EQUITY RESEARCH

Banco Santander. Banks Closing the gap Neutral (YE15 Price Target cut from €7.75 to €7.00; Neutral Medium Risk Recommendation maintained) January 2015 4 Narrowing the capital gap: The recent €7.5bn capital increase allows SAN to narrow the gap to the 10% FL threshold and its peers as it Spain should have placed the pro-forma FL CT1 ratio at YE14 at 9.7%. This SAN vs. IBEX35 vs. DJ Estoxx Banks comes after the bank recognized the failure to meet the 8.6%FL CT1 guidance at YE14. However, most of the cash-in will be distributed in 2015-16 as management announced a change in dividend policy: 140 while cutting the DPS guidance from €0.60 (through scrip dividends) to €0.20, the bank will increase cash pay-out to 30%-40% of earnings SAN from the c. 20% embedded in the previous scrip dividend policy. 120 4 Spain paving the way: As emerging markets cool down, we expect the Spanish division to drive earnings expansion for the group. Spain IBEX35 should benefit from lower funding costs, a stabilization in lending volumes, efficiency improvements, asset quality stabilization and 100 subsequent declines in CoR. We expect a 13% EPS CAGR14-17 with Continental Europe's earnings growing by 33%/year, boosted by the DJ Estoxx Banks turnaround in the Spanish division. The UK should also be a source of 80 positive developments (+10%/year), driven by the expansion into the Jan-14 May-14 Sep-14 Jan-15 SME segment. Brazil should be under a sluggish tone (+4%/year in euros) as the slowdown in GDP growth translates into a deceleration Source: Bloomberg. in volumes growth and margin compression.

4 Capital addressed, but valuation remains rich: Although Spain and the Sum of Parts Valuation - YE15 UK should support a good earnings momentum for the group, we believe this to be already reflected in the stock price (as signalled by Business area Criteria €/sh the capital increase announcement). SAN is trading at a PTBV15 of Spain Nor. PE of 10.7x 1.51 1.22x (PBV15 of 0.89x) for a ROTE of 13% by 2017, placing it at a Nor. PE of 8.9x 0.11 premium to the European sector. The 3% discount to market NAV SCF Nor. PE of 10.7x 0.68 does not make it compelling enough, particularly when considering Poland Nor. PE of 9.5x 0.26 possible headwinds from EM exposures. After factoring-in the capital Rest of Europe Nor. PE of 10.7x 0.04 increase, we reach a YE15 Price Target of €7.00. NEUTRAL. UK Nor. PE of 10.3x 1.17 SANUSA Nor. PE of 10.3x 0.34 Stock Data SCUSA Nor. PE of 10.3x 0.23 Brazil Nor. PE of 9.9x 0.88 Price (9th Jan.): 5.89 Price Target (YE15): 7.00 Mexico Nor. PE of 11.3x 0.46 # shares (mn): 12 584.4 M. Cap (€ mn) / F. Float: 74 122/ 94% Chile Nor. PE of 11.8x 0.42 Reuters/Bloomberg: SAN.MC/SAN SM Avg. Daily Vol. [€'000]: 627 146 Other LatAm Nor. PE of 2.7x 0.03 Corporate centre, unrealised capital Major Shareholders: Blackrock (4.8%); Botin Family (0.8%) gains and excess CT1 capital(1) 0.11 Dividends NPV DCF 0.78 YE15 Price Target (€) 7.00 Estimates 2011 2012 2013 2014F 2015F 2016F 2017F (1) CT1 requirement of 8%. Source: BPI Equity Research. PE 10.1 23.9 14.6 12.1 10.6 9.4 8.4

PE Adj 7.7 10.4 14.5 12.3 10.9 9.6 8.6 Historical Recommendation PCF 2.1 2.0 2.6 2.9 3.0 2.8 2.6 Dividend yield 10.2% 10.2% 10.2% 9.1% 4.8% 3.6% 4.2% Date Recommendation PBV 0.74 0.85 0.95 0.94 0.89 0.84 0.79 09-Aug-13 Neutral PTBV 1.12 1.32 1.44 1.35 1.22 1.12 1.03 Source: BPI Equity Research.

Available on our website: Analyst www.bpiequity.bpi.pt, BPI Online, Carlos Peixoto and Bloomberg at NH BPD. Phone +351 22 607 3141

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Equity Research  Iberian Book  January 2015

P&L (€ mn) CAGR SOP Sensitivity Analysis to norm. 2011 2012 2013 2014F 2015F 2016F 2017F 13-17F P/E in Brazil and UK (€/share) NII 28883 31914 28419 29363 31700 33260 35026 5% Commissions 10145 10125 96229674 10062 10420 10796 3% FX & trading 2499 2691 3496 2887 2870 2875 2903 -5% UK Other income (net) 940 283 394 434 417 432 444 3% 9.3 10.3 11.3 Net Operating Revenue 42466 45014 41931 42358 45050 46987 49169 4% 8.0 6.75 6.85 6.95 Personnel Expenses 10136 10474 10276 10126 10141 10307 10570 1% Other admn. exp. 7196 7570 7482 7547 7458 7664 7895 1% 9.0 6.80 6.95 7.05 Operating cash-flow 25135 26970 24173 24684 27450 29016 30704 6% 9.9 6.90 7.00 7.10 Depreciation 2080 2193 2400 2276 2311 2323 2337 -1% Brazil 11.0 7.00 7.10 7.20 Pre-provision profit 23055 24777 21773 22408 25139 26692 28366 7% Loan loss impairments 9826 13521 12340 10874 11579 11739 12038 -1% 12.0 7.10 7.20 7.30 Other provisions 2 999 2 296 1 796 2 019 1 498 1 383 1 355 -7% Source: BPI Equity Research. Extraordinaries -1656 -2977 -150 0 0 0 n.s. Profit before taxes 8575 5983 7622 9515 12062 13571 14973 18% Taxes 2479 2623 20752518 3318 3733 4095 19% Minorities 766 1066 11771183 1096 1168 1247 1% Geographical breakdown of Net Net profit 5330 2295 4370 5814 7649 8671 9630 22% profit (ex one-offs) (1) Adjustments 1656 2977 15-186 -186 -186 -185 n.s. 11% USA 18% Adjusted Net Profit 6985 5272 4385 5628 7463 8485 9445 21% 22% (1) Non-recurrent items and off-P&L costs. UK 26% 4% Other LatAm 10% Balance Sheet (€ bn) CAGR Chile 7% 2011 2012 2013 2014F 2015F 2016F 2017F 13-17F 10% Cash&Dep. with C. Banks 97 118 77 100 100 101 101 7% Mexico 8% Trading, AFS&HTM port. 279 299 231 293 294 296 298 7% 18% Brazil 36% Loans to credit institutions 49 62 65 77 77 77 77 4% 16% Other Europe 1% Loans to customers 729 708 666 705 724 750 772 4% 1% 6% Participations 4 2 33 3 3 3 0% Poland 8% Tangible&intang. assets 42 43 42 42 42 43 43 0% 2% Portugal 3% Other Assets 52 50 49 46 45 45 44 -3% SCF 13% Total assets 1251 1283 1134 1268 1286 1315 1339 4% 18% 25% Deposits 589 589 573610 626 647 669 4% Spain -4% -17% Trading portfolio 192 189 137 137 137 137 137 0% C. centre-43% Debt to credit institutions 116 134 92 179 165 162 153 13% Debt backed by securities 189 211 182 178 182 186 190 1% -50% -10% 30% 2017F 2013 Subordinated debt 23 18 16 20 20 20 20 6% Other Liabilities 44 44 38 39 40 40 41 2% Source: Disclosed accounts and BPI Equity Provisions 17 16 1414 14 14 14 0% Research. Minorities (B/S) 6 10 10 11 11 11 11 2% Preferred stock 0 0 0 0 0 0 0 n.s. Shareholders equity 74 72 71 79 91 97 103 10% Geographical breakdown of Loan Total liab. & sh.equity 1251 1283 1134 1268 1286 1315 1339 4% Book at 2013 (€683.5bn)

Growth, per share data and ratios 2011 2012 2013 2014F 2015F 2016F 2017F NII growth -1% 10% -11% 3% 8% 5% 5% Net profit growth -35% -57% 90% 33% 32% 13% 11% Adj. Net Profit growth -15% -25% -17% 28% 33% 14% 11% Adj. EPS growth -19% -26% -29% 18% 13% 13% 11% Avg. # shs (f. diluted, mn) 9 106 9 295 10 827 11 959 13 768 13 798 13 798 Basic EPS 0.59 0.25 0.40 0.49 0.56 0.63 0.70 Adj. EPS 0.77 0.57 0.41 0.48 0.54 0.61 0.68 BVPS 7.9 7.0 6.26.3 6.6 7.0 7.5 TBVPS 5.2 4.5 4.14.4 4.8 5.3 5.7 DPS 0.60 0.60 0.600.54 0.28 0.21 0.25 NII/ATA 2.34% 2.52% 2.35%2.45% 2.48% 2.56% 2.64% C/I (excl. D&A) 41% 40% 42% 42% 39% 38% 38% C/I (inc. D&A) 46% 45% 48% 47% 44% 43% 42% CoR 1.35% 1.85% 1.75%1.55% 1.58% 1.55% 1.54% Source: BPI Equity Research. ROE 11.6% 11.3% 6.2%7.6% 8.8% 9.0% 9.4% ROTE 17.3% 17.3% 9.5%11.3% 12.3% 12.2% 12.5% ROA 0.43% 0.18% 0.36%0.48% 0.60% 0.67% 0.73% RoRWA 1.19% 0.94% 0.84%1.07% 1.30% 1.44% 1.56%

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BPI

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In November 2007, Banco BPI has celebrated an "Equity Swap" contract with Sonae Investments with strictly financial settlements (Cash Settled Share Swap Transaction), to cover the inherent risk in the acquisition of 6.64% of Sonae's share capital, at a price of E2.06 per share. In this contract, the periodic repercussion over Sonae Investments of the amounts corresponding to Sonae share price changes relative to the above-mentioned price was agreed as well as the amounts equivalent to the proceeds to be received by Banco BPI under the exercise of rights inherent to these shares. The contract had a maximum maturity of 3 years. In October 2010, the maximum maturity of this "Equity Swap" (covering at such date the inherent risk in respect of 6.52% of Sonae's share capital) was extended up to 3 years. In November 2013, the maximum maturity of this "Equity Swap"(covering at such date the inherent risk in respect of 6.13% of Sonae's share capital) was extended up to 12 Months, until November 2014. In November 2014, the maximum maturity of this "Equity Swap" (covering at such date the inherent risk in respect of 6.10% of Sonae's share capital) was extended up to 12 Months, until November 2015.

Banco BPI and/or Banco Português de Investimento participate or have participated, as a syndicate member and/or assisting the issuer, in the share offerings of CTT, Espirito Santo Saúde, Sonaecom and Sonae Indústria, and in the bonds offerings of Brisa, EDP, Portugal Telecom, Sonae Investimentos, REN, Semapa and ZON Optimus.

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Amongst the companies covered by BPI Equity Research, BPI Group has qualified stakes in Ibersol, , ZON Optimus, Semapa and Sonae SGPS.

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INVESTMENT RATINGS AND RISK CLASSIFICATION (TOTAL RETURN IN 12-18 MONTHS): INVESTMENT RATINGS STATISTICS

Low Risk Medium Risk High Risk As of 31st December BPI Equity Research's investment ratings were Buy/CoRe Buy >15% >20% >30% distributed as follows: Neutral >5% and < 15% >10% and <20% >15% and < 30% CoRe Buy 9% Reduce >-10% and < 5% >-10% and < 10% >-10% and < 15% Buy 26% Sell < -10% < -10% < -10% Neutral 43% These investment ratings are not strict and should be taken as a general rule. Reduce 11% Sell/Accept Bid 5% Under Revision/Restricted 5% Total 100% BANCO PORTUGU®S DE INVESTIMENTO, S.A. Oporto Office Madrid Office Paris Office Cape Town Office Rua Tenente Valadim, 284 Pº de la Castellana, 40-bis-3ª 31, Avenue de L'Opéra 20th Floor, Metropolitan Life Centre, 4100-476 Porto 28046 Madrid 75001 Paris 7 Walter Sisulu Avenue, Foreshore, Cape Town, 8001 - South Africa Phone: (351) 22 607 3100 Phone: (34) 91 328 9800 Phone: (33) 1 4450 3325 Phone: (27) 21 410 9000 Telefax: (351) 22 606 4183 Telefax: (34) 91 328 9870