided by the Group’s principal auditing firm in
Item 16D. Exemption from the Listing Standards for Audit Committees Not applicable. Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table shows the repurchases of shares made by the Bank or any of its Affiliated Purchasers during
During Item 16F. Changes in Registrant’s Certifying Accountant Not applicable Item 16G. Corporate Governance The following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the NYSE listing standards. Independence of the directors on the board of directors Under the NYSE corporate governance rules, a majority of the board of directors must be composed of independent directors, the independence of whom is determined in accordance with highly detailed rules promulgated by the NYSE. Spanish law does not contain any such requirements although there is a non-binding recommendation for listed companies in Spain that the number of independent directors be at least one third of the total size of the Board. Article 42.1 of our Bylaws establishes that the shareholders at the general shareholders’ meeting shall endeavor to ensure that independent directors represent at least one-third of the total number of directors. Article 6.1 of the Rules and Regulations of the Board of Directors establishes likewise that the board shall endeavor that the number of independent directors represent at least one-third of all directors. The board of directors of Santander has eight independent directors (out of sixteen directors total), as defined in Article 6.2.c) of the Rules and Regulations of the Board. We have not determined whether or not the directors on the Santander board would be considered independent under the NYSE rules except in the case of the members of our audit and compliance committee where we have determined that all of them meet the NYSE independence criteria for foreign private issuers. Article 6.2.c) of the Rules and Regulations of the Board defines the concept of an independent director as follows: “External or non-executive Directors who have been appointed based on their personal or professional status and who perform duties not conditioned by relationships with the Company, or with the significant shareholders or management thereof shall be considered independent directors.
In no event may there be a classification as independent directors of those who: a) Have been employees or executive directors of the Group’s companies, except after the passage of 3 or 5 years, respectively, since the cessation of such relationship. b) Receive from the Company, or from another Group company, any amount or benefit for something other than director compensation, unless it is immaterial. For purposes of the provisions of this sub-section, neither dividends nor pension supplements that a director receives by reason of the director’s prior professional or employment relationship shall be taken into account, provided that such supplements are unconditional and therefore, the Company paying them may not suspend, modify or revoke the accrual thereof without breaching its obligations. c) Are, or have been during the preceding 3 years, a partner of the external auditor or the party responsible for auditing the Company or any other Group company during such period. d) Are executive directors or senior managers of another company in which an executive director or senior manager of the Company is an external director. e) Maintain, or have maintained during the last year, a significant business relationship with the Company or with any Group company, whether in their own name or as a significant shareholder, director or senior manager of an entity that maintains or has maintained such relationship. Business relationships shall be considered the relationships of a provider of goods or services, including financial, advisory or consulting services. f) Are significant shareholders, executive directors or senior managers of an entity that receives, or has received during the preceding 3 years, significant donations from the Company or the Group. Those who are merely members of the board of a foundation that receives donations shall not be considered included in this letter. g) Are spouses, persons connected by a similar relationship of affection, or relatives to the second degree of an executive director or senior manager of the Company. h) Have not been proposed, whether for appointment or for renewal, by the appointments and remuneration committee. i) Are, as regards a significant shareholder or shareholder represented on the board, in one of the circumstances set forth in letters (i), (v), (vi) or (vii) of this sub-section 2(c). In the event of a kinship relationship set forth in item (vii), the limitation shall apply not only with respect to the shareholder, but also with respect to the related proprietary directors thereof in the affiliate company”.
Independence of the directors on the audit and compliance committee Under the NYSE corporate governance rules, all members of the audit committee must be independent. Independence is determined in accordance with highly detailed rules promulgated by the NYSE. Such independence criteria are met by all members of our audit and compliance committee. The audit and compliance committee of the board of directors of Santander is composed of four directors. All members are non-executive independent directors and its chairman is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. Under Spanish law, a majority of the members and the chairman of the audit committee must be non-executive. The composition of the audit and compliance committee is described under “—Audit and compliance committee and appointments and remuneration committee”.
Independence of the directors on the appointments and remuneration committee In accordance with the NYSE corporate governance rules, all During the fiscal year Separate meetings for non-management directors In accordance with the NYSE corporate governance rules, non-management directors must meet periodically outside of the presence of management. Under Spanish law, this practice is not required and as such, the non-management directors on the board of directors of Santander do not meet outside of the presence of the directors who also serve in a management capacity. The audit and compliance committee and the appointments and remuneration committee of the Bank’s board of directors consist entirely of non-management independent directors. The audit and compliance committee and the appointments and remuneration committee met Code of ethics Under the NYSE corporate governance rules, all In 2012, a new General Code of Conduct The current General Code of Conduct set an open door policy by which any Grupo Santander employee who becomes aware of an allegedly unlawful act or an act in breach of the General Code of Conduct or of our business specific codes and manuals may report such act directly to compliance management. As of December 31, In addition, the Group abides by a Code of Conduct in the Securities Markets, which was updated on July 28, 2003. This code establishes standards and obligations in relation to securities trading, conflicts of interest and the treatment of price sensitive information. Both codes are available to the public on our website, which does not form part of this annual report on Form 20-F, atwww.santander.com under the heading “Information for shareholders and investors—corporate governance—codes of conduct”.
Item 16H. Mine Safety Disclosure Not applicable.
Item We have responded to Item 18 in lieu of this item. Item Reference is made to Item 19 for a list of all financial statements filed as part of this Form 20-F. (a) Index to Financial Statements
(b) List of Exhibits.
We will furnish to the SEC, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Santander.
SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Banco Santander, S.A.: We have audited the accompanying consolidated balance sheets of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”), as of December 31, 2012, 2011, We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2012, 2011, We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Group’s internal control over financial reporting as of December 31, /s/ Deloitte, S.L. DELOITTE, S.L.
April
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2012, 2011 (Millions of Euros)
CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (Millions of Euros)
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31,
CONSOLIDATED STATEMENTS OF RECOGNISED INCOME FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 (Millions of Euros)
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated
CONSOLIDATED STATEMENTS OF FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 (Millions of Euros)
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated
SANTANDER GROUP CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 (Millions of Euros)
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated
SANTANDER GROUP CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 (Millions of Euros)
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated
CONSOLIDATED STATEMENTS OF FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 (Millions of Euros)
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated
Banco Santander, S.A. and Companies composing Notes to the for the year ended December 31,
Banco Santander, S.A. (“the Bank” or Banco Santander) is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. The Bylaws and other public information on the Bank can be consulted on thewebsite of the Bank (www.santander.com) and at its registered office at Paseo de Pereda 9-12, Santander. In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, Santander Group (“the Group” or Santander Group). Therefore, the Bank is obliged to prepare, in addition to its own separate financial statements, the Group’s consolidated financial statements, which also include the interests in joint ventures and investments in associates.
Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the Law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with the International Financial Reporting Standards In order to adapt the accounting system of Spanish credit institutions to the new standards, the Bank of Spain issued Circular 4/2004, of December 22, on Public and Confidential Financial Reporting Rules and Formats. The Group’s consolidated financial statements for The notes to the consolidated financial statements contain supplementary information to that presented in the consolidated balance sheet, consolidated income statement, consolidated statement of recognized income and expense, consolidated statement of changes in total equity and consolidated statement of cash flows. The notes provide, in a clear, relevant, reliable and comparable manner, narrative descriptions and breakdowns of these financial statements.
Adoption of new standards and interpretations issued The following standards and interpretations came into force and were adopted by the European Union in
Amendment to IFRS 7, Financial Instruments: Disclosures (obligatory for reporting periods beginning on or after July 1, 2011) - Transfers of Financial Assets. IFRS 7 reinforces the disclosures on transfers of financial assets that are not derecognized or, principally, those that qualify for derecognition but in which the entity still has continuing involvement. Amendment to IAS
The application of the aforementioned accounting standards
IFRS 10, Consolidated Financial Statements (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - this standard supersedes the current IAS 27 and SIC 12, and introduces a single control-based consolidation model, irrespective of the nature of the investee. IFRS 10 modifies the current definition of control. The new definition of control sets out the following three elements of control: power over the investee; exposure, or rights, to variable returns from involvement with the investee; and the ability to use power over the investee to affect the amount of the investor’s returns. IFRS 11, Joint Arrangements (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - this standard supersedes the current IAS 31. The fundamental change introduced by IFRS 11 with respect to the current standard is the elimination of the option of proportionate consolidation for jointly controlled entities, which will begin to be accounted for using the equity method. IFRS 12, Disclosure of Interests in Other Entities (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - this standard represents a single standard presenting the disclosure requirements for interests in other entities (whether they be subsidiaries, associates, joint arrangements or other interests) and includes new disclosure requirements. The objective of this standard is to require an entity to disclose information that enables users of its financial statements to evaluate the The Group is currently analyzing the possible effects of the aforementioned standards (IFRSs 10, 11 and 12 ). Based on the analysis performed to date, the Group does not expect the application of these standards to have a material effect on the consolidated financial statements. IFRS Amendments to IAS 1, Presentation of Items of Other Comprehensive Income (obligatory for reporting periods beginning on or after July 1, Amendments to IAS 19, Employee Benefits (obligatory for reporting periods beginning on or after January 1, 2013) - these amendments eliminate the “corridor” under which entities are currently able to opt for deferred recognition of a given portion of actuarial gains and losses, establishing that when the amendments come into effect, all actuarial gains and losses must be recognized immediately. The amendments include significant changes in the presentation of cost components, as a result of which the service cost relating to post-employment benefit obligations (past service cost and plan curtailments and settlements) and net interest cost will be recognized in profit or loss and the remeasurement component (comprising basically actuarial gains and losses) will be recognized in Equity - Valuation adjustments and may not be reclassified to profit or loss. The Bank’s directors consider that, had this standard been applied at December 31, 2012, equity would have been reduced by EUR 3,051 million due mainly to the elimination of the “corridor”. In accordance with IAS 8, these amendments entail a change of accounting policy and, accordingly, they must be applied retrospectively from January 1, 2013, by adjusting the beginning balances of equity for the earliest period presented as though the new accounting policy had always been applied. Amendments to IAS 27 and IAS 28 (revised) (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - these amendments reflect the changes arising from the new IFRS 10 and IFRS 11 described above. Amendments to IAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - these amendments introduce a series of additional clarifications on the requirements Amendments to IFRS 7, Offsetting Financial Assets and Financial Liabilities (obligatory for reporting periods beginning on or after January 1, 2013) - these amendments introduce new disclosures for financial assets IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine - in view of its nature, this interpretation does not Lastly, at the date of preparation of these consolidated financial statements, the following
IFRS 9, Financial Instruments: Classification and Measurement (obligatory as from January 1, 2015), which will in the future replace the part of the current IAS 39 relating to the classification and measurement of financial assets. IFRS 9 presents significant differences regarding financial assets with respect to the current standard, including the approval of a new classification model based on only two categories, namely instruments measured at
Investment companies: Amendments to IFRS 10, IFRS 12
The Group is currently All accounting policies and measurement bases with a material effect on the
The consolidated results and the determination of consolidated equity are sensitive to the accounting policies, measurement bases and estimates used by the directors of the Bank in preparing the consolidated financial statements. The main accounting policies and measurement bases are set forth in Note 2. In the consolidated financial statements estimates were occasionally made by the senior management of the Bank and of the consolidated entities in order to quantify certain of the assets, liabilities, income, expenses and
The impairment losses on certain assets (see Notes 6, 7, 8, 10, 12, 13, 16, 17 and 18);
The assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments and other obligations (see Note 25);
The useful life of the tangible and intangible assets (see Notes 16 and 18);
The measurement of goodwill arising on consolidation (see Note 17); and
The fair value of certain unquoted assets and liabilities (see Notes 6, 7, 8, 9, 10, 11, 20, 21 and 22).
i. Disputed corporate resolutions The directors of the Bank and its legal advisers consider that the objection to certain resolutions adopted by the Bank’s shareholders at the general meetings The status of these matters at the date of preparation of the consolidated financial statements is detailed below: On April 25, 2002, the Santander Court of First Instance number 1 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on January 18, 2000. The plaintiff filed an appeal against the judgment. On December 2, 2002, the Cantabria Provincial Appellate Court dismissed the appeal. The Bank appeared as a party to the cassation appeal and filed pleadings with respect to the inadmissibility of the appeal. In the Order dated November 4, 2008 the Supreme Court considered the appeal to have been withdrawn in view of the decease of the appellant and the failure to appear of his heirs.
On November 29, 2002, the Santander Court of First Instance number 2 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on March 4, 2000. The plaintiffs filed an appeal against the judgment. On July 5, 2004, the Cantabria Provincial Appellate Court dismissed the appeal. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of July 31, 2007. On March 12, 2002, the Santander Court of First Instance number 4 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on March 10, 2001. The plaintiffs filed an appeal against the judgment. On April 13, 2004, the Cantabria Provincial Appellate Court dismissed the appeals. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of November 6, 2007. On September 9, 2002, the Santander Court of First Instance number 5 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on February 9, 2002. The plaintiff filed an appeal against the judgment. On January 14, 2004, the Cantabria Provincial Appellate Court dismissed the appeal. The appellant prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of May 8, 2007. On May 29, 2003, the Santander Court of First Instance number 6 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on June 24, 2002. The plaintiffs filed an appeal against the judgment. On November 15, 2005, the Cantabria Provincial Appellate Court dismissed the appeal in full. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment. The Bank appeared as a party to the two appeals and filed pleadings with respect to the inadmissibility thereof. In the order dated September 23, 2008 the Supreme Court refused leave to proceed with the aforementioned appeals. On November 23, 2007, the Santander Court of First Instance number 7 dismissed in full the claims contesting the resolutions adopted by the shareholders at the annual general meeting on June 21, 2003. The plaintiffs filed an appeal against the judgment. The court was notified of the decease of one of the appellants and the court considered his appeal to have been withdrawn on the grounds of his decease and the failure to appear of his heirs. The other three appeals filed were dismissed in full by the Cantabria Provincial Appellate Court on June 30, 2009. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against this judgment, and the appeal filed by one of the three appellants was refused leave to proceed by the Provincial Appellate Court. The cassation appeals filed against the judgments that dismissed the claims contesting the resolutions adopted at the annual general meeting on June 21, 2003 were not given leave to proceed by order of the Supreme Court of January 25, 2011. On October 28, 2005, the Santander Court of First Instance number 8 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on June 19, 2004. The plaintiffs filed an appeal against the judgment. In a On July 13, 2007, the Santander Court of First Instance number 10 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on June 18, 2005. The plaintiffs filed an appeal against the judgment. In a judgment dated May 14, 2009 the Cantabria Provincial Appellate Court dismissed the appeals in full.
ii. Credit assignment transactions Following the prolonged investigations carried out since 1992 by the Madrid Central Examining Court number 3, and the repeated applications by the Public Prosecutor’s Office and the Government Lawyer, as the representative of the Public Treasury, to have the case against the Bank and its executives dismissed and struck off, the trial commenced at Panel One of the Criminal Chamber of the National Appellate Court and after the debate on preliminary issues was held at the end of November 2006, without the appearance of the Government Lawyer, in which the Public Prosecutor’s Office reiterated its appeal to set aside the trial and interrupt the proceedings, on December 20, 2006, the Criminal Chamber of the National Appellate Court ordered the dismissal of the proceedings, as requested by the Public Prosecutor’s Office and the private prosecution. A cassation appeal was filed against the aforementioned order by the Association for the Defence of Investors and Customers and Iniciativa per Catalunya Verds and, following the opposition by the Public Prosecutor’s Office, the Government Lawyer and the remaining appearing parties, it was dismissed by a Supreme Court decision handed down on December 17, 2007. In an interlocutory order of April 15, 2008, the Supreme Court dismissed the request filed by the Association for the Defence of Investors and Customers for the decision handed down in the judgment of December 17, 2007 to be set aside. The appeal filed by the Association for the Defence of Investors and Customers against the aforementioned Supreme Court decision was given leave to proceed by the Spanish Constitutional Court, and the appearing parties
i. Regulatory and economic capital The Group’s capital management is performed at regulatory and economic levels. Regulatory capital management is based on the analysis of the capital base, The regulations on the calculation and control of minimum capital requirements in Spain have been implemented, since June 2008, by Bank of Spain Circular 3/2008, which adapts Spanish legislation to European Directives 2006/48 and 2006/49 (known as Capital Requirements Directives, or CRD I), which include, inter alia, provisions equivalent to those defined in the Basel II framework agreement. This regulatory framework is based on three pillars. Pillar I sets out the minimum capital requirements to be met, and provides for the possibility of using internal ratings and models (IRB approach) in the calculation of risk-weighted exposures and including operational risk therein. The aim is to render regulatory requirements more sensitive to the risks actually borne by entities in carrying on their business activities. Pillar II establishes a supervisory review system to improve internal risk management and internal capital adequacy assessment based on the risk profile. Lastly, Pillar III defines the elements relating to disclosures and market discipline. In July 2009, the Basel Committee on Banking Supervision published a reform of the Basel II framework which raised the regulatory capital requirements for the trading book and complex securitization exposures, known as Basel 2.5. At European level, these greater requirements were reflected in Directive 2009/111 (CRD II) and 2010/76 (CRD III), which were in turn included in Bank of Spain Circular 03/2008 through Circular 4/2011. In December 2010, the Committee on Banking Supervision published a new global regulatory framework in order to strengthen international capital standards (Basel III), by enhancing the quality, consistency and transparency of the capital base and improving risk coverage. This framework is scheduled for inclusion in European legislation in the near future through a new European Directive (CRD IV) and European Regulation (CRR) which will be directly applicable to the Member States. In December 2011, the European Banking Authority (EBA) published new capital requirements for the main European credit institutions. These requirements are part of a package of measures adopted by the European Council in the second half of 2011 with the aim of restoring stability and confidence in the European markets. At June 30, 2012, the institutions selected for the EBA sample were required to have a Tier 1 core capital ratio, determined on the basis of EBA rules, of at least 9%. These capital requirements are expected to be of an exceptional and temporary nature. In Spain, Royal Decree-Law 2/2011 was approved on February 18, 2011, establishing the implementing regulations of the “Plan for Strengthening the Financial Sector”, which aimed, inter alia, to establish in advance certain capital requirements, established by Basel III, by setting a principal capital requirement of 8% or 10%, depending on the characteristics of each entity. Also, Royal Decree-Law 2/2012, on the clean-up of the financial sector, was published on February 3, 2012, setting forth additional principal capital requirements to be met by entities based on certain levels of assets relating to the property industry. Lastly, Law 9/2012, on restructuring and resolution of credit institutions, was published on November 14, 2012, which established, effective from January 1, 2013, a single principal capital requirement of 9%, phasing in both the eligible instruments and deductions with those used by the European Banking Authority. Law 9/2012 was partially implemented by Bank of Spain Circular 7/2012, on minimum principal capital requirements. At December 31, 2012, the Group met all the minimum capital requirements established by current legislation and those set forth in the EBA’s recommendation. From an economic standpoint, capital management seeks to In order to adequately manage the Group’s capital, it is essential to estimate and In addition, certain stress scenarios are simulated in order to assess the availability of capital in adverse situations. These scenarios are based on sharp fluctuations in macroeconomic variables, GDP, interest rates, values of equity instruments, etc. that mirror historical crises that could happen
Accordingly, the Group continued in The Group has obtained As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, Lastly, as part of the Basel 2.5 requirements, regulatory approval was obtained for the Group’s corporate methodology, enabling Santander Group to calculate, for the market risk of the trading book, the incremental default and migration risk charge (IRC) and stressed value at risk (Stressed VaR). With regard to operational risk, the Group considers that the internal model should be developed primarily on the basis of the experience accumulated in managing the entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature of Santander Group. The Group has performed numerous acquisitions in recent years and, as a result, a longer maturity period
In view of the business activities carried on by the Group entities, the Group does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.
It should be noted that from January 1,
On March 22, 2013 and March 21, 2013, the general shareholders meetings of the Bank and Banesto, respectively, approved the terms of the merger. As of the date of this annual report on Form 20-F the mergers of Banesto and Banif with the Bank are subject to the condition precedent of authorization of the Minister of Economy and Competitiveness (see Note 3.b.xvii). On March 18, 2013, KBC and Banco Santander announced a secondary offering of up to 19,978,913 shares
The placement of these shares would allow Banco Santander to fulfill its commitment towards the
KBC and Banco Santander, as Selling Shareholders, will grant the The Offering was made to eligible institutional investors and within an indicative price range of PLN240 to PLN270. The final sale price was determined through a bookbuilding process that began on March 18, 2013, and ended on March 21, 2013. On March 22, 2013, we announced that Banco Santander and KBC Bank had completed the placement of 19,978,913 shares of Bank Zachodni WBK at a final price of 245 zlotys per share, amounting to a total of €1,171 million. Santander sold 4,852,949 shares, equal to 5.2% of BZ WBK’s capital, for €285 million, while KBC obtained €887 million for its 16.17% stake in BZ WBK. On January 29, 2013, Metrovacesa’s shareholders approved the company’s delisting tender offer. On April 18, 2013, the CNMV authorized the delisting tender offer, which will
The accounting policies
The Group’s functional currency is the euro. Therefore, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in foreign currency.
Foreign currency balances are translated to euros in two consecutive stages:
Translation of foreign currency to the functional currency (currency of the main economic environment in which the entity operates), and
Translation to euros of the balances held in the functional currencies of entities whose functional currency is not the euro.
Translation of foreign currency to the functional currency Foreign currency transactions performed by consolidated entities (or entities accounted for using the equity method) not located in EMU countries are initially recognized in their respective currencies. Monetary items in foreign currency are subsequently translated to their functional currencies using the closing rate. Furthermore:
Non-monetary items measured at historical cost are translated to the functional currency at the exchange rate at the date of acquisition.
Non-monetary items measured at fair value are translated at the exchange rate at the date when the fair value was determined.
Income and expenses are translated at the average exchange rates for the year for all the transactions performed during the year. When applying this criterion, the Group considers whether there have been significant changes in the exchange rates in the year which, in view of their materiality with respect to the consolidated financial statements taken as a whole, would make it necessary to use the exchange rates at the transaction date rather than the aforementioned average exchange rates.
The balances arising from non-hedging forward foreign currency/foreign currency and foreign currency/euro purchase and sale transactions are translated at the closing rates prevailing in the forward foreign currency market for the related maturity. Translation of functional currencies to euros If the functional currency is not the euro, the balances in the financial statements of the consolidated entities (or entities accounted for using the equity method) are translated to euros as follows:
Assets and liabilities, at the closing rates.
Income and expenses, at the average exchange rates for the year.
Equity items, at the historical exchange rates.
The exchange differences arising on the translation of foreign currency balances to the functional currency are generally recognized at their net amount under Exchange differences in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized in the consolidated income statement without distinguishing them from other changes in fair value, and for exchange differences arising on non-monetary items measured at fair value through equity, which are recognized under Valuation The exchange differences arising on the translation to euros of the financial statements denominated in functional currencies other than the euro are recognized under Valuation
In 2009 the Group sold substantially all its businesses in Venezuela and at December 31,
In view of the foregoing, at December 31, 2012, 2011
At December 31, 2012, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling, the Mexican peso, the US dollar and the Chilean peso. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the US dollar and the Polish zloty. At December 31, 2011, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling, the Mexican peso, the Chilean peso, the Polish zloty and the US dollar. At that date, its largest At December 31, 2010, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling, the Mexican peso and the Chilean peso. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso, the US dollar and the Chilean peso.
The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36). The following tables show the sensitivity of consolidated profit and consolidated equity to changes in the Group’s foreign currency positions due to 1% variations in the various foreign currencies in which the Group has material balances. The estimated effect on the Group’s consolidated equity and consolidated profit of a 1% appreciation of the euro against the related currency is as follows:
Similarly, the estimated effect on the Group’s consolidated equity and consolidated profit of a 1% depreciation of the euro against the related currency is as follows:
The foregoing data were obtained by calculating the possible effect of a variation in exchange rates on the various asset and liability items, excluding the foreign exchange positions arising from goodwill, and on other foreign currency-denominated items, such as the Group’s derivative instruments, considering the offsetting effect of the various hedging transactions (mainly foreign currency options and foreign currency purchase and sale transactions) on these items. This effect was estimated using the exchange difference recognition methods set forth in Note 2.a) iii above. Also, the estimated effect on the Group’s consolidated equity of a 1% appreciation or depreciation of the euro against the foreign currencies in which goodwill is denominated at December 31, The estimates used to obtain the foregoing data were performed considering the effects of the exchange rate fluctuations in isolation from the effect of the performance of other variables, the changes in which would affect equity and profit, such as variations in the interest rates of the reference currencies or other market factors. Accordingly, all variables other than the exchange rate fluctuations were kept constant with respect to their positions at December 31, 2012, 2011
Subsidiaries are defined as entities over which the Bank has the capacity to exercise control; control is, in general but not exclusively, presumed to exist when the Parent owns directly or indirectly half or more of the voting power of the investee or, even if this percentage is lower or zero, when, as in the case of agreements with shareholders of the investee, the Bank is granted control. Control is the power to govern the financial and operating policies of an entity, as stipulated by the law, the Bylaws or agreement, so as to obtain benefits from its activities. The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all balances and effects of the transactions between consolidated entities are eliminated on consolidation. On acquisition of control of a subsidiary, its assets, liabilities and contingent liabilities are recognized at their acquisition-date fair Additionally, the share of third parties of the Group’s equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 28). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement.
The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are included in the consolidated income statement from the beginning of the year to the date of disposal. The Appendices contain
Joint ventures are deemed to be ventures that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more entities (venturers) acquire interests in entities (jointly controlled entities) or undertake operations or hold assets so that strategic financial and operating decisions affecting the joint venture require the unanimous consent of the venturers. In the consolidated financial statements, investments in jointly controlled entities are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with a jointly controlled entity are eliminated to the extent of the Group’s ownership interest in the entity. The Appendices contain
Associates
In the consolidated financial statements, investments in associates are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with an associate are eliminated to the extent of the Group’s interest in the associate. The Appendices contain
When the Group incorporates special purpose entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes, it determines, using internal criteria and procedures, and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated. These criteria and procedures take into account, inter alia, the risks and rewards retained by the Group and, accordingly, all relevant matters are taken into consideration, including any guarantees granted or any losses associated with the collection of the related assets retained by the Group. These entities include the securitization special purpose vehicles, which are fully consolidated in the case of the SPVs over which, based on the aforementioned analysis, it is considered that the Group continues to exercise control.
At December 31, In addition, at December 31, The impact of the consolidation of these companies on the Group’s consolidated financial statements is immaterial.
The company object of these entities is the acquisition of real estate and other general operations relating thereto, including the rental, purchase and sale of properties (see Appendices I and II).
A business combination is the bringing together of two or more separate entities or economic units into one single entity or group of entities. Business combinations whereby the Group obtains control over an entity are recognized for accounting purposes as follows:
The Group measures the cost of the business combination, which is normally the consideration transferred, defined as the acquisition-date fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity instruments issued, if any, by the acquirer. Since January 1, 2010, in cases where the amount of the consideration to be transferred has not been definitively established at the acquisition date, but rather depends on future events, any contingent consideration must be recognized as part of the consideration transferred and measured at its
The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognized by the acquiree, are estimated and recognized in the consolidated balance sheet; the Group also estimates the amount of any non-controlling interests and the fair value of the previously held equity interest in the acquiree.
Any positive difference between the aforementioned items is recognized as discussed in Note 2.m. Any negative difference is recognized under Gains Since January 1, 2010, goodwill is only measured and recognized once, when control is obtained of a business.
As required under IFRSs, since January 1, 2010, acquisitions and disposals not giving rise to a change in control are recognized as equity transactions, and no gain or loss is recognized in the income statement and the initially recognized goodwill is not remeasured. The difference between the consideration transferred or received and the decrease or increase in non-controlling interests, respectively, is recognized in reserves. Similarly, since that date, IAS 27 has established that when control over a subsidiary is lost, the assets, liabilities and non-controlling interests and any other items recognized in valuation adjustments of that company are derecognized from the consolidated balance sheet, and the fair value of the consideration received and of any remaining equity interest is recognized. The difference between these amounts is recognized in profit or loss. With respect to non-monetary contributions to jointly controlled entities, the IASB has acknowledged the existence of a conflict between IAS 27, which establishes that if control is lost the remaining equity interest is measured at fair value,
Note 3 provides information on the most significant acquisitions and disposals in 2012, 2011
A financial instrument is any contract that gives rise to a financial asset of one entity and An equity instrument is any agreement that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities. A financial derivative is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date. Hybrid financial instruments are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative. Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer). The following transactions are not treated for accounting purposes as financial instruments:
Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash and balances with central banks, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately. Financial assets are included for measurement purposes in one of the following categories:
Financial assets held for trading (at fair value through profit or loss): this category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.
Other financial assets at fair value through profit or loss: this category includes hybrid financial assets not held for trading that are measured entirely at fair value and financial assets not held for trading that are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or
Available-for-sale financial assets: this category includes debt instruments not classified as Held-to-maturity investments, Loans and receivables or Financial assets at fair value through profit or loss, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as Financial assets held for trading or as Other financial assets at fair value through profit or loss. Loans and receivables: this category includes the investment arising from ordinary lending activities, such as the cash amounts of loans drawn down and not yet repaid by customers or the deposits placed with other institutions, whatever the legal instrument, unquoted debt securities and receivables from the purchasers of goods, or the users of services, constituting part of the Group’s business. The consolidated entities generally intend to hold the loans and credits granted by them until their final maturity and, therefore, they are presented in the consolidated balance sheet at their
Held-to-maturity investments: this category includes debt instruments traded in an active market, with fixed maturity and with fixed or determinable payments, for which the Group has both the intention and proven ability to hold to maturity.
Financial assets are classified by nature into the following items in the consolidated balance sheet:
Cash and balances with central banks: cash balances and balances receivable on demand relating to deposits with the Bank of Spain and other central banks.
Loans and advances: includes the debit balances of all credit and loans granted by the Group, other than those represented by securities, as well as finance lease receivables and other debit balances of a financial nature in
Loans and advances to credit institutions: credit of any nature, including deposits and money market operations, in the name of credit institutions.
Loans and advances to customers: includes the remaining credit, including money market operations through central counterparties.
Debt instruments: bonds and other securities that represent a debt for their issuer, that generate an interest return, and that are in the form of certificates or book entries.
Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, unless they are investments in subsidiaries, jointly controlled entities or associates. Investment fund units are included in this item.
Trading derivatives: includes the fair value in
Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts credited to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are effectively hedged against interest rate risk through fair value hedging derivatives.
Hedging derivatives: includes the fair value in
Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Liabilities associated with non-current assets held for sale or they relate to Hedging derivatives or Changes in the fair value of hedged items in portfolio hedges of interest rate risk (liability side), which are reported separately. Financial liabilities are classified for measurement purposes into one of the following categories:
Financial liabilities held for trading (at fair value through profit or loss): this category includes the financial liabilities issued for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not considered to qualify for hedge accounting and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements (“reverse repos”) or borrowed (short positions).
Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when more relevant information is obtained, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or
Financial liabilities at
Financial liabilities are classified by nature into the following items in the consolidated balance sheet:
Deposits: includes all repayable balances received in cash by the Group, other than those instrumented as marketable securities and those having the substance of subordinated liabilities. This item also includes cash bonds and cash consignments received the amount of which may be invested without restriction. Deposits are classified on the basis of the creditor’s institutional sector into:
Deposits from central banks: deposits of any nature, including credit received and money market operations received from the Bank of Spain or other central banks.
Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.
Customer deposits: includes the remaining deposits, including money market operations through central counterparties. Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than those having the substance of subordinated liabilities. This item includes the component considered to be a financial liability of issued securities that are compound financial instruments.
Trading derivatives: includes the fair value, with a negative balance for the Group, of derivatives, including embedded derivatives separated from the host contract, which do not form part of hedge accounting.
Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements or borrowed.
Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Group which, although capital for legal purposes, do not meet the requirements for classification as equity, such as certain preference shares issued.
Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as doubtful.
Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts charged to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are effectively hedged against interest rate risk through fair value hedging derivatives.
Hedging derivatives: includes the fair value of the Group’s liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.
In general, financial assets and liabilities are initially recognized at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows:
Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those instruments. The fair value of a financial instrument on a given date is taken to be the amount for which it could be bought or sold on that date by two knowledgeable, willing parties in an arm’s length transaction acting prudently. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price). At December 31, If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it. All derivatives are recognized in the balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recognized in Gains/losses on financial assets and liabilities (net) in the consolidated income statement. Specifically, the fair value of financial derivatives traded in The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (present value or theoretical close) using valuation techniques commonly used by the financial markets: net present value (NPV), option pricing models and other methods.
Loans and receivables and Held-to-maturity investments are measured at The effective interest rate is the discount rate that exactly matches the carrying amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date. Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss. The amounts at which the financial assets are recognized represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, the Group has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under finance lease and full-service lease agreements, assets acquired under repurchase agreements, securities loans and credit derivatives.
In general, financial liabilities are measured at
The following table shows a summary of the fair values, at 2012, 2011
Financial instruments at fair value, determined on the basis of published price quotations in active markets (Level 1), include government debt securities, private-sector debt securities, derivatives traded in In cases where price quotations cannot be observed, management makes its best estimate of the price that the market would set using its own internal models. In most cases, these models use data based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). In order to make these estimates, various techniques are employed, including the extrapolation of observable market data. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates. In accordance with the standards in force The Group did not make any material transfers of financial instruments between one measurement method and another in
The The approval of new products follows a sequence of steps (request, development, validation, integration in corporate systems and quality assurance) before the product is brought into production. This process ensures that pricing systems have been properly reviewed and are stable before they are used. The following subsections set forth the most important financial instruments and families of derivatives, and the related valuation techniques and inputs, by asset class. Fixed income and inflation The fixed income asset class includes basic instruments such as interest rate forwards, interest rate swaps and These pricing models are fed with observable market data such as deposits, futures, cross currency swap and constant maturity swap rates as well as basis swap spreads. These data allow us to calculate different interest rate yield curves depending on the payment frequency and discounting curves for each currency. For derivative instruments, implied volatilities are also used as model inputs. These volatilities are observable in the The inflation asset class includes inflation-linked bonds and zero-coupon or Equity and foreign exchange The most important products in these asset classes are forward and futures contracts, which include vanilla, listed and OTC (over-the-counter) derivatives on single underlying assets and baskets of assets. Vanilla options are priced using the The inputs of foreign exchange models include the interest rate curve for each currency, the spot foreign exchange price and the implied volatilities and correlation among assets of this type. Volatilities are obtained from European vanilla call and put options which are quoted in markets as at-the-money, risk reversal or butterfly options. Illiquid currency pairs are usually handled by using the data of the liquid pairs from which Credit The most common instrument in this asset class is the Valuation inputs are the The fair value of financial instruments obtained from the aforementioned internal models takes into account, inter alia, the contract terms and observable market data, which include interest rates, credit risk, exchange rates, the quoted market price of commodities and shares, volatility and prepayments. The valuation models are not significantly subjective, since they can be adjusted and recalibrated, where appropriate, through the internal calculation of the fair value and the subsequent comparison with the related actively traded price. However, fair value adjustments may be necessary when market quoted prices are not available for comparison purposes. There are sources of risk such as uncertain model parameters, illiquid underlying issuers, low quality market data or missing risk factors (sometimes the best available option is to use limited models with controllable risk). In these situations, in keeping with common industry practice, the Group calculates and applies a valuation adjustment in order to account for the sources of model risk described below: For fixed income markets, examples of model risk include the correlation among fixed income indexes, the lack of stochastic basis spread modeling, calibration risk and volatility modeling. Other sources of risk arise from the estimation of market data. In equity markets, examples of model risk include forward skew modeling, the impact of stochastic interest rates, correlation and multi-curve modeling. Other sources of risk arise from the hedging management of digital, callable and barrier option payments. In addition, sources of risk arising from the estimation of market data such as dividends, and correlation for quanto and composite options must also be considered. For specific financial instruments relating to home mortgage loans granted by financial institutions in the UK (which are regulated and partially financed by the Government) and property asset derivatives, the Halifax House Price Index (HPI) is the main input. In these cases, assumptions include estimates of the future growth and the volatility of the HPI, mortality and the implied credit spreads. Inflation markets are exposed to model risk resulting from the uncertainty of modeling the correlation structure among various CPI (Consumer Price Index) rates. Another source of risk may arise from the bid-offer spread of inflation-linked swaps. Foreign exchange markets are exposed to model risk resulting from forward skew modeling, the impact of stochastic interest rates and correlation modeling for multi-asset instruments. Risk may also arise from market data, due to the existence of specific illiquid foreign exchange pairs. The most important source of model risk for credit derivatives relates to the estimation of the correlation between the probabilities of default of different underlying issuers. For illiquid underlying issuers, the CDS spread may not be well defined. Set forth below are the financial instruments at fair value whose measurement was based on internal models (Levels 2 and 3) at December 31, 2012, 2011
Valuation techniques Main assumptions ASSETS: Financial assets held for trading Loans and advances to credit institutions Present Value Method Observable market data Loans and advances to customers (b) Present Value Method Observable market data Debt and equity instruments Present Value Method Observable market data, HPI Trading derivatives Swaps Present Value Method, Gaussian Copula (c) Observable market data, basis, liquidity Exchange rate options Black-Scholes Model Observable market data, liquidity Interest rate options Black-Scholes Model, Heath-Jarrow-Morton Model Observable market data, liquidity, correlation Interest rate futures Present Value Method Observable market data Index and securities options Black-Scholes Model Observable market data, dividends, correlation, liquidity, HPI Other Present Value Method, Monte Carlo simulation and other Observable market data and other Hedging derivatives Swaps Present Value Method Observable market data, basis Exchange rate options Black-Scholes Model Observable market data Interest rate options Black-Scholes Model Observable market data Other N/A N/A Other financial assets at fair value through profit or loss Loans and advances to credit institutions Present Value Method Observable market data Loans and advances to customers (d) Present Value Method Observable market data, HPI Debt and equity instruments Present Value Method Observable market data Available-for-sale financial assets Debt and equity instruments Present Value Method Observable market data LIABILITIES: Financial liabilities held for trading Deposits from central banks Present Value Method Observable market data Deposits from credit institutions Present Value Method Observable market data Customer deposits Present Value Method Observable market data Debt and equity instruments Present Value Method Observable market data, liquidity Trading derivatives Swaps Present Value Method, Gaussian Copula (c) Observable market data, basis, liquidity, HPI Exchange rate options Black-Scholes Model Observable market data, liquidity Interest rate options Black-Scholes Model, Heath-Jarrow-Morton Model Observable market data, liquidity, correlation Index and securities options Black-Scholes Model Observable market data, dividends, correlation, liquidity, HPI Interest rate and equity futures Present Value Method Observable market data Other Present Value Method, Monte Carlo simulation and other Observable market data and other Hedging derivatives Swaps Present Value Method Observable market data, basis Exchange rate options Black-Scholes Model Observable market data Interest rate options Black-Scholes Model Observable market data Other N/A N/A Other financial liabilities at fair value through profit or loss Present Value Method Observable market data Liabilities under insurance contracts See Note 15
The main transactions measured using unobservable market data that constitute significant inputs of the internal models (Level 3) are:
HPI (House Price Index) derivatives at Santander UK. HPI derivatives, of which
Illiquid
The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities. Nevertheless, the As detailed in the foregoing tables, at December 31, The net
As a general rule, changes in the carrying amount of financial assets and liabilities are recognized in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest and similar items, which are recognized under Interest and similar income or Interest expense and similar charges, as appropriate, and those arising for other reasons, which are recognized at their net amount under Gains/losses on financial assets and Adjustments due to changes in fair value arising from:
Available-for-sale financial assets are recognized temporarily in equity under Valuation
Items charged or credited to Valuation
The consolidated entities use financial derivatives for the following purposes: i) to facilitate these instruments to customers who request them in the management of their market and credit risks; ii) to use these derivatives in the management of the risks of the Group entities’ own positions and assets and liabilities (hedging derivatives); and iii) to obtain gains from changes in the prices of these derivatives (trading derivatives). Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives. A derivative qualifies for hedge accounting if all the following conditions are met:
a. Changes in the fair value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (fair value hedge); b. Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge); c. The net investment in a foreign operation (hedge of a net investment in a foreign operation).
a. At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness). b. There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (retrospective effectiveness). To this end, the Group checks that the results of the hedge were within a range of 80% to 125% of the results of the hedged item.
The changes in value of financial instruments qualifying for hedge accounting are recognized as follows: a. In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized directly in the consolidated income statement. In fair value hedges of interest rate risk on a portfolio of financial instruments, the gains or losses that arise on measuring the hedging instruments are recognized directly in the consolidated income statement, whereas the gains or losses due to changes in the fair value of the hedged amount (attributable to the hedged risk) are recognized in the consolidated income statement with a balancing entry under Changes in the fair value of hedged items in portfolio hedges of interest rate risk on the asset or liability side of the balance sheet, as appropriate. c. In hedges of a net investment in a foreign operation, the gains and losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in equity under Valuation adjustments - Hedges of net investments in foreign operations until the gains or losses on the hedged item are recognized in the consolidated income statement.
If a derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified for accounting purposes as a trading derivative. When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are transferred to profit or loss at the effective interest rate re-calculated at the date of hedge discontinuation. The adjustments must be fully When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognized in equity under Valuation adjustments (from the period when the hedge was effective) remains in this equity item until the forecast transaction occurs, at which time it is recognized in profit or loss, unless the transaction is no longer expected to occur, in which case the cumulative gain or loss is recognized immediately in profit or loss. vi. Derivatives embedded in hybrid financial instruments Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as Other financial assets/liabilities at fair value through profit or loss or as Financial assets/liabilities held for trading.
The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties:
a. An associated financial liability, which is recognized for an amount equal to the consideration received and is subsequently measured at amortized cost, unless it meets the requirements for classification under Other financial liabilities at fair value through profit or loss.
a. If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized. b. If the transferor retains control of the transferred financial asset, it continues to recognize it for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value. Accordingly, financial assets are only derecognized when the rights on the cash flows they generate have been extinguished or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognized when the obligations they generate have been extinguished or when they are acquired, with the intention either to cancel them or to resell them.
Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the subsidiaries currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to
A financial asset is considered to be impaired -and therefore its carrying amount is adjusted to reflect the effect of impairment- when there is objective evidence that events have occurred which:
In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date.
In the case of equity instruments, mean that their carrying amount may not be fully recovered. As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced. Balances are deemed to be impaired, and the interest accrual is suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received by the consolidated entities to secure (fully or partially) collection of the related balances. Collections relating to impaired loans and advances are used to Transactions classified as doubtful due to arrears are reclassified as standard if, as a result of the collection of a portion or the sum of the unpaid installments, the reasons for classifying such transactions as doubtful cease to exist -namely, when any remaining unpaid installments are less than 90 days past due-, unless other subjective reasons remain for classifying them as doubtful. The The following constitute effective guarantees or collateral: collateral in the form of cash deposits; quoted equity instruments and debt securities issued by creditworthy issuers; mortgages on completed housing, offices and multi-purpose premises and on rural property, net of any prior charges; and personal guarantees (bank guarantees, inclusion of new obligors, etc.) which entail the direct and joint liability of the new guarantors to the customer, these being persons or entities whose solvency is sufficiently demonstrated so as to ensure the full repayment of the transaction on the agreed terms. The balances relating to impaired transactions continue to be recognized on the balance sheet, for their full amounts, until the Group considers that the recovery of The Group considers recovery to be When the
Individually for Collectively, in all other cases -customers classified by the Group as “standardized”-, by grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the assets are, inter alia, instrument type, debtor’s industry and geographical location, type of guarantee or collateral,
When there is evidence of a deterioration of the obligor’s ability to pay, either because it is in arrears or for other reasons, and/or
When country risk
The Group has certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk. These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments and contingent liabilities and commitments, and in the identification of their impairment and the calculation of the amounts required to cover the related credit risk.
With respect to the coverage of loss arising from credit risk, the Group
The allowance for debt instruments not measured at fair value through profit or loss that are classified as doubtful is generally recognized in accordance with the criteria set forth below:
Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.
Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.
Based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.
Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized.
The Group’s internal models determine the impairment losses on debt instruments not measured at The amount of an impairment loss incurred on these debt instruments is All the amounts that are expected to be obtained over the remaining life of the instrument, including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued past-due interest receivable; The various types of risk to which each instrument is subject; and The circumstances in which collections will foreseeably be made. These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable). The Group uses the concept of incurred loss to quantify the cost of the credit risk and include it in the calculation of The incurred loss is the expected cost, which will be disclosed in the one-year period after the reporting date, of the credit risk of a transaction, considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction. The loss incurred is calculated by multiplying three factors: exposure at default, probability of default and loss given default. Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty. Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction. PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes amounts past due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets). Loss given default (LGD) is the loss arising in the event of default. It depends mainly on discounting of the guarantees associated with the transaction and the future flows that are expected to be recovered. The methodology for determining the general allowance for losses At December 31, 2012, the estimated losses arising from credit risk calculated by the
The amount of the impairment losses on these instruments is the positive difference between their acquisition cost (net of any principal repayment or amortization in the case of debt instruments) and their fair value, less any impairment loss previously recognized in the consolidated income statement.
When there is objective evidence at the date of measurement of these instruments that the aforementioned differences are due to permanent impairment, they are no longer recognized in equity under Valuation If all or part of the impairment losses are subsequently reversed, the reversed amount is recognized, in the case of debt instruments, in the consolidated income statement for the year in which the reversal occurs (or in equity under Valuation
The amount of the impairment losses on equity instruments carried at cost is the difference between their carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities. Impairment losses are recognized in the consolidated income statement for the period in which they arise as a direct reduction of the cost of the instrument. These losses can only be reversed subsequently if the related assets are sold.
Purchases (sales) of financial instruments under a non-optional resale (repurchase) agreement at a fixed price (repos) are recognized in the consolidated balance sheet as financing granted (received), based on the nature of the debtor (creditor), under Balances with central banks, Loans and advances to credit institutions or Loans and advances to customers (Deposits from central banks, Deposits from credit institutions or Customer deposits). Differences between the purchase and sale prices are recognized as interest over the contract term.
Non-current assets held for sale includes the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal (discontinued operations), whose sale in their present condition is highly likely to be completed within one year from the reporting date. Therefore, the carrying amount of these items -which can be of a financial nature or otherwise- will foreseeably be recovered through the proceeds from their disposal. Specifically, property or other non-current assets received by the consolidated entities as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the consolidated entities have decided to make continuing use of these assets. Liabilities associated with non-current assets held for sale includes the balances payable arising from the assets held for sale or disposal groups and from discontinued operations. Non-current assets held for sale are generally measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category. Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.
Insurance contracts involve the transfer of a certain quantifiable risk in exchange for a periodic or one-off premium. The effects on the Group’s cash flows will arise from a deviation in the payments forecast and/or an insufficiency in the premium set.
The Group controls its insurance risk as follows:
By applying a strict methodology in the launch of products and in the assignment of value thereto.
By using deterministic and stochastic models for measuring commitments.
By using reinsurance as a risk mitigation technique as part of the credit quality guidelines in line with the Group’s general risk policy.
By establishing an operating framework for credit risks.
By actively managing asset and liability matching.
By applying security measures in processes. Reinsurance assets includes the amounts that the consolidated entities are entitled to receive for reinsurance contracts with third parties and, specifically, the reinsurer’s share of the technical provisions recorded by the consolidated insurance entities. At least once a year these assets are reviewed to ascertain whether they are impaired (i.e. there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract and the amount that will not be received can be reliably measured), and any impairment loss is recognized in the consolidated income statement and the assets are written down. Liabilities under insurance contracts includes the technical provisions recorded by the consolidated entities to cover claims arising from insurance contracts in force at year-end. Insurers’ results relating to their insurance business are recognized, according to their nature, under the related consolidated income statement items. In accordance with standard accounting practice in the insurance industry, the consolidated insurance entities credit to the income statement the amounts of the premiums written and charge to income the cost of the claims incurred on final settlement thereof. Insurance entities are therefore required to accrue at period-end the unearned revenues credited to their income statements and the accrued costs not charged to income. At least at each reporting date the Group assesses whether the insurance contract liabilities recognized in the consolidated balance sheet are adequate. For this purpose, it calculates the difference between the following amounts:
Current estimates of future cash flows under the insurance contracts of the consolidated entities. These estimates include all contractual cash flows and any related cash flows, such as claims handling costs; and
The carrying amount recognized in the consolidated balance sheet of its insurance contract liabilities (see Note 15), less any related deferred acquisition costs or related intangible assets, such as the amount paid to acquire, in the event of purchase by the entity, the economic rights held by a broker deriving from policies in the entity’s portfolio. If the calculation results in a positive amount, this deficiency is charged to the consolidated income statement. When
The most significant items
Non-life insurance provisions:
Life insurance provisions: represent the value of the net obligations acquired vis-à-vis life insurance policyholders. These provisions include:
Provision for claims outstanding: Provision for bonuses and rebates:
Technical provisions for life insurance policies where the investment risk is borne by the
Tangible assets includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Tangible assets are classified by use as follows:
Property, plant and equipment for own use -including tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance leases- are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (carrying amount higher than recoverable amount). Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand has an indefinite life and, therefore, is not depreciated. The period tangible asset depreciation charge is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets):
The consolidated entities assess at the reporting date whether there is any indication that an asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated). Similarly, if there is an indication of a recovery in the value of a tangible asset, the consolidated entities The estimated useful lives of the items of property, plant and equipment for own use are reviewed at least at the end of the reporting period with a view to detecting significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years on the basis of the new useful lives. Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognized as an expense in the period in which they are incurred, since they do not increase the useful lives of the assets.
Investment property reflects the net values of the land, buildings and other structures held either to earn rentals or for capital appreciation. The criteria used to
Property, plant and The criteria used to
Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.
When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee, When the consolidated entities act as the lessees, they present the cost of the leased assets in the consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, In both cases, the finance income and finance charges arising under finance lease agreements are credited and debited, respectively, to Interest and similar income and Interest expense and similar charges in the consolidated income statement so as to produce a constant rate of return over the lease term.
In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor. When the consolidated entities act as the lessors, they present the acquisition cost of the leased assets under Tangible assets (see Note 16). The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment for own use, and income from operating leases is recognized on a straight-line basis under Other operating income in the consolidated income statement. When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight-line basis to Other general administrative expenses in their consolidated income statements.
In sale and leaseback transactions where the sale is at fair value and the leaseback is an operating lease, any profit or loss is recognized at the time of sale. In the case of finance leasebacks, any profit or loss is In accordance with IAS 17, in determining whether a sale and leaseback transaction results in an operating lease, the Group should
Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise as a result of a legal transaction or which are developed internally by the consolidated entities. Only assets whose cost can be estimated reliably and from which the consolidated entities consider it probable that future economic benefits will be generated are recognized. Intangible assets are recognized initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.
Any excess of the cost of the investments in the consolidated entities and entities accounted for using the equity method over the corresponding underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows:
If it is attributable to specific assets and liabilities of the companies acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired entities’ balance sheets. If it is attributable to specific intangible assets, by
The remaining amount is recognized as goodwill, which is allocated to one or more cash-generating units (a cash-generating unit is the smallest identifiable group of assets that, as a result of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets). Goodwill is only recognized when it has been acquired for consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired entity that are not capable of being individually identified and separately recognized. At the end of each reporting period or whenever there is any indication of impairment goodwill is reviewed for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and, if there is any impairment, the goodwill is written down with a charge to Impairment losses on other assets (net) An impairment loss recognized for goodwill is not reversed in a subsequent period.
Other intangible assets includes the amount of identifiable intangible assets (such as purchased customer lists and computer software). Other intangible assets can have an indefinite useful life -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the consolidated entities- or a finite useful life, in all other cases. Intangible assets with indefinite useful lives are not Intangible assets with finite useful lives are The intangible asset amortization charge is recognized under Depreciation and amortization in the consolidated income statement. In both cases the consolidated entities
Internally developed computer software Internally developed computer software is recognized as an intangible asset if, among other requisites (basically the Group’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated. Expenditure on research activities is recognized as an expense in the year in which it is incurred and cannot be subsequently
Other assets in the consolidated balance sheet includes the amount of assets not recorded in other items, the breakdown being as follows:
Inventories: this item includes the amount of assets, other than financial instruments, that are held for sale in the ordinary course of business, that are in the process of production, construction or development for such purpose, or that are to be consumed in the production process or in the provision of services. Inventories includes land and other property held for sale in the property development business. Inventories are measured at the lower of cost and net Any write-downs of inventories -such as those due to damage, obsolescence or reduction of selling price- to net The carrying amount of inventories is derecognized and recognized as an expense in the period in which the revenue from their sale is recognized.
Other: this item includes the balance of all prepayments and accrued income (excluding accrued interest, fees and commissions), the net amount of the difference between pension plan obligations and the value of the plan assets with a balance in the entity’s
Other liabilities includes the balance of all accrued expenses and deferred income, excluding accrued interest, and the amount of any other liabilities not included in other categories.
When preparing the financial statements of the consolidated entities,
Provisions: credit balances covering present obligations at the reporting date arising from past events which could give rise to a loss for the consolidated entities, which is considered to be likely to occur and certain as to its nature but uncertain as to its amount and/or timing.
Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the consolidated entities. They include the present obligations of the consolidated entities when it is not probable that an outflow of resources embodying economic benefits will be required to settle them.
Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group.
The Group’s consolidated financial statements include all the material provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with accounting standards, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes. Provisions, which are quantified on the basis of the best information available on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year, are used to cater for the specific obligations for which they were originally recognized. Provisions are fully or partially reversed when such obligations cease to exist or are reduced. Provisions are classified according to the obligations covered as
Provision for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations.
Provisions for contingent liabilities and commitments: includes the amount of the provisions made to cover contingent liabilities -defined as those transactions in which the Group guarantees the obligations of a third party, arising as a result of financial guarantees granted or contracts of another kind- and contingent commitments -defined as irrevocable commitments that may give rise to the recognition of financial assets.
Provisions for taxes and other legal contingencies and Other provisions: include the amount of the provisions recognized to cover tax and legal contingencies and litigation and the other provisions recognized by the consolidated entities. Other provisions includes, inter alia, any provisions for restructuring costs and environmental
In addition to the disclosures made in Note 1, at the end of
Own equity instruments are those meeting both of the following conditions:
The instruments do not include any contractual obligation for the issuer: (i) to deliver cash or another financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party under conditions that are potentially unfavorable to the issuer.
The instruments will or may be settled in the issuer’s own equity instruments and are: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled by the issuer through the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. Transactions involving own equity instruments, including their issuance and cancellation, are deducted directly from equity. Changes in the value of instruments classified as own equity instruments are not recognized in the consolidated financial statements. Consideration received or paid in exchange for such instruments is directly added to or deducted from equity.
Own equity instruments delivered to employees in consideration for their services, if the instruments are delivered once the specific period of service has ended, are recognized as an expense for services (with the corresponding increase in equity) as the services are rendered by employees during the service period. At the grant date the services received (and the related increase in equity) are measured at the fair value of the equity instruments granted. If the equity instruments granted are vested immediately, the Group When the requirements stipulated in the remuneration agreement include external market conditions (such as equity instruments reaching a certain quoted price), the amount ultimately to be recognized in equity will depend on the other conditions being met by the employees (normally length of service requirements), irrespective of whether the market conditions are satisfied. If the conditions of the agreement are met but the external market conditions are not satisfied, the amounts previously recognized in equity are not reversed, even if the employees do not exercise their right to receive the equity instruments.
The most significant criteria used by the Group to
Interest income, interest expenses and similar items are generally recognized on an accrual basis using the effective interest method. Dividends received from other companies are recognized as income when the consolidated entities’ right to receive them arises. However, the recognition of accrued interest in the consolidated income statement is suspended for debt instruments individually classified as impaired and for the instruments for which impairment losses have been assessed collectively because they have payments more than three months past due.
Fee and commission income and expenses are recognized in the consolidated income statement using criteria that vary according to their nature. The main criteria are as follows:
Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit or loss are recognized when paid.
Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.
Those relating to services provided in a single act are recognized when the single act is carried out.
These are recognized for accounting purposes on an accrual basis.
These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.
Loan arrangement fees, mainly loan origination, application and information fees, are accrued and recognized in income over the term of the loan. In the case of loan origination fees, the portion relating to the associated direct costs incurred in the loan arrangement is recognized immediately in the consolidated income statement.
Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives. The Group initially Financial guarantees, regardless of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments carried at The provisions made for these transactions are recognized under If a specific provision is required for financial guarantees, the related unearned commissions recognized under Financial liabilities at
Assets owned by third parties and managed by the consolidated entities are not presented on the face of the consolidated balance sheet. Management fees are included in Fee and commission income in the consolidated income statement. Note 35.c contains information on the third-party assets managed by the Group. The investment funds and pension funds managed by the consolidated entities are not presented on the face of the Group’s consolidated balance sheet since the related assets are owned by third parties. The fees and commissions earned in the year for the services rendered by the Group entities to these funds (asset management and custody services) are recognized under Fee and commission income in the consolidated income statement.
Under the collective agreements currently in force and other arrangements, the Spanish banks included in the Group and certain other Spanish and foreign consolidated entities have undertaken to supplement the public social security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability or death, the benefits and indemnity payments payable, the contributions to employee welfare systems for pre-retirees and the post-employment welfare benefits.
The Group’s post-employment obligations to its employees are deemed to be defined contribution plans when the Group makes pre-determined contributions (recognized in Personnel expenses in the consolidated income statement) to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans (see Note 25). Defined contribution plans The contributions made in this connection in each year are recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized, at their present value, under Defined benefit plans The Group Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions:
They are not owned by the consolidated entities, but by a legally separate third party that is not a party related to the Group.
They are only available to pay or fund post-employment benefits and they cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the entity to current and former employees, or they are returned to reimburse employee benefits already paid by the Group. If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit obligation, and it is practically certain that said insurer will reimburse some or all of the expenditure required to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group Actuarial gains and losses are defined as those arising from differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions. The Group uses, on a plan-by-plan basis, the corridor approach and The past service cost
Post-employment benefits are recognized in the consolidated income statement as follows:
Current service cost, i.e. the increase in the present value of the obligations resulting from employee service in the current period, under Personnel expenses.
Interest cost, i.e. the increase during the year in the present value of the obligations as a result of the passage of time, under Interest expense and similar charges. When obligations are presented on the liability side of the consolidated balance sheet, net of the plan assets, the cost of the liabilities recognized in the consolidated income statement relates exclusively to the obligations recognized as liabilities.
The expected return on plan assets and the gains or losses on the value of the plan assets, under Interest and similar income.
The actuarial gains and losses calculated using the corridor approach and the unrecognized past service cost, under Provisions (net) in the consolidated income statement.
Other long-term employee benefits, defined as obligations to pre-retirees -taken to be those who have ceased to render services at the entity but who, without being legally retired, continue to have economic rights vis-à-vis the entity until they acquire the legal status of retiree-, long-service bonuses, obligations for death of spouse or disability before retirement that depend on the employee’s length of service at the entity and other similar items, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that all past service costs and actuarial gains and losses are recognized immediately (see Note 25).
Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, provided that implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.
The expense for Spanish corporation tax and other similar taxes applicable to the foreign consolidated entities is recognized in the consolidated income statement, except when it results from a transaction recognized directly in equity, in which case the tax effect is also recognized in equity. The current income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement. Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is Tax assets includes the amount of all tax assets, which are broken down into current -amounts of tax to be recovered within the next twelve months- and deferred -amounts of tax to be recovered in future years, including those arising from tax loss or tax credit carryforwards. Tax liabilities includes the amount of all tax liabilities (except provisions for taxes), which are broken down into current -the amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months- and deferred -the amount of income tax payable in future years.
Deferred tax liabilities are recognized in respect of taxable temporary differences associated with investments in subsidiaries, associates or joint ventures, except when the Group is able to control the timing of the reversal of the temporary difference and, in addition, it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be Income and expenses recognized directly in equity are accounted for as temporary differences. The deferred tax assets and liabilities recognized are reassessed at each reporting date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the analyses performed.
The analysis of the maturities of the balances of certain items in the consolidated balance sheet and the average interest rates at 2012, 2011 aa) Consolidated statements of cash flows The following terms are used in the consolidated statements of cash flows with the meanings specified:
Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified. The Group classifies as cash and cash equivalents the balances recognized under Cash and balances with central banks in the consolidated balance sheet.
Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities.
Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.
Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities. ab) Consolidated statements of recognized income and expense This statement presents the income and expenses generated by the Group as a result of its business activity in the year, and a distinction is made between the income and expenses recognized in the consolidated income statement for the year and the other income and expenses recognized directly in consolidated equity. Accordingly, this statement presents:
The amount of the income and expenses relating to entities accounted for using the equity method recognized directly in equity is presented in this statement, irrespective of the nature of the related items, under Entities accounted for using the equity method. ac) Statements of changes in total equity This statement presents all the changes in equity, including those arising from changes in accounting policies and from the correction of errors. Accordingly, this statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the consolidated equity items, and the changes are grouped together on the basis of their nature into the following items:
The growth of the Group in the last decade has led the Bank to also act, in practice, as a holding entity of the shares of the various companies in its Group, and its results are becoming progressively less representative of the performance and earnings of the Group. Therefore, each year the Bank determines the amount of the dividends to be distributed to its shareholders on the basis of the consolidated net profit, while maintaining the Group’s traditionally high level of At international level, the various banks and other subsidiaries, jointly controlled entities and associates of the Group are integrated in a corporate structure comprising various holding companies which are the ultimate shareholders of the banks and subsidiaries abroad. The purpose of this structure, all of which is controlled by the Bank, is to The Appendices provide relevant data on the consolidated Group companies and on the companies accounted for using the equity method.
Following is a summary of the main acquisitions and disposals of ownership interests in the share capital of other entities and other significant corporate transactions performed by the Group in the last three years: i.
On June 8, 2010, Santander Consumer Bank Spólka Akcyjna S.A. (Poland) carried out a capital increase through the issue of 1,560,000 new shares, fully subscribed by AIG Consumer Finance Group Inc., through a non-monetary contribution of 11,177,088 shares of AIG Bank Polska Spólka Akcyina, representing 99.92% of its share capital. The capital increase amounted to PLN 452 million (approximately EUR 109 million at the transaction date). Following this capital increase, the ownership interest held by the Group in Santander Consumer Bank, S.A. (Poland) was diluted to 70% of the share capital.
On March 10, 2010, Santander Private Banking UK Limited completed the sale of James Hay Holdings Limited (including its five subsidiaries) through the transfer of all the shares of James Hay Holdings Limited to IFG UK Holdings Limited, a subsidiary of the IFG Group, for a total of GBP 39 million.
In July 2010 the agreement entered into with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale to these two entities of Santander Group’s ownership interest in Companhia Brasileira de Soluções e Serviços-CBSS (15.32% of the share capital) was executed. The sale price was approximately EUR 88.9 million, giving rise to a gain of EUR 80 million, which was recognized under Gains/(losses) on disposal of assets not classified as non-current assets held for sale (EUR 33 million net of tax and non-controlling interests) in the consolidated income statement for 2010.
The bid launched by Administración de Bancos Latinoamericanos Santander, S.L. (Ablasa), a wholly-owned subsidiary of Santander, for the portion of the share capital of Santander BanCorp (Puerto Rico) that it did not control, ended on July 22, 2010. Shareholders owning 7.8% of the shares accepted the offer and, therefore, following the transaction Ablasa held 98.4% of the total share capital of Santander BanCorp. Ablasa acquired the remaining shares through a The transaction After the short form merger was completed, Santander BanCorp is now a wholly-owned subsidiary of Banco Santander. Its shares are no longer listed on the New York and Latibex stock exchanges and it is no longer required to file certain periodic information with the US Securities and Exchange Commission.
On July 12, 2010,
The detail of the
The acquired business contributed a loss of EUR 58 million to pre-tax profit for 2011.
On February 7, 2011, the Group announced the preparation in Poland of a takeover bid for all the shares of the Polish company Bank Zachodni WBK, S.A. (“BZ WBK”), which Allied Irish Bank (“AIB”), owner of 70.36% of BZ WBK, was obliged to accept, by virtue of the agreement entered into with Banco Santander in September 2010. On February 18, 2011, notification of non-opposition to the Group’s acquisition of a significant holding was received from the financial regulator in Poland -KNF. On April 1, 2011, the Group acquired 69,912,653 shares of Bank Zachodni WBK, S.A. representing 95.67% of the capital of this entity. The purchase of the aforementioned shares gave rise to a disbursement of EUR 3,987 million. Also, as had already been announced, on the same date Santander acquired the 50% ownership interest held by AIB in Bank Zachodni WBK Asset Management, S.A. for EUR 174 million in cash. Subsequently, based on the terms and conditions of the takeover bid, certain non-controlling shareholders of BZ WBK opted to sell their shares. As a result, the Group acquired 421,859 additional shares for EUR 24 million.
Following is the detail of the
At December 31, 2011, the Group held a total of 70,334,512 shares of Bank Zachodni WBK, S.A. (96.25%).
In August 2012, Bank Zachodni WBK S.A. performed a capital increase amounting to PLN 332 million (EUR 81 million) which was not subscribed by the Group, giving rise to a reduction of EUR 12 million in Reserves and EUR 5 million in Valuation adjustments, and to an increase of EUR 93 million in Non-controlling interests, considering the Group’s effective ownership interest in the entity. Following the aforementioned transaction, the Group holds 94.23% of the entity’s share capital.
On December 3, 2010, for purely commercial reasons, the Group decided to contribute resources to the Santander Banif Inmobiliario, F.I.I. property investment fund (“the Fund”) through the subscription of new units and the granting of a two-year liquidity guarantee in order to meet any outstanding redemption claims by the unitholders and to avoid winding up the Fund. The Group offered the unitholders of the Fund the possibility, before February 16, 2011, to submit new requests for the total or partial redemption of their units or for the total or partial revocation of any redemption requests that they had previously submitted and had not been met. Redemptions from this Fund, which is managed by the Group entity Santander Real Estate, S.G.I.I.C. S.A., had been suspended for two years in February 2009, in accordance with the request filed with the Spanish National Securities Market Commission (CNMV), due to the lack of sufficient liquidity to meet the redemptions requested at that date, which were in excess of 10% of net assets.
On March 1, 2011, the Group paid the full amount of the redemptions requested by the Fund’s unitholders, i.e. EUR 2,326 million (93.01% of the Fund’s net assets), through the subscription of the related units by the Group at their redemption value at February 28, 2011.
Since the Group already had a non-controlling interest in the Fund,
The detail of the
At December 31, 2011, Santander Banif Inmobiliario F.I.I. had contributed a pre-tax loss of EUR 106 million to the Group. In 2012 the Group had acquired Fund units amounting to EUR 22 million and, accordingly, its ownership interest rose to 97.63%.
In 2011 the Group performed various sales of shares representing 9.72% of the share capital of Banco Santander Chile for a total of USD 1,241 million, which gave rise to increases of EUR 434 million in Group reserves and EUR 373 million in non-controlling interests. Following these transactions, the Group holds 67% of the share capital of Banco Santander Chile and it has undertaken not to reduce its percentage of ownership for one year.
On February 22, 2011, Banco Santander and the insurance company Zurich Financial Services Group entered into an agreement to create a strategic alliance that will boost Santander Group’s bancassurance business in five key Latin American markets: Brazil, Chile, Mexico, Argentina and Uruguay. Once the required Following this transaction Santander retained 49% of the share capital of the holding company and entered into a distribution agreement for the sale of insurance products in each of the signatory countries for 25 years (see Note 13). As a result of the aforementioned transaction, the Group recognized a gain of EUR
In December 2011 Santander Consumer USA Inc. (SCUSA) increased capital by USD 1,158 million, of which USD 1,000 million were paid by Sponsor Auto Finance Holdings Series LP (Auto Finance Holdings) Also, the Group Also as provided for in the shareholders’ agreement, if SCUSA’s earnings for 2014 and 2015 exceed certain targets, SCUSA may be required to pay up to USD 595 million to Santander Holdings USA, Inc. (SHUSA). If SCUSA’s earnings do not surpass those targets in 2014 and 2015, SCUSA may be obliged to make a payment of up to that same amount to Auto Finance Holdings. Lastly, the shareholders’ agreement establishes that both Auto Finance Holdings and DDFS will be entitled to sell to SHUSA their ownership interests in the share capital of SCUSA at market value on the fourth, fifth and seventh anniversaries of completion of the transaction, unless a public offering of SCUSA shares has taken place prior to those dates. The agreement also provides for this same entitlement in the event of a situation of impasse in relation to any of the matters subject to joint approval by the general meeting or the board of directors of SCUSA. Following this transaction As a result of the aforementioned transaction, in 2011 the Group recognized a gain of EUR 872 million under Gains (losses) on disposal of assets not classified as non-current assets held for sale (see Note 49), of which EUR 649 million related to the measurement at fair value of the 65% ownership interest retained in this company.
The fair value of SCUSA was determined using comparable market data, recent transactions and discounted cash flow analyses, taking into account contingent payments.
In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions xii. Colombia In December 2011, the Group entered into an agreement with the Chilean group Corpbanca to sell its shareholding in Banco Santander Colombia S.A. and its other business subsidiaries in this country (Santander Investment Valores Colombia S.A., Comisionista de Bolsa Comercial, Santander Investment Colombia S.A., Santander Investment Trust Colombia S.A., Sociedad Fiduciaria y Agencia de Seguros Santander, Ltda.). Following the obtainment of the regulatory authorizations from the competent authorities and the delisting of the shares of Banco Santander Colombia S.A., in the second quarter of 2012 the Group sold its shareholding in Banco Santander Colombia S.A. and its other business subsidiaries in this country to the Corpbanca Group for a total of USD 1,229 million (EUR 983 million), giving rise to a gain of EUR 619 million which was recognized by the Group under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement (see Note 49). xiii. Grupo Financiero Santander México, S.A. B. de C.V. On June 9, 2010, Banco Santander announced that it had entered into an agreement with Bank of America whereby it would acquire the 24.9% ownership interest that the latter held in Grupo Financiero Santander México, S.A. B. de C.V. for USD 2,500 million. The transaction, which was completed in the third quarter of 2010, gave rise to a decrease in the balances of Non-controlling interests and Reserves of EUR 1,177 million and EUR 843 million, respectively. Following the transaction, Santander’s ownership interest in Grupo Financiero Santander México S.A. B. de C.V. stood at 99.9%. In August 2012 the Group announced its intention to file prospectuses with the Mexican National Banking and Securities Commission (CNBV) and the US Securities and Exchange Commission for the The public offering for 1,469,402,029 series B shares of Grupo Financiero Santander México, S.A. B. de C.V. was completed on September 26, 2012. The transaction was made up of a Mexican tranche, consisting of shares, and an international tranche, including the The share placement was priced at MXN 31.25 (USD 2.437) per share. Also, the underwriters involved in Once the
On March 17, 2011, the creditor entities that had been party to an agreement to restructure the On June 28, 2011, the shareholders at the annual general meeting of Metrovacesa resolved to approve the aforementioned capital increase, subject to certain conditions precedent such as the Spanish National Securities Market Commission (CNMV) releasing the Group from the obligation to launch a takeover bid for all of the share capital, since the transaction might raise the Group’s holding in the share capital of Metrovacesa above 30%. This release was granted on July 6, 2011. Following the performance of the aforementioned capital increase, the Group On December 19, 2012, the creditor entities that took part in the aforementioned debt restructuring agreement announced that they had reached an agreement to promote the delisting of the shares of Metrovacesa, S.A. and to vote in favor of this at the general meeting to be held for this purpose. Subject to the approval of the delisting and public takeover offer by the shareholders at Metrovacesa’s general meeting, the offerors will prepare a delisting public takeover offer, at a price of EUR 2.28 per share, aimed at the Metrovacesa shareholders that did not enter into the agreement. The Group’s share of the delisting public takeover offer will be 45.56% and, as a result, if the public takeover offer were accepted in full, the Group would acquire an additional 2.007% of Metrovacesa for which it would pay EUR 45 million.
On February 28, 2012 the Group announced that Banco Santander, S.A. and KBC Bank NV had entered into an investment agreement to merge their two subsidiaries in Poland, Bank Zachodni WBK and Kredyt Bank, and the merger took place in the first few days of 2013 following the obtainment of the related authorization from the Polish financial supervisory authorities (KNF). The entity resulting from the merger will reinforce its position as the third-largest bank in Poland in terms of deposits, loans, branches and profit. Following the transaction, the Group will control approximately 75.2% of the resulting entity and KBC Bank NV will control approximately 16.2%, with the remaining 8.6% being owned by non-controlling interests. However, the Group has undertaken to assist KBC Bank NV to reduce its shareholding in the merged company to less than 10% immediately after the merger. xvi. Agreement to purchase Royal Bank of Scotland branch offices In August 2010 Santander UK plc announced that it had entered into an agreement to acquire the portion of the banking business carried on by Royal Bank of Scotland (RBS) through its branches in England and Wales and the NatWest network in Scotland, as well as certain SME and corporate banking On October 12, 2012, the Group announced that the agreement had become null and void due to the foreseeable breach of the terms and conditions thereof by the agreed deadline (February 2013). xvii. Merger by absorption of Banesto and Banco Banif a) Common draft terms of merger between Banco Santander and Banesto On December 17, 2012, the Bank announced that it had resolved to approve the plan for the merger by absorption of Banesto as part of the restructuring of the Spanish financial sector. After the end of the reporting period, at their respective board of directors meetings held on January 9, 2013, the directors of the Bank and Banco Español de Crédito, S.A. (Banesto) approved the common draft terms of the merger by absorption of Banesto into the Bank with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to the Bank, which will acquire, by universal succession, the rights and obligations of the absorbed entity. As a result of the merger, the shareholders of Banesto, other than those forming part of the Group, will receive in exchange shares of the Bank. Merger exchange ratio The This exchange ratio was agreed to and calculated based on the methodologies that will be set forth and supported in The shares of both the Bank and Banesto are listed on the official stock markets. Therefore, in order to determine the fair value of the assets and liabilities of the two companies, the directors of the Bank and Banesto considered, among other valuation methods, the market price of the shares of both companies at the close of trading on December 14, 2012 (the trading day immediately preceding the announcement of the transaction). Considering that the market price of the shares of Banco Santander at the close of trading on December 14, 2012 was EUR 5.90 per share, the exchange ratio agreed upon would value the shares of Banesto at EUR 3.73 per share. Since Banesto’s shares were quoted at EUR 2.99 per share on December 14, 2012, the proposed exchange ratio represented a premium of 25% at that date. In determining the exchange ratio, with the aforementioned premium over the market price on December 14, 2012, the Bank and Banesto took the following matters, among others, into account: The synergies to be achieved with the merger of the two companies. The fact that Banesto’s shareholders will not be able to receive the remuneration that the Bank’s shareholders will receive under the Santander Dividendo Elección programme in January/February and April/May 2013, in either cash or shares of Banco Santander, since the merger will foreseeably be completed in May. Banesto will not foreseeably distribute any dividend. However, the The Bank will exchange the Banesto shares for treasury shares and, accordingly, the Bank’s share capital will not be increased for this purpose. In any case, pursuant to Article 26 of the Law on structural changes to companies formed under the Spanish Commercial Code, neither the Banesto shares owned by Santander Group nor Banesto’s treasury shares will be exchanged. These shares will be retired. At December 31, 2012, Once the The exchange will take place from the date indicated in the notices to be published in one of the highest-circulation daily newspapers in the autonomous communities of Cantabria and Madrid, in the Official Gazettes of the Spanish Stock Exchanges, and in the Official Gazette of the Mercantile Registry. For such purpose, the Bank will act as agent, and this will be indicated in the above-mentioned notices. The shares of Banesto will be retired as a result of the merger. Effective date of the merger for accounting purposes Pursuant to the Spanish National Chart of Accounts approved by Royal Decree 1514/2007, of November 16, January 1, 2013 was established as the date from which the transactions of Banesto would be considered to have been Merger balance sheets, financial statements and measurement of the assets and liabilities of Banesto to be transferred For the purposes of Article 36.1 of the Law on structural changes to companies formed under the Spanish Commercial Code, the balance sheets of the Bank and Banesto at December 31, 2012 were taken to be the merger balance sheets. The merger balance sheets of the Bank and Banesto, duly verified by their auditors, will be submitted for approval by the shareholders at the general meetings of each of the companies that must decide on the merger, prior to the adoption of the merger resolution itself. As a result of the merger, Banesto will be dissolved without liquidation, and its assets and liabilities will be transferred en bloc to the Bank. Tax regime The merger was performed under the tax regime provided for in Chapter VIII, Title VII and Additional Provision Two.3 of Legislative Royal Decree 4/2004, of March 5, approving the Consolidated Spanish Corporation Tax Law, and in Article 45, paragraph I. B.) 10. of Legislative Royal Decree 1/1993, of September 24, approving the Consolidated Spanish Transfer Tax Law. The tax authorities will be notified of the use of this tax regime within three months from the registration of the merger deed, in the terms established by the relevant regulations. Conditions precedent The effectiveness of the merger is subject to the following conditions precedent: i). The authorization of the Minister of Economy and Competitiveness for the absorption of Banesto by the Bank, pursuant to Article 45.c) of the Bank Law of December 31, 1946. ii). The obtainment of the other authorizations that, by reason of the business activities of Banesto or its subsidiaries, must be obtained from the Bank of Spain, the CNMV or any other administrative or supervisory body. Finally, pursuant to Article 30.3 of the Law on structural changes to companies formed under the Spanish Commercial Code, the merger plan will be subject to the approval of the shareholders at the general meetings of the Bank and Banesto within the six months following the date of the draft terms of merger. The general meetings to which the merger will foreseeably be submitted will be the respective annual general meetings in March 2013. b) Common draft terms of merger between Banco Santander and Banco Banif On December 17, 2012, the directors of Banco Santander, S.A. announced that they had resolved to approve the proposal for the merger by absorption of Banco Banif, S.A. as part of the restructuring of the Spanish financial sector. After the end of reporting period, the directors of Banco Banif, S.A., at its board of directors meeting held without a session and in writing on January 28, 2013, and the directors of Banco Santander, S.A., at its board of directors meeting held on that same day, approved the common drafts terms of the merger by absorption of Banco Banif, S.A. into Banco Santander, S.A. with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to Banco Santander, S.A., which will acquire, by universal succession, the rights and obligations of the absorbed entity. Effective date of the merger for accounting purposes Pursuant to the Spanish National Chart of Accounts approved by Royal Decree 1514/2007, of November 16, January 1, 2013 was established as the date from which the transactions of Banco Banif, S.A. would be considered to have been performed for accounting purposes for the account of Banco Santander. Merger balance sheets For the purposes of Article 36.1 of the Law on structural changes to companies formed under the Spanish Commercial Code, the balance sheets of Banco Santander and Banco Banif, S.A. at December 31, 2012 will be taken to be the merger balance sheets. The merger balance sheet of Banco Santander, S.A., duly verified by its auditors, will be submitted for approval by the shareholders at the general meetings that must decide on the merger, prior to the adoption of the merger resolution itself. Also, the sole shareholder of Banco Banif, S.A. will approve its financial statements for 2012 and, therefore, the balance sheet that will serve as the merger balance sheet of Banco Banif, S.A. As a result of the merger, Banco Banif, S.A. will be dissolved without liquidation, and its assets and liabilities will be transferred en bloc to Santander. Tax regime The merger will be performed under the tax regime provided for in Chapter VIII, Title VII and Additional Provision Two.3 of Legislative Royal Decree 4/2004, of March 5, approving the Consolidated Spanish Corporation Tax Law, and in Article 45, paragraph I. B.) 10. of Legislative Royal Decree 1/1993, of September 24, approving the Consolidated Spanish Transfer Tax Law. The tax authorities will be notified of the use of this tax regime within three months from the registration of the merger deed, in the terms established by the relevant regulations. Condition precedent The effectiveness of the merger is subject to the condition precedent of authorization by the Minister of Economy and Competitiveness of the absorption of Banco Banif, S.A. by Banco Santander, S.A., pursuant to Article 45.c) of the Bank Law of December 31, 1946. Finally, pursuant to Article 30.3 of the Law on structural changes to companies formed under the Spanish Commercial Code, the merger plan will be subject to approval by the shareholders at the general meeting of Banco Santander, S.A. within the six months following the date of the drafts terms of merger. The general meeting to which the merger will foreseeably be submitted will be the annual general meeting in March 2013. Since Banco Banif, S.A. is a wholly-owned subsidiary of Banco Santander, S.A., and in accordance with Article 49 of the Law on structural changes to companies formed under the Spanish Commercial Code, the merger does not need to be approved by the sole shareholder at its general meeting.
The * * * * * The cost, total assets and
The Group currently has
Following the above-mentioned planned disposals, the Group will have a total of i. Operating subsidiaries engaging in banking or financial activities or in services:
Abbey National International Limited in Jersey, which engages in remote banking for British customers not resident in the UK, who are offered traditional savings products.
Alliance & Leicester International Limited, a bank located in the Isle of Man, which focuses on attracting funds through savings accounts and deposits. ii. Scantly active or inactive or
Serfin International Bank and Trust, Limited (Cayman Islands), an inactive bank.
Whitewick Limited (Jersey), an inactive company. iii. Issuing The Group has Issuers of preference shares:
Totta & Açores Financing, Limited (Cayman Islands) Issuers of debt:
Santander Central Hispano Financial Services, Ltd. (Cayman Islands)
Santander Central Hispano International, Ltd. (Cayman Islands)
Santander Central Hispano Issuances, Ltd. (Cayman Islands) The preference share and subordinated debt issues launched by the aforementioned issuers were authorized by the Bank of Spain or the Bank of Portugal as computable for eligible capital calculation purposes. Once the issues launched by these issuers have been redeemed, these entities will be liquidated. The individual results of these subsidiaries, calculated in accordance with local accounting principles, are shown in the Appendices to these notes to the consolidated financial statements together with other data thereon. It should be noted that the individual results include transactions performed with other Group companies, such as dividend collection, recognition and reversal of provisions and corporate restructuring results which, in accordance with accounting standards, are eliminated on consolidation in order to avoid the duplication of profit or the recognition of intra-Group results. Individual results also include the profit attributable to the holders of preference shares. Therefore, they are not representative of the Group’s operations in these countries or of the results contributed to Santander Group.
The banks and companies, whose activities are detailed above, contributed a profit of approximately EUR
Also, the Group has Spain Also, the Group controls from Brazil a securitization Singapore and Hong Kong, in which the Group has 1 subsidiary and 2 branches, will no longer be considered off-shore centers from January and April 2013, respectively, following the application of the provisions contained in the international double taxation conventions signed with Spain in 2011. The Group has
* * * * * The Group has established the proper procedures and controls (risk management, supervision, verification and review plans and periodic reports) to prevent reputational and legal risk arising at these entities. Also, the Group has continued to implement its policy to reduce the number of off-shore units. The financial statements of the Group’s off-shore units are audited by member firms of Deloitte.
The distribution of the Bank’s net profit for
In addition to the EUR Similarly, under the
The provisional accounting statements prepared by the Bank pursuant to legal requirements evidencing the existence of sufficient funds for the distribution of
The board of directors will propose to the shareholders at the annual general meeting that remuneration of approximately EUR 0.60 per share be paid for
Basic earnings per share are calculated by dividing the net profit attributable to the Group by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares held in the year. Accordingly:
In calculating diluted earnings per share, the amount of profit attributable to ordinary shareholders and the weighted average number of shares outstanding, net of treasury shares, are adjusted to take into account all the dilutive effects inherent to potential ordinary shares (share options). Accordingly, diluted earnings per share were determined as follows:
Article 58 of the Bank’s current Bylaws approved by the shareholders at the annual general meeting held on June 21, 2008 provides that the share in the Bank’s profit for each year that the directors will be entitled to receive for discharging their duties as members of the board of directors -annual emolument and attendance fees- will be equal to 1% of the Bank’s net profit for the year. However, the board of directors may resolve to reduce this percentage. The amount set by the board of directors for At the proposal of the appointments and remuneration committee, the directors at the board meeting held on December
Hence, the amounts received individually by each board member in
Furthermore, the directors receive fees for attending board and committee meetings, excluding executive committee meetings, since no attendance fees are received for this committee. The amounts of the fees for attending the meetings of the board of directors and of the board committees (excluding the executive committee) were the same in
Board of directors: EUR 2,540 for resident directors and EUR 2,057 for non-resident directors.
Risk committee and audit and compliance committee: EUR 1,650 for resident directors and EUR 1,335 for non-resident directors.
Other committees: EUR 1,270 for resident directors and EUR 1,028 for non-resident directors.
The fixed salary remuneration of the executive directors for
The maximum variable remuneration of the executive directors for
The amounts shown in the foregoing table reflect the maximum total variable remuneration allocated to the executive directors for each year. These amounts include both the cash-based and share-based variable remuneration (according to the plans agreed in each year) and both the remuneration payable immediately and that which, as the case may be, is payable following a deferral period. In recent years the Group has adapted its remuneration policy to the new requirements and best practices, increasing the variable remuneration to be deferred and paid in shares, rather than in cash. The following table shows a breakdown of the variable remuneration:
The first cycle of the deferred conditional variable remuneration plan was approved in 2011, whereby payment of a portion of the variable remuneration for 2011 amounting to EUR 13,127 thousand is deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. Similarly, the portion of the variable remuneration that is not deferred (immediate payment) was paid 50% in cash and 50% in shares. The second cycle of the deferred conditional variable remuneration plan was approved in 2012 under the same payment terms as the previous plan.
The amounts relating to the variable share-based remuneration reflect the equivalent value, at the agreement date, of the maximum number of shares (886,510 shares) that may be received by the directors for their participation in the various plans. The number of shares that each director will actually receive on expiry of each plan will depend on the director’s compliance with the conditions for entitlement thereto (see Note 5.e).
The detail, by Bank director, of the foregoing remuneration for
By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group.
Furthermore, other directors of the Bank received a total of EUR
The following table provides information on the
The contracts of the executive directors and the other members of the Bank’s senior management
Since the aforementioned option has been exercised, the amounts included in the foregoing table in respect of the directors In 2012, under the
A detail of each of the
From 2013 onwards, the Bank will make annual contributions to The terms of the employee welfare system regulate the impact of the deferral of the computable variable
The Group also continues to have pension obligations to other directors amounting to EUR Pension provisions recognized d) Insurance The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the Other remuneration column of the table shown in Note 5.a.iii above. Also, the following table provides information on the sums insured for the Bank’s executive directors:
Additionally, other directors have life insurance policies the cost of which is borne by the Group, the related insured sum being EUR e) Deferred variable share-based remuneration systems Following is a description of the various share delivery plans instrumenting the directors’ share-based deferred variable remuneration (see Note 47): i) Performance share plan This plan involves successive three-year cycles of share deliveries to the beneficiaries, as part of their variable remuneration for the year in which each cycle begins, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. Following the changes implemented in 2011 to the remuneration policy for the executive directors, the latter The table below shows the maximum number of options granted to each executive director in each cycle and the number of shares received in
ii) Obligatory investment share plan Pursuant to the obligatory investment share plan (see Note 47), and also as part of the deferred share-based variable remuneration for each period, the current executive directors acquired, prior to February The shareholders at the annual general meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should exist: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.
Since the condition to retain the shares acquired
iii) Deferred conditional delivery share plan At the annual general meeting held on June 11, 2010, the shareholders approved the first cycle of the deferred conditional delivery share plan, applicable to the variable remuneration for 2010 of the executive directors and executives and employees of Santander Group whose variable remuneration or annual bonus for 2010 generally exceeded EUR 300,000 (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid, where appropriate, in Santander shares. In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the share-based deferred remuneration is conditional upon none of the following circumstances existing, in the opinion of the board of directors, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk. The share-based bonus will be deferred over three years and will be paid, where appropriate, in three The number of shares allocated to each executive director for deferral purposes, the shares delivered in 2012 (first third) and the shares
iv) Deferred conditional variable remuneration plan Variable remuneration for 2011 The shareholders at the annual general meeting of June 17, 2011 approved the first cycle of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 2011 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration which puts them on the same remuneration level as senior executives and employees who assume risks (all of them are referred to asidentified staff, in accordance with theGuidelines on Remuneration Policies and Practicesapproved by theCommittee of European Banking Supervisors on December 10, 2010). The purpose of this first cycle is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof over a period of three years for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycle, in accordance with the rules set forth below.
The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is deferred):
The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in thirds, within fifteen days following the anniversaries of the initial date in 2013, 2014 and 2015, 50% being paid in cash and 50% in shares, provided that the conditions listed below are met. In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the amount deferred in shares and the interest on the amount deferred in cash. The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for 2011. The number of Santander shares allocated as variable remuneration to each executive director, distinguishing between those which In January 2013, at the proposal of the appointments and remuneration committee and considering that the conditions for delivery had been met, the board approved the accrual of the first third of the plan and, accordingly, in February 2013 the cash will be paid and the shares corresponding to the first third will be delivered. These amounts are shown in the following table:
Variable remuneration for 2012 The shareholders at the annual general meeting of March 30, 2012 approved the second cycle of the deferred conditional variable remuneration plan in relation to the variable remuneration or bonus for 2012 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration which puts them on the same remuneration level as senior executives and employees who assume risks (all of them are referred to as identified staff, in accordance with the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010), under the same conditions as the first cycle. The number of Santander shares allocated to each executive director as variable remuneration, distinguishing between those which are delivered immediately and those subject to a three-year deferral, is as follows:
The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below. These transactions were made on an arm’s-length basis or the related compensation in kind was charged:
Following is a detail of the maximum remuneration approved for the Bank’s executive vice presidents (*) in
Following is a detail of the maximum number of Santander shares that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2012 and 2011
In
The actuarial liability recognized in respect of post-employment benefits earned by the Bank’s executive vice presidents Settlements of EUR As indicated in Note 5.c, in 2012 the contracts of senior executives of the Bank which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros Compañía Aseguradora, S.A. Under the new system, the executive directors are granted the right to receive a pension benefit upon retirement which is based on the contributions made to the aforementioned system and supersedes the right to receive a pension supplement which had hitherto been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executives other than the conversion of the current system into the new employee welfare system and, as the case may be, the annual contributions to be made. In the event of pre-retirement, the senior executives who have not exercised the option described in Note 5.c are entitled to an annual emolument until the date of retirement. The executive directors’ beginning balance under the new employee welfare system amounted to EUR 287 million. This balance reflects the market value, at the date of conversion of the pension obligations under the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested. Additionally, the total sum insured under life and accident insurance policies relating to this group amounted to EUR
The post-employment benefits paid and settlements made in
Furthermore, In January 2013, upon his retirement, Mr Francisco Luzón López requested payment of the pensions to which he was entitled in a lump sum (EUR 65.4 million gross). For such purpose, his pension rights were settled in accordance with the contractual and legal terms applicable through: i) the payment in cash of EUR 21.1 million relating to the net amount of the pension calculated by taking into account the fixed remuneration and the bylaw-stipulated emoluments and EUR 7.1 million relating to the net amount of the pension calculated by taking into account the accrued variable remuneration at the retirement date, ii) the investment by Mr Luzón of those EUR 7.1 million in Santander shares (1,144,110 shares), which shall be deposited on a restricted basis until January 23, 2017 and iii) the investment by the Bank of the gross remaining amount of the pension (EUR 6.6 million), calculated by taking into account the unaccrued variable remuneration, in Santander shares (1,061,602 shares) that will be delivered to Mr Luzón (subject to the same restriction period mentioned above and net of tax) or will finally remain in the Bank’s possession depending on whether or not the variable remuneration giving rise to them finally accrues to him.
The Bank has signed contracts with all its executive directors. The Bank’s executive directors have indefinite-term employment contracts. Executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation.
In the case of earning an annual emolument. At December 31,
In the case of
If If the other executive directors’ contracts are terminated for any reason, they may take retirement and, therefore, claim from the insurer the benefits accrued to them under the
In accordance with the requirements of Articles 229 and 230 of the Spanish Limited Liability Companies Law (Ley de Sociedades de Capital), in order to enhance the transparency of listed companies, following is a detail of the investments held by the directors and persons related to them in the share capital of entities engaging in banking, financing or lending; and of the management or governing functions, if any, that the directors discharge thereat:
None of the members of the board of directors perform, as independent professionals or as employees, any activities of the kind indicated in the foregoing table.
The detail, by classification, type and currency, of Loans and advances to credit institutions in the consolidated balance sheets is as follows:
The loans and advances to credit institutions classified under Financial assets held for trading consist mainly of securities of foreign institutions purchased under reverse repurchase agreements, The loans and advances to credit institutions classified under Loans and receivables are mainly guarantees given in cash to credit institutions and time deposits. The impairment losses on financial assets Note 51 contains a detail of the residual maturity periods of
The detail, by classification, type and currency, of Debt instruments in the consolidated balance sheets is as follows:
At December 31,
The detail, by origin of the issuer, of Debt instruments at December 31, 2012, 2011 and 2010, net of impairment losses, is as follows:
The detail, by issuer rating, of Debt instruments at December 31, 2012, 2011 and 2010 is as follows:
The breakdown of the exposure by rating has been affected by the numerous reviews of the ratings of sovereign issuers in recent years, mainly of Spain (from AA in 2010 to A in 2011 and to BBB en 2012), Portugal (from A in 2010 to BB in 2011), the United States (from AAA in 2010 to AA in 2011) and Chile (from A in 2011 to AA in 2012). Brazil and Mexico maintained a BBB rating in 2012, 2011 and 2010.
The detail, by type of financial instrument, of Private fixed-income securities at December 31, 2012, 2011 and 2010, net of impairment losses, is as follows:
The changes in the impairment losses on Available-for-sale financial
Also, the impairment losses on Loans and receivables (EUR
Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets. Note 51 contains a detail of the residual maturity periods of Note 54 shows the Group’s total exposure, by origin of the
The detail, by classification and type, of Equity instruments in the consolidated balance sheets is as follows:
Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets, and also the related impairment losses.
The changes in Available-for-sale financial assets-Equity instruments were as follows:
The main acquisitions and disposals made in 2012, 2011
In July 2010 the Group entered into an agreement with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale to these two entities of all the shares held by Santander Group in Cielo S.A.
In December 2012 the Group, together with other Spanish financial institutions, entered into an agreement to invest in the Spanish Bank Restructuring Asset Management Company (SAREB), whereby the Group undertook to make an investment of
The notifications made by the Bank in
The detail, by type of inherent risk, of the fair value of the trading derivatives arranged by the Group is as follows (see Note 36):
Following is a breakdown of the short positions:
The detail, by classification, of Loans and advances to customers in the consolidated balance sheets is as follows:
Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates. Note 54 shows the Group’s total exposure, by origin of the There are no loans and advances to customers for material amounts without fixed maturity dates.
Following is a detail, by loan type and status,
At December 31, 2012, the Group had granted loans amounting to EUR 16,884 million (December 31, 2011: EUR 12,147 million; December 31, 2010: EUR 12,137 million) to the Spanish public sector (which had ratings of BBB, A and AA at December 31, 2012, 2011 and 2010, respectively), and EUR 4,983 million to the public sector in other countries (December 31, 2011: EUR 4,394 million; December 31, 2010: EUR 3,527 million). At December 31, 2012, the breakdown of this amount by issuer rating was as follows: 10.8% AA, 0.9% A, 74.7% BBB and 13.6% below BBB. Following is a detail, by activity, of the loans and advances to customers at December 31, 2012, net of impairment losses:
The amount of loans with less than 90 days past due installments classified as standard amounted to €4,732 million as of December 31, 2012 (€5,208 million as of December 31, 2011).
The changes in the impairment losses on the assets making up the balances of Loans and
The increase in credit loss provisions recorded in 2012 was due mainly to two factors: (i) a rise in non-performing loans ratios in certain sectors in Spain, caused by the worsening of Spain’s macroeconomic situation as a result of economic slowdown, falling consumer spending and job market deterioration, with the unemployment rate exceeding 25% (particularly significant in this context was the increase in non-performing loans ratios in the real estate sector – 47.7% at December 31, 2012, compared with 28.6% in 2011 (see Note 54)); and (ii) the upward shift in non-performing loans ratios in certain financial systems (Brazil, Chile and Portugal). Previously written-off assets recovered in 2012, 2011
The detail of the changes in the balance of the financial assets classified as Loans and
This amount, after deducting the related allowances, represents the Group’s best estimate of the fair value of the impaired assets. At December 31, Following is a detail of the financial assets classified as
The detail at December 31, 2011 is as follows:
The detail at December 31, 2010 is as follows:
Loans and advances to customers includes, inter alia, the
Securitization is used as a tool for the management of regulatory capital and as a means of diversifying the Group’s liquidity sources. In 2012, 2011 The loans derecognized include assets of Santander Holdings USA, Inc. amounting to approximately EUR 5,603 million at December 31, 2012 (December 31, 2011: EUR 7,188 million; December 31, 2010: EUR 8,538 million) that were sold, prior to this company’s inclusion in the Group, on the secondary market for multifamily loans, and over which control was transferred and substantially all the associated risks and rewards were not retained. At December 31, 2012, the Group recognized under Other liabilities an obligation amounting to EUR 91 million (December 31, 2011: EUR 105 million; December 31, 2010: EUR 128 million), which represents the fair value of the retained credit risk. The loans retained on the face of the balance sheet include the loans associated with securitizations in which the Group retains a subordinated debt and/or grants any manner of credit enhancements to the new holders. In 2012, following the Bank of England’s decision to accept, as collateral in its liquidity programmes, not only securitizations but also all mortgage loans with a given credit quality, the Group companies in the UK redeemed GBP 33,800 million in order to manage more efficiently the on-balance-sheet liquidity of Santander UK.
The detail, by type of risk hedged, of the fair value of the derivatives qualifying for hedge accounting is as follows (see Note 36):
Note 36 contains a description of the Group’s main hedges.
The detail of Non-current assets held for sale in the consolidated balance sheets is as follows:
At December 31, In 2012, the Group sold properties amounting to EUR 2,043 million, with a gross value of EUR 3,249 million, and a provision of EUR 897 million was recognized in this connection. These sales generated losses of EUR 308 million (see Note 50).
The detail, by company, of
The changes in
Following is a summary of the financial information on the companies accounted for using the equity method (obtained from the information available at the date on preparation of the financial statements):
The detail of Insurance contracts linked to pensions
In 2012 the Group entered into an agreement with Generali España, S.A. to terminate a portion of the insurance contracts linked to pensions which it held with this insurance company (see Note 25.c).
The detail of Liabilities under insurance contracts and Reinsurance assets in the consolidated balance sheets (see Note 2.j) is as follows:
The decrease in the above line items in 2011 arose from the sale of the insurance companies in Latin America to Zurich (see Note 3). In addition, on July 19, 2012, the Group entered into an agreement with Abbey Life Assurance Company Limited (“Abbey Life Assurance”), a subsidiary of Deutsche Bank, whereby Abbey Life Assurance will reinsure the entire individual life risk portfolio of Santander Group insurance companies in Spain and Portugal. Under this agreement, the Group transferred to Abbey Life Insurance, in exchange for an up-front amount, its life insurance policy portfolio at June 30, 2012 and the potential renewals of these policies. Abbey Life Insurance will assume, from the agreement date, all the risks and rewards relating to the term of these policies and their potential renewals (i.e. both the risk of changes in the actual rates of mortality and permanent total disability compared with the estimated rates, and the lapse risk of the portfolio, credit risk on the part of the insureds, etc.). The Group will continue to carry out the administrative management of these policies and will receive in exchange from Abbey Life Insurance a market consideration independent of the up-front amount received. This transaction gave rise to income of EUR 435 million recognized under Other operating income - Income from insurance and reinsurance contracts issued in the consolidated income statement (EUR 308 million net of tax).
The changes in Tangible assets in the consolidated balance
Impairment losses: Balances at January 1, 2010 Impairment charge for the year Exchange differences and other items Balances at December 31, 2010 Impairment charge for the year Exchange differences Balances at December 31, 2011 Impairment charge for the year Disposals due to change in the scope of consolidation Exchange differences Balances at December 31, 2012 Tangible assets, net: Balances at December 31, 2010 Balances at December 31, 2011 Balances at December 31, 2012
The detail, by class of asset, of Property, plant and
The carrying amount at December 31,
EUR
EUR
The fair value of investment property at December 31, The rental income earned from investment property and the direct costs related both to investment properties that generated rental income in 2012, 2011
In 2007 the Group sold ten hallmark properties and 1,152 Group branch offices to various buyers. Simultaneously, the Group entered into operating leases (with maintenance, insurance and taxes payable by the Group) on those properties with the buyers for various compulsory terms (12 to 15 years for the hallmark properties and 24 to 26 years for the branch offices), with various rent review agreements applicable during those periods. The agreements are renewable for Also, on September 12, 2008, the Group sold its head office complex (Ciudad Financiera or Santander Business Campus) to Marme Inversiones 2007, S.L. and simultaneously entered into an operating lease agreement with this company for the complex (with maintenance, insurance and taxes payable by the Group), with a compulsory term of 40 years, during which the rent (initially set at EUR 6.8 million per month, payable quarterly) will be reviewed annually based on the variation in the preceding twelve months in the Harmonised Consumer Price Index of the euro zone multiplied by 1.74, with a minimum of 2.20% during the first ten years and a maximum of 6% throughout the lease term. The agreement includes an option exercisable by the Group on final expiry of the lease to purchase the Business Campus at its market value on the expiry date -the market value will be determined, if appropriate, by independent experts-, and a right of first refusal if the lessor should wish to sell the Business Campus. In addition to the two aforementioned agreements, the Group entered into a third additional promotion agreement, whereby during the first 20 years of the lease term it can request Marme Inversiones 2007, S.L. to construct buildings additional to those already existing at the Business Campus or to acquire additional land (from the third year onwards) to be included in the Business Campus, all under certain terms and conditions and with a maximum total cost of approximately EUR 296 million, which would subsequently be included in the lease agreement. The most noteworthy feature of the other agreed terms and conditions, all of which are customary market conditions for operating lease agreements, is that none of the aforementioned lease agreements provides for the transfer of ownership of the properties to the Group on expiry thereof, and the Group is entitled not to renew the rentals beyond the minimum compulsory term. Furthermore, the Group has not granted any guarantee to the buyers for any losses that might arise from the early termination of the agreements or for possible fluctuations in the residual value of the aforementioned properties.
The rental expense recognized by the Group in
The detail
At least once per year (or whenever there is any indication of impairment), the Group reviews goodwill for impairment (i.e. a potential reduction in its recoverable value to below its carrying amount). The first step that must be taken in order to perform this analysis is the identification of the cash-generating units, i.e. the Group’s smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The The amount to be recovered of the cash-generating unit The Group’s directors assess the existence of any indication that might be considered to
Regardless of whether there is any indication of impairment, every year the Group calculates the recoverable amount of each cash-generating unit to which goodwill has been allocated and, Firstly, the Group determines the recoverable amount by calculating the fair value of each cash-generating unit on the basis of the quoted price of the cash-generating units, if available, and of the price earnings
Following is a detail of the main assumptions used in determining the recoverable amount, at 2012 year-end, of the most significant cash-generating units which were valued using the discounted cash flow method:
Given the degree of uncertainty Based on the foregoing, and in accordance with the estimates, projections and sensitivity analyses available to the Bank’s directors, in In 2011 all At December 31, The changes in Goodwill were as follows:
The Group has goodwill generated by cash-generating units located in non-euro currency countries (mainly the UK, Brazil, the United States, Poland, Mexico and Chile) and, therefore, this gives rise to exchange differences on the translation to euros, at closing rates, of the amounts of goodwill denominated in foreign currencies. In accordance with current regulations, these exchange differences were recognized with a charge to the heading Valuation
The detail of Intangible
At December 31, 2012, 2011
The detail of Other assets is as follows:
The detail, by classification, counterparty, type and currency, of Deposits from central banks and Deposits from credit institutions in the consolidated balance sheets is as follows:
Both asset and liability balances with central banks The Group continued to go to these auctions and deposit in the ECB most of the funds captured, Note 51 contains a detail of the residual maturity periods of financial liabilities at
The detail, by classification, geographical area and type, of Customer deposits is as follows:
Note 51 contains a detail of the residual maturity periods of financial liabilities at
The detail, by classification and type, of Marketable debt securities is as follows:
At December 31, 2011 Note 51 contains a detail of the residual maturity periods of financial liabilities at
The detail, by currency of issue, of Bonds and debentures outstanding is as follows:
The changes in Bonds and debentures outstanding were as follows:
These notes were issued basically by Banco Santander, S.A., Santander Consumer Finance, S.A., Santander Commercial Paper, S.A. (Sole-Shareholder Company), Abbey National North America LLC,
At December 31,
The mortgage-backed securities and other mortgage securities are secured by mortgage loans with average maturities of more than ten years. The main terms and conditions of these loans are listed below:
First mortgage for acquisition and/or refurbishment of principal or second residence, which at the date of securitization must not have any amounts more than 30 days past due. For these purposes, financing granted to property developers is excluded.
Appraisal conducted by specialist valuer.
The amount of the loan does not exceed 80% of the lower of the appraised value and the purchase price, unless additional guarantees are provided (borrower’s payment capacity, other collateral, guarantors of solvency or mortgage credit insurance), in which case this limit may be extended up to a maximum of 120%.
Each of the mortgaged properties must have at least one liability insurance policy in force. The capital insured must not be lower than either the appraised value (excluding the land) or the amount of the loan.
Transactions classified as non-performing, at pre-action stage and at procedural stage.
Transactions without appraisal by a specialist valuer.
Transactions exceeding 80% of the appraised value in residential financing and 60% in the case of other assets.
Second mortgages or mortgages with insufficient collateral.
Transactions without insurance or with insufficient insurance.
The other securitizations, including asset-backed securities and notes issued by special-purpose vehicles (SPVs), are secured by:
Mortgage loans to individuals to finance the acquisition and refurbishment of homes with an average maturity of more than ten years.
Personal consumer finance loans with no specific guarantee and unsecured loans with an average maturity of five years.
Loans to SMEs (non-financial small and medium-sized enterprises) secured by State guarantees, and loans to companies (micro companies, SMEs, companies and large companies) secured by property mortgages, the borrower’s personal guarantee, guarantees and other collateral other than property mortgages, with an average maturity of seven years.
Mortgage and non-mortgage loans to finance municipalities, autonomous communities and subsidiaries with an average maturity of more than ten years.
Asset-backed securities issued by various European special-purpose vehicles backed by German and Italian loans for the purchase of vehicles and Italian personal loans, with an average maturity of eight years.
Commercial credit of Banco Santander, S.A. (ordinary invoice discounting, occasional discounting and advances to customers on legitimate receivables) with an average maturity of 45 days. The fair value of the guarantees received by the Group (financial and non-financial assets) which the Group is authorized to sell or pledge even if the owner of the guarantee has not defaulted is scantly material taking into account the Group’s financial statements as a whole.
The members of the boards of directors of the Group entities hereby state that the Group entities have specific policies and procedures in place to cover all activities relating to the mortgage-market issues launched by the Group, which guarantee strict compliance with the mortgage market regulations applicable to these activities as provided for in Royal Decree 716/2009, of April 24, implementing certain provisions of Mortgage Market Law 2/1981, of March 25, and, by application thereof, in Bank of Spain Circulars 7/2010 and 5/2011, and other financial and mortgage system regulations. Also, financial management defines the Group entities’ funding strategy. The risk policies applicable to mortgage market transactions envisage maximum loan-to-value (LTV) ratios, and specific policies are also in place adapted to each mortgage product, which occasionally require the application of stricter limits. The Bank’s general policies in this respect require the repayment capacity of each potential customer (the effort ratio in loan approval) to be analyzed using specific indicators that must be met. This analysis must determine whether each customer’s income is sufficient to meet the repayments of the loan requested. In addition, the analysis of each customer must include a conclusion on the stability over time of the customer’s income considered with respect to the life of the loan. The aforementioned indicator used to measure the repayment capacity (effort ratio) of each potential customer takes into account mainly the relationship between the potential debt and the income generated, considering on the one hand the monthly repayments of the loan requested and other transactions and, on the other, the monthly salary income and The Group entities have The Group entities’ procedures envisage that each mortgage originated in the mortgage market must be individually valued by an appraisal company not related to the Group.
Mortgage Market Law 41/2007, Article 5, establishes that any appraisal company approved by the Bank of Spain may issue valid appraisal reports. However, as permitted by this same article, the Group entities perform a series of checks and select, from among these companies, a small group with which Basically, the companies wishing to cooperate with the Group must have a significant level of activity in the mortgage market in the area in which they operate, they must pass a preliminary screening process based on criteria of independence, technical capacity and solvency -in order to ascertain the continuity of their business- and, lastly, they must pass a series of tests prior to obtaining definitive approval. In order to comply in full with the legislation, any appraisal provided by the customer is reviewed, irrespective of which appraisal company issues it, to check that the requirements, procedures and methods used to prepare it are formally adapted to the valued asset pursuant to current legislation and that the values reported are customary in the market.
The information
Mortgage-backed bonds (cédulas hipotecarias) The mortgage-backed bonds issued by Group entities are securities the principal and interest of which are specifically secured by mortgages, there being no need for registration in the Property Register and without prejudice to the issuer’s unlimited liability. The mortgage-backed bonds include the holder’s financial claim on the issuer, secured as indicated in the preceding paragraph, and may be enforced to claim payment from the issuer after maturity. The holders of these securities have the status of special preferential creditors vis-à-vis all other creditors (established in Article 1923.3 of the Spanish Civil Code) in relation to all the mortgage loans and credits registered in the issuer’s
In the event of insolvency, the holders of these bonds will enjoy the special privilege established in Article 90.1.1 of Insolvency Law 22/2003, of July 9. Without prejudice to the foregoing, in accordance with Article 84.2.7 of the Insolvency Law, during the insolvency proceedings, the payments relating to the repayment of the principal and interest of the bonds issued and outstanding at the date of the insolvency filing will be settled up to the amount of the income received by the insolvent party from the mortgage loans and credits and, where appropriate, from the replacement assets backing the bonds and from the cash flows generated by the financial instruments associated with the issues (Final Provision 19 of the Insolvency Law). If, due to a timing mismatch, the income received by the insolvent party is insufficient to meet the payments described in the preceding paragraph, the insolvency managers must settle them by In the event that the measure indicated in Article 155.3 of the Insolvency Law were to be adopted, the payments to all holders of the mortgage-backed bonds issued would be made on a pro-rata basis, irrespective of the issue dates of the bonds. The outstanding mortgage-backed bonds issued by the Group Mortgage bond issuers have an early redemption option solely for the purpose of complying with the limits on the volume of outstanding mortgage-backed bonds stipulated by mortgage market regulations. None of the mortgage-backed bonds issued by the Group entities had replacement assets assigned to them.
The detail, by currency of issue, of Subordinated liabilities in the consolidated balance sheets is as follows:
Note 51 contains a detail of the residual maturity periods of subordinated liabilities at each year-end and of the related average interest rates in each year.
The changes in Subordinated liabilities in the last three years were as follows:
This item includes the preference shares The preference shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties and, except for the shares of Santander UK plc referred to below, are redeemable at the discretion of the issuer, based on the terms and conditions of each issue. For the purposes of payment priority, preference shares (participaciones preferentes) are junior to all general creditors and to subordinated deposits. The remuneration of these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.
The other issues are subordinated and, therefore, rank junior to all general creditors of the issuers. The issues launched by Santander Central Hispano Issuances Limited, Santander Central Hispano Financial Services Limited, Santander Issuances, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company), Santander Finance Capital, S.A. (Sole-Shareholder Company), Santander International Preferred, S.A. (Sole-Shareholder Company) and Santander Finance Preferred S.A. (Sole-Shareholder Company) are guaranteed by the Bank or by restricted deposits arranged by the Bank for this purpose.
At December 31, At December 31, The interest accrued
The detail of Other financial liabilities in the consolidated balance sheets is as follows:
Note 51 contains a detail of the residual maturity periods of other financial
The detail of Provisions in the consolidated balance sheets is as follows:
The changes in Provisions in the last three years were as follows:
The detail of Provisions for pensions and similar obligations is as follows:
In 2012, the Bank and Banesto reached an agreement with the employees’ representatives to alter the form of the defined-benefit obligations arising from the collective agreement into defined-contribution plans. In addition, the senior executives’ contracts with defined-benefit pension obligations were amended to alter such obligations into a defined-contribution employee welfare system. The amount of the obligations accrued with respect to all the current employees, both those subject to the collective agreement and executives, whose defined-benefit obligations were converted into defined-contribution plans, totaled EUR 1,573 million. The obligations thus altered were externalized through the execution of various insurance contracts with Spanish At December 31, 2012, 2011 The expenses incurred in respect of contributions to defined contribution plans amounted to EUR The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:
The discount rate used for the flows was determined by reference to high-quality corporate bonds. Any changes in the main assumptions could affect the calculation of the obligations. If the discount rate used had been increased or decreased by 50 b.p., there would have been an impact of +/- EUR 21 million, net of tax, on the consolidated income statement and of +/- EUR 215 million in unrecognized actuarial losses and gains.
The fair value of insurance contracts was determined as the present value of the related payment obligations, taking into account the following assumptions:
The funding status of the defined benefit obligations in 2012 and the four preceding years is as follows:
The amounts recognized in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows:
The changes in the present value of the accrued defined benefit obligations were as follows:
The changes in the fair value of plan assets and of insurance contracts linked to pensions were as follows: Plan assets
Insurance contracts linked to pensions
In view of the conversion of the defined-benefit obligations to defined-contribution obligations, the Group will not make material current contributions in Spain in 2013 to fund its defined-benefit pension obligations. The plan assets and the insurance contracts linked to pensions are instrumented through insurance policies. The following table shows the estimated benefits payable at December 31, 2012 for the next ten years:
At the end of each of the last three years, the businesses in the United Kingdom had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 53 million in 2012 (2011: EUR 35 million; 2010: EUR 55 million). The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:
The discount rate used Any changes in the
The funding status of the defined benefit obligations in
The amounts recognized in the consolidated income
The changes in the present value of the accrued defined benefit obligations were as follows:
Present value of the obligations at beginning of year Current service cost Interest cost Benefits paid Actuarial (gains)/losses Exchange differences and other items Present value of the obligations at end of year
The changes in the fair value of the plan assets were as follows:
In The main categories of plan assets as a percentage of total plan assets are as follows:
The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations. The following table shows the estimated benefits payable at December 31,
Certain of the consolidated foreign entities have acquired commitments to their employees similar to post-employment benefits. At December 31, 2012, 2011 The actuarial assumptions used by these entities (discount rates, mortality tables and cumulative annual CPI growth) are consistent with the economic and social conditions prevailing in the countries in which they are located. Specifically, the discount rate used for the flows was determined by reference to high-quality corporate bonds, except in the case of Brazil where there is no extensive corporate bond market and, accordingly the discount rate was determined by reference to the series B bonds issued by the Brazilian National Treasury Secretariat. The funding status of the obligations similar to post-employment benefits and other long-term benefits in
In December 2011 the Portuguese financial institutions, including Banco Santander Totta, S.A., transferred in part their pension obligations to the social security authorities. As a result, Banco Santander Totta, S.A. transferred the related assets and liabilities and The amounts recognized in the consolidated income
The changes in the present value of the accrued obligations were as follows:
The changes in the fair value of the plan assets were as follows:
The change in 2012 in the actuarial gains and losses, in terms of both the present value of the obligations and the fair value of the plan assets, relates to the fall in interest rates. The present value of the obligations increased due to the fall in the discount rates, since rates of between 1% and 1.75% lower than in 2011 were used. The market value of the assets improved as a result of the fall in interest rates. In
The main categories of plan assets as a percentage of total plan assets are as follows:
The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations. The following table shows the estimated benefits payable at December 31,
The
The detail of Provisions for taxes and other legal contingencies and Other provisions by each class of provision, determined by grouping those items that are of a similar nature, is as follows:
Provisions for taxes comprise provisions for Provisions for labor proceedings (Brazil) comprise lawsuits brought by labor unions, associations, public prosecutors and Provisions for other legal proceedings include provisions for court, arbitration or administrative (other than those included in other areas) proceedings brought against Santander Group companies. Customer remediation (UK) comprises the estimated Regulatory-related provisions (UK) mainly include the provisions in respect of the following issues related to Santander UK: Financial Services Compensation Scheme (‘FSCS’): The FSCS is the UK’s independent statutory compensation fund for customers of authorized financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by levies on the industry (and recoveries and borrowings where appropriate). The levies raised comprise both management expenses levies and, where necessary, compensation levies on authorized firms. UK Bank Levy: the Finance Act 2011 introduced an annual bank levy in the UK which is collected through the existing quarterly Corporation Tax collection mechanism. The UK Bank Levy is based on the total chargeable equity and liabilities as reported in the balance sheet at the end of a chargeable period, although the certain amounts are excluded. During 2012, a rate of 0.088% was applied and three different rates applied during 2011 which averaged to 0.075%. Restructuring provisions include only the direct expenditures arising from the restructuring. Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine the amounts to be provided for as our best estimate of the expenditure required to settle the corresponding claim based, among other factors, on a case-by-case analysis of the facts and the legal opinion of internal and external counsel or by considering the historical average amount of the loss incurred in such type of lawsuits. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, these obligations have no fixed settlement period and, in other cases, The
As of the date of this report, the main tax-related proceedings concerning the Group were as follows:
“Mandados de Segurança” filed by Banco Santander (Brasil) S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008.
“Mandados de Segurança” filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998.
“Mandados de Segurança” filed by Banco Santander Brasil, S.A. (currently Banco Santander (Brasil) S.A.) and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander Brasil, S.A., the “Mandado de Segurança” was declared unwarranted and an appeal was filed at the Federal
Banco Santander (Brasil) S.A.
Banco Santander (Brasil) S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services.
In addition, Banco Santander (Brasil) S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against the tax authorities in connection with the taxation for social security purposes of certain items which are not considered to be employee remuneration.
In December 2008 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. in relation to income tax (IRPJ and CSL) for 2002 to 2004. The tax authorities took the view that Banco Santander (Brasil) S.A. did not meet the necessary legal requirements to be able to deduct the amortization of the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil) S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais In May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM) and Banco Santander Brasil, S.A. (currently Banco Santander (Brasil), S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander Brasil, S.A. to DTVM in 2000, 2001 and the first two months of 2002. Both entities appealed against the infringement notices at CARF, with DTVM obtaining a favorable decision and Banco Santander Brasil, S.A. an unfavorable decision. Both decisions were appealed by the losing parties at the Higher Chamber of CARF, and the appeal relating to Banco Santander Brasil, S.A. is pending a decision. With respect to DTVM, having been notified of the decision overturning the previous favorable judgment on August 24, 2012, it lodged an appeal at the Higher Chamber of CARF on August 29, 2012. In the opinion of its legal advisors, the Group considers that the tax treatment applied in these transactions was correct.
In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros S.A. (Brasil), as the successor by merger to ABN AMRO Brasil Dois Participaçoes, S.A., in relation to income tax (IRPJ and
A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. A favorable judgment at first instance was handed down in September 2006, although the judgment was appealed against by the tax authorities in January 2007 and the court found in favor of the latter in June 2010. Abbey National Treasury Services plc appealed against this decision at a higher court and in December 2011 the tax authorities confirmed their intention to file the related pleadings. The
Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right to take a foreign tax credit in connection with taxes paid outside the United States At the date of approval of
Customer remediation: claims associated with the sale by Santander UK of certain financial products (principally payment protection
Payment protection insurance is a UK insurance product offering payment protection on unsecured personal loans (and credit cards). The product was sold by all UK banks. The mis-selling issues are predominantly related to business written before 2009. The nature and profitability of the product has changed materially since 2008, in part due to customer and regulatory pressure. On July 1, 2008, the UK Financial Ombudsman Service On October 8, 2010, the British Bankers’ Association Santander UK did not participate in the legal action undertaken by other UK banks and has been consistently making A detailed review of the provision was performed by Santander UK in the first half of In this context, in 2011 the Group recognized a provision, with a net effect on results of EUR 620 million (GBP 538 million), which was calculated on the basis of the estimate of the number of claims that would be received, of the number of claims that would be upheld and of the estimated average amount of compensation in each case.
Claim volumes – the estimated number of customer complaints received, Uphold rate – the estimated percentage of complaints that are, or will be, upheld in favor of the customer, and Average cost of redress – the estimated payment to customers, including compensation for any direct loss plus interest. The assumptions have been based on the following: Analysis completed of the causes of complaints, and uphold rates, and how these are likely to vary in the future, Actual claims activity registered to date, The level of redress paid to customers, together with a forecast of how this is likely to change over time, The impact on complaints levels of proactive customer contact, and The effect of media coverage on the issue. The assumptions are kept under review, and regularly reassessed and validated against actual customer data, e.g. claims received, uphold rates, the impact of any changes in approach to uphold rates etc, and any re-evaluation of the estimated population. The most critical factor in determining the level of provision is the volume of claims. The uphold rate is a reasonably consistent function of the sales process and the average cost of redress can be predicted reasonably accurately given that management is dealing with a high volume and reasonably homogeneous population. In setting the provision, management estimated the total claims that were likely to be received. Previous experience has indicated that claims could be received over a number of years. While initial claim levels at the beginning of the process were quite low, this has increased in line with our initial expectations as a result of press coverage and the activities of the claims management companies (“CMC’s”). The CMC’s facilitate customer claims in return for a share of the redress payment and advertise heavily thereby resulting in an increase in the volume of claims experienced. The table below sets out the actual claims received to date. Movements in the number of PPI claims outstanding during the years ended December 31, 2012, 2011 and 2010 were as follows:
As anticipated, PPI complaints rose significantly in 2012, due to higher press coverage and increased focus by CMCs. The increase was partly driven by invalid complaints (which also drove an increase in the level of claims rejected) and claims originated by CMCs. In addition, Santander UK proactively contacted more than 300,000 customers during the year, which led to an increase in claims received. The number of claims Press coverage on PPI reached significant levels in 2011, following the High Court‘s dismissal of the BBA’s application for a judicial review, as highlighted above. The focus of the CMCs also started to be Management reassess the level of provision required at each reporting period, taking account of the predictions of The assumptions and consequent level of provision remain subjective. This relates particularly to the uncertainty associated with
Lanetro, S.A. (currently Zed Worldwide, S.A.): claim (ordinary lawsuit no. 558/2002) filed by Lanetro, S.A. against Banco Santander, S.A. at On December 16, 2003, a judgment was handed down dismissing the plaintiff’s request. The subsequent appeal filed by Lanetro, S.A. was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006. In a decision handed down on March 30, 2010, the Supreme Court dismissed an extraordinary appeal against procedural infringements and partly upheld a cassation appeal filed in both cases by the Bank against the decision of the Madrid Provincial Appellate Court. Zed Worldwide, S.A. requested the court-ordered enforcement of the decision. On January 25, 2011, the court issued an order to enforce the decision handed down by the Madrid Provincial Appellate Court, whereby the Bank Following this order, an agreement was reached for the out-of-court enforcement of the decision whereby the Bank would subscribe and
Proceeding under The damages claimed are broken down as follows: (i) On March 2, 2010, the court of first instance handed down a decision partly upholding both the claim filed against the Bank and the counterclaim, ordering the Bank to pay the plaintiff Galesa de Promociones S.A. filed a cassation appeal with the Supreme Court against this decision, which was given leave to proceed in an order dated October 11, 2011, and the Bank submitted a notice of opposition.
After the Madrid Provincial Appellate Court had rendered null and void the award handed down in the previous arbitration proceeding, on September 8, 2011 Banco Santander S.A. filed a new request for arbitration with the Secretary of the Spanish Arbitration Court against the business entity The Arbitration Court, in strict obedience with the decision of the Commercial Court, agreed in a decision dated January 20, 2013 to stay the arbitration proceedings at the stage reached until a decision may be reached in this respect in the insolvency proceeding. In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party due to the potential creditor’s rights to which it might be entitled as a result of the arbitration proceeding relating to Delforca 2008 S.A, with a view to having the claim recognized as a contingent ordinary claim without specified amount. The insolvency proceeding is Additionally, in April 2009 Mobilaria Monesa, This proceeding was stayed by the Santander Provincial Appellate Court in an order dated December 20, 2010 due to the Court admitting the preliminary civil ruling grounds claimed by the Bank. The above stay
The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.
Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s
“Planos
Proceeding under Civil Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for USD 150,000,000 in principal plus USD 4,656,164 in interest, upon alleged termination of an escrow contract. On October 7, 2010, the Bank was served notice of a decision dated October 1, 2010 which upheld the claim filed by Banco Occidental de Descuento, Banco Universal, C.A. without a ruling being issued in relation to
A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A., dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. A cassation appeal was filed by Banco Occidental de Descuento, Banco Universal, C.A. against the Madrid Provincial Appellate Court judgment and the parties have appeared before the Supreme Court.
On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group S.A. at
The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets On November 12, 2008, the Group announced the implementation of a solution (which was of a strictly commercial, exceptional nature and did not imply any admission of mis-selling) for holders of one of the products sold -Seguro Banif Estructurado- issued by the insurance company Axa Aurora Vida, which had as its underlying The solution involved replacing the Lehman issuer risk with the issuer risk of Santander Group subsidiaries. The exchange period ended on December 23, 2008. As a result of the exchange, at 2008 year-end a loss of In February 2009 the Group offered a similar solution to other customers affected by the Lehman bankruptcy. The cost of this transaction, before tax, was
The intervention, on the grounds of alleged fraud, of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) by the On January 27, 2009, the Group announced its decision to offer a solution to those of its private banking customers who had invested in Optimal Strategic and had been affected by the alleged fraud. This solution, which was applied to the principal amount invested, net of redemptions, totaled The Group has at all times exercised due diligence in the management of its customers’ investments in the Optimal Strategic fund. These products have always been sold in a transparent way pursuant to applicable legislation and established procedures and, accordingly, the decision to offer a solution was taken in view of the exceptional circumstances attaching to this case and based on solely commercial reasons, due to the interest the Group has in maintaining its business relationship with these customers.
At the time of On March 18, 2009, the Group issued the preference shares earmarked for the replacement of assets offered to the private banking customers affected by the intervention of Madoff On May 26, 2009, two funds managed by Optimal Investment Services, S.A. (“OIS”), an indirect subsidiary of Banco Santander, S.A., announced that they had entered into an agreement with Irving H. Picard, the court-appointed trustee for the liquidation of Madoff Securities. Under the agreement, the trustee allowed the funds’ claims in the liquidation proceeding and reduced his clawback demands on the funds by the amounts withdrawn by the latter from Madoff Securities, in the 90 days prior to bankruptcy, which US legislation allows him to claim, in exchange for the partial payment of those demands by the funds. The funds are Optimal Strategic U.S. Equity Limited and Optimal Arbitrage Limited. These are the only Optimal funds that had accounts at Madoff Securities. Pursuant to the agreement, the funds’ claims against Madoff Securities’ estate were allowed in their full amounts, calculated on a cash-in, cash-out basis, of USD 1,540,141,277.60 and USD 9,807,768.40, respectively, and the funds were entitled to Securities Investor Protection Corporation advances of USD 500,000 each. The funds paid 85% of the clawback claims asserted by the trustee. The payments totaled USD 129,057,094.60 for Strategic U.S. Equity and USD 106,323,953.40 for Arbitrage. The funds agreed not to file any other claims against Madoff Securities’ estate (in liquidation). The agreement also contains an “equal treatment” provision, so that if the trustee settled similar clawback claims for less than 85%, the funds would receive a rebate of a portion of their payments to make the percentages applied to the funds equal to those applied to other investors in comparable situations. The agreement The agreement contains The agreement between the trustee and the aforementioned Optimal funds was approved by the United States Bankruptcy Court in New York on June 16, 2009. Madoff Securities is currently in liquidation in accordance with the Securities Investor Protection Act of 1970 at the United States Bankruptcy Court in New York. Bernard L. Madoff, the chief executive of Madoff Securities, pleaded guilty to perpetrating what was probably the In April 2011, by means of a corporate operation, the funds Optimal
This arrangement enabled the investors who so wished to take direct control of their proportional part of the claim against the insolvency estate of Madoff Securities and also
The price reached in the auction of the SPV shares was equal to 72.14% of the amount of the claim against
In the second half of 2012 the Group made additional sales of its interest in the SPV and, accordingly, at December 31,
On December 17, 2010, the Bank of New York Mellon Trust Company, National Association (“the Trustee”) filed a The If the acquisition The increased rate in the event of a “change of control” is defined in the indenture as the greater of (i) 7.41% per annum; and (ii) the rate determined by a reference agent in accordance with a process established in the indenture. There is no “change of control” under the Trust PIERS indenture, among other reasons, if the consideration for the acquisition consisted of shares of common stock listed on a national securities market. Banco Santander issued American Depositary Shares (ADSs) in relation to the acquisition that were traded and continue to be traded on the New York Stock Exchange.
On December 13, 2011, the On September 12, 2012, the judge in charge of the investigation issued a report recommending that the interest rate of the Trust PIERS be set at 13.61% from January 31, 2009 and that the holders of Trust PIERS should be compensated with USD 305,626,022 for unpaid interest, USD 3,160,012.31 for lawyers’ fees and USD 130,150.23 for the interest on On November 23, 2012, Sovereign signed a “ Settlement Agreement” with the Trustee resolving all the disputes between the Trustee and Sovereign with respect to the claim filed. The Settlement Agreement (i) acknowledges that a “change of control” occurred in accordance with the Trust indenture as a result of the acquisition, (ii) provides that the annual interest rate on the distributions made to the Trust PIERS holders from November 15, 2012 shall be 12.835%, (iii) requires Sovereign to carry out a takeover bid for all the Trust PIERS at a purchase price of USD 78.95 in cash per USD 50.00 and (iv) establishes that Sovereign may redeem the issue in full at any time from January 30, 2014. The Settlement Agreement also requires Sovereign to make additional offers to purchase the Trust PIERS within ten business days following each quarterly distribution from the settlement date until no Trust PIERS remain outstanding, at the same purchase price mentioned above. On November 26, 2012, Sovereign announced to the Trust PIERS holders an offer in accordance with the requirements of the Settlement Agreement indicated in point (iii) of the preceding paragraph, which was completed on December 26, 2012, and approximately 40.4% of the outstanding aggregate liquidation amount of the Trust PIERS was accepted for purchase. In addition, under the Settlement Agreement, on December 26, 2012, the parties applied to discontinue proceedings at the US District Court for the Southern District of New York and, accordingly, this litigation is
At December 31, 2011, the Group had recognized
The Bank and
In this context, it must be considered that the
The total amount of payments made by the Group arising from litigation in 2012, 2011
The detail of Other liabilities in the consolidated balance sheets is as follows:
Pursuant to current legislation, the Consolidated Tax Group includes Banco Santander, S.A. (as the Parent) and the Spanish subsidiaries that meet the requirements provided for in Spanish legislation regulating the taxation of the consolidated profits of corporate groups (as the controlled entities). The other Group companies file income tax returns in accordance with the tax regulations applicable to them.
At December 31, The other entities have the corresponding years open for review, pursuant to their respective tax regulations. The tax audit of 2003 and 2004 for the main taxes applicable to the Consolidated Tax Group was completed in April 2010. Most of the tax assessments issued were signed on a contested basis. In In 2012 there were no developments with a significant impact in connection with the tax disputes at various instances which were pending resolution at December 31, Because of the possible different interpretations which can be made of the tax regulations, the outcome of the tax audits of the years reviewed and of the open years might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Group’s tax advisers consider that it is unlikely that such contingent liabilities will become actual liabilities, and that in any event the tax charge which might arise therefrom would not materially affect the consolidated financial statements of the Group.
The reconciliation of the income tax expense calculated at the
In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in consolidated equity:
Tax assets in the consolidated balance sheets includes debit balances with the Spanish Public Treasury relating to deferred tax assets. Tax liabilities includes the liability for the Group’s various deferred tax liabilities. The detail of Tax
The detail, by type, of the deferred tax assets and liabilities at December 31,
The changes in Tax
In conformity with the Listing Rules Instrument 2005 published by the UK Financial Services Authority, it is hereby stated that shareholders of the Bank resident in the United Kingdom will be entitled to a tax credit in respect of the withholdings the Bank is required to make from the dividends to be paid to them. The shareholders of the Bank resident in the United Kingdom who hold their ownership interest in the Bank through Santander Nominee Service will be informed directly of the amount thus withheld and of any other data they may require to complete their tax returns in the United Kingdom. The other shareholders of the Bank resident in the United Kingdom should contact their bank or securities broker.
Non-controlling interests include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.
The detail, by Group company, of
The changes in Non-controlling interests are
As described in Note 3, in 2010 the Bank acquired non-controlling interests previously held by third parties in Grupo Financiero Santander
Finally, as indicated in Note 3, in 2012 the Group sold 24.9% of its ownership interest in Grupo Financiero Santander México, S.A.B. de C.V., thus giving rise to an increase of EUR 1,092 million in Reserves, EUR 1,493 million in Non-controlling interests and EUR 263 million in Valuation adjustments - Exchange differences. Also, in January and March 2012 the Group transferred shares accounting for 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions, generating an increase in the balance of Non-controlling interests of EUR 1,532 million (see Note 34). The foregoing changes are shown in the consolidated statement of changes in total equity.
The balances of Valuation adjustments include the amounts, net of the related tax effect, of the adjustments to assets and liabilities recognized temporarily in equity through the consolidated statement of recognized income and expense until they are extinguished or It should be noted that the consolidated statement of recognized income and expense includes the changes to Valuation adjustments as follows:
Revaluation gains (losses): includes the amount of the income, net of the expenses incurred in the year, recognized directly in equity. The amounts recognized in equity in the year remain under this item, even if in the same year they are transferred to the income statement or to the initial carrying amount of the assets or liabilities or are reclassified to another line item.
Amounts transferred to income statement: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the income statement.
Amounts transferred to initial carrying amount of hedged items: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the initial carrying amount of assets or liabilities as a result of cash flow hedges.
Other reclassifications: includes the amount of the transfers made in the year between the various valuation adjustment items. The amounts of these items are recognized gross, including the amount of the valuation adjustments relating to non-controlling interests, and the corresponding tax effect is presented under a separate item, except in the case of entities accounted for using the equity method, the amounts for which are presented net of the tax effect.
Valuation
The breakdown, by type of instrument and geographical origin of the issuer, of Valuation
At each reporting date the Group assesses whether there is any objective evidence that the instruments classified as available-for-sale (debt securities and equity instruments) are impaired. This assessment includes but is not limited to an analysis of the following information: i) the issuer’s economic and financial position, the existence of default or late payment, analysis of the issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; ii) market-related information such as changes in the general economic situation, changes in the issuer’s sector which might affect its ability to pay; iii) changes in the fair value of the security analyzed, analysis of the origins of such In the case of equity instruments, when the changes in the fair value of the instrument under analysis are assessed, the duration and significance of the fall in its market price below cost for the Group is taken into account. As a general rule, for these purposes the Group considers a significant fall to be a 40% drop in the value of the asset and/or a continued fall over a period of 18 months. Nevertheless, it should be noted that the Group assesses, on a case-by-case basis each of the securities that have suffered losses, and monitors the performance of their prices, If, after the above assessment has been carried out, the Group considers that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the income statement for the amount of the loss in equity under Valuation adjustments. Also, where the Group does not intend and/or is not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down to its fair value. At the end of At the end of At the end of
Valuation Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged instruments.
Valuation Valuation The changes in Of the change in the balance in The detail, by country, of Valuation
Valuation The net changes in Valuation
Shareholders’ equity includes the amounts of equity contributions from shareholders, accumulated profit or loss recognized through the consolidated income statement, and components of compound financial instruments having the substance of permanent equity. Amounts arising from subsidiaries are presented in the appropriate items based on their nature. The changes in Shareholders’ equity are presented in the consolidated statement of changes in total equity. Significant information on certain items of Shareholders’ equity and the changes therein in
At December 31,
On October 7, 2010, after completion on October 4, 2010 of the period for the voluntary conversion of “Valores Santander” into shares, and in accordance with the terms established in the related prospectus, 11,582,632 new shares were issued to cater for the conversion of 33,544 debt securities. On November 2, 2010, the bonus issue through which the “Santander Dividendo Elección” programme is instrumented took place, whereby 88,713,331 shares (1.08% of the share capital) were issued, corresponding to a capital increase of EUR 44 million. Following these transactions, at December 31, 2010 the Bank’s share capital On February 1, 2011, the bonus issue through which the “Santander Dividendo Elección” programme (see Note 4) is instrumented took place, whereby 111,152,906 shares (1.33% of the share capital) relating to bonus share rights were issued in the proportion of one new share for 65 existing shares, for an amount of EUR 55.5 million. Additionally, on October 7, 2011, after completion on October 3, 2011 of the period for the voluntary conversion of “Valores Santander” into shares, and in accordance with the terms established in the prospectus, 1,223,457 new shares were issued to cater for this exchange. On November 2, 2011, the bonus issue through which the “Santander Dividendo Elección” programme is instrumented took place, whereby 125,742,571 shares (1.49% of the share capital) were issued, corresponding to a capital increase of EUR 62.8 million.
Finally, 341,802,171 new shares (3.837% of the share capital) with a par value of EUR 171 million and a share premium of EUR 1,773 million were issued on December 30, 2011 within the framework of the repurchase offer aimed at the holders of Series X preference shares issued by Santander Finance Capital, who, upon accepting this offer, irrevocably requested to subscribe new shares of the Bank for the amount received by them in the repurchase. At December 31, 2011, the Bank’s share capital consisted of 8,909,043,203 shares with a total par value of EUR 4,454.5 million. On January 31, 2012 and May 2, 2012, the bonus issues through which the “Santander Dividendo Elección” programme is instrumented took place, whereby 167,810,197 and 284,326,000 shares (1.85% and 3.04% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 83.9 million and EUR 142.2 million, respectively. The shareholders at the annual general meeting on March 30, 2012 resolved to grant holders of “Valores Santander” (see Note 34.a) the option to request the voluntary conversion of their shares on four occasions prior to October 4, 2012, the date of their mandatory conversion. As a result of the exercise of this option, 73,927,779 shares were issued on June 7, 193,095,393 on July 5, 37,833,193 on August 7, 14,333,873 on September 6 and 200,311,513 on October 9, 2012, relating to capital increases of EUR 37 million, EUR 97 million, EUR 19 million, EUR 7 million and EUR 100 million, respectively. Also, on July 31, 2012 and November 2, 2012, the bonus issues through which the “Santander Dividendo Elección” programme is instrumented took place, whereby 218,391,102 and 222,107,497 shares (2.22% and 2.15% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 109.2 and EUR 111.1 million, respectively. At December 31, 2012, the Bank’s share capital consisted of 10,321,179,750 shares with a total par value of EUR 5,161 million. The Bank’s shares are listed on the Spanish Stock Market Interconnection System and on the New York, London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges, and all of them have the same features and rights. At December 31,
The shareholders at the annual general meeting held on The shareholders at the annual general meeting of In addition, the aforementioned annual general meeting authorized the board to issue fixed-income securities, convertible into or exchangeable for shares of the Bank, for up to a total of EUR 8,000 million or the equivalent amount in another currency. The Bank’s directors have until At December 31, At December 31, At December 31,
Share premium includes the amount paid up by the Bank’s shareholders in capital issues in excess of the par value. The Spanish Limited Liability Companies Law The increase in the balance of Share premium in 2012, 2011 and 2010 relates to the capital increases detailed in Note 31.a. Specifically, in 2012 the share premium was increased by EUR 6,551 million as a result of the conversion of “Valores Santander” and was reduced by EUR 220 million in order to cater for the capital increases resulting from the “Santander Dividendo Elección” programme. Also, in
Shareholders’ Shareholders’
The detail of Accumulated reserves and Reserves of entities accounted for using the equity method is as follows:
Under the Consolidated Spanish Limited Liability Companies Law, 10% of net profit for each year must be transferred to the legal reserve. These transfers must be made until the balance of this reserve reaches 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount. In 2012 the Bank transferred EUR 141 million from the Share premium account and EUR 34 million of 2011 profit to the Legal reserve. In 2011 the Bank transferred EUR 24 million (2010: EUR 10 million) from the Share premium account to the Legal
Pursuant to the Consolidated Spanish Limited Liability Companies Law (Ley de Sociedades de Capital), a restricted reserve has been recognized for an amount equal to the carrying amount of the Bank shares owned by subsidiaries. The balance of this reserve will become unrestricted when the circumstances that made it necessary to record it cease to exist. Additionally, this reserve covers the outstanding balance of loans granted by the Group secured by Bank shares and the amount equivalent to loans granted by Group companies to third parties for the acquisition of treasury shares.
The balance of Revaluation reserve Royal Decree-Law 7/1996 can be used, free of tax, to increase share capital. From January 1, 2007, the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been If the balance of this reserve were used in a manner other than that provided for in Royal Decree-Law 7/1996, of June 7, it would be subject to taxation.
The detail, by company, of Reserves of subsidiaries and jointly controlled entities, based on the companies’ contribution to the Group (considering the effect of consolidation adjustments) is as follows:
Other equity instruments includes the equity component of compound financial instruments, the increase in equity due to personnel remuneration, and other items not recognized in other Shareholders’ equity items. At December 31, “Valores Santander” In 2007, in order to partially finance the takeover bid launched on ABN AMRO, Santander Emisora 150, S.A. Sole-Shareholder Company issued securities mandatorily convertible into newly-issued ordinary shares of the Bank (“Valores Santander”) amounting to EUR 7,000 million. It was possible to exchange these securities voluntarily for Bank shares on October 4, 2011, 2010, 2009 and 2008 and they The reference price of the Bank’s share for conversion purposes was set at EUR 16.04 per share, and the conversion ratio of the debt securities -i.e. the number of Bank shares corresponding to each “Valor Santander” for conversion purposes- is 311.76 shares for each “Valor Santander”. The nominal interest rate on these securities was 7.30% until October 4, 2008 and Euribor plus 2.75% thereafter until the securities are exchanged for shares. Subsequent to issue, Banco Santander, S.A. resolved on several occasions, in accordance with the prospectus, to change the conversion ratio of these securities. The latest revision was carried out in view of the bonus share issue
In
Agreement with Qatar Holding In October 2010 several investors from the Emirate of Qatar subscribed and paid an issue launched by Banco Santander, S.A. of bonds mandatorily exchangeable for shares of Banco Santander (Brasil), S.A. The issue amounted to USD 2,819 million, of which Qatar Holding subscribed USD 2,719 million. The bonds mature on October 29, 2013, at which time they will be automatically exchanged for shares of Banco Santander (Brasil), S.A. equivalent to 5% of its share
In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions that have undertaken to deliver these shares to the holders of the bonds convertible into shares of Banco Santander (Brasil) S.A. issued by Banco Santander, S.A. in October 2010 upon the maturity of the bonds and under the terms laid down therein. As a result of these transactions, the balances of Other equity instruments and Valuation adjustments were reduced by EUR 1,668 million and EUR 26 million, respectively, and the balances of Reserves and Non-controlling interests increased by EUR 162 million and EUR 1,532 million, respectively, and, accordingly, there was no impact on Equity.
Shareholders’ Transactions involving own equity instruments, including their issuance and cancellation, are recognized directly in equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from equity, net of any related tax effect. The shareholders at the Bank’s annual general meeting on June 11, 2010 set the maximum number of Bank shares that the Bank and/or any Group subsidiary are authorized to acquire at a number equivalent to 10% of the fully paid share capital amount, at a minimum share price not lower than par value and a maximum share price of up to 3% higher than the latest quoted price with respect to which the Bank did not trade for its own account in the Spanish Stock Market Interconnection System (including the block market) on the acquisition date concerned. The Bank’s shares owned by the consolidated companies accounted for 0.474% of issued share capital at December 31, The average purchase price of the Bank’s shares in The effect on equity, net of tax, arising from the purchase and sale of Bank shares was
Memorandum items relates to balances representing rights, obligations and other legal situations that in the future may have an impact on net assets, as well as any other balances needed to reflect all transactions performed by the consolidated entities although they may not impinge on their net assets.
Contingent liabilities includes all transactions under which an entity guarantees the obligations of a third party and which result from financial guarantees granted by the entity or from other types of contract. The detail is as follows:
A significant portion of these guarantees will expire without any payment obligation Income from guarantee instruments is recognized under Fee and commission income in the consolidated income statements and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee. At December 31, i. Financial guarantees Financial guarantees includes, inter alia, financial guarantee contracts such as financial bank guarantees, credit derivatives sold, and risks arising from derivatives arranged for the account of third parties. ii. Other bank guarantees and indemnities provided
iii. Other contingent liabilities Other contingent liabilities includes the amount of any contingent liability not included in other items.
Contingent commitments includes those irrevocable commitments that could give rise to the recognition of financial assets. The detail is as follows:
The detail of off-balance-sheet funds managed by the Group is as follows:
At December 31,
The detail of the notional and/or contractual amounts and the market values of the trading and hedging derivatives held by the Group is as follows:
The notional and/or contractual amounts of the contracts entered into do not reflect the actual risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or combining them. This net position is used by the Group basically to hedge the interest rate, underlying asset price or foreign currency risk; the results on these financial instruments are recognized under Gains/losses on financial assets and liabilities (net) in the consolidated income statements and increase or offset, as appropriate, the gains or losses on the investments hedged (see Note 11). Additionally, in order to interpret correctly the results on the Securities and commodities derivatives shown in the foregoing table, it should be considered that these items relate mostly to securities options for which a premium has been received which offsets their negative market value. Also, this market value is offset by positive market values generated by symmetrical positions in the Group’s held-for-trading portfolio. The Group manages the credit risk exposure of these contracts through netting arrangements with its main counterparties and by receiving assets as collateral for its risk positions. The detail of the cumulative credit risk exposure, by type of financial derivative, is as follows:
The notional amounts and fair values of the hedging derivatives, by type of hedge, is as follows:
Following is the description of the main hedges (including the results of the hedging instrument and the hedged item attributable to the hedged risk): i. Fair value and cash flow hedges Micro-hedges The Group hedges the interest rate risk of the liabilities guaranteed by Banco Santander S.A. At Interest rate risk hedges of portfolios of financial instruments The main hedges of portfolios of financial instruments in the Group are described below:
Hedges for the purpose of eliminating exposure to the interest rate risk of mortgage loan portfolios.
Interest rate risk hedges of portfolios of fixed-rate consumer loans. Hedges for the purpose of covering the interest rate risk of sovereign debt portfolios in various currencies (euros and pounds sterling). Hedges for the purpose of covering the interest rate risk of fixed-rate
Hedges for the purpose of covering the interest rate risk of floating rate deposits from financial institutions.
These hedges are At At In 2012 a net gain of EUR 344 million was recognized in the consolidated income statement as a result of the measurement of hedges qualifying for hedge accounting (micro-hedges and macro-hedges); this amount resulted from a gain of EUR 1,265 million on hedged items and a loss of EUR 921 on hedging derivatives. In 2011 a net loss of EUR 83 million The fair value of the cash flow hedges, net of the related tax effect, is recognized
ii. Foreign currency hedges (net investments in foreign operations) As part of its financial strategy, the Group hedges the foreign currency risk arising from its investments in non-euro-zone countries. To this end, it arranges foreign currency derivatives in order to take a long position in euros vis-à-vis the local currency of the investment. At 2012 year-end, the Group held foreign currency options in this connection with an equivalent euro notional amount of EUR 12,370 million, of which EUR 10,468 million were denominated in Brazilian reais and EUR 1,902 million in Polish zloty. In 2012 losses amounting to EUR 571 million, which arose from the settlement of options that were exercised, were taken to equity. At 2012 year-end, the market value of the options not yet exercised represented an unrealized net loss of EUR 33 million. In addition to foreign currency options, the Group also arranged other hedging derivatives to round off its hedging of the structural foreign currency risk of its foreign currency investments: Chilean pesos for a notional amount of EUR 2,327 million, which gave rise to a loss of EUR 360 million in 2011; Brazilian reais for a notional amount of EUR 2,722 million, with a loss of EUR 377 million; and Mexican pesos for a total notional amount of EUR 4,172 million, with a loss of EUR 266 million. Lastly, in addition to these hedges involving derivatives, foreign currency spot sales were made to offset structural foreign currency risk. By currency, spot sales were made of US dollars against euros, which amounted to EUR 1,805 million and gave rise to a gain of EUR 38 million, and of pounds sterling against euros, which totaled EUR 6,377 million and gave rise to a loss of EUR 170 million. At 2011 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of EUR 16,688 million, of which EUR 14,456 million were denominated in Brazilian reais, EUR 942 million in Mexican pesos and EUR 1,290 million in Polish zloty. In 2011 losses amounting to EUR 83 million arising from the settlement of options that were exercised in the year were taken to Lastly, in addition to these hedges involving derivatives, the structural currency risk of the underlying carrying amount in US dollars was
At 2010 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of EUR 13,375 million, of which EUR 10,030 million were denominated in Brazilian reais and EUR 3,345 million in Mexican pesos. In 2010 losses amounting to EUR 1,313 million arising from the settlement of options that were exercised in the year were taken to reserves. At 2010 year-end, the market value of the options not yet exercised represented an
In line with the
No significant operations were discontinued in 2012, 2011 or 2010.
The detail of the profit or loss from discontinued operations is set forth below. The comparative figures were restated in order to include the operations classified as discontinued:
Additionally, following is a detail of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.
The earnings per share relating to discontinued operations were as follows:
Interest and similar income in the consolidated income statement comprises the interest accruing in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting. Interest is recognized gross, without deducting any tax withheld at source. The detail of the main interest and similar income items earned in 2012, 2011
Interest expense and similar charges in the consolidated income statement includes the interest accruing in the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by applying the effective interest method, irrespective of measurement at fair value; the rectifications of cost as a result of hedge accounting; and the interest cost attributable to provisions recorded for pensions. The detail of the main items of interest expense and similar charges accrued in 2012, 2011
Income from equity instruments includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest. The detail of Income from equity instruments is as follows:
Income for companies accounted for using the equity method comprises the amount of profit or loss attributable to the Group generated during the year by associates. The detail of Income for companies accounted for using the equity method is as follows:
Fee and commission income comprises the amount of all fees and commissions accruing in The detail of Fee and commission income is as follows:
Fee and commission expense shows the amount of all fees and commissions paid or payable by the Group in the year, except those that form an integral part of the effective interest rate on financial instruments. The detail of Fee and commission expense is as follows:
Gains/losses on financial assets and liabilities includes the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses obtained from the sale and purchase thereof.
The detail, by origin, of Gains/losses on financial assets and liabilities is as follows:
On January Also, on February 17, 2010, Banco Santander, S.A. invited the holders of perpetual subordinated bonds issued by Santander Perpetual, S.A. (Sole-Shareholder Company), with a combined outstanding nominal amount of approximately USD 1,500 million (of which Santander holds approximately USD 350 million) to submit offers for the sale of all or part of their securities, to be purchased in cash by Banco These transactions did not give rise to any significant gains or losses in 2010.
exchange differ substantially, the Group wrote down the original financial liability and recognized a new financial liability for the securities delivered, and credited to income an amount of EUR 144 million (EUR 100 million net of the related tax effect) relating to the difference between the carrying amount of the financial liability written down and the fair value of the consideration delivered. In 2012 the Group performed several securities exchange and repurchase transactions for which EUR 870 million were credited to income. In July 2012 the Group offered the holders of certain securities issued by Santander UK plc the possibility of exchanging these securities for newly-issued Santander UK plc securities; in August 2012 Banco Santander, S.A. and Santander Financial Exchanges Limited invited the holders of securities of various issues of Santander Finance Preferred, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company) and Santander Issuances, S.A. (Sole-Shareholder Company) to submit offers for the sale of their securities, to be purchased in cash; in February 2012 Banco Español de Crédito, S.A. offered the holders of preference shares of various issues the possibility of exchanging these securities for securities of a new non-convertible bond issue and, in September 2012, Banco Español de Crédito, S.A. offered the holders of securities of various issues to submit an offer for the sale of their securities, to be purchased in cash.
The detail of the amount of the asset balances is as follows:
The foregoing table shows the maximum credit risk exposure of these assets. The Group mitigates and reduces this exposure as follows:
With respect to derivatives, the Group has entered into framework agreements with a large number of credit institutions and customers for the netting-off of asset positions and the provision of collateral for non-payment. For derivatives arranged with customers, the Group also applies a risk premium accrual policy. At December 31,
Loans and advances to credit institutions and Loans and advances to customers included reverse repos amounting to EUR Also, mortgage-backed assets
Debt instruments include EUR At December 31, The detail of the amount of the liability balances is as follows:
The difference between the amount recognized as liabilities at fair value and the amount which the Group would contractually be required to pay to the holders of the related obligations at maturity, in other than derivative transactions, was EUR
Exchange differences shows basically the gains or losses on currency dealings, the differences that arise on translations of monetary items in foreign currencies to the functional currency, and those disclosed on non-monetary assets in foreign currency at the time of their disposal.
Other operating income and Other operating expenses in the consolidated income
Most of the Bank’s insurance activity is carried on in life insurance.
The detail of Personnel expenses is as follows:
The average number of employees in the Group, by professional category, was as follows:
The functional breakdown, by gender, at December 31,
The same information, expressed in percentage terms at December 31,
The
The main share-based payments granted by the Group at December 31, 2012, 2011
In recent years, as part of the deferred variable remuneration, the Group has set up remuneration systems tied to the performance of the stock market price of the shares of the Bank, based on the achievement of certain targets indicated below:
Long-term incentive policy At the board meeting on March 26, 2007, following the report of the appointments and remuneration committee, the Bank’s directors approved a long-term incentive policy aimed at the Bank’s executive directors and certain executive personnel of the Bank and of other Were it necessary or advisable for legal, regulatory or other similar reasons, the delivery mechanisms described below may be adapted in specific cases without altering the maximum number of shares linked to the plan or the essential conditions to which the delivery thereof is subject. These adaptations may involve replacing the delivery of shares with the delivery of cash amounts of an equal value. The plans shaping the aforementioned incentive policy are as follows: (i) performance share plan; (ii) obligatory investment share plan; (iii) deferred conditional delivery share plan and (iv) deferred conditional variable remuneration plan. The characteristics of the plans are set forth below: (i) Performance share plan The deferred share-based variable remuneration is instrumented through a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and other members of senior management, together with any other Group executives determined by the board of directors or, when delegated by it, the executive
This plan involves successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. The aim is to establish an adequate sequence between the end of the incentive programme linked to the previous Plan I06 and the successive cycles of this plan. Thus, the first two cycles commenced in July 2007, the first cycle having a duration of two years (PI09) and the second cycle having a standard three-year term (PI10). In June 2008, 2009, 2010 and 2011 the third, fourth, fifth and sixth and final cycles of the performance share plan (PI11, PI12, PI13 and Pl14, respectively) were approved. On July 31, 2009, 2010, 2011 and For each cycle a maximum number of shares is established for each beneficiary who remains in the Group’s employ for the duration of the plan. The target, which, if met, will determine the number of shares to be delivered, is defined by comparing the Group’s performance with that of a benchmark group of financial institutions and is linked to only one parameter, namely Total Shareholder Return (TSR). With regard to the plans approved until June 2008, the targets, which, if met, determined the number of shares to be delivered, were defined by comparing the Group’s performance with that of a benchmark group of financial institutions and were linked to two parameters, namely Total Shareholder Return (TSR) and growth in Earnings per Share (EPS). The ultimate number of shares to be delivered will be determined in each of the cycles by the degree of achievement of the targets on the third anniversary of commencement of each cycle (with the exception of the first cycle, for which the second anniversary was considered), and the shares will be delivered within a maximum period of seven months from the beginning of the year in which the cycle ends. At the end of the cycle of
In the case of Plan PI14, the TSR criterion will determine the percentage of shares to be delivered, based on the following scale and in accordance with Santander’s relative position among the group of benchmark financial institutions:
Any benchmark group entity that is acquired by another company, whose shares cease trading or that ceases to exist, will be excluded from the benchmark group. In an event of this or any similar nature, the comparison with the benchmark group will be performed in such a way that the maximum percentage of shares will be delivered if Santander ranks within the first quartile (including the 25th percentile) of the benchmark group; no shares will be delivered if Santander ranks below the median (50th percentile); 30% of the maximum amount of shares will be delivered if Santander is placed at the median (50th percentile). The linear interpolation method will be used for calculating the corresponding percentage for positions between the median and the first quartile (25th percentile) (neither included). The fair value of the equity instruments granted under these plans is EUR Plan (ii) Obligatory investment share plan The deferred share-based variable remuneration is instrumented through this multiannual incentive plan, which is payable in shares of the Bank and is conditional upon compliance with certain investment and continued service requirements. The current beneficiaries of the plan are the Group’s top 27 executives, who include the executive directors, non-director members of senior management and other executives (see Note 5). This plan, which was discontinued in 2010, is structured in three-year cycles. The beneficiaries of the plan must use 10% of their gross annual variable cash-based remuneration (or bonus) to acquire shares of the Bank in the market (the “Obligatory Investment”). As resolved by the shareholders at the relevant general Participants who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made will be entitled to receive the same number of Bank shares as that composing their initial obligatory investment. The shares will be delivered within a maximum period of one month from the third anniversary of the date on which the obligatory investment was made. The shareholders at the annual general meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should exist: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards. (iii) Deferred conditional delivery share plan At the annual general meeting held on June 11, 2010, the shareholders approved the first cycle of the deferred conditional delivery share plan. This deferred share-based variable remuneration is instrumented through a multiannual incentive plan, which is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and executives and employees of the Group whose variable remuneration or annual bonus for 2010 generally exceeded EUR 0.3 million (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid in Santander shares.
The share-based bonus is deferred over three years and will be paid, where appropriate, in three
The condition for accrual of the share-based deferred remuneration was, in addition to that of the beneficiary remaining in the Group’s employ, with the exceptions envisaged in the plan regulations, that none of the following circumstances should occur in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks, where applicable to the executive in question; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk. The shareholders at the annual general The share-based bonus is deferred over three years and will be paid, where appropriate, in three
The condition for accrual of the share-based deferred remuneration was, in addition to that of the beneficiary remaining in the Group’s employ, with the exceptions envisaged in the plan regulations, that none of the following circumstances should occur in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.
(iv) Deferred conditional variable remuneration plan The shareholders at the annual general The purpose of The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is deferred):
The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing -in the opinion of the board of directors and following a proposal of the appointments and remuneration committee-, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile. On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the deferred amount in shares and the interest on the amount accrued in cash. The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for
ii. Santander UK plc The long-term incentive plans on shares of the Bank granted by management of Santander UK plc to its employees are as follows:
In 2008 the Group launched a voluntary savings scheme for Santander UK employees (Sharesave Scheme) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the three trading sessions prior to the approval of the plan by the UK tax authorities (HMRC). This approval must be received within 21 to 41 days following the publication of the Group’s results for the first half of the year. This scheme, which commenced in September 2008, was approved by the shareholders at the annual general meeting held on June 21, 2008 and is authorized by the UK tax authorities (HMRC). At the annual general meetings held on June 19, 2009, June 11, 2010, iii. Fair value The fair value of each plan granted by the Group is calculated at the grant date. With the exception of the share option plans which include terms relating to market conditions, the transfer terms included in the vesting conditions are not taken into account to estimate fair value. The transfer terms that are not based on market conditions are taken into account by adjusting the number of shares or share options included in the measurement of the service cost of the employee so that, ultimately, the amount recognized in the consolidated income statement is based on the number of shares or share options transferred. When the transfer terms are related to market conditions, the charge for the services received is recognized regardless of whether the market conditions for the transfer are met, although the non-market transfer terms must be satisfied. The share price volatility is based on the implicit volatility scale for the Bank’s shares at the exercise prices and the duration corresponding to most of the sensitivities.
The fair value of the performance share plans was calculated as follows:
It was assumed that the beneficiaries will not leave the Group’s
The fair value of the Bank’s relative TSR position
The application of the simulation model results in a percentage value The fair value of each option granted by Santander UK was estimated at the grant date using a European/American Partial Differential Equation model with the following assumptions:
The detail of Other general administrative expenses is as follows:
Technical reports includes the fees paid by the various Group companies (detailed in the accompanying Appendices) to their respective auditors, the detail being as follows:
Other
The services commissioned from the Group’s auditors meet the independence requirements stipulated by the consolidated Audit Law (Legislative Royal Decree 1/2011, of Lastly, the Group commissioned services from audit firms other than Deloitte amounting to EUR 38.7 million (2011: EUR 37
The detail of Gains/(losses) on disposal of assets not classified as non-current assets held for sale is as follows:
The detail of Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations is as follows:
The detail, by maturity, of the balances of certain items in the consolidated balance sheets is as follows:
Both asset and liability balances with central banks The Group continued to go to these auctions and deposit in the ECB most of the funds captured, significantly increasing the liquidity buffer and improving its structure by replacing short-term maturities by longer term funding. The
Assets: Cash and balances with central banks Available-for-sale financial assets- Debt instruments Loans and receivables- Loans and advances to credit institutions Loans and advances to customers Debt instruments Liabilities: Financial liabilities at amortized cost: Deposits from central banks Deposits from credit institutions Customer deposits Marketable debt securities (*) Subordinated liabilities Other financial liabilities Difference (assets less liabilities)
The detail of the main foreign currency balances in the consolidated balance sheet, based on the nature of the related items, is as follows:
The financial assets owned by the Group are measured at fair value in the accompanying consolidated balance sheet, except for loans and receivables, equity instruments whose market value cannot be estimated reliably and derivatives that have these instruments as their underlyings and are settled by delivery thereof. Similarly, the Group’s financial liabilities -except for financial liabilities held for trading, those measured at fair value and derivatives other than those having as their underlying equity instruments whose market value cannot be estimated reliably- are measured at
Following is a comparison of the carrying amounts of the Group’s financial assets measured at other than fair value and their respective fair values at year-end:
Following is a comparison of the carrying amounts of the Group’s financial liabilities measured at other than fair value and their respective fair values at year-end:
Business segment reporting is a basic tool used for monitoring and managing the Group’s various activities. This primary level of segmentation, which is based on the Group’s management structure, comprises five segments: four operating areas plus the Corporate Activities Unit. The operating areas, which include all the business activities carried on therein by the Group, are Continental Europe, the United Kingdom (Santander UK), Latin America and The Continental Europe area encompasses all the Commercial Banking (including the Private Banking entity Banco Banif, S.A.), Wholesale Banking and Asset Management and Insurance business activities carried on in Europe with the exception of the United Kingdom. Latin America includes all the financial activities carried on by the Group through its banks and subsidiaries, as well as the The Corporate Activities segment includes the centralized management business relating to financial and industrial investments, the financial management of the Parent’s structural currency position and its structural interest rate risk position and the management of liquidity and equity through issues and securitizations.
The financial statements of each operating segment are prepared by aggregating the figures for the Group’s various business units. The basic information used for segment reporting comprises the accounting data of the legal units composing each segment and the data available from the management information systems. All segment financial statements have been prepared on a basis consistent with the accounting policies used by the Group. Consequently, the sum of the figures in the various segment income statements There are no customers located in areas other than those in which the Group’s assets are located that generate income exceeding 10% of The condensed balance sheets and income statements of the various geographical segments are as follows:
(Condensed) balance sheet Loans and advances to customers Financial assets held for trading (excluding loans and advances) Available-for-sale financial assets Loans and advances to credit institutions Non-current assets Other asset accounts Total assets / liabilities and equity Customer deposits Marketable debt securities Subordinated liabilities Liabilities under insurance contracts Deposits from central banks and credit institutions Other liability accounts Equity (share capital and reserves) Other customer funds under management Investment funds Pension funds Assets under management Savings insurance Customer funds under management (Condensed) income statement INTEREST INCOME/(CHARGES) Dividends Income for companies accounted for using the equity method Net fee and commission income/(expense) Gains/losses on financial assets and liabilities (net) and exchange differences (net) Other operating income/(expenses) TOTAL INCOME General administrative expenses Personnel expenses Other general administrative expenses Depreciation and amortization Provisions (net) Impairment losses PROFIT (LOSS) FROM OPERATIONS Impairment losses on non-financial assets Other income and charges PROFIT (LOSS) BEFORE TAX Income tax PROFIT (LOSS) FROM ORDINARY ACTIVITIES Loss from discontinued operations CONSOLIDATED PROFIT (LOSS) FOR THE YEAR Attributable to non-controlling interests PROFIT (LOSS) ATTRIBUTABLE TO THE PARENT
Following is the detail of revenue by the geographical segments used by the Group. For the purposes of the table below, revenue is deemed to be that recognized under Interest and similar income, Income from equity instruments, Fee and commission income, Gains/Losses on financial assets and liabilities (net) and Other operating income in the accompanying consolidated income statements for 2012, 2011
At this secondary level of segment reporting, the Group is structured into commercial banking, asset management and insurance and global wholesale banking; the sum of these three segments is equal to that of the primary operating geographical segments. Total figures for the Group are obtained by adding to the business segments the data for the corporate activities segment. The commercial banking segment encompasses the entire commercial banking business (except for the corporate banking business managed globally using the global relationship model). The asset management and insurance segment includes the contribution to the Group arising from the design and management of the investment fund, pension and insurance businesses of the various units. The global wholesale banking segment reflects the returns on the global corporate banking business, those on investment banking and markets worldwide, including all the globally managed treasury departments and the equities business. The condensed income statements and other significant data are as follows:
(Condensed) income INTEREST INCOME/(CHARGES) Income from equity instruments Income for companies accounted for using the equity method Net fee and commission income (expense) Gains/losses on financial assets and liabilities (net) and exchange differences (net) Other operating income/(expenses) TOTAL INCOME General administrative expenses Personnel expenses Other general administrative expenses Depreciation and amortization Provisions (net) Impairment losses PROFIT (LOSS) FROM OPERATIONS Net impairment losses on non-financial assets Other non-financial gains/(losses) PROFIT (LOSS) BEFORE TAX Income tax PROFIT (LOSS) FROM ORDINARY ACTIVITIES Loss from discontinued operations CONSOLIDATED PROFIT (LOSS) FOR THE YEAR Attributable to non-controlling interests PROFIT (LOSS) ATTRIBUTABLE TO THE PARENT
The parties related to the Group are deemed to include, in addition to its subsidiaries, associates and jointly controlled entities, the Bank’s key management personnel (the members of its board of directors and the executive vice presidents, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control. Following is a detail of the ordinary business transactions performed by the Group with its related parties, distinguishing between associates and jointly controlled entities, members of the Bank’s board of directors, the Bank’s executive vice presidents, and other related parties. Related-party transactions were made on terms equivalent to those that prevail in arm’s-length transactions or, when this was not the case, the related compensation in kind was recognized.
In addition to the detail provided above, there were insurance contracts linked to pensions amounting to EUR
1. CORPORATE RISK MANAGEMENT, CONTROL AND APPETITE PRINCIPLES
1.1 Corporate The Group’s risk management model underlying the business model is based on the following principles:
Independence of the risk function with respect to the business. The head of the Group’s risk division,
Direct involvement of senior management in the decision-making process.
Decisions by consensus,
Definition of powers. The type of activities to be performed, segments, risks to be assumed and risk decisions to be made are clearly defined for each risk approval
At
Definition of risk
Establishment of risk policies and
Construction, independent validation and approval of the risk models developed pursuant to corporate methodological guidelines. These
Implementation of a risk monitoring and control system which checks, on a daily basis and with the corresponding reports, the degree to which
1.2 Risk culture The Group’s risk culture is based on the principles of the Group’s risk management At the Group, the risk function is independent from the business units. This allows its criteria and opinions to be taken into account in the various spheres in which the Group’s businesses are carried on. The structure of the delegation of powers at the Group requires a large number of transactions to be submitted for decision by one of the Group’s central services risk committees, namely the global risk unit committee, the risk committee or the Group’s executive committee. The highly frequent nature of the meetings of these risk acceptance and monitoring committees (twice a week in the case of the risk committee; once a week in the case of the executive committee) enables a high degree of agility in the resolution of proposals while, at the same time, ensuring the assiduous participation of senior management in the daily management of the Group’s various risks. The Group has detailed action manuals and policies regarding risk management. The risk and business teams hold periodic business orientation meetings which establish approaches that are in line with Limit plan: the Group has implemented a risk limit system, which is updated at least once a year and encompasses both credit risk and the various trading, liquidity and structural market risk exposures (for each business unit and by risk factor). Credit risk management is supported by credit management programmes (individual customers and small businesses), rating systems (exposures to medium-sized and large companies) and pre-classifications (large corporate customers and financial counterparties). The exposure information and aggregation systems in The main risks are
1.3 Risk appetite at
The board of directors is the body responsible for establishing and annually updating the Group’s risk appetite, for monitoring
The risk appetite is determined both for the Group as a whole and for each of the main business Senior management is responsible for achieving the desired risk profile -which is reflected in the approved annual budget and in the medium-term strategic plan-, and for the day-to-day management of risk. Thus, it ensures that the habitual limit structures formalized for each risk are properly connected to the These limit structures for each risk are complementary to the risk appetite and fundamental to the articulation of an effective management thereof on a day-to-day basis. If the established risk appetite levels are reached, once the board has been informed the required management measures must be adopted so that the desired risk profile can be restored. Every quarter, the risk committee and the executive committee of the Group check compliance with the risk appetite at both Group and business unit level. Risk appetite framework The Quantitative elements of the risk appetite The primary quantitative metrics of the risk appetite are as follows: The maximum losses the Group The minimum capital position the Group wishes to maintain, and The minimum liquidity position the Group wishes to have. These metrics are calculated for severe stress scenarios that are unlikely but possible. Also, the Group has a Losses One of the three primary metrics used to These scenarios affect mainly both the losses arising from credit risk exposure of retail and wholesale portfolios (considering both the direct credit loss and the reduction in margin) and the potential adverse effect of the exposure to market risk. After applying these credit and market impacts to the budgeted results, in the context of the monitoring of the risk appetite, senior management assesses whether the resulting margin is sufficient to absorb any unexpected effects arising from technology and operational risk and compliance and reputational risk. The time horizon for the materialization of the adverse effects for all the risks considered is usually twelve months, except in the case of credit risk, for which a supplementary impact analysis is performed with a three-year time horizon. In any case, the time horizon for the formulation of the risk appetite is one year. With regard to this loss metric, the Group’s risk appetite establishes that the combined effect on all risks arising from these scenarios must be lower than the net margin after ordinary provisions, i.e. ordinary operating profit/(loss) before tax. Capital position The Group Also, in view of the related stress scenarios referred to in the preceding section, the Group’s risk appetite establishes that its risk profile must be such that the unexpected effect of these stress scenarios does not impair the core capital ratio by more than 100 b.p. This capital approach included in the risk appetite framework is complementary to and consistent with the capital target for the Group that was approved as part of the capital planning process (Pillar II) implemented at the Group for a period of three years. Liquidity position The liquidity management model at the Group is based on the following principles: Decentralized liquidity model. Needs arising from medium- and long-term business activities must be financed with medium- and long-term instruments. High proportion of customer deposits in a balance sheet of a commercial nature. Diversification of wholesale funding sources by: instruments/investors; markets/currencies; and maturity periods. Limited recourse to short-term financing. Availability of a sufficient liquidity reserve, including the capacity for discounting at central banks to be used in adverse situations. In view of the Group’s desire to have a structure based on autonomous subsidiaries, liquidity management is performed at each subsidiary, with the related control being exercised at corporate level. Therefore, each of the subsidiaries has to be self-sufficient in terms of the availability of liquidity. Supplementary quantitative metrics of concentration risk appetite The Group wishes to maintain a widely diversified risk portfolio from the perspective of its exposure to large risks, to certain markets and to specific products. This is obtained primarily by virtue of its focus on the retail banking business with a high level of international diversification. Concentration risk is measured using the following metrics for which risk appetite thresholds are established as a proportion of capital or loans and credits (generally): Customer (in proportion to capital): a) maximum individual net exposure to corporate customers (also, customers with internal ratings below the investment grade equivalent and which exceed a certain exposure level are monitored); b) maximum aggregate net exposure to the Group’s 20 largest corporate customers (Top 20); c) maximum aggregate net exposure of the exposures considered to be large exposures (corporate and financial customers); and d) maximum effect on earnings before tax (EBT) of the simultaneous default of the five largest corporate exposures (jump to default Top 5). Sector: maximum exposure of the corporate portfolio in a given economic sector as a percentage of loans and credits (both total loans and credits and those to the corporate segment). Portfolios with a high risk profile (defined as retail portfolios with percentage risk premiums above the established threshold): maximum percentages of exposure to this type of portfolio as a proportion of loans and credits (both total and retail loans and credits) and for the various business units. Qualitative elements of the risk appetite
A
A target rating of between AA- and A-
A stable, recurring earnings generation and shareholder remuneration policy based on a strong capital and liquidity base and a strategy to effectively diversify funding sources and maturities.
A corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms,
An independent risk function with
To maintain a management model that ensures that all risks are viewed in a global interrelated way through a robust corporate risk control and monitoring environment with global responsibilities: all risks, all businesses, and all geographical areas.
The confidence of customers, shareholders, employees and professional counterparties,
The application of a remuneration policy
Risk appetite and living will The In 2010 In Mention must be made of the important contribution that the preparation of the corporate living will makes to the conceptual delimitation of the Group’s risk appetite and risk profile.
The risk committee is responsible for proposing the Group’s risk policy for approval by the board within its governing and supervisory powers. Furthermore, the committee ensures that the Group’s activities are consistent with its risk appetite level and, in this regard, it sets global limits for the main risk exposures, which it reviews systematically, and decides upon any transactions that exceed the powers delegated to lower-ranking bodies. The risk committee, an executive body that adopts decisions within the scope of the powers delegated by the board, is presided over by the third deputy chairman of The responsibilities assigned to the risk committee are essentially as follows:
To propose to the board the Group’s risk policy, which will identify, in particular:
The various types of risk (financial, operational, technological, legal and reputational, inter alia) facing the Group;
The information and internal control systems to be used to control and manage these risks;
The level of risk deemed acceptable by the Group;
The measures envisaged to mitigate the impact of the identified risks in the event that they
To conduct systematic reviews of the Group’s exposure to its main customers, economic activity sectors, geographical areas and types of risk.
To
To ensure that the Group’s actions are consistent with the previously defined risk appetite.
To be informed of, assess and follow
To resolve transactions outside the powers delegated to lower-ranking bodies and the overall limits for pre-classified risk categories for economic groups or in relation to exposure by type of risk. The risk committee has delegated certain of its powers to risk subcommittees which are structured by geographical area, business line and type of risk, all of which are defined in the corporate risk governance model. In addition, both the executive committee and the board of directors of the Bank pay particular attention to the management of the Group’s risks. The third deputy chairman of the Group is the person ultimately responsible for risk management. He is also a member of the board of directors and chairman of the risk
The The areas of the risk unit are divided into two blocks:
A business structure, Between these two blocks is the corporate management integration area the purpose of which is to intensify and systematize the use of corporate risk management models (for credit, market and structural risk), to accelerate their implementation and to ensure their integration in the management of all Group entities. The above structure is complemented by The scope of action of these functions is global, i.e. they feature in all the units in which the risk division acts and this structure is mirrored in the local units. The fundamental elements through which the global functions are replicated in each unit are the corporate frameworks. These are the central elements for disseminating and transferring global practices, reflecting the action policies and criteria for each area and establishing the Group’s compliance standards to be applied at all local units.
In general, it is possible to distinguish the main functions performed by the global areas of the
The risk unit establishes risk policies and criteria, global limits and decision-making and control
The local units apply the policies and systems to the local market; they adapt the management schemes and The integrated risk control and internal risk validation unit. This unit
Internal validation of the credit and market risk and economic capital models in order to measure their suitability for management and regulatory purposes. The validation exercise envisages the review of the theoretical fundamentals of the model, the quality of the data used to build and calibrate the model, and its use and the associated corporate governance process.
Integrated risk control, the purpose of which is to supervise the quality of the Group’s risk management, in order to ensure that the systems for the management and control of the risks inherent to its activity comply with the strictest criteria and the best practices observed in the industry and/or required by the regulators, and to verify that the risk profile actually assumed is within the guidelines laid down by senior management.
The integrated risk control 3.1 Integrated risk control function In 2008 the Group launched the integrated risk control function in order to ensure an integrated view of the management of all the risks affecting the performance of the Group’s ordinary activities. The risks The integrated risk control
The function is characterized by
areas. It is a third layer of control which follows the control performed in the first instance by the officer responsible for managing and controlling each risk at each business or functional unit (first layer of control) and by each officer responsible for the control of each risk at corporate level (second layer of control). This system ensures a vision and, therefore, the integrated
Methodology and tools This function is performed using an internally developed methodology and a series of supporting tools with a view to Module The Group performs the tests and gathers the relevant evidence assessed in the process -which enables it to regulators. The supporting tool is Module Module The Bank of Spain has unrestricted access to these tools and, accordingly, to the working papers used to perform the integrated risk control function.
Internal model validation at the Group encompasses credit risk This function is performed at a global and corporate level in order to ensure uniformity of application, and is implemented through four regional centers located in Madrid, London, Sao Paulo and New York. From a functional and hierarchical standpoint, these centers are fully accountable to the corporate center, which makes it possible to ensure consistency in the performance of their activities. This system facilitates the application of a corporate methodology that is supported by a set of tools developed internally that provide a corporate framework to be used at all the Group’s
The Following is an analysis of the Group’s main types of risk: credit, market, operational, compliance and reputational risks.
Credit risk is the possibility of loss stemming from the total or partial failure of our customers or counterparties to meet their financial obligations to the Group.
In 2012 credit risk exposure Disregarding the effect of changes in the exchange rates of the main currencies against the euro,
The Group’s non-performing loans ratio stands at 4.54%, up 65 b.p. on 2011. The Group’s coverage ratio stands at 72.6%, up from 61.4% in 2011. 4.3 Detail of geographical areas with the highest concentrations Following is a description of the portfolios in the geographical areas where the Group’s risk concentration is highest: 4.3.1 UK Credit risk exposure to UK customers amounted to EUR 255,519 million at 2012 year-end, and represented 32.1% of the Group total. Due to its importance, not only to Santander UK, but also to the Group’s credit risk exposure as a whole, the mortgage loan portfolio (which totaled EUR 191,827 million at 2012 year-end) must be highlighted. This portfolio is composed entirely of first-mortgage home purchase or refurbishment loans to new and existing customers, since transactions involving second or successive liens on mortgaged properties are no longer originated. The property on which the mortgage guarantee is constituted must always be located in the UK, irrespective of where the funding is to be employed. Loans may be granted for the purchase of residences abroad, but the mortgage guarantee must in all cases be constituted on a property located in the UK. All properties are appraised independently prior to the approval of each new transaction, in accordance with the Group’s risk management principles. For mortgage loans that have already been granted, the appraised value of the mortgaged property is updated quarterly by an independent agency using an automatic appraisal system in accordance with standard procedure in the market and in compliance with current legislation. The non-performing loans ratio of this portfolio rose from 1.46% in 2011 to 1.74% at 2012 year-end, although at all times it remained below the ratio for the industry as a whole, according to data published by the Council of Mortgage Lenders. The two reasons for this rise are as follows: the fall in loans and credits due to the application of the strict lending and pricing policies implemented in recent years, and the fall in the number of loans that became reperforming in 2012. The decrease in the number of loans that became reperforming in the year was due mainly to the introduction of new debt recovery procedures within the framework of the regulatory initiative known as “Treating Customers Fairly”. This gave rise to an increase in the administrative procedures to be performed in managing defaults, which resulted in customers being classified as non-performing for a longer period of time. As regards the profile of the portfolio, the application of the strict lending policies mentioned above has enabled new NPLs to be kept at very similar levels to those of 2011. Thus, the maximum loan-to-value criteria were reduced to 75% for loans on which principal and interest are repaid and to 50% for loans on which interest is paid periodically and the principal is repaid on maturity. The simple average LTV for the total portfolio stood at 52.2%, while the weighted average LTV was 49%. The proportion of the portfolio with an LTV above 90% remained at 12%, comfortably below the UK market average (above 17%) (CACI Mortgage Market Data). Current credit risk policies expressly prohibit loans considered to be high risk (subprime mortgages), and establish demanding requirements regarding the credit quality of both loans and customers. For example, in 2009 the granting of mortgage loans with LTVs exceeding 100% was forbidden. Between 2009 and 2012 less than 0.1% of new production had an LTV higher than 90%, and in 2012 a maximum limit of 75% was established for this ratio, as stated above. Another indicator of the sound performance of the portfolio is the small volume of foreclosed properties, which amounted to EUR 157 million at 2012 year-end, representing just 0.1% of total mortgage exposure. The efficient management of foreclosures, coupled with the existence of a dynamic market in which foreclosed homes can be sold in a short space of time, contributes to the good results achieved. SMEs and companies: In line with the aim of becoming the first-choice bank for SMEs and companies, the most representative portfolios in this segment saw growth of around 18% in 2012. 4.3.2 Spain 4.3.2.1 Portfolio overview The total credit risk exposure (including guarantees and documentary credits) of the Group’s businesses in Spain at 2012 year-end represented 31% of the total for the Group, displaying an appropriate level of diversification, in terms of both products and customer segments. In 2012 there was a decrease in lending levels as a result of the fall in the demand for credit, the economic situation and, as far as real estate loans were concerned, the active policy to reduce these exposures. Due mainly to the impairment of real estate loans, the NPL ratio of the portfolio as a whole increased to 6.74% in 2012. Excluding the real estate loan portfolio, the NPL ratio stood at 4.0% in 2012, up 65 b.p. on 2011. The provisions recognized at 2012 year-end represented a coverage of 70.6% of doubtful balances (compared with 45.5% at 2011 year-end). 4.3.2.2 Portfolio of home purchase loans to families The loans granted to families to purchase residential property by the main businesses in Spain amounted to EUR 55,997 million at 2012 year-end and represented 22.4% of total credit risk exposure. Of this amount, 98.9% was secured by mortgages.
The non-performing loans ratio of the mortgage loan portfolio fell slightly year-on-year and ended 2012 at 2.6%, a figure clearly lower than that recorded by the other businesses in Spain. In the home purchase loans detailed in the foregoing table, the guarantee is the financed home on which the Group has a priority claim in the event of default. At December 31, 2012, 94% of these loans related to principal-residence houses (December 31, 2011: 97%). The specific characteristics of the home purchase mortgage loan portfolio in Spain result in a medium-low risk profile and limited prospects of additional impairment: All mortgage transactions include principal repayments from the very first day. There is a habitual practice of early repayment, as a result of which the average life of transactions is much shorter than the contractual term. Debtors provide all their assets as security, not just the home. High quality of the collateral, since the portfolio consists almost exclusively of principal-residence loans. 89% of the portfolio has an LTV of less than 80%. Stable average debt-to-income ratio at around 29%. The following table sets forth the loan to value ratio of our home purchase loan portfolio with mortgage guarantee as of the December 31, 2012 taking into account guarantee values at the time of origination and updated as of December 31, 2012 as explained below:
For internal management purposes, the Group updates the LTV ratios at least once a year, taking into consideration published house price indices. Also, if a debtor becomes doubtful the Group updates the appraisals undertaken by valuers, which are taken into account in the estimate of impairment losses. 4.3.2.3 Portfolio of loans to non-real estate companies The total lending to non-real estate companies of the Group’s businesses in Spain stood at EUR 139,851 million at 2012 year-end. More than 90% of this segment relates to individualized customers to which a risk analyst has been assigned because of the risk assumed. The risk analyst monitors the customer on an ongoing basis in all the phases of the risk cycle. The non-performing loans ratio of this portfolio remained at levels below those of the businesses in Spain as a whole, and stood at 4.4% at 2012 year-end. 4.3.2.4 Real estate loan portfolio The real estate exposure in Spain amounted to EUR 23,705 million at 2012 year-end, of which EUR 15,867 million relate to loans and EUR 7,838 million to foreclosed properties. The policy severely reducing the balances in this segment continued in 2012, and the balances fell by 25.9% compared with 2011 and decreased by 44.2% compared with 2008.
Third party subrogations correspond to the replacement of the original borrower (real estate developer) with a private individual who acquires a share of the loan equivalent to the house acquired from the developer by such individual. These loans are included in the “Home purchase loan portfolio and as mentioned in Note 54 of our financial statements have a stable delinquency rate (2.6% as December 31, 2012).
In accordance with the requirements of the Bank of Spain, the collateral values presented in the table above have been obtained using external appraisals as of the date of origination for standard loans and as of the date the loans became doubtful for non-performing loans. The valuation of collateral for projects that are in process contemplates the values “as is” and not “as completed. Notwithstanding the above, for internal management purposes, we update LTVs for all secured loans at least once a year taking into consideration the price index published by the corresponding government institution. The NPL ratio of this portfolio ended the year at 47.7% (compared with 28.6% at December 2011) due to the increase in the proportion of doubtful assets in the problem loan portfolio and, in particular, to the sharp reduction in lending in this segment. The distribution of the portfolio is as follows:
The coverage ratio of the real estate exposure in Spain stands at 47% (22% at December 2011). The Group calculates the loan loss allowance individually as the difference between the carrying amount of the debt and the present value of its estimated cash flows over the life of the agreement, including those from the guarantees, less costs to sell. At year-end, this portfolio had low concentration and an adequate level of collateral and allowances. The analysis of the portfolio distribution, by stage of the work in progress of the financed developments, is as follows: Developments with completed work / certificate of final completion obtained: 66% of outstanding risk. Developments with a percentage of completion of more than 80%: 11% of outstanding risk. Developments with a percentage of completion of between 50 and 80%: 4% of outstanding risk. Percentage of completion of less than 50%: 19%. The detail of the stages of completion of the property developments shows that nearly 86% of the financed developments of this kind are complete or are close to completion, thus having overcome the construction risk. Policies and strategies in place for the management of these risks The policies in force for the management of this portfolio, which are reviewed and approved on a regular basis by the Group’s senior management, are currently geared towards reducing and securing the outstanding exposure, albeit without neglecting any viable new business that may be identified. In order to manage this credit exposure, the Group has specialized teams that not only form part of the risk areas but also supplement the management of this exposure and cover the entire life cycle of these transactions: commercial management, legal processes, court procedures and potential recovery management. As has already been discussed in this section, the Group’s anticipatory management of these risks enabled it to significantly reduce its exposure, and it has a granular, geographically diversified portfolio in which the financing of second residences accounts for a very small proportion of the total. Mortgage lending on non-urban land represents a low percentage of mortgage exposure to land, while the remainder relates to land already classified as urban or developable, which can therefore be developed. In the case of home financing projects in which the construction work has already been completed, the significant reduction in the exposure is supported by various actions. As well as the specialized marketing channels already in existence, campaigns were carried out with the support of specific teams of managers for this function who, in the case of the Santander Network, were directly supervised by the recoveries business area. These campaigns, which involved the direct management of the projects with property developers and purchasers, reducing sale prices and adapting the lending conditions to the buyers’ needs, enabled loans already in force to be subrogated. These subrogations enable the Group to diversify its risk in a business segment that displays a clearly lower non-performing loans ratio. The loan approval processes are managed by specialist teams which, working in direct coordination with the sales teams, have a set of clearly defined policies and criteria: Developers with an ample solvency profile and proven experience in the market. Strict criteria regarding the specific parameters of the transactions: exclusive financing for the construction cost, high percentages of accredited sales, principal residence financing, etc. Support of financing of government-subsidized housing, with accredited sales percentages. Restricted financing of land purchases, subject to the restoration of a sufficient level of coverage in existing financing arrangements or to the obtainment of increased collateral. In addition to the permanent control performed by its risk monitoring teams, the Group has a specialist technical unit that monitors and controls this portfolio with regard to the stage of completion of construction work, planning compliance and sales control, and validates and controls progress billing payments. The Group has created a set of specific tools for this function. All mortgage distributions, amounts drawn down of any kind, changes made to the grace periods, etc. are authorized on a centralized basis. In the case of construction-phase projects that are experiencing difficulties of any kind, the policy adopted is to ensure completion of the construction work so as to obtain completed buildings that can be sold in the market. To achieve this aim, the projects are analyzed on a case-by-case basis in order to adopt the most effective series of measures for each case (structured payments to suppliers to ensure completion of the work, specific schedules for drawing down amounts, etc.). The management of on-balance-sheet property assets is performed by companies that specialize in the sale of property (Altamira Santander Real Estate, S.A.) and is supplemented by the commercial network structure. The assets are sold with price reductions in keeping with the market situation. Foreclosed properties As a last resort, the acquisition and foreclosure of property assets is one of the mechanisms adopted in Spain in order to manage the portfolio efficiently. At December 31, 2012, the net balance of these assets amounted to EUR 3,674 million (gross amount: EUR 7,838 million; recognized allowance: EUR 4,164 million). The following table shows the detail of the assets acquired and foreclosed by the businesses in Spain at 2012 and 2011 year-end:
In recent years, the Group has considered asset acquisition/foreclosure to be a more efficient method for resolving cases of default than legal proceedings. The Group initially recognizes foreclosed assets at the lower of the carrying amount of the debt (net of provisions) and the fair value of the acquired/foreclosed asset (less estimated costs to sell). If fair value (less costs to sell) is lower than the net value of the debt, the difference is recognized under Impairment losses on financial assets (net) - Loans and receivables in the consolidated income statement for the year. Subsequent to initial recognition, the assets are measured at the lower of fair value (less costs to sell) and the amount initially recognized. The fair value of this type of assets is determined by the Group’s directors based on evidence obtained from qualified valuers or evidence of recent transactions. Net additions to acquired and foreclosed assets continued to fall in 2012, due to the higher level of growth in disposals than in additions.
4.3.3 Brazil The loan portfolio in Brazil grew by 9.58% to EUR 89,142 million in 2012 (excluding the exchange-rate effect), representing 11% of the Group’s total lending. This growth is in line with the growth in the Brazilian economy. The portfolio mix is characterized by customer diversification and the significant volume of retail transactions: 56.1% of loans are loans to individuals, consumer loans and loans to SMEs. Loans to individuals increased by 11% in 2012. By segment, the highest growth recorded in the loans to individuals portfolio was that of the mortgages segment, although its weight in the portfolio continues to be low (5% of total lending in Brazil). The NPL ratio was 6.86% at 2012 year-end, compared with 5.38% in 2011, against a backdrop of a slowdown in the Brazilian economy that gave rise to an increase in non-performing loans in the system. The non-performing loans coverage ratio stands at 90.2% (2011 year-end: 95%). 4.4. Credit risk from other standpoints 4.4.1 Credit risk from financial market operations This concept includes the credit risk arising in treasury operations with customers, mainly credit institutions. These operations are performed using both money market financing products arranged with various financial institutions and derivative products intended to provide service to the Group’s customers. Credit risk is measured at its current market value and its potential value (exposure value considering the future variation in the underlying market factors). Therefore, the credit risk equivalent (CRE) is defined as the sum of net replacement value plus the maximum potential value of the contracts in the future. Calculations are also performed of capital at risk or unexpected loss (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recoveries). Derivatives exposures The net total credit risk exposure in derivatives activities amounted to EUR 52,184 million in 2012, and was concentrated at counterparties with high credit quality: 76.6% of the exposure was to counterparties with ratings of A- or above. Around 50% of the derivatives exposure is to financial institutions with which almost all transactions are entered into under netting and collateral arrangements. The other transactions with various financial institution customers relate generally to hedging transactions. On occasion, non-hedging transactions may be entered into, but only with specialist customers. The Group uses credit derivatives to hedge credit transactions, to conduct customer business in financial markets, and as part of its trading operations. The risk inherent to these transactions is controlled using an array of limits such as VaR, nominal value by rating, sensitivity to spread by rating and name, sensitivity to recovery rate and sensitivity to correlation. Jump-to-default limits are also set by individual name, geographical area, sector and liquidity. In notional terms, the position in CDSs includes protection purchased for EUR 47,105 million and protection sold for EUR 42,529 million. At December 31, 2012, for the Group’s trading activities, the sensitivity of the lending business to one-basis-point increases in spreads was EUR -0.3 million, similar to the 2011 figure, and the average annual VaR amounted to EUR 2.9 million, significantly lower than in 2011 (average VaR of EUR 10.6 million). 4.4.2. Concentration risk The Group continuously monitors the degree of credit risk concentration, by geographical area/country, economic sector, product and customer group. The risk committee establishes the risk policies and reviews the exposure limits required to ensure adequate management of credit risk concentration. The Group is subject to Bank of Spain regulations on “Large Exposures”. Pursuant to the rules contained in Bank of Spain Circular 3/2008 (on the calculation and control of minimum capital requirements) and subsequent amendments thereto, the value of a credit institution’s total exposure to a single individual, entity or economic group, including the non-consolidated portion of its own economic group, may not exceed 25% of its capital. Exposures to a single individual, legal entity or economic group are deemed to be large exposures when their value exceeds 10% of the credit institution’s capital. Exposures to governments and central banks belonging to the OECD are excluded from this treatment. At December 31, 2012, there were several economic and financial groups with respect to which the Group’s exposure initially exceeded 10% of capital: three financial institutions in the EU, two financial institutions in the US, one oil corporation and one central counterparty in the EU. Following the application of risk mitigation techniques and the regulations applicable to large exposures, the exposure to each of these entities represented less than 5.5% of eligible capital. At December 31, 2012, the Group’s credit exposure to the top 20 borrower economic and financial groups, excluding AAA-rated governments and sovereign bonds denominated in local currency, accounted for 5.0% of the credit risk exposure to customers (lending plus off-balance-sheet exposures), which is the same as the year-ago figure. From a sector-based standpoint, the distribution of the corporate portfolio is adequately diversified. The Group’s risk division works closely with the finance division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio. The detail, by activity and geographical area of the counterparty, of the concentration of the Group’s risk at December 31, 2012 is as follows:
4.4.3 Country risk Country risk is a credit risk component inherent in all cross-border credit transactions due to circumstances other than ordinary commercial risk. Its main elements are sovereign risk, transfer risk and other risks that can affect international financial operations (war, natural disasters, balance of payments crises, etc.). At December 31, 2012, the country risk exposure for which allowances must be recorded amounted to EUR 342 million. At 2011 year-end, the total regulatory country risk exposure amounted to EUR 380 million. The allowance recognized in this connection at 2012 year-end amounted to EUR 45 million, as compared with EUR 55 million at 2011 year-end. 4.4.4 Sovereign risk As a general rule, the Group considers sovereign risk to be the risk assumed in transactions with the central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or Republic (government debt securities) and the risk arising from transactions with public entities that have the following features: their funds are obtained only from fiscal income; they are legally recognized as entities directly included in the government sector; and their activities are of a non-commercial nature. In general, sovereign risk exposure arises mainly from the subsidiary banks’ obligations to make certain deposits at the related central banks and from the fixed-income portfolios held as part of the structural interest rate risk management strategy. The vast majority of these exposures are taken in local currency and are financed out of local customer deposits, also denominated in local currency. Also, the sovereign risk investment strategy takes into account each country’s credit quality when establishing maximum exposure limits. As could be expected, the distribution of sovereign exposure by rating was affected by the numerous revisions of sovereign issuers’ ratings in recent years, mainly Spain, Portugal, the US and Chile. The detail of the Group’s total risk exposure to the so-called peripheral countries of the euro zone at December 31, 2012 and 2011, distinguishing, based on the country of the issuer or borrower, between sovereign risk and private sector exposure, is as follows (for the purpose of presenting the following tables, the term “sovereign exposure” is considered in its broadest sense and includes, in addition to exposure to the State/central banks, the exposure to other public authorities, such as autonomous community governments and municipal councils):
12/31/12 Private sector exposure by country of issuer/borrower (**) Spain Portugal Italy Greece Ireland
12/31/11 Sovereign risk by country of issuer/borrower (**) Spain Portugal Italy Greece Ireland
Following is certain information on the notional amount of the CDSs at December 31, 2012 and 2011 detailed in the foregoing tables:
In addition, our total risk exposure to Cyprus at December 31, 2012 was €12.9 million, mainly secured loans granted in Spain and the UK to individuals resident in Cyprus.
The environmental risk analysis of credit
The Equator Principles: an initiative of the International Finance Corporation of the World Bank. These principles constitute an international standard for the analysis of the social and environmental implications of project finance transactions. The assumption of these principles involves a For transactions amounting to USD 10 million or more, an initial general questionnaire is completed, designed to establish the social and environmental risk of the project (which is classified, from higher to lower risk, into category A, B or C, respectively) and the degree of compliance of the transaction with the Equator Principles. For projects classified into the highest-risk categories (categories A and B, non-high income OECD country), a more exhaustive questionnaire is completed, which is adapted according to the business sector involved. Depending on the category and location of the projects, a social and environmental audit is conducted (by independent external advisers). To this end, specific questionnaires have been developed for the sectors in which the Bank is most active. Furthermore, the Bank organizes social and environmental training courses for both its risk management teams and the heads of its The VIDA tool: implemented since 2004, the main aim of this tool is to assess the environmental risk of both current and potential individualized companies in commercial banking (Spain), using a system that classifies each of the companies into one of seven categories, depending on the degree of environmental risk incurred. 4.5. Credit risk cycle The credit risk management process consists of identifying, analyzing, controlling and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the business areas, senior management and the risk units. The process involves the board of directors, the executive committee and the risk committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function. The risk cycle comprises three different phases: pre-sale, sale and post-sale. The process is being permanently updated, with the findings and conclusions of the post-sale phase being fed back into the risk analysis and planning of the pre-sale phase. 4.5.1 Risk analysis and credit rating process In general, the risk analysis consists of examining the customer’s ability to meet its
Since 1993 the Group has used
Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the banking relationship. The frequency of the reviews is increased in the case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.
For individualized risks, customers represent the most basic level and individual limits are established (pre-classification) when certain features, generally materiality, concur. Thus, for large corporate groups a pre-classification model, based on an economic capital measurement and monitoring system, is used. The result of the pre-classification is the maximum level of risk that can be assumed vis-à-vis a customer or group in terms of amount or maturity. In the corporate segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.). Scenario analysis An important aspect of the planning phase is the consideration of the volatility of the macroeconomic variables supporting the preparation of the budget. The Group performs simulations of the performance of its portfolio in various adverse and stress scenarios (stress testing), which enables the Group to assess its capital adequacy in the event of certain future circumstantial situations. These simulations are performed systematically on the Group’s most important portfolios in accordance with a corporate methodology which: Calculates the sensitivity of the credit risk parameters (PD and LGD) to certain macroeconomic variables. Designs benchmark scenarios (at global level and for each of the Group units). Identifies “break-off scenarios” (the levels above which the sensitivity of the risk factors to macroeconomic variables is more accentuated) and the distance of these break-off scenarios from the current situation and the benchmark scenarios. Estimates the expected loss associated with each of the set scenarios and the changes in the risk profile of each portfolio in response to changes in certain macroeconomic variables. The simulation models used by the Group rely on data from a complete economic cycle to calibrate the behavior of the credit risk parameters in response to changes in the macroeconomic variables. The scenarios are developed from the standpoint of each unit and from that of the Group as a whole. The main macroeconomic variables contained in these scenarios are as follows: Unemployment rate. Housing prices. GDP. Interest rate. Inflation. The scenario analysis enables senior management to gain a clearer understanding of the foreseeable performance of the portfolio in response to changing market and circumstantial conditions and it is a basic tool for assessing the adequacy of the provisions recognized to cater for stress scenarios.
The sale phase consists of the decision-making process, providing support to the business units which need the analysis and The purpose of the decision-making process
transaction. The
As stated above, the previous limit-setting stage can follow two different paths, giving rise to different types of decisions in the individualized customer sphere: It can be automatic, consisting of verification by the business that the proposed transaction (in terms of amount, product, maturity and other conditions) falls within the limits authorized pursuant to the aforementioned pre-classification. This process is generally applied to corporate pre-classifications. It may always require the analyst’s authorization, even if the transaction meets the amount, product, maturity and other conditions established in the pre-classified limit. This process applies to pre-classifications of individualized retail banking companies. Credit risk mitigation techniques Although they are important in all the phases of the credit risk cycle, mitigation techniques play a particularly important role in the decisions on transactions. The Group applies various methods of reducing credit risk, depending, inter alia, on the type of customer and product. As we shall see, some of these methods are specific to a particular type of transaction (e.g. real estate guarantees) while others apply to groups of transactions (e.g. netting and collateral arrangements). The various mitigation techniques can be grouped into the following categories: Netting Netting refers to the possibility of offsetting transactions of the same type, under the umbrella of a framework agreement such as ISDA or similar agreements. It consists of netting off the positive and negative market values of the derivatives transactions entered into by the Group An important aspect of framework agreements is that they represent a single legal obligation encompassing all the transactions they cover. This is the key to being able to offset the risks of all the transactions covered by the contract with the same counterparty. Collateral Collateral refers to the assets pledged by the customer or a third party to secure the performance of an obligation. Collateral may be:
Financial: cash, security deposits, gold, etc.
Non-financial: property (both residential and commercial), other movable property. From the risk acceptance standpoint, collateral of the highest possible quality is required. For regulatory capital calculation purposes, only collateral that meets the minimum quality requirements described in the Basel capital accords, i.e. not all collateral, can be considered to reduce the capital requirement.
Collateral agreements vary in nature but, whichever the specific form of collateralization may be, the ultimate aim, as in the netting technique, is to reduce counterparty risk through the recovery of all or part of the benefits generated at a given point in time by the transaction (measured at market price). Transactions subject to collateral agreements are assessed periodically (normally on a daily basis). The agreed-upon parameters defined in the agreement are applied to these assessments, from which the collateral amount (normally cash), payable to or receivable from the counterparty, is obtained. With regard to real estate collateral, periodic re-appraisal processes are in place, based on the actual market values for different types of real estate, which meet all the requirements established by the regulator. When mitigation techniques are used, the minimum requirements established in the credit risk management policy manual are adhered to. In short, these consist of monitoring the following: Legal certainty. Collateral and guarantees must be examined to ensure A substantial positive correlation must not exist between the counterparty and the value of the collateral. Collateral and guarantees must be correctly documented. The availability of documentation of the methodologies used for each mitigation technique. The appropriate periodic monitoring and control of the methodologies. Personal guarantees and credit Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Credit derivatives are financial instruments whose main purpose is to hedge credit risk by buying protection from a third party, whereby the Bank transfers the risk
The monitoring function is based on an ongoing process of permanent observation to enable early detection of any Monitoring is based on the Monitoring involves, inter alia, identifying and
Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed. For exposures to
The risk Each control pillar can be analyzed in two ways: Quantitative and qualitative analysis of the In the analysis of the
In addition to the traditional metrics, the following, inter alia, are used in the credit risk control phase: Change in non-performing loans (VMG) VMG measures the change in non-performing loans in the period, discounting the loans written off and taking recoveries into account. It is an aggregate measure at portfolio level that enables action to be taken in the event of deteriorations in the trend of non-performing loans. VMG and its component parts play a decisive role as monitoring variables. EL (expected loss) and capital Expected loss is the estimated financial loss that will occur over the next twelve months on the portfolio existing at any given time. It is an additional cost of the activity and must be charged in the transaction price. It is calculated using three basic parameters: EAD (exposure at default): the maximum amount that could be lost as a result of a default. PD (probability of default): is the probability that a customer will default in the next twelve months. LGD (loss given default): represents the percentage of the exposure that will not be recovered in the event of default. To calculate the LGD, the amounts recovered throughout the recovery process are discounted to the time of default, and this figure is compared, on a percentage basis, with the amount owed by the customer at that date. Thus, other relevant factors are taken into account in estimating the risk involved in transactions, such as the quantification of off-balance-sheet exposures, or the expected percentage of recoveries, which is related to the guarantees associated with the transaction and other characteristics of the transaction: type of product, term, etc. The risk Assessment of
This includes a systematic periodic review of the In 2006, within the corporate framework established in the Group for compliance with the Sarbanes-Oxley Act, a corporate tool was made available on the Group’s intranet for the documentation and certification of all the subprocesses, operational risks and related mitigating controls.
4.5.6 Recovery management Recovery management is a strategic function in the Group’s
In order to
The current macroeconomic environment has a direct effect on customer default and non-performing loans ratios. Therefore, the quality of
The Group has in place a corporate management model that defines the general recovery action guidelines. These guidelines are applied in the various countries, always taking into account the local peculiarities required for the recovery activity, due either to the local economic environment, to the business model or to a combination of both. This corporate model is subject to the permanent review and enhancement of the management processes and Also, the differing characteristics of the Group’s customers make segmentation necessary for the performance of proper recovery management. The mass management of large groups of customers with similar profiles and products is performed using highly technological processes, while personalized and individualized management is reserved for customers who, due to their profile, require the assignment of a specific manager and a more tailored analysis. The Restructured/refinanced portfolio On September 28, 2012, the Bank of Spain published Circular 6/2012 establishing the regulations relating to the information on refinancing and restructuring transactions that Spanish credit institutions must disclose in their financial statements. Bank of Spain Circular 6/2012 uses the general term “restructured/refinanced portfolio” to refer to transactions in which the customer has, or might foreseeably have, financial difficulty in meeting its payment obligations under the terms and conditions of the current agreement and, accordingly, it may be advisable to cancel the agreement and/or even enter into a Restructuring/refinancing policy The Group follows highly rigorous definitions and policies in this management process, so that in strictest compliance with regulatory requirements. In Applicable to all countries and all customers, this policy is adapted to local requirements and regulations and is always subordinate to compliance with any stricter local regulation that might apply. Its principles include the following: The restricted use of this practice, which must be accompanied by additional guarantees or efforts by the customer, avoiding any actions that might defer the recognition of non-performing loans.
Its purpose must be to recover all the
All the alternatives and their impacts must be assessed, making sure that the results of this practice exceed those which would foreseeably be obtained if it were not performed. It may not give rise to an improvement in the classification of the loan until such time as the experience with the customer has proven to be satisfactory. Given that the purpose of restructuring/refinancing is to enable the customer to continue to settle its debts, the focal point of any analysis is the ability to pay. The The Group’s approach to managing restructured/refinanced transactions varies depending on the degree of deterioration of the borrower’s financial situation at the time the terms and conditions of the transaction are modified. Thus, in managing these transactions, it distinguishes between: Transactions which at the time of their restructuring/refinancing were current in their payments or did not have any payments more than three months past due, with respect to which it is expected that the borrower might possibly experience a reduction in its ability to pay. The approach adopted is to adapt the terms and conditions of the debt to suit the customer’s new payment capacity. This early action represents one of the main levers of the Group’s credit risk Transactions which at the time of their restructuring/refinancing were classified as doubtful due to payment arrears (more than three months) or other situations. This restructuring/refinancing does not entail the release of provisions and the borrowers continue to be classified as doubtful, unless the criteria established in the regulations based on Bank of Spain circulars are met (i.e. collection of ordinary interest outstanding and, in any case, provision of new effective guarantees or reasonable assurance of ability to pay) and the precautionary requirements included for prudential reasons in the Group’s corporate policy are also satisfied (i.e. sustained payment for a certain period, depending on the transaction features and the type of guarantee). This practice of loan restructuring/refinancing is confined, subject to stringent and selective criteria, to transactions: that are viable and whose initial impairment is not very severe, in which customers have a willingness to pay, that improve the Group’s position in terms of expected loss, and in which restructuring/refinancing does not discourage an additional effort by For standardized customers, the following general principles are applied, although exceptional circumstances are handled on a case-by-case basis: The overall customer risk is assessed. The exposure to the customer is not increased. All the alternatives and their impacts are assessed, making sure that the results of this practice exceed those which would foreseeably be obtained if it were not performed. Special attention is paid to the guarantees and the possible future changes in their value. The use of loan restructuring/refinancing is restricted, with priority being given to additional efforts from customers, and actions that only postpone the problem are avoided. Restructured/refinanced transactions are subject to special monitoring, which continues until the debt has been repaid in full. In the case of individualized customers, these principles are used as a point of reference, but a case-by-case analysis of each customer is of particular importance. The corporate policy establishes different types of modifications to be made to the terms and conditions of the transactions, based on the borrower’s economic
Each case is analyzed on an individual basis, with priority being given to modifications for customers displaying a slight but prolonged deterioration, since those who have suffered severe transitory deterioration carry a higher risk, The Group has a series of mechanisms for the management and control of loan restructuring/refinancing, which allow it to manage these transactions in a differentiated way, paying particular attention to the processes of: Planning and budgeting, including preparing the pertinent business plans, projections and limits for the most relevant items. Monitoring portfolio evolution and assessing the degree of compliance with the projections prepared in the planning phase. This portfolio of loans is In the event of repeated defaults after modification of the agreement that lead to the loan being classified as doubtful, the recognition of provisions is recalculated from the date of the oldest past-due amount of the original transaction. Our corporate policy establishes a maximum of one restructuring per year and three restructurings every 5 years together with more restrictive criteria: subsequent restructurings, which are not common, are only carried out after an exhaustive analysis of viability and when it has been determined that subsequent renegotiation can assure the payment with a reasonable certainty. Additionally, our corporate policy prescribes significant requirements (such as an extended period and new effective guaranties requested) before a restructured loan with subsequent restructuration to be reclassified as standard. For the purpose of determining losses, the Group monitors its debtors differentiating between: Customers classified by the Group as “standardized”: grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. This category includes exposures to individuals, individual entrepreneurs and retail banking enterprises not classified as individualized customers. Customers classified by the Group as “individualized”: they are monitored individually for significant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises. Our internal models, used to calculate our loan loss provisions, incorporate re-defaults of the restructured loans in the following manner: Customers classified by the Group as “standardized”: our internal models consider restructured loans as a pool with differentiated behavior, which has its own probability of default calculated based on past credit history, which consider, among others, successive restructuration. Customers classified by the Group as “individualized”: internal ratings are the key input for determining the probability of default of these loans and it takes into consideration subsequent restructuring to a loan. In this sense, our corporate risk policy establishes that the “rating” for restructured customers must be updated at least every six months reflecting new financial conditions or modifications. Quantitative information required by Bank of Spain Set forth below is the quantitative information required by Bank of Spain Circular 6/2012 on Refinancing transaction: transaction granted or used for reasons relating to -current or foreseeable- financial difficulties the
CURRENT REFINANCING AND RESTRUCTURING BALANCES (a)
It should be noted that 67% of all the transactions restructured/refinanced by the Group are not classified as doubtful. Also, from the guarantee standpoint, more than 70% are secured by collateral (92% in the case of real estate companies). Of the total gross amount of transactions restructured/refinanced by the Group at December 31, 2012, EUR 32,867 million relate to portfolios in Spain, with the following features: EUR 11,256 million relate to real estate companies, and 72% of this balance is classified as doubtful or substandard, with a specific allowance of 46%. 34% of the total EUR 29,380 million (89%) relate to transactions previously classified as other than doubtful, with collateral of 82%. The remaining EUR 3,487 million (11%) relate to transactions previously classified as doubtful, with collateral of 84%.
The table below sets forth the movements in our restructured/refinanced loans for the period shown:
The measurement, control and monitoring of the market risk area comprises all operations in which net worth risk is Interest rate risk is the possibility that fluctuations in interest rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Interest rate risk affects, inter alia, loans, deposits, debt securities, most financial assets and liabilities held for trading and derivatives. Inflation rate risk is the possibility that fluctuations in inflation rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Inflation rate risk affects, inter alia, loans, debt securities and derivatives, the returns on which are linked to inflation or to an actual variation rate. Foreign currency risk is defined as the sensitivity of the value of a position in a currency other than the base currency to a potential change in exchange rates. Accordingly, a long position in a foreign currency will generate a loss if this currency depreciates against the base currency. The positions affected by this risk include investments in subsidiaries in currencies other than the euro, and loans, securities and derivatives denominated in foreign currencies. Equity risk is the sensitivity of the value of the open positions in equity securities to adverse changes in the market prices of those equity securities or in future dividend expectations. Equities risk affects, among other instruments, positions in shares, equity indices, convertible bonds and equity derivatives (puts, calls, equity swaps, etc.). Credit spread risk is the sensitivity of the value of open positions in fixed-income securities or in credit derivatives to fluctuations in the credit spread curves or in the recovery rates (RR) of specific issuers and types of debt. The spread is the differential between the quoted price of certain financial instruments over other benchmark instruments, mainly the IRR of government bonds and interbank interest rates. Commodity price risk is the risk arising from the effect of potential changes in commodity prices. The Group’s exposure to commodity price risk is not material and it is concentrated in commodity derivatives with customers. Volatility risk is the sensitivity of the value of the portfolio to changes in the volatility of risk factors, i.e. the volatility of interest rates, exchange rates, credit spreads and commodities. Volatility risk arises on financial instruments whose measurement model includes volatility as a variable, most notably financial option portfolios. All these market risks can be mitigated in part or in full through the use of derivatives such as options, futures, forwards and swaps. In addition, there are other market risks, which are more difficult to hedge, the detail being as follows: Correlation risk. Correlation risk is defined as the sensitivity of the value of the portfolio to changes in the relationship between risk factors (correlation), whether they are the same type (e.g. between two exchange rates) or different (e.g. between an interest rate and a commodity price). Market liquidity risk. The risk that a Group entity or the Group as a whole may not able to unwind or close a position on time without affecting the market price or the cost of the transaction. Market liquidity risk may be caused by the reduction in the number of market makers or institutional investors, the execution of large volumes of transactions, market instability or the increase in concentration in certain products and currencies. Prepayment or termination risk. When the contractual relationship in certain transactions explicitly or implicitly permits early repayment before maturity without negotiation, there is a risk that the cash flows might have to be reinvested at a potentially lower interest rate. It mainly affects mortgage loans or securities. Underwriting risk. Underwriting risk arises as a result of an entity’s involvement in the underwriting of a placement of securities or other type of debt, thus assuming the risk of owning part of the issue or the loan if the entire issue is not placed among the potential buyers. The activities are segmented by risk type as follows:
Structural interest rate risk: arises as a result of the maturity and repricing gaps of all the assets and liabilities on the balance sheet. Structural foreign currency risk/hedges of results: foreign currency risk resulting from the fact that investments in consolidable and non-consolidable companies are made in currencies other than the euro (structural exchange rate). In addition, this item includes the positions to hedge the foreign currency risk on future results generated in currencies other than the euro (hedges of results).
Structural equities risk: this item includes equity investments in non-consolidated financial and non-financial companies The The The aim pursued Each of these activities is measured and analyzed using different
5.2.1 Trading In 2012 the Group intensified its strategy of focusing its trading activity on the customer business and minimizing as far as possible the outstanding directional risk exposures in net terms. This was reflected in the performance of value at risk (VaR), which declined with respect to previous years. The structured derivative activity is focused mainly on designing investment products and hedging risk for customers. Management is geared towards ensuring that the net outstanding risk is as low as possible. This type of transaction includes equity, fixed-income and foreign currency options. The management units in which this activity was carried out are primarily Madrid, Banesto and Santander UK and, to a lesser extent, Brazil and Mexico. The Group continued to have very limited exposure to complex structured instruments or vehicles. Specifically, at 2012 year-end, the Group had: CDOs and CLOs at fair value classified as Level 3: the Group’s position continued to be scantly material, at EUR 207 million. This position is largely a result of the integration of the Alliance&Leicester portfolio in 2008. Hedge funds: the total exposure was not material (EUR 274 million at December 31, 2012) and consisted largely of the financing provided to these funds (EUR 169 million), the remainder being direct portfolio investment. This exposure featured low loan-to-value ratios, of below 20% (collateral of EUR 1,480 million at the end of December). The risk exposure to this type of counterparty is analyzed on a case-by-case basis, and the percentages of collateral are established according to the features and assets of each fund. Conduits: there was no exposure.
In short, the exposure to instruments of this kind in the ordinary course of the Group’s business generally continued to decrease in 2012. It is due mainly to the integration of exposures at entities acquired by the Group, such as Alliance&Leicester and Sovereign (in 2008 and 2009, respectively). All these exposures were known at the time of the purchase and adequate provisions were recognized. Since their integration in the Group these exposures have been reduced notably, the final objective being their derecognition. The Group’s policy with respect to the approval of new transactions involving these products continues to be prudent and conservative and is subject to strict supervision by the Group’s senior management. Before approval is given for a new transaction, product or underlying, the risk division checks: whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure. whether the inputs enabling application of this valuation model are observable in the market. Provided the two aforementioned conditions are met, the risk division ascertains: the availability of adequate systems duly adapted for the daily calculation and monitoring of the results, positions and risks of the new transactions envisaged. the degree of liquidity of the product or underlying, with a view to arranging the related hedge on a timely basis. Calibration and test measures In 2012 the Group continued to perform regular analyses and tests to check the accuracy of the value-at-risk (VaR) calculation model, and drew conclusions which enabled it to verify the reliability of the model. The objective of these tests is to determine whether it is possible to accept or reject the model used to estimate the maximum loss of a portfolio for a given confidence level and time horizon. The most important tests are the backtesting exercises, which are analyzed at local and global level by the market risk control units. The backtesting methodology is applied homogenously to all the Group’s portfolios and sub-portfolios. The backtesting exercise consists of comparing the projected VaR measurements, for a given confidence level and time horizon, with the actual losses obtained in the same time horizon.
Three types of backtesting are calculated and assessed at the Group: Clean backtesting: the daily VaR is compared with the results obtained without taking into account the intra-day results or the changes in the portfolio’s positions. This model serves to check the accuracy of the individual models used to assess and measure the risks of the various positions. Dirty backtesting: daily VaR is compared with the day’s net results, including the results of intra-day operations and those generated by fees and commissions. Dirty backtesting without mark-ups or fees and commissions: daily VaR is compared with the day’s net results, including the results of intra-day operations but excluding those generated by margins and fees and commissions. This method is intended to obtain an idea of the intra-day risk assumed by the Group’s treasury areas. In the first case, for the entire portfolio, in 2012 there were three violations of VaR at 99% (i.e. days when the daily loss was higher than VaR): two in May, the first of which can be explained mainly by the sharper-than-normal increase in the Brazilian real curve indexed to inflation following the publication of higher-than-expected inflation data; and the second by sharper-than-normal increases in Spain and Mexico’s yield curves; and one in June, due to the sudden widening of credit spreads, the falls in the stock markets and the depreciation of most currencies against the dollar due to the worsening of expectations as to the outcome of the Summit of the Heads of State or Government of the European Union (June 29). The number of violations is in line with the expected performance of the VaR calculation model, given that a confidence level of 99% and a time horizon of one year are used (with a longer time horizon one could expect an average of two or three violations a year). The backtesting exercises are carried out regularly for each significant portfolio or strategy of each Group trading unit, and their main objective (as in the case of the other benchmark tests) is to detect anomalies in the VaR model of each portfolio in question (e.g. deficiencies in the parameterization of the valuation models of certain instruments, scantly adequate proxies, etc.). This is a dynamic process in the context of the procedure to review and validate the model. 5.2.2 Structural market risks2 5.2.2.1 Structural interest rate risk Europe and the United States In these mature markets which are witnessing a scenario of low interest rates, the general positioning has been to maintain balance sheets with a positive sensitivity to interest rate rises in terms of both the net interest margin (NIM) and the market value of equity (MVE). At the end of December 2012, the sensitivity of the net interest margin at one year to parallel shifts of 100 basis points was concentrated on the euro, US dollar and pound sterling yield curves, the Parent bank, the US subsidiary and Santander UK, plc being the main contributors with EUR 183 million, USD 60 million and GBP 14 million, respectively. As regards the euro yield curve, the contributions to the exposure by Banesto and Santander Consumer Finance are also significant. The sensitivity of the margin for other convertible currencies was scantly material. Also at 2012 year-end, the most significant sensitivity of the market value of equity to parallel shifts of 100 basis points (EUR 527 million at the Parent bank) was that of the euro yield curve. With respect to the US dollar and pound sterling curves, the sensitivities were USD 297 million and GBP 215 million, respectively. Latin America Due to the differences in macroeconomic context and the degree of maturity of these markets, the positions with respect to the net interest margin (NIM) were not homogenous. Accordingly, in certain geographical areas the balance sheets were positioned for rising interest rates and in others they were positioned for falling rates. In relation to the sensitivity of the market value of equity (MVE), the general positioning of the balance sheets was such that the average term of the assets exceeded that of the liabilities (negative sensitivity to interest rate rises).
In any case, the level of exposure in all countries is very low in relation to the annual budget and the amount of capital. 5.2.2.2 Structural foreign currency risk/hedges of results Structural foreign currency risk arises from the Group’s operations in foreign currencies, and relates mainly to long-term investments, and the results and hedges of those investments. Foreign currency risk is managed dynamically in order to limit the impact on capital of currency depreciations and optimize the financial cost of hedges. The Group’s general policy for managing the foreign currency risk on long-term investments is to finance these investments in the currency in which they are denominated, provided that the market is sufficiently deep and the cost is justified by the expected currency depreciation. Also, hedges are arranged on an as-needed basis when it is considered that a local currency may weaken against the euro more quickly than it is being discounted in the market. At 2012 year-end, the largest long-term exposures (with their potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the US dollar, the Mexican peso, the Chilean peso and the Polish zloty. The Group hedges a portion of these long-term exposures through foreign exchange derivatives. Additionally, the financial management division at consolidated level is responsible for managing the foreign currency risk inherent in the expected results and dividends of the Group at the units whose base currency is not the euro. 5.2.2.3 Structural equity risk The Group has equity positions in its balance sheet (banking book) in addition to the trading positions. These positions are classified as available-for-sale financial assets (equity instruments) or as investments, depending on the length of time they are expected to remain in the portfolio. These positions are exposed to market risk. VaR is calculated for these positions using series of market prices for listed shares and proxies for unlisted securities. 5.3. Methodologies
The standard methodology applied to trading activities by The historical simulation VaR has many advantages as a risk metric (it summarizes in one single number a portfolio’s market risk, it is based on market changes that have actually occurred without having to make assumptions regarding functions or correlation between market factors, etc.), but it also has limitations. The most significant limitations are the high sensitivity of the historical window used, the inability to capture plausible events with a major impact if they do not occur in the historical window used, the existence of measurement parameters in which there is no market input available (such as correlations, dividends and recovery rates) and the slow adaptation to new volatilities and correlations if the most recent data are given the same weight as the oldest data. Most of these limitations are corrected by using stressed VaR, by calculating a VaR with exponential decline and by applying conservative valuation adjustments.
VaR is not the only measure. It is used because it is easy to calculate and because it provides a good reference of the level of risk incurred by the Group. However, other measures are simultaneously being taken to enable the Group to exercise greater risk control in all the markets in which it operates. One of these measures is scenario analysis, which consists of defining On a regular basis (at least once a month) the Group calculates and analyses the potential impact on results of applying different stress scenarios to all the trading portfolios, considering the same situations by risk factor. A minimum of three types of scenarios Also, the market risk area, in accordance with the principle of independence of the business units, monitors daily the positions of each unit and the global positions, through an exhaustive control of changes in the portfolios, the aim being to detect possible incidents and correct them immediately. Particularly worthy of
With respect to the credit risk inherent in the trading portfolios, and in keeping with the recommendations made by the Basel Committee on Banking Supervision and with current regulations, an additional metric, the incremental risk charge (IRC), is calculated to cover the default risk and rating migration risk not properly captured in the VaR, by measuring the variation in the related credit spreads. The instruments subject to control are basically fixed-income government and corporate bonds, derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset-backed securities, etc.). The method used to calculate the IRC is based on direct measurements on the loss distribution tails at the appropriate percentile (99.9%). The Monte Carlo method is used and one million simulations are applied.
The Group analyses the sensitivity of the net interest margin and market value of equity to changes in interest rates. This sensitivity arises from maturity and interest rate repricing gaps in the various balance sheet items. On the basis of the balance-sheet interest rate position, and considering the market situation and outlook, the necessary financial measures are adopted to align this position with that desired by the The metrics used by the Group to control interest rate risk in these activities are the interest rate gap, the sensitivity of net interest margin and market value of equity to changes in interest rates, the duration of capital and value at risk (VaR)
The interest rate gap analysis focuses on the mismatches between the interest reset periods of on-balance-sheet assets and liabilities and of off-balance-sheet items. This analysis facilitates a basic snapshot of the balance sheet structure and enables concentrations of interest rate risk in the various
The flows of all the on- and off-balance-sheet aggregates must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of aggregates that do not have a contractual maturity date are analyzed and estimated using an internal model. Net interest margin (NIM) sensitivity The sensitivity of the net interest margin measures the change in the expected The sensitivity of the net interest margin is calculated by simulating the margin both for a scenario of changes in the yield curve and for the current scenario, the sensitivity being the difference between the two margins so calculated.
The sensitivity of the market value of equity is a complementary measure to the sensitivity of the net interest margin. This sensitivity measures the interest rate risk implicit in the market value of equity based on the effect of changes in interest rates on the present values of financial assets and liabilities.
These activities are monitored by measuring positions, VaR and 5.3.2.3 Structural equity risk These activities are monitored by measuring positions, VaR and results on a monthly basis. 5.4. Management framework Organizational and governance structure The market and structural risk area forms part of one of the two Group risk units. The tasks of the market risk function are as follows:
Definition and supervision of the market risk management model, which includes corporate policies, definition of the risk map and segmentation criteria.
Control, consolidation, reporting and centralized approval of market risks. These tasks are based on five basic pillars that are crucial for a correct market risk management:
Calculation, analysis, Definition, capture, validation and distribution of market data. Approval of limits, products and underlyings. Consolidation of data. Market risk management is in turn guided by the Involvement of senior management Independence of the Clear definition of Risk measurement. Risk limitation. Analysis and Establishment of risk policies and procedures. Assessment of risk methodologies validated or developed by the methodology area. 5.5. Internal model At 2012 year-end, the Group had obtained the Bank of Spain’s approval for the internal market risk model for the calculation of regulatory capital in the trading portfolios of the The consolidated regulatory capital for the Group per the internal market risk model is obtained by adding the regulatory capital of each of the
The Group cooperates closely with the Bank of Spain to make further progress in the scope of application of the internal
Structural liquidity management seeks to finance the Group’s recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks. Liquidity management at the Group
Medium and High proportion of customer deposits, as a result of a commercial balance sheet. Diversification of wholesale funding sources by: instrument/investor; market/currency; and maturity. Restrictions on recourse to short-term financing. Availability of a sufficient liquidity reserve, including a capacity for discounting at central banks, to be drawn upon in In order to ensure the effective application of these principles by all the Group entities, it was necessary to develop a single management framework resting on the following three cornerstones: A sound organizational and
Decisions relating to all structural risks, including liquidity risk, are made The markets committee
Funding and liquidity decision-making is based on a thorough understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of the future liquidity needs of the businesses (liquidity projection) and of the accessibility and situation of the funding sources in wholesale markets. Its aim is to ensure that the Group maintains optimum liquidity levels to cover its short- and long-term liquidity requirements with stable funding This requires the monitoring of the balance sheet structure, the preparation of short- and medium-term liquidity projections and the establishment of basic Simultaneously, various scenario analyses are conducted considering the additional liquidity needs that could arise if certain extreme but plausible events occur. These events might have a varying effect on the various balance sheet items and/or funding sources (extent of roll-over of wholesale financing, run-off of deposits, impairment of liquid assets, etc.), due either to the global market conditions or to the Group’s specific situation.
The liquidity risk measures adopted by the Group To attain the highest degree of effectiveness in liquidity risk measurement and control. To provide support for financial management, to which end the measures are adapted to the manner in which the Group’s liquidity is managed. To be aligned with Basel III, in order to avoid any “conflicts” between varying limits and to facilitate limit management. To constitute an To achieve involvement at country level. Although the metrics are developed on the basis of common, uniform concepts affecting liquidity, they have to be analyzed and adapted by each unit. Two kinds of basic metrics are used to control liquidity risk: dynamic and static. Dynamic metrics include basically the liquidity gap, while static metrics feature the net structural balance-sheet position. The Group supplements these metrics by developing various stress scenarios. Following is a detailed description of these three metrics:
The liquidity gap provides information on cash inflows and outflows -both contractual and those estimated using assumptions- for a given period. Liquidity gap analyses are prepared for each of the main currencies in which the Group operates. The gap supplies data on the projected sources and applications of funds of all on- and off-balance sheet items in specific time periods. This analysis tool is obtained by considering the net result of the maturity and cash flow structure for each of the time buckets established. The tool is constructed by including the available liquidity and contrasting it with the liquidity requirements resulting from maturities. In practice, since the same item will behave differently at the various Group subsidiaries, a set of common standards and methodologies are in place to make it possible to construct the liquidity risk profiles of each unit in a uniform manner and to submit these profiles in a comparable form to the Bank’s senior management. Consequently, in the case of Group, a consolidated view of the liquidity gaps is of very limited use for the management and understanding of liquidity risk. Its usefulness is further diminished if the gaps are obtained by using contractual maturities. The various analyses conducted using the liquidity gap as a basis include most notably the wholesale funding analysis. Based on this analysis, a metric has been defined the aim of which is to ensure that the Group has sufficient liquid assets to attain a minimum liquidity horizon in a scenario in which wholesale financing is not renewed on maturity. The minimum liquidity horizons are established at corporate level and on a uniform basis for all units/countries, which must calculate their wholesale liquidity metric for the main currencies in which they operate. Bearing in mind the pressures experienced by the markets in 2012, the wholesale liquidity gap was monitored particularly closely at the Parent and at the units in the euro zone. At the end of 2012, all units were comfortably positioned with respect to the horizons set at corporate level for the aforementioned scenario.
The purpose of this metric is to determine the reasonableness of the balance-sheet funding structure. The Group’s aim is to ensure that its structural needs (lending, non-current assets, etc.) are satisfied by means of an appropriate combination of wholesale funding sources and a stable retail customer base. Each unit prepares its liquidity balance sheet based on the nature of its business and compares its liquidity needs with the various funding sources available to it. The essential factors taken into account in determining this metric are the degree of recurrence of the business to be financed, the stability of the funding sources and the readiness with which assets can be converted into cash. In practice, each subsidiary prepares its own liquidity balance sheet (different from the balance sheet for accounting purposes) by classifying the various asset, liability and off-balance-sheet items on the basis of their nature in terms of liquidity. Thus, the funding structure of each subsidiary is determined, which must at all times conform to a fundamental premise: namely that the basic businesses must be financed with stable funds and medium and long-term financing. The combination of these measures guarantees the robustness of the Group’s financial structure and the sustainability of its business plans. At the end of 2012, the Group had a structural liquidity
In order to supplement the aforementioned metrics, the Group develops a series of stress scenarios. Its main objective is to identify the critical factors in each potential crisis and, at the same time, to define the most appropriate management measures to address each of the situations assessed. In their liquidity analyses the units generally consider three different scenarios: systemic, idiosyncratic and hybrid. These scenarios constitute the minimum standard analysis established for all Group units to be reported to senior management. Also, each unit develops ad-hoc scenarios which replicate major historical crises or the liquidity risks specific to its particular environment. At the end of 2012, in the event of a potential systemic crisis affecting the wholesale funding of the units located in Spain, the Group would have an adequate liquidity position. In addition to these three metrics, the Group has defined a series of internal and market variables to act as early warning signals for potential crises; these signals are also capable of indicating the nature and severity of such crises. The incorporation of these variables in day-to-day liquidity management enables the Group to anticipate any situations that might have an adverse effect on its liquidity risk. Although these alerts vary from country to country and from entity to entity, based on the specific conditioning factors in each case, certain parameters are used across the Group, such as the price of Banco Santander CDSs, the changes in deposits and the trend in central bank interest rates. 6.1.3 Management tailored to business needs In practice, in keeping with the funding principles mentioned above, the Group’s liquidity management consists of the following: Preparation of a liquidity plan each year on the basis of the funding needs arising from the budgets of each business and the methodology described above. Based on these liquidity requirements and taking into account certain prudential limits on the raising of funds in the short-term markets, the financial management area establishes an issue and securitization plan for the year at subsidiary/global business level. Year-round monitoring of the actual changes in the balance sheet and in the funding requirements of the subsidiaries/businesses, which results in the relevant updates of the plan. Continuous active presence in a wide range of wholesale funding markets, enabling the Group to maintain an adequate issue structure that is diversified in terms of product type and has a conservative average maturity. The effectiveness of this management effort is based on the fact that it is implemented at all subsidiaries. Specifically, each subsidiary budgets the liquidity requirements resulting from its intermediation activity and assesses its own ability to The Group’s main subsidiaries are currently self-sufficient in terms of their structural funding. The exception is Santander Consumer Finance, which requires the support of other Group units, especially the Parent, since it specializes in consumer financing mainly through dealer/retailer recommendations. Funding of subsidiaries is conducted at all times at market In any case, over the last three years the amount of the support provided to Santander Consumer Finance by the
In the last few years the Group’s funding activity has achieved its goal of obtaining sufficient funds for the Group’s recurring business, in a highly demanding environment marked by a heightened perception of risk, scant liquidity at This sound performance was underpinned by the extension of the management model to all Group subsidiaries, including recent acquisitions, and, above all, by the adaptation of subsidiaries’ strategies to the growing market demands. These demands were not uniform across the markets and reached far higher levels of difficulty and pressure in certain areas, such as the peripheral regions of Europe. In any case, it is possible to identify a Reduced growth in lending due to the environment, reflected more intensely in the economies currently undergoing adjustment, such as Spain and Portugal. Priority focus on attracting customer funds. Group deposits excluding repos (but including retail promissory notes) rose by almost EUR 122,000 million. Deposits increased across all geographical areas, above all at the units with the highest growth in lending. Maintenance of adequate, stable medium and long-term wholesale funding levels at Group level. The Group’s model of decentralized subsidiaries has helped it to continue to be very active in the wholesale markets in a highly demanding period. Holding a sufficient volume of assets eligible for discount at central banks as part of the liquidity reserve to cater for episodes of stress on wholesale markets. In particular, in 2012 the Group raised its total discount capacity to approximately EUR 130,000 million (up from around EUR 100,000 million in 2010 and 2011). In order to achieve this, it was necessary for the subsidiaries to implement an ongoing strategy for the generation of discountable assets with which to offset the reduced value of collateral resulting from the lowering of ratings in the period, above all those of sovereign debt and related assets. This total discount capacity was generated largely by the units located in the euro zone. These units took advantage of the quality of their assets and the extraordinary monetary policy measures introduced by the European Central Bank (ECB) in late 2011 and early 2012 (basically, extension of collateral eligibility and three-year liquidity auctions) to substantially increase their liquidity buffers Consequently, at the end of 2012 the Group’s total volume of discountable assets amply exceeded the commercial In 2012, in view of the situation of the euro markets, the Group pursued a prudent strategy of depositing most of the funds raised by it as an immediate liquidity reserve at the European System of central banks and, as a result, its net global position was virtually zero. In January 2013, the improvement in the liquidity position of the Group and that of its Spanish units, together with the loosening-up of the wholesale funding markets, will enable the Group to repay, in January 2013, all of the funds received by Banco Santander and Banesto in the first LTRO (Long Term Refinancing Operations) auction performed by the ECB in December 2011. Specifically, Santander will repay the EUR 24,000 million deposited at the European System of central banks, which is the maximum amount allowed in the first repayment window offered by the European monetary authority. Thanks to all these developments, conducted on the basis of a liquidity management model, the Group currently enjoys a funding structure that sets it apart from most of its peers worldwide. The High proportion of customer deposits in a predominantly commercial balance sheet. Customer deposits are the Group’s major source of funding. If retail promissory notes are included (given that in Spain they are a substitute for Furthermore, these customer deposits are regarded as highly stable funds given their predominantly retail origin (more than 85% of deposits relate to commercial banking). Diversified wholesale funding, primarily at medium and Medium and long-term The bulk of the medium and long-term wholesale funding consists of debt issues. At the end of 2012 the outstanding nominal balance in the In addition to the debt issues, the medium and long-term
Wholesale funding in the
At December 2012 the outstanding balance of the short-term funding was less than EUR 17,000 million, raised basically by the United Kingdom unit and the Parent through the existing issue programmes. 6.2.2 Evolution of liquidity in 2012 6.2.2.1 Improvements in the basic liquidity ratios At the end of 2012, in comparison with 2011, the Group reported: A reduction in the ratio of loans to net assets (total assets less trading derivatives and interbank balances) to 74% due to the decrease in lending in the climate of deleveraging referred to earlier. Nevertheless, this figure still mirrors the commercial An improvement in An improvement also in the ratio of customer deposits plus medium and long-term funding to loans, owing to the combination of improved liquidity resulting from commercial management efforts and the Group’s unchanged issue capacity. This ratio stood at 118% (2011: 113%), by far surpassing the 104% reported in 2008. At the same time, there was a continuing limited recourse to short-term wholesale funds, at 2% around the same level as in 2011. Lastly, in 2012 the Group’s structural surplus (i.e. the excess of structural funding resources -deposits, medium and long-term funding, and capital- over structural liquidity The Group captured EUR 43,000 million in medium and long term issues of fixed income and securitizations in 2012. The chart below sets out their distribution by instruments and geographic areas. Issues were made in 10 currencies, involving 13 issuers in 10 countries, with an average maturity of around 4.3 years. Medium and long term issues (senior debt and covered bonds) raised EUR 31,000 million. Two points are worth mentioning:
In securitizations, the Group’s Along with the This improvement of the
6.2.2.2 Increase in the liquidity reserve The liquidity reserve is the stock of highly-liquid assets Consequently, this reserve includes cash and balances with central banks, as well as central-bank eligible assets and government debt securities. The existence of this reserve further bolsters the robust liquidity position enjoyed by the Group and its subsidiaries. At the end of 2012, the Group’s liquidity reserve amounted to EUR 217 billion, equal to 22% of the Group’s funding. The structure of this volume by type of asset, according to the effective value (net of haircuts), was as follows:
Note: the reserve excludes other assets of high liquidity such as listed fixed income and equity portfolios. As of December 31, 2012, the liquidity reserve was located: EUR 107 billion in the UK, EUR 90 billion in the rest of the units in the convertible currencies area, and the remaining EUR 20 billion mainly in Latin America and Poland. In 2012, the Group was particularly active in generating eligible assets linked in general to development of At the same time, the extraordinary liquidity measures put into effect by central banks
7.1 Definition and objectives
The aim pursued by the Group in operational risk control and management is primarily to identify, measure/assess, control/mitigate and The Group’s priority, therefore, is to identify and eliminate any clusters of operational risk, irrespective of whether losses have been incurred. Measurement of this risk also contributes to the establishment of priorities in operational risk management. For the purpose of calculating regulatory capital for operational risk,
The
First level: management and control functions performed by the Group’s
Second level:
Third level: integrated This model is reviewed on a recurring basis by the internal audit division.
The Group considers it is advisable for the first and second layer control functions to be performed within the aforementioned technology and operations division, which manages operational risk more directly and which has resources and personnel better suited to the identification, measurement, valuation and mitigation of operational risk. All of the above forms part of the recurring supervision of the Group’s control bodies, in line with its strong risk management culture. The implementation, integration and local adaptation of the policies and guidelines established by the corporate area are the responsibility of the local
This operational risk management structure is based on the knowledge and experience of the executives and professionals of the various Group units, with particular importance being attached to the role of the local operational risk officers. The technology and operational risk management model includes the following phases:
Identification of the operational risk inherent in all the
Objective and continued measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel, Bank of Spain, etc.), and setting of risk tolerance limits.
Continuous monitoring of operational risk exposures, implementation of control procedures, improvement of internal awareness and mitigation of losses.
Establishment of mitigation measures to eliminate or
Generation of periodic reports on the exposure to operational risk and its level of control for senior management and the Group’s areas/units, and reporting to the market and the regulatory authorities.
Definition and implementation of systems enabling the Group to monitor and control operational risk exposures. These systems are integrated into the Group’s daily management, using the current technology and
Definition and documentation of operational risk management policies and implementation of the related methodologies consistent with current regulations and best practices. The operational risk control model implemented by
Integrated and effective management of operational risk (identification, measurement/assessment, control/mitigation and
Improved knowledge of actual and potential operational risks and better assignment to business and support lines.
The information on operational risk helps improve processes and controls and reduce losses and income volatility.
Setting of limits for operational risk appetite. Model implementation: global initiatives and results The main functions, activities and global initiatives adopted, which seek to ensure the effective management of operational and technology risk, can be
Definition and implementation of the corporate technology and operational risk management framework.
Designation of head coordinators and creation of operational risk departments at the local units.
Training and experience sharing: communication of best practices within the Group.
Fostering of mitigation plans: control of both the implementation of corrective measures and projects under development.
Definition of policies and structures to
Adequate control of the activities carried out by third parties, enabling the Group to respond to potential critical situations.
Provide adequate information on this type of risk.
The corporate function strengthens technology risk management and fosters the following aspects, inter alia:
Security of information systems.
Promotion of contingency and business continuity plans.
Management of technology risk (risk associated with the use of technology -development and maintenance of applications, design, implementation and maintenance of technology platforms, production of computer processes, etc.). Substantially all the Group units are currently included in the model, with a high degree of uniformity. However, the different pace of the implementation, phases, timetables and historic depth of the respective databases gives rise to differences in the level of progress between one country and another. In
In
7.4 Other matters relating to operational risk
Analysis and monitoring of controls in market operations In view of the specific features and complexity of financial markets, the Group considers it necessary to steadily strengthen the operational control of its financial market activities, thus bolstering the highly stringent and conservative risk and operational principles already applied on a regular basis by In addition to monitoring all operational control-related matters, in all its units the Group placed greater emphasis on the following aspects:
Review of the valuation models and, in general, of the values of the portfolios.
Processes for the capture and independent validation of prices.
Adequate confirmation of transactions with counterparties.
Review of transaction cancellations/modifications.
Review and monitoring of the effectiveness of guarantees, collateral and risk mitigators. Corporate information The corporate technology and operational risk control area has a system for integral management of operational risk information (IGIRO), which every quarter consolidates the information available from each country/unit in the operational risk sphere and gives a global view with the following features:
Two levels of information: one corporate, with consolidated information, and the other
Dissemination of the best practices among the countries/units of Information is also prepared on the following aspects:
Analysis of the database of
Operational risk cost and accounting reconciliation.
Self-assessment questionnaires.
Mitigating measures/active management.
Business continuity plans and contingency plans.
Regulatory framework: BIS II.
This information acts as the basis for meeting reporting requirements The role of insurance in operational risk management
Cooperation in the presentation of
Analysis and follow-up of the recommendations and suggestions for improving operational risks made by insurance companies, through previous audits performed by
Sharing of the information generated in the two areas in order to strengthen the quality of error
Close cooperation between local operational risk officers and local insurance coordinators in order to enhance operational risk mitigation.
Regular meetings to report on specific activities, statements of position and projects in the two areas.
Active participation of the two areas in the global insurance sourcing desk, the highest technical body in the Group responsible for the definition of insurance coverage and arrangement strategies.
Compliance risk is the risk of receiving penalties (financial or otherwise) or being subject to other types of disciplinary measures by the supervisors as a result of failing to comply with laws, regulations, standards, the organization’s self-regulatory standards or codes of conduct applicable to the activity carried on. Reputational risk is the risk associated with the perception of the
8.2 Corporate governance and organizational model It is the responsibility of the Bank’s board or directors, as part of its supervisory function, to approve the Group’s general risk policy. In the corporate compliance and reputational risk The risk committee proposes the Group’s risk policy to the board. Also, as the body responsible for global risk management, it measures reputational risk in its area of activity and decision-making. The audit and compliance committee is entrusted, inter alia, with the functions of supervising compliance with legal requirements, watching over the effectiveness of internal control and risk management systems, supervising compliance with the Group’s code of conduct in the securities markets, with the manuals and procedures for the prevention of The compliance function reports to the board on an ongoing basis, mainly through the audit and compliance committee, to which the Group’s head of compliance reported at the eleven meetings held by this committee in 2012. The Group’s head of compliance also reported to one meeting of the risk committee, without prejudice to attending other sessions of this committee when transactions with a possible impact from the reputational risk standpoint are submitted to it. The last layer of governance comprises the corporate committees for regulatory compliance, analysis and resolution and marketing (the last two specialize in their respective subjects: the prevention of money-laundering and the marketing of products and services), which have a global scope (all geographical areas, all businesses) and are replicated at local level. As part of the risk division, in the exercise of its functions to support the risk committee, the integrated risk control and internal risk validation area (CIVIR) supervises the control framework applicable to compliance and reputational risk and, in turn, facilitates information in this connection to the Group’s control bodies. The organizational model revolves around the corporate compliance and reputational risk area, forming part of the general secretary’s division, which is entrusted with managing the Group’s compliance and reputational risks. Within this area, which is led by the Group’s head of compliance, are the corporate regulatory compliance risk management office, the corporate reputational risk management office and the central department for the prevention of money-laundering and terrorist financing. This structure is replicated at local level and also in the global businesses, since the appropriate functional reporting channels to the corporate area have been established. 8.3 Risk management model The main responsibility for compliance and reputational risk management is shared by the compliance department and the various business and support units that conduct the activities giving rise to risk. The responsibility for developing policies and implementing the corresponding controls lies with the compliance department, which is also responsible for advising senior management on these matters and fostering a culture of compliance, all as part of an annual programme whose effectiveness is periodically evaluated. The compliance department directly manages the basic components of these risks (money-laundering, codes of conduct, product marketing, etc.) and ensures that the other components are duly addressed by the corresponding Group unit (responsible financing, data protection, customer claims, etc.), for which purpose it has established the appropriate control and verification systems. The integrated risk control and internal risk validation area ensures that the risk management model is properly executed. Also, as part of its functions, internal audit performs the tests and reviews required to check that the standards and procedures established at the Group are being complied with. Policies The general code of conduct is the central plank of the Group’s compliance programme. The general code of conduct contains the ethical principles and standards of conduct that must guide the actions of all the Group employees and is complemented in certain matters by the standards contained in the industry-specific codes and manuals3. Also, the code establishes: i) the functions and responsibilities regarding compliance by the Group’s relevant governing bodies and divisions; ii) the standards regulating the consequences of the failure to comply; and iii) a channel through which notifications of allegedly illicit actions are formulated and processed. Governance and organization It is the role of the corporate compliance office, under the supervision of the audit and compliance committee and the regulatory compliance committee, to ensure the effective implementation and monitoring of the general code of conduct. The regulatory compliance committee, which is chaired by the Group’s general secretary, has authority on all matters relating to the compliance function, without prejudice to the matters assigned to the two specialist bodies in this area (the corporate marketing committee with regard to the marketing of products and services, and the analysis and resolution committee with regard to the prevention of money-laundering and terrorist financing). The regulatory compliance committee is composed of representatives from internal audit, the general secretary’s division, financial management, human resources and the most directly affected business units. The Group’s compliance department has been entrusted with the following compliance and reputational risk management functions:
The Group’s compliance department has also been entrusted with the management of the criminal risk prevention model, which resulted from the entry into force of Organic Law 5/2010, which made legal entities criminally responsible for crimes committed on their account or for their benefit by directors or representatives or employees as a result of a lack of control. 2012 saw the completion of the implementation at the Group in Spain of this model, which includes the design and implementation of a risk map with the related controls; the preparation of a prevention manual and protocols that would be applicable if criminal proceedings were initiated; and various employee training and awareness-raising measures on criminal risk. As regards the industry-specific codes and manuals, the focus of the compliance programme is on the following operational spheres, inter alia: Prevention of money-laundering and the financing of terrorism. Marketing of products and services. Conduct in securities markets. Relations with regulators and supervisors. Preparation and dissemination of the Group’s institutional information. Prevention of money-laundering and terrorist financing Policies As a socially responsible organization, it is a strategic objective for the Group to have an advanced effective system for the prevention of money-laundering and the financing of terrorism that is constantly adapted to the latest international regulations and has the capacity to respond to the appearance of new techniques employed by criminal organizations. The prevention of money-laundering and terrorist financing function is articulated in certain policies that establish minimum standards that the Group’s units must observe, and which are prepared in conformity with the principles contained in the 40 recommendations of the Financial Action Task Force (FATF) and the obligations and stipulations of Directive 2005/60/EC of the European Parliament and of the Council of October 26, 2005 on the prevention of the use of the financial system for the purpose of money-laundering and terrorist financing. The corporate policy and the standards implementing it must obligatorily be complied with at all Group units worldwide. In this regard, units should be taken to be all Banco Santander’s banks, subsidiaries, departments or branches, both in Spain and abroad, which, in accordance with their legal status, must be subject to the regulations on the prevention of money-laundering and terrorist financing. Governance and organization The organization of the prevention of money-laundering and terrorist financing function is based on three figures: the analysis and resolution committee (CAR), the central money-laundering prevention department (DCPBC) and the persons responsible for prevention at various levels. The CAR is a collective body with a corporate scope which is chaired by the Group’s general secretary and is composed of representatives of internal audit, the general secretary’s division, human resources and the most directly affected business units. The DCPBC’s function is to establish, coordinate and supervise the systems and procedures for the prevention of money-laundering and terrorist financing at all Group units. Also, there are persons responsible for the prevention of money-laundering and terrorist financing at four different levels: area, unit, branch and account. In each case their role is to provide support to the DCPBC based on their proximity to the customer and transactions. The Group has established corporate systems at all its units and business areas based on decentralized computer software which makes it possible to present directly to the account branches or the relationship managers the transactions and customers which need to be analyzed because of their risk. The aforementioned tools are supplemented by other tools used centrally by the teams of analysts in the prevention units and, based on certain risk profiles and changes in certain customer operational behavior patterns, they enable transactions that might be linked to money-laundering or terrorist financing to be analyzed, identified on a preventative basis and monitored. Banco Santander is a founder member, along with ten other large international banks, of the Wolfsberg Group. The Wolfsberg Group’s objective is to establish international standards to increase the effectiveness of programmes to combat money-laundering and terrorist financing in the financial community. Various initiatives have been developed which have addressed, inter alia, issues such as the prevention of money-laundering in private banking and correspondent banking, and the financing of terrorism as regulatory authorities and experts in this area consider that the Wolfsberg Group and the principles and guidelines set by it represent an important step in the fight against money-laundering, corruption, terrorism and other serious crimes. Product and service marketing Policies The Group manages the These corporate policies aim to establish a single corporate framework for all regions, businesses and entities that: (i) reinforces the These policies are developed and specifically adapted to the actual local situation and to local regulatory requirements through the local internal rules of the various Group units, once
The management of the
The corporate marketing committee The CCC pays particular attention to the suitability of the product or service for the environment in which it is to be marketed, placing particular emphasis on ensuring that:
Each product or service is sold by competent sales personnel.
Customers are furnished with the required appropriate information.
The product or service fits the customer’s risk profile.
Each product or service is assigned to the appropriate market, not only from a legal or tax standpoint, but also with regard to the financial culture of that market.
The product or service meets the requirements of the corporate marketing policies and, in general, the applicable internal or external regulations.
Also, local marketing committees In their respective approval processes the marketing committees’ actions are guided by a risk-based approach, from the view point of both the Bank and the customer.
The global consultative committee (CGC) is the advisory body of the corporate marketing committee and consists of area representatives who provide an insight into risks, The corporate monitoring committee (CCS)
The purpose of the corporate reputational risk management office At local level Conduct in securities markets Policy This is set by the code of conduct in the securities markets, complemented, inter alia, by the code of conduct for analysis activities, the research policy manual and the procedure for detecting, analyzing and communicating transactions suspected of market abuse. Governance and organization The organization is centered on the corporate compliance office and local and subsidiaries’ compliance divisions. The Group’s compliance department performs the following main functions in relation to the rules of conduct in securities markets:
Relationships with supervisors and dissemination of information to the markets The compliance department is responsible for responding to the information requirements of the regulatory and supervisory bodies, both in Spain and in other countries where the Group operates, monitoring implementation of the measures arising from the reports or inspections conducted by these bodies and supervising the way in which the Group disseminates institutional information in the markets, transparently and in accordance with the regulators’ requirements. The audit and compliance committee is informed of the main issues at each of its meetings. Other actions In The losses incurred by the Group due to compliance and reputational risk 9. CAPITAL 9.1 Compliance with the new regulatory framework The new regulatory framework established by Basel III will heighten the capital requirements very significantly, from both a
Accordingly, As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, Santander Group With regard to operational risk, the Group considers that the internal model should be developed primarily on the basis of the experience accumulated in managing an entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature of Santander Group. The Group With respect to Pillar II, management and internal control systems, is reviewed by internal audit and internal validation teams and is subject to a corporate governance structure that culminates in its approval by the Group’s board of directors, which also establishes the strategic factors relating to risk appetite and capital adequacy targets on an annual basis. The economic capital model considers risks not included in Pillar In accordance with the capital requirements set by the European Directive and Bank of Spain rules, Parallel to the roll-out of advanced approaches at the various Group units, Santander is carrying out an
The concept of economic capital has traditionally been contrasted with that of regulatory capital, the latter being the measure required by capital adequacy regulations. The Basel II capital framework has without doubt brought the two concepts closer together. While Pillar I determines the minimum regulatory capital requirements, Pillar II quantifies, through economic capital, the Group’s overall capital adequacy position. The Group’s economic capital model enables it to quantify the consolidated risk profile taking into account all the significant risks of the business In the internal definition of available capital, unlike the regulatory capital base, certain on-balance-sheet assets (such as goodwill, etc.) to which the regulator does not grant any value from a prudential point of view are not deducted, since in Santander’s model risks and capital requirements are also calculated for these assets. The concept of diversification is fundamental
areas. To this end, the Group plans the business performance and the capital requirements under a central scenario and under alternative stress scenarios. With this planning the Group ensures that it maintains its capital adequacy targets, even in adverse economic scenarios.
RORAC and value creation
Calculation of economic capital requirements and of the return thereon for the Group’s business units, segments, portfolios and customers, in order to facilitate an optimal allocation of economic capital.
Budgeting of capital requirements and RORACs of the Group’s business units and inclusion thereof in their compensation plans.
Analysis and setting of prices in the decision-making process for transactions (loan approval) and customers (monitoring). The RORAC methodology facilitates the comparison, on a like-for-like basis, of the performance of transactions, customers, portfolios and businesses, and identifies those which achieve a risk-adjusted return higher than the Group’s cost of capital, thus aligning risk management and business management with the aim of The Group periodically assesses the level and evolution of the value creation (VC) and return on risk-adjusted capital (RORAC) of its main business units. The VC is the profit generated over and above the cost of the economic capital (EC) used, and is calculated using the following formula: VC = Profit - (average EC x cost of capital) The profit used is obtained by making the required adjustments to accounting profit in order to reflect only the recurring profit obtained by each unit from its business activity. The minimum rate of return on capital that a transaction should achieve is determined by the cost of capital, which is the minimum remuneration required by shareholders. In order to objectively calculate this rate, the premium that shareholders demand for investing in the Group is added to the risk-free return. This premium depends essentially on the degree of volatility of the market price of the Banco Santander share in relation to the market trend. If a transaction or portfolio yields a positive return, it will be contributing to the Group’s profit, although it will only create shareholder value when this return exceeds the cost of capital. In 2012 value creation by the business units was disparate, falling in Europe and increasing in the United States. The Group’s
This Note includes relevant information about additional disclosure requirements. 55.1 Consolidated financial statements Following are the consolidated balance sheets and consolidated statements of income of the Group under the IFRS reformatted to conform to the presentation guidelines for bank holding companies set forth in Regulation S-X of the Securities and Exchange Commission of the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts and allocations of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
The Group has issued Mortgage backed securities, calledCédulas Hipotecarias (see Note 22). Additionally, as of December 31, 2012, 2011
NET CONSOLIDATED PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME Available-for-sale financial assets: Revaluation gains/(losses) Amounts transferred to income statement Other reclassifications Cash flow hedges: Revaluation gains/(losses) Amounts transferred to income statement Amounts transferred to initial carrying amount of hedged items Other reclassifications Hedges of net investments in foreign operations: Revaluation gains/(losses) Amounts transferred to income statement Other reclassifications Exchange differences: Revaluation gains/(losses) Amounts transferred to income statement Other reclassifications Non-current assets held for sale: Revaluation gains/(losses) Amounts transferred to income statement Other reclassifications Actuarial gains/(losses) on pension plans Entities accounted for using the equity method: Revaluation gains/(losses) Amounts transferred to income statement Other reclassifications Other comprehensive income Income tax TOTAL COMPREHENSIVE INCOME Attributable to the Parent Attributable to non-controlling interests
Following are the summarized balance sheets of Banco Santander, S.A. as of December 31, 2012, 2011
In the financial statements of the Parent Company, investments in subsidiaries, jointly controlled entities and associates are recorded at cost. Following are the summarized statements of income of Banco Santander, S.A. for the years ended December 31, 2012, 2011
Following are the summarized cash flow statements of Banco Santander, S.A. for the years ended December 31, 2011, 2010 and 2009.
55.2 Preference Shares and Preferred Securities The following table shows the balance of the preference shares and preferred securities as of December 31, 2012, 2011
Both Preference Shares and Preferred Securities are recorded under the “Financial liabilities at amortized cost – Subordinated Liabilities” caption in the consolidated balance sheet as of December 31, 2012, 2011 Preference Shares include the financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity in the financial statements. These shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties except for the shares of Santander UK, plc amounting to GBP 200 million, are redeemable at the discretion of the issuer, based on the conditions of the issuer. None of these issues are convertible into Bank shares or granted privileges or right which, in certain circumstances, make them convertibles into shares. This category includes non-cumulative preferred non-voting shares issued by For the purposes of payment priority, Preferred Securities are junior to all general creditors and to subordinated deposits. The payment of dividends on these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity. This category includes non-cumulative preferred non-voting securities issued by Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal), and Santander International Preferred, S.A. (Sociedad Unipersonal), guaranteed by the Bank. It also includes non-cumulative preferred non-voting securities issued by Banesto Preferentes, S.A, Banco Español de Crédito, S.A., Santander PR Capital Trust and Santander UK Group. Except the issues of Santander PR Capital Trust I, which redeems in 2036, all preference shares and preferred securities are perpetual securities and there is no obligation that requires the Group to redeem them. All securities have been fully subscribed by third parties outside the Group. In the consolidated balance sheets, these securities are shown net of any temporary operations relating to liquidity guarantees (see Note 23 and Exhibit III), and are described in the table below:
Preference Shares Issuer/Date of issue Santander UK plc, October 1995 Santander UK plc, February 1996 Santander UK plc, March 2004 Santander UK plc, May 2006 Santander Holdings USA, Inc, August 2000 Santander Holdings USA, Inc, May 2006
In accordance with Reg. S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal) and Santander International Preferred, S.A. (Unipersonal)
Santander Finance Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. who fully and unconditionally guarantees the preferred securities (Series 1, 4, 5, 6, 10 and 11 are listed in the United States). No other subsidiary of the Bank guarantees such securities.
Santander Finance Capital, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.
Santander International Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities. The condensed financial statements of Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal) and Santander International Preferred, S.A. (Sociedad Unipersonal) for the years ended December 31, SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL) Santander Finance Capital, S.A. (Unipersonal) was established in Spain on July 8, 2003. The common stock of the company is Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Capital, S.A. (Unipersonal), prepared in conformity with IFRS. Balance sheets
Statement of income
Statement of comprehensive income
Statement of changes in stockholders’ equity
In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a €100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A. After this capital increase, the capital stock of Santander Finance Capital S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).
Preferred Securities
Series I: on October 3, 2003, Santander Finance Capital, S.A. (Unipersonal) issued 18,000,000 preference securities, at €25 par value. On April 7, 2009 the company redeemed the whole series.
Series II: on February 18, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 16,000,000 preference securities, at €25 par value. On March 31, 2009 the company redeemed the whole series.
Series III: on July 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 30,000,000 preference securities, at €25 par value. On August 17, 2009 the company redeemed the whole series.
Series IV: on September 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 27,200,000 preference securities, at €25 par value. On August 17, 2009 the company redeemed the whole series.
Series V: on April 12, 2005, Santander Finance Capital, S.A. (Unipersonal) issued 40,000,000 preference securities, at €25 par value. On July 12, 2010 the company redeemed the whole series.
Series VI: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 12,122 preference securities, at €1,500 par value.
Series VII: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 333 preference securities, at €75,000 par value.
Series VIII: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 313,745 preference securities, at €1,000 par value.
Series IX: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 3,074 preference securities, at €50,000 par value.
Series X: on June 30, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 78,624,629 preference securities, at €25 par value. On December 2, 2011, we announced an offer (the “Repurchase Offer”) to repurchase Series X Preferred Securities issued by Santander Finance Capital, S.A.U. in June 2009 and guaranteed by the Bank (the “Series X Preferred Securities”) and a simultaneous public offer to subscribe for newly-issued shares of Banco Santander (the “New Shares”), on the terms set out below. We refer to the Repurchase Offer and the issuance of New Shares as the “Capital Increase.” In order to participate in the Repurchase Offer, holders of Series X Preferred Securities were required to irrevocably subscribe the number of New Shares which corresponded to the repurchase price of their Series X Preferred Securities. The New Shares were offered solely to the abovementioned holders of Series X Preferred Securities who accepted the Repurchase Offer.
The issue price of the New Shares (nominal plus premium) equaled to the arithmetic mean of the average weighted prices of Banco Santander shares on the Spanish stock exchanges during the Acceptance Period. Consequently, the number of New Shares to be subscribed by each holder of Series X Preferred Securities who accepted the Repurchase Offer was the result from dividing the nominal value of the preferred securities (€25.00) by the issue price of the New Shares. On December 28, 2011, we announced that during the acceptance period, the holders of 77,743,969 preferred securities, representing 98.88% of the preference shares outstanding, had accepted the repurchase offer. The holders of these preferred securities subscribed 341,802,171 shares under the Capital Increase. Consequently, the total amount (nominal plus premium) subscribed was €1,943,599,225 and the nominal value of the Capital Increase was €170,901,085.50. The New Shares represented 3.84% of the share capital of Banco Santander following the Capital Increase. On December 30, 2011, Banco Santander acquired the Series X Preferred Securities and the new shares subscribed by the holders of those preferred securities were paid up. These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date. All the issues of Santander Finance Capital, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A. SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL) Santander Finance Preferred, S.A. (Unipersonal) was established in Spain on February 27, 2004. The common stock of the company is Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Preferred, S.A. (Unipersonal), prepared in conformity with IFRS.
Balance sheets
Statement of income
Statement of comprehensive income
Statement of changes in stockholders’ equity
In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a €100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A. After this capital increase, the capital stock of Santander Finance Preferred, S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company). Preferred Securities
Series 1: on March 11, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 7,600,000 preferred securities, at $25 par value.
Series 2: on September 30, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 300,000 preferred securities, at €1,000 par value.
Series 3: on October 8, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 200,000 preferred securities, at €1,000 par value.
Series 4: on November 21, 2006 Santander Finance Preferred, S.A. (Unipersonal) issued 20,000,000 preferred securities, at €25 par value.
Series 5: on January 31, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 24,000,000 preferred securities, at $25 par value.
Series 6: on March 5, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 14,000,000 preferred securities, at $25 par value.
Series 7: on July 10, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 5,000 preferred securities, at £50,000 par value.
Series 8: on July 27, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 13,588 preferred securities, at £50,000 par value.
Series 9: on July 27, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 2,514 preferred securities, at €50,000 par value.
Series 10: on September 29, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 33,004,383 preferred securities, at $25 par value.
Series 11: on September 29, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 161,587 preferred securities, at $1,000 par value.
These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.
All the issues of Santander Finance Preferred, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.
On July 9, 2009, we published on the international markets offers to exchange issues of securities eligible to be included in capital issued by Santander and its subsidiaries. The exchange envisaged the delivery of new securities that meet the current market standards and regulatory requirements to be classified as equity at the consolidated Group level. For this purpose Santander Finance Preferred, S.A. (Unipersonal) issued Series 8, 9, 10 and 11 above.
SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL) Santander International Preferred, S.A. (Sociedad Unipersonal) was established in Spain on February 17, 2009. The common stock of the company is Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander International Preferred, S.A. (Sociedad Unipersonal), prepared in conformity with IFRS. Balance sheets
Statement of income
Statement of comprehensive income
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parent company only) NET INCOME/(LOSS) Income and expense recognised directly in equity Arising from revaluation of financial instruments: Arising from cash flow hedges Grants, donations and legacies received Arising from actuarial gains and losses and other adjustments Tax effect Total income and expense recognised directly in equity Transfers to profit or loss Arising from revaluation of financial instruments: Arising from cash flow hedges Grants, donations and legacies received Tax effect Total transfers to profit or loss TOTAL COMPREHENSIVE INCOME Statement of changes in stockholders’ equity
At December 31, Preferred Securities
Series 1: on March 19, 2009, Santander International Preferred, S.A. (Sociedad Unipersonal) issued 653,995 preferred securities, at $1,500 par value.
Series 2: on March 19, 2009, Santander International Preferred, S.A. (Sociedad Unipersonal) issued 8,582 preferred securities, at €1,000 par value.
These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after ten years from the issue date.
All the issues of Santander Finance Preferred, S.A. (Sociedad Unipersonal) are guaranteed by Banco Santander, S.A. 55.3 US Registered senior debt SANTANDER US DEBT, S.A. (Sociedad Unipersonal) Santander US Debt, S.A. (Sociedad Unipersonal) was established in Spain on February 27, 2004. The common stock of the company is On December 31,
Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander US Debt, S.A. (Sociedad Unipersonal), prepared in conformity with IFRS. Balance sheets
Statement of income
Statement of comprehensive income
Statement of changes in stockholders’ equity
At December 31,
Exhibit I Subsidiaries of Banco Santander, S.A. (1)
Company Location Line of business Abbey National Investments (b) Abbey National Investments Holdings Limited (b) Abbey National Legacy Holdings Limited (b) Abbey National Legacy Limited (b) Abbey National Nominees Limited Abbey National North America Holdings Limited Abbey National North America LLC Abbey National Pension (Escrow Services) Limited Abbey National PLP (UK) Limited Abbey National Property Investments Abbey National Property Services Limited (b) Abbey National Securities Inc. Abbey National September Leasing (3) Limited Abbey National Sterling Capital plc (b) Abbey National Treasury Investments Abbey National Treasury Services (Transport Holdings) Limited (b) Abbey National Treasury Services Investments Limited Abbey National Treasury Services Overseas Holdings Abbey National Treasury Services plc Abbey National UK Investments Abbey Stockbrokers (Nominees) Limited Abbey Stockbrokers Limited Ablasa Participaciones, S.L. Ablasa Participações S.A. ABN AMRO Administradora de Cartões de Crédito Ltda. (d) ABN AMRO Brasil Partipações e Investimentos S.A. (d) Administración de Bancos Latinoamericanos Santander, S.L. AEH Purchasing, Ltd. (b) Afisa S.A. Agrícola Tabaibal, S.A. AKB Marketing Services Sp. Z.o.o. Alcaidesa Golf, S.L. Alcaidesa Holding, S.A. (consolidated) Alcaidesa Inmobiliaria, S.A. Alcaidesa Servicios, S.A. ALCF Investments Limited (b) Aljarafe Golf, S.A. Aljardi SGPS, Lda. Alliance & Leicester (Jersey) Limited Alliance & Leicester Cash Solutions Limited Alliance & Leicester Commercial Bank plc Alliance & Leicester Commercial Finance (Holdings) plc (b) Alliance & Leicester Equity Investments (Guarantee) Limited Alliance & Leicester Estate Agents (Mortgage & Finance) Limited (b) Alliance & Leicester Financing plc (b) Alliance & Leicester Independent Financial Advisers Limited (b) Company Location Line of business Alliance & Leicester International Limited Alliance & Leicester Investments (Derivatives No.3) Limited Alliance & Leicester Investments (Derivatives) Limited Alliance & Leicester Investments (Jersey) Limited (b) Alliance & Leicester Investments (No.2) Limited Alliance & Leicester Investments (No.3) LLP (b) Alliance & Leicester Investments (No.4) Limited (b) Alliance & Leicester Investments Limited Alliance & Leicester Personal Finance Limited Alliance & Leicester plc Alliance & Leicester Print Services Limited (b) Alliance & Leicester Share Ownership Trust Limited (b) Alliance & Leicester Sharesafe Limited (b) Alliance & Leicester Unit Trust Managers Limited (b) Alliance Bank Limited Alliance Corporate Services Limited (b) Altamira Santander Real Estate, S.A. Amazonia Trade Limited Andaluza de Inversiones, S.A. ANITCO Limited Aquanima Brasil Ltda. Aquanima Chile S.A. Aquanima México S. de R.L. de C.V. Aquanima S.A. Argenline, S.A. Arizona Concentrating Solar I LLC Arka Emerging Markets SICAV - FIS Asesoría Estratega, S.C. Atual Companhia Securitizadora de Créditos Financeiros Aurum Inversiones Limitada Aviación Antares, A.I.E. Aviación Británica, A.I.E. Aviación Centaurus, A.I.E. Aviación Intercontinental, A.I.E. Aviación RC II, A.I.E. Aviación Real, A.I.E. Aviación Regional Cántabra, A.I.E. Aviación Scorpius, A.I.E. Aviación Tritón, A.I.E. Aymoré Crédito, Financiamento e Investimento S.A. Bajondillo, S.A. Banbou S.A.R.L. Banco Bandepe S.A. Banco Banif, S.A. Banco de Albacete, S.A.
Company Location Line of business BZ WBK Towarzystwo Funduszy Inwestycyjnych S.A. CA Premier Banking Limited Caja de Emisiones con Garantía de Anualidades Debidas por el Estado, S.A. Cántabra de Inversiones, S.A. Cántabro Catalana de Inversiones, S.A. Capital Riesgo Global, SCR de Régimen Simplificado, S.A. Capital Street Delaware, LP Capital Street Holdings, LLC Capital Street REIT Holdings, LLC Capital Street S.A. Carfax (Guernsey) Limited (f) Carpe Diem Salud, S.L. Cartera Mobiliaria, S.A., SICAV Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander Cater Allen Holdings Limited Cater Allen International Limited Cater Allen Limited Cater Allen Lloyd’s Holdings Limited Cater Allen Pensions Limited (b) Cater Allen Syndicate Management Limited Central Eólica Santo Antonio De Padua S.A. Central Eólica Sao Cristovao S.A. Central Eólica Sao Jorge S.A. Certidesa, S.L. Clínica Sear, S.A. Club Zaudin Golf, S.A. Costa Canaria de Veneguera, S.A. Crawfall S.A. Credicenter Empreendimentos e Promoções Ltda. (d) Credisol, S.A. (b) Crefisa, Inc. CRV Distribuidora de Títulos e Valores Mobiliários Darep Limited Depósitos Portuarios, S.A. Digital Procurement Holdings N.V. Diners Club Spain, S.A. Dirección Estratega, S.C. Dom Maklerski BZ WBK S.A. Dudebasa, S.A. Elerco, S.A. Embuaca Geração e Comercialização de Energia S.A. Empresas Banesto 2, Fondo de Titulización de Activos Empresas Banesto 5, Fondo de Titulización de Activos Empresas Banesto 6, Fondo de Titulización de Activos Energía Eólica de México, S.A. de C.V. (consolidated) Company Location Line of business EOL Brisa Energias Renováveis S.A. EOL Vento Energias Renováveis S.A. EOL Wind Energias Renováveis S.A. Eólica Bela Vista Geração e Comercialização de Energia S.A. Eólica Icaraí Geração e Comercialização de Energia S.A. Eólica Mar e Terra Geração e Comercialização de Energia S.A. Erestone S.A.S. FFB - Participações e Serviços, Sociedade Unipessoal, S.A. Fideicomiso 100740 SLPT Fideicomiso 2002114 Fideicomiso GFSSLPT Banca Serfín, S.A. Fideicomiso Super Letras Hipotecarias Clase I Fideicomiso Super Letras Hipotecarias Clase II Financiación Banesto 1, Fondo de Titulización de Activos First National Motor Business Limited First National Motor Contracts Limited First National Motor Facilities Limited First National Motor Finance Limited First National Motor Leasing Limited First National Motor plc First National Tricity Finance Limited Fomento e Inversiones, S.A. Fondo de Titulización de Activos PYMES Santander 3 Fondo de Titulización de Activos PYMES Santander 4 Fondo de Titulización de Activos Santander 2 Fondo de Titulización de Activos Santander Consumer Spain 09-1 Fondo de Titulización de Activos Santander Consumer Spain Auto 07-1 Fondo de Titulización de Activos Santander Consumer Spain Auto 2010-1 Fondo de Titulización de Activos Santander Consumer Spain Auto 2011-1 Fondo de Titulización de Activos Santander Consumer Spain Auto 2012-1 Fondo de Titulización de Activos Santander Empresas 1 Fondo de Titulización de Activos Santander Empresas 10 Fondo de Titulización de Activos Santander Empresas 2 Fondo de Titulización de Activos Santander Empresas 3 Fondo de Titulización de Activos Santander Empresas 4 Fondo de Titulización de Activos Santander Empresas 8 Fondo de Titulización de Activos Santander Empresas 9 Fondo de Titulización de Activos Santander Financiación 5 Fondo de Titulización de Activos Santander Hipotecario 6 Fondo de Titulización de Activos Santander Hipotecario 7 Fondo de Titulización de Activos Santander Hipotecario 8 Fondo de Titulización de Activos Santander Público 1 Fondo de Titulización Santander Financiación 1 Fondos Santander, S.A. Administradora de Fondos de Inversión (in liquidation) (b) Formación Integral, S.A. Fortensky Trading, Ltd.
Company Location Line of business Hipototta No. 2 FTC (b) Hipototta No. 2 plc (b) Hipototta No. 3 FTC (b) Hipototta No. 3 plc (b) Hipototta No. 4 FTC Hipototta No. 4 plc Hipototta No. 5 FTC Hipototta No. 5 plc Hipototta No. 7 FTC Hipototta No. 7 Limited Hipototta No. 8 FTC (b) Hipototta No. 8 Limited (b) Hispamer Renting, S.A. Sole-Shareholder Company Holbah II Limited Holbah Limited Holmes Funding Limited Holmes Holdings Limited Holmes Master Issuer plc Holmes Trustees Limited Holneth B.V. Home Services On Line Solutions, S.L. HRE Investment Holdings II-A S.à.r.l. HSH Delaware L.P. Hualle, S.A. Ibérica de Compras Corporativas, S.L. Idaho Wind I LLC Independence Community Bank Corp. Independence Community Commercial Reinvestment Corp. Infraestructuras Americanas, S.L. Ingeniería de Software Bancario, S.L. Inmo Francia 2, S.A. Instituto Santander Serfin, A.C. Insurance Funding Solutions Limited Interfinance Holanda B.V. Inversiones Marítimas del Mediterráneo, S.A. Isban Argentina S.A. Isban Brasil S.A. Isban Chile S.A. Isban DE GmbH Isban México, S.A. de C.V. Isban U.K., Ltd. Island Insurance Corporation J.C. Flowers II-A L.P. JCF BIN II-A JCF II-A AIV K L.P. JCF II-A Special AIV K L.P. Jupiter III C.V. Company Location Line of business Jupiter JCF AIV II-A C.V. Konecta Activos Inmobiliarios, S.L. Konecta Brazil Outsourcing Ltda. Konecta Broker, S.L. Konecta Bto, S.L. Konecta Catalunya, S.L. Konecta Chile Limitada Konecta Colombia Grupo Konecta Colombia Ltda Konecta Field Marketing, S.A. Konecta Perú S.A.C. Konecta Portugal, Lda. Konecta Servicios Administrativos y Tecnológicos, S.L. Konecta Servicios de BPO, S.L. Konectanet Andalucía, S.L. Konectanet Comercialización, S.L. Kontacta Comunicaciones, S.A. La Unión Resinera Española, S.A. (consolidated) Laboratorios Indas, S.A. Langton Funding (No.1) Limited Langton Mortgages Trustee (UK) Limited Langton Mortgages Trustee Limited Langton PECOH Limited Langton Securities (2008-1) plc Langton Securities (2008-2) plc (b) Langton Securities (2010-1) PLC Langton Securities (2010-2) PLC Langton Securities (2012-1) PLC Langton Securities Holdings Limited Laparanza, S.A. Larix Chile Inversiones Limitada Lease Totta No. 1 FTC Leasetotta No. 1 Limited Liquidity Import Finance Limited Liquidity Limited Luresa Inmobiliaria, S.A. Luri 1, S.A. (e) Luri 2, S.A. (e) Luri 4, S.A. Sole-Shareholder Company Luri Land, S.A. (e) MAC No. 1 Limited Mantiq Investimentos Ltda. Marylebone Road CBO 3 BV Mata Alta, S.L. Merciver, S.L. Mesena CLO 2011-1 B.V. Mitre Capital Partners Limited Motor 2011 Holdings Limited
Company Location Line of business Puntoform, S.L. Real Corretora de Seguros S.A. (d) REB Empreendimentos e Administradora de Bens S.A. Reintegra, S.A. Retail Financial Services Limited Riobank International (Uruguay) SAIFE (b) Rosenlease, S.L. Ruevilliot 26, S.L. Saja Eca Limited Sancap Investimentos e Participações S.A. Sánchez Ramade Santander Financiera, S.L. Saninv - Gestão e Investimentos, Sociedade Unipessoal, S.A. Sansol S.r.l. Santander (CF Trustee Property Nominee) Limited Santander (CF Trustee) Limited Santander (UK) Group Pension Scheme Trustees Limited Santander Administradora de Consórcios Ltda. (d) Santander Agente de Valores Limitada Santander Ahorro Inmobiliario 2 S.I.I., S.A. Santander AM Holding, S.L. Santander Asset Finance (December) Limited Santander Asset Finance plc Santander Asset Management - Sociedade Gestora de Fundos de Investimento Mobiliário, S.A. Santander Asset Management Chile S.A. Santander Asset Management Corporation Santander Asset Management Luxembourg, S.A. Santander Asset Management S.A. Administradora General de Fondos Santander Asset Management UK Holdings Limited Santander Asset Management UK Limited Santander Asset Management, S.A., S.G.I.I.C. Santander Back-Offices Globales Especializados, S.A. Santander Back-Offices Globales Mayoristas, S.A. Santander BanCorp Santander Banif Inmobiliario, F.I.I. Santander Bank & Trust Ltd. Santander Benelux, S.A./N.V. Santander Brasil Administradora de Consórcio Ltda. Santander Brasil Advisory Services S.A. Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A. Santander Brasil, EFC, S.A. Santander Capital Desarrollo, SGECR, S.A. Santander Capital Structuring, S.A. de C.V. Santander Capitalização S.A. Santander Carbón Finance, S.A. Company Location Line of business Santander Cards Ireland Limited Santander Cards Limited Santander Cards UK Limited Santander Carteras, S.G.C., S.A. Santander Central Hispano Financial Services Limited Santander Central Hispano International Limited Santander Central Hispano Issuances Limited Santander Chile Holding S.A. Santander Commercial Paper, S.A. Sole-Shareholder Company Santander Consulting (Beijing) Co., Ltd. Santander Consumer (UK) plc Santander Consumer Bank AG Santander Consumer Bank AS Santander Consumer Bank GmbH Santander Consumer Bank S.p.A. Santander Consumer Bank Spólka Akcyjna Santander Consumer Beteiligungsverwaltungsgesellschaft mbH Santander Consumer Chile S.A. Santander Consumer Credit Services Limited Santander Consumer Finance Benelux B.V. Santander Consumer Finance Media S.r.l. Santander Consumer Finance Oy Santander Consumer Finance Zrt. Santander Consumer Finance, S.A. Santander Consumer Finanse Spólka Akcyjna Santander Consumer Holding Austria GmbH Santander Consumer Holding GmbH Santander Consumer Leasing GmbH Santander Consumer Multirent Spółka z ograniczoną odpowiedzialnością Santander Consumer Renting, S.L. Santander Consumer Services GmbH Santander Consumer, EFC, S.A. Santander Consumo Perú S.A. Santander Consumo, S.A. de C.V., SOFOM, E.R. Santander Corredora de Seguros Limitada Santander Corretora de Câmbio e Valores Mobiliários S.A. Santander de Titulización S.G.F.T., S.A. Santander Energías Renovables I, SCR de Régimen Simplificado, S.A. Santander Envíos, S.A. Santander Estates Limited Santander Factoring S.A. Santander Factoring y Confirming, S.A., E.F.C. Santander Finance 2012-1 LLC Santander Financial Exchanges Limited Santander Financial Products plc Santander Financial Services, Inc.
Company Location Line of business Santander Leasing S.A. Arrendamento Mercantil Santander Mediación Operador de Banca-Seguros Vinculado, S.A. Santander Merchant S.A. Santander Microcrédito Assessoria Financeira S.A. Santander Operaciones Retail, S.A. Santander Overseas Bank, Inc. Santander Participações S.A. Santander PB UK (Holdings) Limited Santander Pensiones, S.A., E.G.F.P. Santander Pensões - Sociedade Gestora de Fundos de Pensões, S.A. Santander Perpetual, S.A., Sole-Shareholder Company Santander Portfolio Management UK Limited Santander Private Banking s.p.a. Santander Private Banking UK Limited Santander Private Equity, S.A., S.G.E.C.R. Santander Private Real Estate Advisory, S.A. Sole-Shareholder Company Santander Real Estate, S.G.I.I.C., S.A. Santander Río Asset Management Gerente de Fondos Comunes de Inversión S.A. Santander Río Servicios S.A. Santander Río Sociedad de Bolsa S.A. Santander Río Trust S.A. Santander S.A. - Serviços Técnicos, Administrativos e de Corretagem de Seguros Santander S.A. Corredores de Bolsa Santander S.A. Sociedad Securitizadora Santander Secretariat Services Limited Santander Securities LLC Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. Santander Service GmbH Santander Servicios Corporativos, S.A. de C.V. Santander Servicios de Recaudación y Pagos Limitada Santander Servicios Especializados, S.A. de C.V. Santander Tecnología y Operaciones A.E.I.E. Santander Totta Seguros, Companhia de Seguros de Vida, S.A. Santander Totta, SGPS, S.A. Santander Trade Services Limited Santander UK Foundation Limited Santander UK Investments Santander UK plc Santander Unit Trust Managers UK Limited Santander US Debt, S.A. Sole-Shareholder Company Santander Venezuela Sociedad Administradora de Entidades de Inversión Colectiva, C.A. Company Location Line of business Santander Vida Seguros y Reaseguros, S.A. Santos Energia Participações S.A. Santotta-Internacional, SGPS, Sociedade Unipessoal, Lda. Santusa Holding, S.L. Saturn Japan II Sub C.V. Saturn Japan III Sub C.V. SC Germany Auto 06 plc SC Germany Auto 08-2 Limited (b) SC Germany Auto 2009-1 Limited SC Germany Auto 2010-1 UG (haftungsbeschränkt) SC Germany Auto 2011-1 UG (haftungsbeschränkt) SC Germany Auto 2011-2 UG (haftungsbeschränkt) SC Germany Consumer 08-1 Limited (b) SC Germany Consumer 09-1 Limited (b) SC Germany Consumer 10-1 Limited SC Germany Consumer 11 -1 Limited SC Private Cars 2010-1 Limited SCF Ajoneurohallinto Limited SCF Rahoituspalvelut Limited SCI BANBY PRO Scottish Mutual Pensions Limited Serfin International Bank and Trust, Limited Services and Promotions Delaware Corporation Services and Promotions Miami LLC Servicio de Alarmas Controladas por Ordenador, S.A. Servicios Administrativos y Financieros Ltda. Servicios Corporativos Seguros Serfin, S.A. de C.V. (b) Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. Servicios de Cobranzas Fiscalex Ltda. Servicios Universia Venezuela S.U.V., S.A. (b) Sheppards Moneybrokers Limited Shiloh III Wind Project, LLC Silk Finance No. 3 Limited Sinvest Inversiones y Asesorías Limitada Sistema 4B, S.A. (consolidated) Sociedad Integral de Valoraciones Automatizadas, S.A. Socur, S.A. Sodepro, S.A. Solarlaser Limited SOV APEX LLC Sovereign Bank, National Association Sovereign Capital Trust IV Sovereign Capital Trust IX Sovereign Capital Trust V Sovereign Capital Trust VI Sovereign Community Development Company
Exhibit II Companies in which Santander Group has ownership interests of more than 5% (b), associates of Santander Group and jointly controlled entities
Company Location Line of business Compañía Española de Seguros de Crédito a la Exportación, S.A. Comprarcasa Servicios Inmobiliarios, S.A. Desarrollos Eólicos Mexicanos de Oaxaca 2, S.A.P.I. de C.V. Dirgenfin, S.L. FC2Egestión, S.L. Federal Home Loan Bank of Pittsburgh Federal Reserve Bank of Boston Fondo de Titulización de Activos UCI 11 Fondo de Titulización de Activos UCI 14 Fondo de Titulización de Activos UCI 15 Fondo de Titulización de Activos UCI 16 Fondo de Titulización de Activos UCI 17 Fondo de Titulización de Activos UCI 18 Fondo de Titulización Hipotecaria UCI 10 Fondo de Titulización Hipotecaria UCI 12 Friedrichstrasse, S.L. Gire S.A. Grupo Alimentario de Exclusivas, S.A. Helican Desarrollo Eólico, S.L. HLC - Centrais de Cogeração, S.A. Hyundai Capital Germany GmbH Hyundai Capital UK Limited Imperial Holding S.C.A. Indice Iberoamericano de Investigación y Conocimiento, A.I.E. Inmo Alemania Gestión de Activos Inmobiliarios, S.A. Inversiones ZS América Dos Ltda Inversiones ZS América SpA Invico S.A. J.C. Flowers I L.P. JC Flowers AIV P L.P. Kassadesign 2005, S.L. Krynicki Recykling S.A. Luri 3, S.A. Metrohouse & Partnerzy S.A. Metrovacesa, S.A. (consolidated) Neoen, SGPS, S.A. Nevis Power Limited New PEL S.a.r.l. Norchem Holdings e Negócios S.A. Norchem Participações e Consultoria S.A. NPG Wealth Management S.àr.l (consolidated) Olivant Investments Switzerland S.A. Olivant Limited (consolidated) Omega Financial Services GmbH Company Location Line of business Operadora de Activos Alfa, S.A. de C.V. Operadora de Activos Beta, S.A. de C.V. Parque Eólico Dominica, S.A.P.I. de C.V. Parque Eólico el Mezquite, S.A.P.I. de C.V. Parque Eólico la Carabina I, S.A.P.I. de C.V. Parque Eólico la Carabina II, S.A.P.I. de C.V. Parque Solar Afortunado, S.L. Parque Solar la Robla, S.L. Parque Solar Páramo, S.L. Parque Solar Saelices, S.L. Partang, SGPS, S.A. POLFUND - Fundusz Poręczeń Kredytowych S.A. Prodesur Mediterráneo, S.L. Proinsur Mediterráneo, S.L. Promoreras Desarrollo de Activos, S.L. PSA Finance PLC Q 205 Real Estate GmbH Queenford, S.L. Redbanc S.A. Redbanc, S.A. Redsys Servicios de Procesamiento, S.L.U. Retama Real Estate, S.L. Santander Ahorro Inmobiliario 1, S.I.I., S.A. Santander Consumer USA Inc. (consolidated) Santander Río Seguros S.A. Santander Seguros, S.A. Saudi Hollandi Bank (consolidated) Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A. Sociedad Interbancaria de Depósitos de Valores S.A. Sociedad Promotora Bilbao Plaza Financiera, S.A. Solar Energy Capital Europe S.à.r.l. Tecnologia Bancária S.A. Teka Industrial, S.A. (consolidated) Torre de Miguel Solar, S.L. Trabajando.com Chile S.A. Transbank S.A. Transolver Finance EFC, S.A. U.C.I., S.A. UCI Holding Brasil Ltda UCI Mediação de Seguros Unipessoal, Lda. Unicre-Instituição Financeira de Crédito, S.A. Unión de Créditos Inmobiliarios, S.A., EFC Vector Software Factory, S.L. Viking Consortium Holdings Limited (consolidated) Zurich Santander Brasil Seguros e Previdência S.A.
Exhibit III Preference share issuer subsidiaries
Exhibit IV Notifications of acquisitions and disposals of investments in (Article 155 of the Spanish Limited Liability Companies Law and Article 53 of Securities Market Law 24/1998) On On On On On May 7, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BOLSAS Y MERCADOS ESPAÑOLES, SOCIEDAD HOLDING DE MERCADOS Y SISTEMAS FINANCIEROS, S.A. had fallen below 3% on April 27, 2012. On May 22, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had exceeded 3% on May 14, 2012. On June 6, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had fallen below 3% on On
On December 13, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had fallen below 3% on December 7, On December 20, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had exceeded 3% on December 12, 2012. On December 27, 2012, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in FERROVIAL, S.A. had fallen below 3% on December 20, 2012.
Exhibit V Other information on the share capital of the Group’s banks Following is certain information on the share capital of the Group’s banks. 1) Banco Santander (Brasil) S.A. a) Number of equity instruments held by the Group The Group holds The shares composing the share capital of Banco Santander (Brasil) S.A. have no par value and there are no capital payments payable. At In accordance with current Bylaws (Article 5.7) the preference shares do not confer voting rights on their holders, except under the following circumstances: a) In the event of the transformation, merger, consolidation or spin-off of the company. b) In the event of approval of agreements between the company and the shareholders, either directly, through third parties or other companies in which the shareholders hold a stake, provided that, due to legal or bylaw provisions, they are submitted to a general meeting. c) In the event of an assessment of the assets used to increase the company’s share capital. d) The selection of a e) Amendments and repeals of bylaw provisions that change any of the requirements stipulated in point 4.1 of the Level 2 Best Practices on Corporate Governance of the Brazilian Securities Commodities and Futures Exchange (BM&FBOVESPA), although these voting rights will prevail upon the entry into force of the Agreement for the Adoption of the Level 2 Best Practices on Corporate Governance. The General Assembly may, at any moment, decide to convert the preference shares into ordinary shares, establishing a reason for the conversion. However, the preference shares do have the following advantages (Article 5.6): a) Their dividends are 10% higher than those on ordinary shares. b) Priority in the distribution of dividends. c) Participation, on the same terms as ordinary shares, in capital increases resulting from the d) Priority in the reimbursement of capital in the event of the dissolution of the company.
e) In the event of a public offering due to a change in control of the company, the holders of preference shares are guaranteed the right to sell the shares at the same price paid for the block of shares that changed hands as part of the change of control, i.e. they are treated the same as shareholders with voting rights. b) Capital increases in progress No approved capital increases are in progress. c) Capital authorized by the shareholders at the general meeting The company is authorized to increase share capital, subject to approval by the board of directors, up to a limit of 500,000,000,000 ordinary shares or preference shares, and without the need to maintain any ratio between any of the different classes of shares, provided they remain within the limits of the maximum number of preference shares established by Law. At present the share capital consists of 399,044,116,905 shares (212,841,731,754 ordinary shares and 186,202,385,151 preference shares). d)Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights Not applicable. e) Specific circumstances that restrict the availability of reserves The only restriction on the availability of Banco Santander (Brasil) S.A.’s reserves relates to the legal reserve (restricted reserves), which can only be used to offset losses or to increase capital. The legal reserve is provided for in Article 196 of the Spanish Public Limited Liability Companies Law, which establishes that before being allocated to any other purpose, 5% of profits must be transferred to the legal reserve, which must not exceed 20% of share capital. f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. g) Quoted equity instruments All the shares are listed on the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA) and the share deposit certificates (units) are listed on the New York Stock Exchange (NYSE). 2) Banco Español de Crédito, S.A. (Banesto) a) Number of equity instruments held by the Group The share capital of Banco Español de Crédito, S.A. consists of 687,386,798 fully subscribed and paid shares of EUR 0.79 par value each, all with identical voting and dividend rights. At December 31,
b) Capital increases in progress No approved capital increases are in progress. c) Capital authorized by the shareholders at the general meeting The annual general meeting of Banco Español de Crédito, S.A. held at first call on d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights At December 31, e) Specific circumstances that restrict the availability of reserves The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount (10% of any net profit reported each year must be transferred to the legal reserve until the balance of this reserve reaches 20% of share capital). Pursuant to the Spanish Limited Liability Companies Law, a restricted reserve has been recorded for an amount equal to the carrying amount of the Banesto shares owned by subsidiaries.
f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. g) Quoted equity instruments All the shares are listed on the Spanish Stock Exchanges. 3) Banco Santander Totta, S.A. (Totta) a) Number of equity instruments held by the Group The Group holds
b) Capital increases in progress No approved capital increases are in progress. c) Capital authorized by the shareholders at the general meeting Not applicable. d)Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights At December 31, e) Specific circumstances that restrict the availability of reserves Under Article 296 of the Portuguese Companies’ Code, the legal and merger reserves can only be used to offset losses or to increase capital. Non-current asset revaluation reserves are regulated by Decree-Law 31/1998, under which losses can be offset or capital increased by the amounts for which the underlying asset is depreciated, f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. g) Quoted equity instruments Totta’s shares are not listed. 4) Banco a) Number of equity instruments held by the Group The Group holds 126,593,017,845 ordinary shares through its subsidiaries: Santander Chile Holding S.A. with 66,822,519,695 ordinary shares, Teatinos Siglo XXI Inversiones Limitada, now known as Teatinos Siglo XXI Inversiones S. A., with 59,770,481,573 ordinary shares and Santander Inversiones Limitada with 16,577 ordinary shares, all of which have no par value, are fully subscribed and paid and carry the same voting and dividend rights. b) Capital increases in progress No approved capital increases are in progress. c) Capital authorized by the shareholders at the general meeting Share capital at December 31, 2012 amounted to CLP d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights At December 31,
e) Specific circumstances that restrict the availability of reserves Remittances to foreign investors in relation to investments made under the Statute of Foreign Investment (Decree-Law 600/1974) and the amendments thereto require the prior f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. g) Quoted equity instruments All the shares are listed on the Chilean Stock Exchanges and, through American Depositary Receipts (ADRs), on the New York Stock Exchange (NYSE). 5) Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México. a) Number of equity instruments held by the Group At December 31, b) Capital increases in progress
c) Capital authorized by the shareholders at the general meeting The shareholders at the d) Rights on founder’s shares, The shareholders at the general meeting held on May 14, 2012 ratified the resolution adopted by the shareholders at the extraordinary general meeting held on March 17, 2009, At the board of directors meeting held on January 27, 2011 the directors approved the general terms and conditions for the issue of senior debt in international markets. This issue of USD 500 and USD 1,000 million at a 5 to 10 year term was authorized on October 18, 2012. The issue was approved in order to obtain resources to finance the increase of business assets and the management of the Bank’s liquidity. As a result of these resolutions adopted by the board of directors, on November 9, 2012, debt amounting to USD 1,000 million was issued. e) Specific circumstances that restrict the availability of reserves Pursuant to the Mexican Credit Institutions Law and the general provisions applicable to credit institutions, the Mexican Companies Law and the institutions’ own Bylaws, universal banking institutions are required to constitute or increase capital reserves for the purposes of ensuring solvency and protecting payment systems and savers. The bank increases its legal reserve annually directly from the profit obtained in the year.
The f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. g) Quoted equity instruments The company does not have any equity instruments quoted on a stock exchange. 6) Santander UK plc a) Number of financial equity instruments held by the Group The Group holds ordinary shares amounting to GBP 3,105,176,886.60 through Banco Santander, S.A. (24,117,268,865 shares with a par value of GBP 0.10 each), Cántabro Catalana de Inversiones, S.A. (1 share with a par value of On October 23, 1995 and February 13, 1996, Santander UK plc issued subordinated bonds, for a total of GBP 200 million, which are convertible into non-cumulative preference shares with a par value of GBP 1 each. On June 9, 1997, Santander UK plc also issued subordinated bonds, for a total of GBP 125 million, which are convertible into non-cumulative preference shares with a par value of GBP 1 each. At the discretion of the issuer, the exchange may be performed on any interest payment date, provided that holders receive between 30 and 60 days’ notice. The Group holds 100,487,938 securities through Santander Financial Exchanges Limited. On April 28, 2010, Santander UK plc issued 300 million preference shares with a par value of GBP 1 each to replace, pursuant to current legislation, a previous issue launched by Alliance & Leicester plc under the same terms and conditions. As part of this new issue, the Group holds 107.3 million shares through Banco Santander, S.A. and 155.7 million shares through Santander Financial Exchanges Limited. b) Capital increases in progress No approved capital increases are in progress. c) Repurchases of share capital authorized by the shareholders at the general meeting The shareholders at the annual general meeting held on 1. The repurchase of its own 8.625% yield preference shares, subject to the following conditions:
It is hereby stated that this 2. The repurchase of its own 10.375% yield preference shares, subject to the following conditions:
It is hereby stated that this 3. The repurchase of its own fixed/floating rate series A non-cumulative preference shares subject to the following conditions:
It is hereby stated that this However, prior to such expiry, the
d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights Not applicable.
e) Specific circumstances that restrict the availability of reserves Not applicable. f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. g) Quoted equity instruments Not applicable. 7) Santander Holdings USA, Inc. a) Number of financial equity instruments held by the Group At December 31, b) Capital increases in progress No approved capital increases are in progress.
c) Capital authorized by the shareholders at the general meeting Banco Santander, S.A. is the sole shareholder. d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights Not applicable. e) Specific circumstances that restrict the availability of reserves Not applicable. f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. g) Quoted equity instruments Class C preference shares are listed on the New York Stock Exchange (NYSE).
8) a) Number of financial equity instruments held by the Group At December 31,
Not applicable. d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights At the e) Specific circumstances that restrict the availability of reserves Not applicable. f) Not applicable. g) Quoted equity instruments All the shares of Bank Zachodni WBK S.A. are listed on the local stock exchange in Warsaw 9) Banco Santander Río S.A. a) Number of equity instruments held by the Group At December 31, b) Capital increases in progress At the
The shareholders c) Capital authorized by the shareholders at the general meeting The authorized share capital of Banco Santander Río S.A. amounts to ARP 1,078,875,015, represented by a total of 1,078,875,015 fully subscribed and paid shares with a par value of ARP 1 each. d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights Not applicable. e) Specific circumstances that restrict the availability of reserves Financial institutions must The reserve must be recognized by transferring 20% of net profit for each year, including the adjustments to prior years’ results recognized in the year and any accumulated loss recognized at the previous year-end. This proportion must be applied irrespective of the ratio of the legal reserve balance to the company’s share capital. With respect to the distribution of profit, the Central Bank of the Republic of Argentina (BCRA) has ruled that the total minimum capital of companies wishing to distribute dividends must not be lower than the sum of the capital requirements for credit risk, interest rate risk, market risk and operational risk, increased by 75%. Also, the distribution of profit must be expressly authorized by the Argentine Financial and Exchange Institutions Authority, which must check that the procedures required by legislation for the distribution of profits have been complied with. f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. g) Quoted equity instruments The shares have been listed on the Buenos Aires Stock Exchange (BCBA) since 1997, and on Latibex (the market for Latin-American stocks in euros) in Spain since 1999.
Exhibit VI
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