00_Cover_1 16/2/10 12:22 Página 1
ANNUAL REPORT 2009 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 1_HIGHLIGHTS_2 16/2/10 12:22 Página B
HIGHLIGHTS ROE Cost-to-income Non-performing (efficiency) ratio loan ratio
10.5 % 38.9 % 2.94 %
Ordinary attributable Earnings per profit share million euros euros 822 1.13 765 824 1.10 606 570 0.97 0.81 0.82
05 06 07 08 09 05 06 07 08 09
ROE Cost-to-income (%) (efficiency) ratio (%)
19.0 48.8 46.7 17.1 16.6 42.7 40.5 15.6* 38.9 10.5
05 06 07 08 09 05 06 07 08 09
* Before discontinued operations WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 2_INDEX_2 16/2/10 12:24 Página 1
ANNUAL REPORT INDEX 2009 Chairman’s Letter 2 Governing Bodies 6 Banesto in 2009 Business model 8 The customer and quality 10 Managing talent 12 Risk control 18 Resources and technology 20 Business units Retail and consumer banking 22 Company banking 28 Wholesale banking 30 The Banesto share 32 Corporate social responsibility 34 Corporate governance 38 Financial Information 40 Risk Management 66 Report of the Audit and Compliance Committee 81 Compliance and Internal Control 90 Auditor’s Report and Annual Financial Statements 92 Auditor’s Report 92 Annual Consolidated Financial Statements 104 Management Report 239 Corporate Governance Report in accordance with the model of the National Securities Market Commission 252 Main figures 253 General information and regional offices 254 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 3_CHAIRMAN_1 16/2/10 12:25 Página 2
2 Annual Report 09
CHAIRMAN’S LETTER
Dear Shareholder,
Last year, in this same letter, I said 2009 would This enabled us to achieve significantly better be a difficult and more complicated year than results than those of our competitors: 2008. And so it was. • Gross income increased 4.8% to EUR 2,562 2009 was, without a shadow of doubt, the worst million, which coupled with year of the crisis since it began in August 2007. All developed countries suffered downturns in • Containment of costs produced a 7.4% rise their economies. And Spain was not immune. in net operating income to EUR 1,564 million. The Spanish economy shrank by an estimated 3.6% in 2009, in line with other western • Against a background of a general economies, although with a much greater impact deterioration of risk throughout the financial on the labour market, domestic demand and the sector, Banesto’s non-performing loan ratio property sector. of 2.94% was well below the sector’s average of close to 5%. Macroeconomic imbalances are, however, being corrected and this is a necessary condition for Despite the difficulties, we maintained beginning a sustainable recovery. considerable lending during 2009. Banesto granted EUR 2,500 million of mortgages to The current account deficit was halved in 2009 individuals and EUR 29,049 million to SMEs to 5% of GDP. and companies.
A factor at play here is an important change in We granted 61% of the total operations requested the financial position of households, whose by customers, very much in line with that in financing needs moved from 2% of GDP to a 2008. financial capacity of 6.5% of GDP. And lending was on an upward trend: in the In this complex environment, Banesto continued fourth quarter the volume was slightly above that to focus on managing risk and recoveries well; of the same period of 2008. maintaining tight control of costs and ensuring that we continued normal lending to our solvent Lastly, we were able to assign EUR 450 million customers. of extraordinary provisions to strengthen the balance sheet via a large voluntary allocation to generic provisions and valuation of assets. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 3_CHAIRMAN_1 16/2/10 12:25 Página 3
Banesto 3
“In 2010, Banesto aspires to enhance its competitive position even more with quality growth that generates differential value for all shareholders.” Ana P. Botín Chairman
As a result, ordinary net consolidated profit was Bearing in mind these results and their EUR 824 million. Attributable profit, after recurrence, as well as the balance sheet’s extraordinary provisions and taxes, was EUR solvency and soundness, rating agencies 560 million, 28.2% lower than in 2008. On the continued to regard Banesto as one of the best basis of available figures, these results compare classified Spanish and world banks. The three very well with other Spanish banks. leading agencies held their double A rating.
A final dividend of EUR 0.135 per share will be All of this was recognised once again by the proposed at the Shareholders’ Meeting which, magazine Euromoney which named Banesto together with the three interim dividends already “Best bank in Spain”, emphasising the quality of paid, gives a total dividend of EUR 0.46 charged its risk, growth in operating income and robust to 2009’s earnings. Given its voluntary nature, development of our business model. the extraordinary generic provisions of EUR 100 million is not calculated in the profits. As a These good results are the consequence of a result, the final pay out will be 56%. corporate culture than combines tradition with innovation and personal commitment, as well as a Based on the year-end share price, the dividend business model whose key elements are: yield in 2009 is more than 5%. • In the first place, the customer is the focal point The Banesto share rose 5.9% in 2009, clearly of our activity: quality of service, innovation outperforming our reference banks, while the and the attractiveness of the products we total shareholder return, assuming the final offer are producing significant and sustained dividend is approved, will be 13.2%. growth in the number of customers and their product linkage. In 2009, 430,000 new WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 3_CHAIRMAN_1 16/2/10 12:25 Página 4
4 Annual Report 09
customers joined Banesto (348,000 Flexibility and anticipation in management individuals and 82,000 SMEs) and 49.1% of are the key elements behind the good customers have more than four of the bank’s performance of risk variables: Banesto has products. adapted agilely to the new economic environment, taking major decisions as of the • Commercial and operational efficiency is second half of 2007. Measures have been another defining feature, thanks to which our taken, policies reviewed and more resources cost-to-income (efficiency) ratio is one of the assigned to risk activity. sector’s best. Prudent management of liquidity and risk has • We also strive for greater productivity, contributed soundness and balance to the generating more business with the resources results. In 2009, Banesto placed EUR 3,800 available. We are an agile bank and making million of debt in the market without the the customer the focal point is the pillar of need for state guarantee. our business model. In short, and bearing in mind the current • We have a great team, full of talent and environment, Banesto’s risks model is a commitment competitive advantage and offers differential value. 2009 was the year when we consolidated the Human Resources Plan. We developed In a year when the Spanish economy was in the projects for training, career monitoring, doldrums, Banesto did not neglect its social assessment and recognition. responsibility.
However, 2009 was a difficult year as we had We continued to focus on small firms and to adjust the headcount and installed foment entrepreneurial activity, in the conviction capacity to business needs. This enables us that supporting SMEs, as a job creator, is today to face 2010 with greater stability and with more important than ever. everyone prepared and focused on the growth opportunites. We developed the Internet television channel Emprendedores TV more. It has become a Banesto was once again chosen as one of the reference point for Spain’s entrepreneurs, with best companies to work for in Spain, and the more than three million visits and the presence first among the country’s banks. of 600 business people. Today, this series is used by leading European business schools. • In fourth place, prudence in managing all risks: credit, market and liquidity. We also launched the YUZZ project, a pioneering initiative to identify and promote the projects of Risk is inherent in banking activity. This is young business people in the sphere of why at Banesto, in good times as well as bad, technology. all employees, beginning with the Board, are actively involved in risk management. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 3_CHAIRMAN_1 16/2/10 12:25 Página 5
Banesto 5
Lastly, our project Solidarity and Sustainable • A continuous focus on risk management and a Tourism already supports more than 300 female prudent policy in provisions. entrepreneurs in Africa and Latin America. Banesto’s contribution in the form of volunteers Difficult times always offer opportunities. has been decisive. I would like to thank all those who participated in the voluntary activities of our The current economic environment, combined bank. with the restructuring needed in part of the financial system, will offer opportunities to grow I do not want to end without commenting on the and gain market share. Banesto is well placed future. for this.
Although the international financial crisis is In 2010, Banesto aspires to enhance its under control, Spain’s high unemployment and competitive position even more with quality the tough adjustment in the property sector will growth that generates differential value for all continue to affect us in 2010. Governments, shareholders. including Spain’s, have taken the right steps to soften their effects. Yet even so, it will not be We have the will and the resources for it. easy or quick to exit the crisis, and it requires the efforts of all social agents.
Spain aspires to recover its potential GDP growth rates, for which it is necessary to create solid foundations that enable us to successfully compete internationally. Ana P. Botín
2010 will also be a complicated year for the financial system, but Banesto is prepared, as it has a solid and strong balance sheet and a proven capacity to generate recurring income. Our priorities this year are:
• A greater focus on growth through our business model, increasing the customer base and the degree of product linkage.
• Control of costs and further gains in efficiency. A large part of the work was done in 2009. In 2010, from the standpoint of human resources and on the basis of the environment envisaged, we see the need for fewer changes. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 4_GOVERNING BODIES_1 16/2/10 12:25 Página 6
6 Annual Report 09
GOVERNING BODIES
From left to right and starting at the front: José García Cantera, Mónica López Monís, Belén Romana García, Ana Patricia Botín-Sanz de Sautuola y O'Shea, Rosa María García García, José María Nus Badia, and Francisco Daurella Franco. David Arce Torres, Matías Rodríguez Inciarte, José María Fuster Van Bendegem, Carlos Pérez de Bricio, Rafael del Pino y Calvo-Sotelo, Juan Delibes Liniers, Carlos Sabanza Teruel, and José Luis López Combarros.
BOARD OF DIRECTORS
Executive Chairman Vice-Chairman Chief Executive Officer Ana P. Botín-Sanz de Sautuola José Luis López Combarros. José García Cantera. y O´Shea. Non-executive director (independent) Executive director Executive director
DIRECTORS
Juan Delibes Liniers David Arce Torres Francisco Daurella Franco Executive Non-executive Non-executive (independent) José María Nus Badía Carlos Pérez de Bricio Rosa María García García Executive Non-executive (independent) Non-executive (independent) José María Fuster van Bendegem Belén Romana García Carlos Sabanza Teruel Non-executive (proprietary) Non-executive (independent) Non-executive (independent) Matías Rodríguez Inciarte Rafael del Pino y Non-executive (proprietary) Calvo-Sotelo Non-executive (independent)
SECRETARY
Mónica López-Monís Gallego WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 4_GOVERNING BODIES_1 16/2/10 12:25 Página 7
Banesto 7
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee Chairman Members Secretary Ana P. Botín-Sanz José Luis López Combarros Mónica López-Monís de Sautuola y O´Shea Gallego José García Cantera (not a member) Juan Delibes Liniers José María Nus Badía José María Fuster van Bendegem Carlos Sabanza Teruel
Audit and Compliance Committee Chairman Members Secretary Belén Romana García Matías Rodríguez Inciarte Mónica López-Monís David Arce Torres Gallego (not a member) José Luis López Combarros
Appointments and Remuneration Committee Chairman Members Secretary José Luis López Combarros Rosa María García García Mónica López-Monís Gallego Belén Romana García (not a member)
Risks Committee Chairman Members Secretary José María Nus Badía Juan Delibes Liniers Mónica López-Monís Gallego Carlos Sabanza Teruel (not a member) WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 5_BUSINESS MODEL_1 16/2/10 12:26 Página 8
8 Annual Report 09
BUSINESS MODEL
OUR BUSINESS MODEL SETS BANESTO’S MANAGEMENT PRIORITIES, FACILIATING THE ALIGNMENT OF THE WHOLE ORGANISATION WITH ACHIEVING OUR COMMON GOAL:
TO BE EUROPE’S BEST COMMERCIAL BANK AND THE REFERENCE INSTITUTION FOR OUR CUSTOMERS, BE THEY COMPANIES OR INDIVIDUALS.
Continuous improvement Financial soundness as a in the quality of service competitive advantage as the foundation for our Banesto’s strategic objective is to value proposal maintain a non-performing loan ratio below that of the banking sector’s Our revenue recurrence is due to the average. success of our processes for attracting, linking and retaining customers. This This ratio stood at 2.94% at the end of virtuous circle can only be maintained 2009, widening our differential with the through a continuous improvement in average (4.99%). service quality and enhanced customer satisfaction, the key elements of our At the same time, Banesto strengthened business management. its solvency through the issue of EUR 500 million of preferred shares, the Our Clienting Q10 model, since 2004, is internal generation of capital and the not only a battery of 2,200 indicators, but better mix of risks. also a system for managing and measuring the quality of service, a Our Tier 1 at December 31 was 7.7%, commitment by the whole bank and an 0.5 p.p. higher than at the end of 2008. “Banesto has a solid inherent part of our culture. A total of business model almost 1,000 Quality Committees have The market recognises Banesto’s involved everyone. financial soundness with the highest whose objective is rating for a Spanish bank (AA by S&P, to generate value in In recognition of our commitment to among others) and the bank’s ranking in all phases of the service quality and excellence, the Club the world’s 50 most solid financial Excelencia de Gestión awarded Banesto institutions in 25th position (Global cycle” in December 2008 the gold stamp of Finance). José García Cantera approval from the European Foundation CEO for Quality Management (EFQM) for excellence with +500, the highest level certified by this institution. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 5_BUSINESS MODEL_1 16/2/10 12:26 Página 9
Banesto 9
Committed to talent Operating and Technological leadership commercial efficiency and operating excellence We can only achieve our objective of being Europe’s best commercial bank if Operating and commercial efficiency is Banesto continued in 2009 to bet on we have a sustainable policy of another of management’s priorities. We innovative technological solutions as a searching for, developing and retaining continuously review our commercial differential factor giving us an the best employees. This is why we processes in order to make them more enormous competitive advantage. launched our Human Resources streamlined, flexible and integrated into Master Plan in 2007. the bank’s systems. This enables us to This has been one of the elements, dedicate more time to higher value- among many, that has determined our Some of the projects in this plan added tasks, lower costs and enhance success in winning for the second year received awards in 2009: the iCRM the quality of service. For example, running the tender for the accounts of Banesto received the Ken Ernst back-office staff as a proportion of our the Justice Ministry for the next four Innovation Award from Accenture and total employees dropped from 9% in years, renewable for two more. The key the GPD Professional project the prize 2002 to 2.8% in 2008 and 2.0% in factor was our technology, backed up for innovation in human resources from 2009. by the excellent levels of service and Expansión&Empleo. quality shown in the last seven years. These and other specific cost-cutting As a result of this policy, Banesto was measures in the Menara Plan will Furthermore, during 2009 we selected in 2009 as the best bank to receive a new boost in 2010 from the launched new and significant projects, work for and it was among the five best Elan Plan. Thanks to these measures, such as the Casaktua property portal companies for the sixth year running in our cost-to-income ratio in 2009 whose web page is already receiving the ranking of the magazine Actualidad improved by 1.6 p.p. to 38.9%. Gross more than 2,000 visits a day, and our Económica. Moreover, for the second income grew 4.8% and costs by only new foreign trade portal. straight year, the magazine Euromoney 0.9%. chose Banesto as the best bank in Spain. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 6_THE CUSTOMER AND QUALITY_1 16/2/10 12:27 Página 10
10 Annual Report 09
THE CUSTOMER AND QUALITY
QUALITY IS ONE OF THE KEY ELEMENTS OF OUR BUSINESS MODEL
Customer service quality survey Banesto’s indicators of quality had their best performance in Score 1-10 2009. In the survey of service quality which is conducted 24 8.22 hours after a customer has acquired a product or carried out 7.97 7.84 operations, Banesto obtained a score of 8.22 for the first time. And in FRS Inmark’s annual customer satisfaction survey, Banesto rose to 4th place. And we were the only institution whose assessment improved in the EQUOS index of objective quality.
Various projects have been launched since 2004, as well as 07 08 09 new processes and indicators of quality throughout the bank. They have enabled us to continue to achieve better results in quality. Customer satisfaction Banesto has also obtained various prizes, recognitions and study certifications in quality which back its achievements. FRS Inmark In 2009 we made considerable gains 4º in the indicators and rankings of 6º 8º quality in the banking sector
Banesto made substantial progress in 2009 in the banking sector’s indicators and rankings of quality. It also continued on its path of excellence via the model of the European Foundation for Quality Management (EFQM), which accorded Banesto the 07 08 09 “European Excellence Stamp +500 points.”
Various projects launched during 2009 enabled Banesto to EQUOS index of objective attain the best results in quality of service, among which were:
quality Panel of customers: methodology used to collect qualitative Score 1-10 information from customers on their needs, expectations and 7.24 7.20 preferences regarding the various aspects of their relations with Banesto in order to include their opinions in the bank’s 7.06 7.06 main decision-taking processes.
6.73
05 06 07 08 09 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 6_THE CUSTOMER AND QUALITY_1 16/2/10 12:27 Página 11
Banesto 11
PRIZES, RECOGNITIONS AND CERTIFICATIONS IN 2009
First bank to obtain the AENOR EFQM stamp of excellence certificate for quality of service +500 points from the European and management of customer Foundation for Quality Service and satisfaction (renewed in 2009). Recognised for Excellence 5 stars.
Customer confidence prize from the regional government of Madrid.
Madrid excellence quality Excellence in quality prize from certification from the regional the magazine Dirigentes. government of Madrid (renewed in 2009)
Observatory of customers by segments: this deepens the Of note in 2009 were the renewal for three years of the AENOR information on customer types, establishing specific plans for certificate for quality of service and management of customer each one in order to improve their experience with the bank. satisfaction in banks and the awarding of the Certificate of Quality Madrid Excellence by the regional government of Monthly meetings of quality committees for all branches by Madrid. zones: every month a representative of each of Banesto’s branches attends the Quality Committee, which reviews the In July, the magazine Dirigentes, awarded Banesto its Quality guidelines of activity common to the whole bank in order to Excellence prize improve service, study the evolution and improvement of indicators and contribute ideas and suggestions. Close to 1,000 Quality Committee meetings were held in 2009.
The customer’s experience project: Banesto works on and measures the “moments of truth”, i.e. those of greatest impact in the customer’s experience in order to provide the best service in their dealings with the bank at all times and via any channel.
The magazine Dirigentes awarded Banesto its Quality Excellence Prize for its performance in recent years
Renewal of the AENOR Quality of Service Certification for the next three years. Banesto’s quality model has been certificated by AENOR since 2005. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 12 Annual Report 09
MANAGEMENT OF TALENT
EMPLOYEES, AN OPPORTUNITY TO ACHIEVE OUR GOALS
Participation in The team. Thanks to our talent, we are more than a bank Q10 global quality Banesto has consolidated itself as one of the best companies surveys internal to work for in Spain. We were selected as the best bank to work customer for in 2009 by the magazine Actualidad Económica, were third in the overall ranking and the only company to remain among the top seven for seven years running. 86% 82% 83% Our employees are committed and want to grow in Banesto and make it the best bank possible and the best company to work for.
The average headcount in 2009 was 9,111. This meant a considerable effort to adapt to business needs and to management of the socioeconomic situation through a 07 08 09 reasonable containment of costs and an appropriate installed capacity, without jeopardising the quality and efficiency of Female employees. Employees The average age is 41.7 and the average number of years with 37.45% the bank 17.43, making possible an appropriate balance 37.1% 36.8% between experience and enthusiasm and maintaining at all times the objective of providing our customers with highest quality of service.
The proportion of female employees, both as a percentage of the total (37.45%) and of the management team (33.41%) underscores Banesto’s commitment to diversity as a factor that Mar.09 Jun.09 Sep.09 differentiates our corporate culture. Both indicators increased in 2009.
Female Management of talent In 2009, a particularly difficult year for Spain’s economy and branch finances, Banesto’s employees showed an enormous managers professionalism, effectiveness, flexibility and adaptation, all of 29.21% which enabled us to achieve our goals. 27.7% 26.32% A series of programmes were implemented to manage employees and policies designed in 2008 to strengthen business, with quality as the measurement of our progress, were consolidated. Commitment, linkage and motivation are the strategic elements for managing our talent.
07 08 09 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e Banesto 13
Banesto Convention of Executives 2009
Human Resources Master Plan - The assessment interview was institutionalised in the first The Human Resources Master Plan was consolidated in 2009 quarter of 2009. Eight hundred and forty two people were through seven main focal points: assessed by the 360º system, 20% more than in 2008, and 8,337 were evaluated by the skills system. The objective of this system is to help identify areas of Banesto’s employees feel committed improvement and strengthen the strong points. More than 16,400 activities were identified for improving and want to make the bank the best employee productivity and skills. Each employee thus has a tailored development plan which is systematically company to work for monitored.
Communication with line managers was the aspect that • iCRM Banesto, our system for knowing our employees – their improved the most (the score increased from 7.55 to 8.04). expectations, professional interests and skills – enables us to achieve a better person/post fit and a more efficient - In this environment of commitment and involvement of all management. teams, the coaching project was consolidated under which 307 executives participated in development A total of 9,617 people were interviewed personally or via new programmes (development and leadership programme, channels and management tools: 1,820 online interviews and leadership tactics and one to one coaching). 7,797 personal, applying different levels of service on the basis of the life cycle of each employee. - Meanwhile, given the vital importance of appropriate risk management, a risk mentoring programme was launched This programme received the international Global Winner Ken in which 452 people participated. Ernst Innovation prize from Accenture. - Top 10 Programme. The collective included in this project • Management quality, the year of leadership. Banesto strives was renewed during 2009 on the basis of objective criteria for talent, enthusiasm, innovation, team spirit, permanent of skills, productivity, potential and commitment. It concern to do things well the first time, flexibility, a clear currently includes 449 executives, 46% of whom took part commitment to productivity, adapting to new situations and in training programmes (IESE, IE business schools), 70% involvement of everybody. And this is not possible without are participating in coaching programmes and 39% of executives being responsible for the bonding, development zone managers and branch managers are participating as and commitment of their teams. mentors in the risk mentoring programme. Five per cent participated in executive programmes (IMD, INSEAD, etc). WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 14 Annual Report 09
- Flexible remuneration system. As in other years the collective subject to this type of remuneration was consolidated and increased (250 more) and accounts for 35% of total executives.
• Productivity gains for improving efficiency. The protocol for identifying and acting in cases where productivity can be improved was consolidated, an area where the role of human resources manager and that of the chief are vital. Everyone in The role of internal experts as those who best know business the collective in this programme has an individual was strengthened. Their contributions are vital for the learning improvement plan which enabled the collective to be reduced curve of employees. Strategic solutions were also put into effect by 31%. Particularly noteworthy in this programme was the which helped teams work together, innovate, manage strengthening and monitoring of the productivity classroom at knowledge and contribute value continuously. our corporate school
• Talent map for planning succession. In the current economic, • The Sustainable Professional Progress Guide enables Banesto social and labour context, it is very important to ensure the to “reinvent” its careers plan with elements more in tune with orderly succession in the bank’s key posts and create the the current socio-labour situation, incorporating flexibility, the pool in Banesto so that the possible impact on results is employee’s life cycle and their tailored professional minimised. development as key values. Career paths at Banesto are an element that differentiates the bank for its employees. During 2009 174 people were selected and incorporated to the Talent Map. Their individual training needs were identified and more than 1,400 actions taken.
• Value Proposal, to attract and retain. The main objective of this project is to realise the value and develop the internal brand in order to strengthen the sense of belonging to Banesto.
Projects for employees and their families were consolidated: Open Day, attended by more than 3,000 people; camps for the children of employees, with more and a better and diversified offer of centres and a children’s painting An interactive website enables all employees to “visualise” competition (Banesto Pinta) which received more than 1,000 their professional development and know at any one time the works from children between the ages of 4 and 12. requirements, stages and training needed to adapt their career progress to the current needs. The web received more • Banesto x Ti, reconciling work and family life and diversity, than 16,000 visits and carried out more than 7,500 which contributes solutions to business needs. Banesto was professional development simulations. the first Spanish bank in 2006 to receive the Family- Responsible Company Certificate. This was renewed in 2009 This initiative received the human resources innovation prize for three more years; furthermore, the classification was from Expansión & Empleo. improved and Banesto is now considered to be a proactive company in this sphere. • Training and Development is moving toward a new model for developing productivity. In order to tend to business needs Banesto was also one of the first companies in 2009 to sign and in line with the new market trends, a new productivity the “Charter of Diversity – Spain” within the framework of the development model was launched based on improving the European Union’s anti-discrimination directives. Its purpose is individual performance. to encourage management practices that foment diversity in Spanish companies and institutions. Steps were taken to share and generate knowledge and experiences, extend best practices to everyone and take advantage of the collective intelligence. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e Banesto 15
Banesto’s human resources team at the Cercedilla Training Centre (Madrid)
Of note are: (vaccinations, medication, etc). Medical and surgical equipment was also donated to a children’s hospital in Africa. - 29.21% of branch managers are women, up from 26% in 2007. Our labour accident indicators remained low. There were 33 - 21% of zone managers are women compared with 13% in accidents at work in 2009 (0.36% of employees). 2008. - 31% of the main zones are headed by women. Banesto maintained its cardiovascular prevention programme - The measures to reconcile work and family life are for the early identification and prevention of heart diseases increasingly used by men (40% of requests). - 19% of employees used at some point during 2009 some of the measures.
Health and prevention Banesto’s policy for health and labour risk prevention is aimed at continuously improving the conditions at work and promoting and controlling the health of its employees.
Our labour accident indicators remain low
Banesto has the OHSAS 18001 certificates for Management of Prevention of Labour Risks and Management of Quality in Medical Services ISO 9001. We are fully committed to permanently guaranteeing quality in management models.
In 2009, we put into effect the action plan to combat flu pandemics, integrating it onto the Business Continuity Plan in order to preserve the health of our employees and customers and guarantee a healthy working environment.
As regards our initiatives related to Amanecer por África and Solidarity in Tourism and Sustainable Development, the Prevention Service facilitated specific training in health matters for all participants in this campaign and documented the preventative recommendations for correct health coverage WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16 Annual Report 09
Management data dec-09 dec-08 dec-07 dec-06 dec-05 Professional capital (Current human profile) Total number of employees 8,905 9,718 9,923 9,708 9,468 Average age 41.7 41.12 40.41 41.08 41.25 Number of years at Banesto 17.43 17 16.34 17.42 18.49 Diversity (women as % of total employees) 37.45% 36.41% 35.77% 33.35% 33% Diversity (number of different nationalities) 23 28 25 23 25 % of staff with a university degree 55.65% 54% 53% 60% 58.8% Number of different degrees 90 93 87 82 104 % of staff with the three most frequent degrees (Percentage of employees with degrees) 36.78% 38.00% 35.00% 35.14% 31.61% Internal promotion: promotions/total employees 7.07% 13.59% 13.57% 14.58% 8.77% Average number of years in current post 3.99 3.79 3.53 3.2 3.56 Average number of years in current centre 4.59 4.46 4.18 4.04 3.92 % of employees with variable remuneration 100% 100% 100% 100% 71.32% % of employees in commercial tasks in branches 95.36% 84% 83% 79.37% 77% Internal functional rotation 11.56% 15% 15.57% 12.57% 20.18%
Human potential (Capacity to improve) New employees/total employees 1.57% 5.27% 15.38% 9.46% 5.03% Training hours per employee 65 71 63 55 Training costs/personnel costs 1.65% 1.68% 1.82% 1.73% 1.54% Quality of selection: people selected/people interviewed 3.1% % of employees with evaluation of skills 100% 100% 100% 100% 100% Number of online training hours 264,622 226,735 205,912 177,488 135,000 Number of e-learning courses completed 66,460 56,898 79,884 111,775 63,000 Employees/total employees users of online training 90% 80% 86% 87% 90% Employees in training/total employees 90% 88% 88% 86% 85% Evaluation of the satisfaction of participants in training courses 8.6 8.7 8.6 8.6 8.5 Index of application of training in the post occupied 8.4 8.49 8.42 8.34 8
7.26% Distribution of training Commercial hours by type of post 10.66% Technicians and others Support
82.08% WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e Banesto 17
dec-09 dec-08 dec-07 dec-06 dec-05
Social quality (social policies)% % of employees on permanent contracts 99.91% 99.59% 98.45% 96.54% 96.5%
Social return (return on the human factor) Human factor cost: personnel costs/total operating costs 72.21% 75.58% 77.16% 74.43% 77.20% ROI of human capital: gross income less operating costs per employee/personnel costs per employee 2.62 2.4 2.21 1.91 1.94 Value added of human capital: gross income less operating costs /average number of employees 180.7 161.8 142.28 121.2 119.56 Efficiency of wage bill: personnel costs/total revenues 24.95% 26.62% 27.96% 30.63% 30.89%
Training By posts Commercial 37% 63% 83% 68.86% 82.08% Technicians and others 62% 36% 12% 27.88% 10.66% Support 1% 1% 1.38% 3.26% 7.26%
Resources for reconciling professional and family life Mobile phones 3,774 3,939 1,675 1,285 1,151 PCs 2,625 2,148 2,411 2,575 2,296
Selection process CVs managed 129,523 130,330 119,431 109,524 103,588
Indices of quality Internal customer June 6.81 6.57 6.59 6.68 6.64 Internal customer December n,d, 6.65 6.70 6.58 6.86
Employees in 360º assessment 863 860 707 n,d 290 Average number of assessors per person evaluated 10 10 10 n,d 10
Quality surveys Interview 7.30 satisfaction 7.30 for employees Commitments Overall score Score 1-10 assumed 6.97
Advice 6.98
My interests 7.47
Profesional expectations 7.43
Length of interviews 7.76 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 8_RISK CONTROL_1 16/2/10 12:36 Página 18
18 Annual Report 09
RISK CONTROL
PRUDENT MANAGEMENT OF RISKS FOR BANESTO IS NOT ONLY A GENERAL PRINCIPLE, BUT ALSO A COMPETITIVE ADVANTAGE IN THE CURRENT ECONOMIC ENVIRONMENT
Banesto has the methodologies to identify and assess the risks Banesto is a customer-focused bank which aspires to maintain it incurs, as well as the skills needed to admit, manage, track a stable and long-term relation with its clients. We adapt the (anticipation) and recover risks. risks policy to this requirement, and aim it at those customers with an adequate repayment capacity stemming from income The bank has risk intelligence units that incorporate modern flows, economic solvency and reputational aspects based on technologies of analysis and management, generally based on economic morality. the use of quantitative benchmarks. This management is complemented by risk analysis units based on knowledge, experience and analytical capacity. Our structure adapts to the Banesto’s risk management various types of banking business. involves everyone
A large part of our risk analysis and management processes are computerised. This makes it quicker to execute decisions, greater analytical homogeneity and a significant elimination of The Lending and Risks Area conducts risk management and is errors. As a result, automation of risk processes is a basic responsible for meeting the goals set for credit quality and objective. growth and assigned to it in the bank’s strategic plans and annual budget. Banesto’s preference for automation and for the centralisation characteristic of the most advanced banks is combined with This area comprises a series of functional units, each of them use of decentralisation frameworks for decision-taking, responsible for integral management of the credit risk of particularly when the direct relational factors are also a source different segments: retail, companies, corporate, real estate, of knowledge. We have a decentralised system for approving consumer, etc. risk operations based on the expected loss of each customer. Banesto’s risk management involves everyone: senior The main objective of risk management is to preserve the management, specialists, etc. This involvement gives us a clear quality of the portfolio. The bank’s goal is to maintain a non- competitive advantage. performing loan ratio lower than the average of the Spanish banking system. Meeting this objective must also be combined with a creative type of risk management that anticipates events and gives Banesto a competitive advantage for achieving its loan growth targets.
NON-PERFORMING LOAN NPL COVERAGE (NPL) RATIO
2.94 % 63 % WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 8_RISK CONTROL_1 16/2/10 12:36 Página 19
Banesto 19
MAIN PRINCIPLES OF BANESTO’S RISK MANAGEMENT
THE RISKS FUNCTION IS INDEPENDENT 01 of the business units when decisions are taken.
PRUDENT ADMISSION, 02 which makes risk management predictable.
ANTICIPATION THROUGH TRACKING RISKS 03 by assessing customers constantly and updating information on them
INVOLVEMENT OF SENIOR EXECUTIVES IN RISK MANAGEMENT, 04 with their active participation in admitting and tracking risks.
ADAPTING THE POLICIES AND STRUCTURES TO THE MARKET’S 05 SITUATION, maintaining the appropriate balance between risks and prices
ADVANCED MANAGEMENT TECHNIQUES 06 based on methodologies of analysis, assessment and specialised measurement by customer segment
SUPPORT FOR BUSINESS, 07 maintaining a healthy loan portfolio, appropriate profitability and customer service quality
ADAPTING TO THE NEW CAPITAL ACCORD (BASEL II) 08 through validation of our capital requirement model WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 9_RESOURCES AND TECHNOLOGY_2 16/2/10 12:39 Página 20
20 Annual Report 09
RESOURCES AND TECHNOLOGY
THE TOOLS AND SKILLS DEVELOPED OVER THE YEARS AND THE FOCUS OF THE MENARA STRATEGIC PLAN ARE THE BEST WAY TO TACKLE THE CURRENT ENVIRONMENT
The three-year strategic plan, known as Menara, for the The function of this post is general, involves many segments Resources Area was drawn up in 2006 with a clear objective to and qualified. The person is responsible for the quality of increase the efficiency of the tools and systems available for service and for the risk of the branch, guaranteeing, together maximising the time dedicated to customer attention and with the deputy manager, the standards of document quality eliminating administrative tasks in branches. and control
In 2009, the last year of the plan, the expectations were As regards the projects to eliminate administrative tasks and surpassed for the plan’s three focal points: commercial free up time, an operational efficiency initiative known as efficiency (giving the bank business strength), efficiency in CROQUE was launched, Focused on improving the 10 most production (producing at lower cost) and service quality. iterative processes (the longest and most laborious), CROQUE saved the branch network 140,000 hours of work on Commercial efficiency administrative tasks and dedicated them to customer business. The improvement in this area was due to the implementation during the last few years of simple, flexible and intuitive As a result, the proportion of administrative staff in the total processes supported by innovative software integrated with the number of employees in the branch network dropped to bank’s computer systems. 18.3%, with an average of 0.64 per branch (22% cut since 2005), and there was a consequent increase in the number of The project to review and roles and functions in branches was staff dedicated to business. executed in 2009. Its objective is to reorder the commercial processes of each position in the retail network in order to At the same time, and with the expectation of achieving the increase the time dedicated to selling and eliminate tasks that same success as in the retail network, work proceeded on the do not contribute value added. help programme for the Companies Centre. It focuses on systematics and on the management model. The post created to capture, detect and identify market opportunities and customer needs was fomented, seeking Efficiency in production proximity and confidence. The main objective of the Menara Plan is to establish a strong cost optimisation culture (i.e. maximise productivity and business growth with flat costs). Back office (branch network and central services)/total employees Significant cost savings of a
8% discretional nature were achieved 7.2% 6.3% in 2009 4.7% 4.3% Transaction costs continued to decline and the back office’s 3.5% 2.8% share of total employees reached 2%. This was due to 2% adaptation of profiles and functions, as well as implementing the Resources Model: centralisation in centres of specialised responsibilities, use of common ‘factories’, optimisation of work flows and handling strategic technology platforms. 02 03 04 05 06 07 08 09 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 9_RESOURCES AND TECHNOLOGY_2 16/2/10 12:39 Página 21
Banesto 21
We also continued to work on an appropriate streamlining of Foreign trade portal costs. In 2009, the bank achieved significant cost savings of a This portal provides exclusive contents and services for discretional nature after negotiating contracts by volume (34% Banesto, It is a powerful tool for preparing and developing cut in travel), supplies and starting various ways to reduce the operations in the international market and facilitating costs of electricity. processes of internationalisation. It gives the commercial profiles of 185 countries (economic information, business These actions helped to lower operating costs in 2009 by 0.8%. practices, ways to access markets, etc), information on sectors, directories of partners or potential clients, regulations Service and operational quality and documents required, as well as cost simulations of The quality model continued to improve its compliance and customs and tariffs. satisfaction indices thanks to the defining of increasingly more demanding levels of specialised service according to the type Justice Ministry tender of service to be provided (consultation, request, problem, Banesto again won the tender to handle the accounts of the incident, complaint, etc) and the casuistry (operations, Justice Ministry. One of the decisive factors in this has been maintenance, logistics, office automation support, etc). The the bank’s technological and computing strength demonstrated model provides a solution adjusted to defined standards and during the previous seven years, with excellent levels of service enables the bank’s functioning to be strictly controlled. The and quality. levels of compliance improved from 75.4% and nine hours on average for resolving issues in 2005 to 96.5% and five hours and 45 minutes in 2009, improvements of 28% and 49%, respectively.
Significant investments were made in direct technologies of communication with the network, such as modern systems of individual and collective videoconferences, commercial and strategic videos and opinion portals and interaction.
As regards the support offered to the bank’s customers via the Contact Centre, the external indicators put us among Spain’s three best banks in telephone attention for individuals and companies (source, AQmetrix).
Main projects Banesto makes available to the justice administration an Structural projects of great impact on the bank were embarked integral solution with cutting-edge technology for managing on in 2009 and were very much in line with the situation accounts, a training portal, online assistance for users and a demanded by our customers. Strong systems were put in place person to handle incidents and consultations. All of this to give us a competitive advantage. facilitates the internal processes conducted by those who work in the justice system and citizens’ relations with it. Casaktua property portal Many channels Banesto was one of the first banks to launch a property portal. It offers more than 3,200 properties around Spain from new The current situation and the external recommendations homes and garage spaces to second hand properties and of supervisors on the streamlining of branch networks information on auctions. The portal provides details on location, requires greater and more flexible interaction with construction features, price, financing conditions, rental customers. options, etc. Casaktua received around 2,000 visits a day, multiplied by 3.5 the monthly average of property visits and The complexity of the multi-channel relation requires helped to double the sale of homes. coordination between channels. In 2009, we developed a multi-channel platform which allows a large range of products to be contracted and a relation integrated in the bank’s operations. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 10_RETAIL BANKING_2 16/2/10 12:41 Página 22
22 Annual Report 09
RETAIL BANKING
OUR MAXIM IS TO PROVIDE THE BEST RESPONSE TO OUR CUSTOMERS’ NEEDS
Customers captured The main points of our strategy which consolidate us as the thousand market’s clear reference are selective growth, first relation and 450 loyalty. 377 344 348 Business in 2009 was conducted in a complicated environment, mainly due to the sharp decline in consumption. This made it necessary to adapt the business strategies applied when demand was greater.
The Banesto Lidera programme was our response to the economic situation. It provides co-operation, solutions and finance mainly for SMEs, the self-employed and shops, all of them sector particularly hit by the recession. 2006 2007 2008 2009 Launched at the beginning of 2009, Banesto Lidera co- Customers with payroll operates with public institutions (ministries, regional % governments and town halls) and business associations in order to find ways to reactivate the economy. This programme 46.7 48.1 has three focal points: forums of debate, attended by politicians 41.0 and businessmen in each zone; drawing up agreements, and 39.4 communicating to the various collectives involved the conclusions and results, particularly regarding exports, innovation and new technologies as they are key elements for economic development.
Our strategy consolidates us as the clear reference in the market 2006 2007 2008 2009
Banesto’s firm commitment to the short- and medium-term Linked customers development of each zone was underscored by the signing of % 20 agreements and new financing lines totalling €4,570 million. 47.2 49.1 43.5 40.2 Individual customers A strategy focused on quality growth combined with appropriate capturing of customers, linkage and retention was developed and strengthened in 2009. The Nómina (payroll) campaign continued to be developed, but as something more: it is a relationship model that is the main source of capturing linked customers (more than 4 products per client).
2006 2007 2008 2009 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 10_RETAIL BANKING_2 16/2/10 12:41 Página 23
Banesto 23
As well as campaigns with gifts of a TV or a latest generation laptop, which continued to reap a notable success, we launched:
• The VAMOS campaign, in which customers receive €500 or €1,000 depending on the size of the payroll paid into their accounts every month. • The Nómina Wii campaign to cover the leisure and entertainment needs of certain customers.
More than 48% of account holders have their salaries paid into their accounts
These initiatives enabled Banesto to maintain strong growth in capturing customers –more than 800,000 payrolls in the last three years -, as well as a significant advance in their quality. More than 48% of account holders have their salaries paid into their account, the proportion of transaction customers reached 43.5% and linked customers 49%.
Payroll campaigns had a notable impact on the evolution of demand deposit balances, which helped to improve the market share in households. As well as the campaigns, the Unicef Children’s Account also produced excellent results. Collectives The Smash mortgage, focused on capturing business from The strategy in this segment was very successful. Of note was other banks, facilitated the incorporation of new high profile winning the contract put out to tender by the Justice Ministry customers and good quality risk and produced a significant for a minimum of four years to handle the pay cheques to increase in linkage (an average of nine products per customer 25,000 employees and to manage the deposits of the justice captured. administration and accounts (lawyers and solicitors have access via Banesnet, our online bank). The contract can be WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 10_RETAIL BANKING_2 16/2/10 12:41 Página 24
24 Annual Report 09
extended for two more years. The governing body of the justice Private banking system awarded Banesto the contract to manage its payment In a year when the market’s situation and the image of the main and income accounts. international financial institutions specialised in private banking deteriorated, Banesto strengthened even more its contact with These contracts facilitate access to the justice system customers in order to guarantee the best service and a collective, as well as consolidating Banesto’s relation with the conservative management of their assets, adjusting portfolios to legal profession by managing the payments. each investor’s profile. The objective was to achieve greater proximity to customers and exploit the most profitable SMEs investment opportunities. We achieved a qualitative leap forward in this segment by installing a new relational and management model which The commercial framework was optimised in 2009, thanks to enabled more than 80,000 SMEs, self-employed and shops to the incorporation of new management tools which facilitate a be captured in 2009. global view of the private banking portfolio and better coordination with the branch network, a basic aspect sought A qualitative leap forward was made by our customers. in the SMEs segment by installing a Businesses and shops The “environment leader” plan was launched in 2009 aimed at new relational model all Banesto branches having as customers the main shops in their area of influence.
The ways to capture customers were also extended to non- Among the actions taken in 2009 were: branch channels. Forty co-operation agreements were signed with associations of shopkeepers and franchise chains, • Participation, as the only bank, in seminars on learning how resulting in more than 2,000 new clients. to export, organised by the Foreign Trade Institute (ICEX). • Active presence in the IMEX Fair, focused on In point-of-sale terminals, new software was developed internationalisation services. including mobile phone topping up (market share of 5.89% and 5.1% of total turnover). • Launch of the foreign trade portal, the only one of its kind among Spanish banks, which facilitates ample information Customer linkage campaigns were launched, with novel and support for the internationalisation of companies. incentives. • Subscribing to all ICO lines for SMEs, especially ICO Avanza which supports investment in information and The self-employed communication technologies. Banesto is making a determined bid for business people with • Banesto Enisa Sepi Desarrollo venture capital fund, which integral and differentiated offers that embrace both their continues to invest and grow. The fund has invested in 17 individual and professional needs. companies. Banesto is making a determined bid Personal banking The specialised service provided by personal banking was even for business people with an integral more important in 2009 than in other years. and differentiated offer We implemented very defined strategies for capturing customers and maintaining the loyalty of current ones. This enabled Banesto to consolidate itself as the reference bank. New customers are captured via the domiciling of salaries in The number of customers in this segment increased by 22% accounts or regular income and the Special Regime of the Self- (20,000 new ones with an average of 4.5 products). Employed (RETA), backed by the flat rate account for the self-employed which integrates transaction costs and a This was made possible by Banesto developing a very novel temporary incapacity insurance. model based on the attention and dedication of branch managers and a team of specialists, which guarantees a personalised service.
Of note also was the significant effort made to grant loans to this segment’s customers. Its lending balances rose by close to 30% and mortgages by more than 50%. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 10_RETAIL BANKING_2 16/2/10 12:41 Página 25
Banesto 25
Banesto Natura Institutions Banesto has 400 branches which mainly focus on business Specialist managers, via the branch network, offer full related to the environment, coverage of all the banking needs of the more than 6,600 customers distributed in 2,225 public institutions (county Among the measures taken in 2009, all of them based on councils, town halls, related entities) and more than 4,400 concepts of sustainable rural development, equality in the rural private institutions (foundations, professional colleges, environment, water management and biodiversity, the following religious congregations). were noteworthy: Banesto also actively participates in all the administration’s • Common Agricultural Programme: more than 44,000 public tenders, offering personalised solutions, as well as co- operations managed and securing our leadership. operating in the development of the projects of the State Fund • Agreements with the CONAMA Foundation to foment and for Job Creation (PlanE) and facilitating finance for developing sponsor the sustainability prize for small and medium municipal plans. municipalities. • Accords with FADEMUR (65,000 women) and AFAMMER (160,000) to strengthen the role of women as a key factor in Banesto actively participates in all rural development. of the administration’s public • Agreements with AGADER to channel aid from the 2007- 2013 Leader programme to rural areas in Galicia. tenders and offers personalised • Agreement with Acorex (6,500 members of cooperatives): solutions creation of a €100 million financing line for new investment projects, as well as encouraging and facilitating the use of new technologies. • Agreement with ASOPROVAC (3,600 cattle farmers); loans related to fodder, access to ICTs and creation of a community of purchases via Internet . WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 10_RETAIL BANKING_2 16/2/10 12:41 Página 26
26 Annual Report 09
Marketing and products The Smash mortgage enables customers to change their Of note in this area during 2009 were the following projects mortgage to Banesto which assumes all the costs in excellent which helped the bank achieve its objectives: financial conditions and with no interest rate floor.
In capturing customers, the payroll offer was the main driver (+247,000 from the campaign).
Following our tradition of product innovation and commitment to our customers, two novel campaigns were launched:
The Vamos nómina with the image of Rafa Nadal which makes a present of €500 or €1,000 in a gift card to “spend on what you want and where you want.”
The Wii payroll in which the customer is given as well as a Wii video game console a Wii Fit and the Grand Slam Tennis. This campaign was held before Christmas as they are appropriate gifts.
Banesto continued to offer the best and fullest range of products for payroll customers, with other campaigns (Compaq HP laptop and 32” Toshiba TV). All the self-employed who domicile regular amounts of income in their accounts receive gifts.
Rafa Nadal was the image during 2009 on all our campaigns. We were able to celebrate with him all his triumphs - Conde de Godó Rome Masters, Montecarlo Masters, Indian Wells Masters and Australian Open - contributing to strengthening Banesto’s values, with features that define our personality as an institution and that of Rafa as a sportsman: effort, tenacity and innovation. Because “Something unites us”: winning spirit. In addition, more than €18 billion of credit was made available to 600,000 customers for the purchase of consumer goods.
We united under the slogan “Winning Customer linkage improved notably during 2009, thanks to the increased sale of transaction products such as insurance, Spirit” of Rafa Nadal and the Spanish enhancing the relation with customers and cards. Banesto is national football team the bank that grew the most in terms of turnover (9% compared with negative growth for the market as a whole).
Also, there was a new sponsorship deal between Banesto and Banesto also improved its positioning in the mutual funds the Spanish Football Federation under which Banesto became market, especially in its range of conservative funds, thanks to a sponsor and official bank for the Spanish team in 2010. With an agile capacity of response to customers’ needs in a very this agreement, Banesto has united under the slogan “Winning competitive environment which saw our market share rise by Spirit” the two main references in Spanish national sport: Rafa 39 b.p. Nadal and the Spanish national team. The innovation and anticipation strategy followed in 2009 Of note among lending products was the Smash mortgage embraces a range of offers and consolidated the gain in market aimed at luring mortgages from other banks. This star product share of demand deposits, thanks to the success of capturing was largely responsible for the 10% rise in the number of payroll customers and the increase in the linkage index. mortgages. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 10_RETAIL BANKING_2 16/2/10 12:41 Página 27
Banesto 27
In traditional funds, Banesto continued to adjust its offer to the profile and needs of customers. In 2009, it began to market the IPF Creciente, a competitive product that combines a return over the medium term with security.
iBanesto consolidated itself as the online bank leader in the sector’s growth
We continued to push iBanesto, which consolidated itself in 2009 as the online bank leader in the sector’s growth. Of note were:
• More than 40,000 new customers were captured. • The business volume grew 50% to €1,300 million. • Customer linkage was doubled with the sale of additional products. • Credit quality remained very high.
Presentation of the agreement to sponsor Spain’s national football team. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 11_COMPANY BANKING_2 16/2/10 12:43 Página 28
28 Annual Report 09
COMPANY BANKING
THIS AREA SURPASSED ITS GOAL, DESPITE THE DIFFICULT ENVIRONMENT
Change in Despite the complex environment, with a sharp drop in interest rates, the Company Banking Area achieved its goals spread on loans for 2009.
38% Gross income increased 14%. All geographic zones contributed to this growth. 29% 25% This growth is particularly noteworthy in an environment of low interest rates whose impact has been very negative on the spread for funds. Excluding this impact, this area’s gross income would have increased by 9 p.p. to 23%.
2% We continued to make progress in our objective of consolidating Banesto’s leadership as the best bank for 2006 2007 2008 2009 companies. The 2009-2010 Strategic Plan is designed to enable the bank to keep on growing and be the best bank on the basis of profitability, risk control and management model. Change in gross The area mainly focused on the following strategic lines: risk income management, prices, customers (linkage and capturing of new companies), improving the range of products and, lastly, 22% adjusting structures and optimising processes. 19% A decisive role in defining and developing specific plans was 13% 14% played by our branch network, which actively participated in the plan’s 89 working groups.
Banks played a key role in 2009 in reordering the financing structures of customers and helped them to find alternatives to frameworks designed for periods of much higher growth. 2006 2007 2008 2009 This area was not unaffected. It concentrated on adapting structures and processes in order to help the largest number Non-performing of customers redesign their optimum financing structures.
loan ratio 1.44% • Particular importance was attached to the quality of our customers. The policy of anticipation in risk management enabled us to build up a portfolio with an excellent profile, reflected in NPL ratios well below those of our competitors. 0.69% • The joint work with our clients in the search for solutions enabled, in many cases, the problems in accessing the credit 0.27% 0.22% of their suppliers to be mitigated.
2006 2007 2008 2009 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 11_COMPANY BANKING_2 16/2/10 12:43 Página 29
Banesto 29
“COMSA EMTE has grown a lot in the last few years and we have been helped in this by Banesto, which has been and will continue to be one of our main banks. In order to grow and be a successful group, you have to surround yourself with the best people and Banesto has always met our expectations.”
Jorge Miarnau, Chairman of COMSA EMTE
COMSA EMTE is Spain’s second largest unlisted group in the infrastructure and technology sector. It has a turnover of EUR 2,200 million, 8,600 employees, a stable presence in 12 countries and projects in more than 18 countries.
Confirming, in its many versions, was a very useful Another factors behind the success was co-operation with the alternative. New forms were incorporated to this product in Capital Markets and Corporate Finance teams. From IPOs to 2009, enabling us to increase by more than 20% the clients advice on the acquisition and sale of companies and already using our payment solutions for suppliers. Particular syndicated loans, our teams worked shoulder to shoulder. Of mention should be made of the market’s first Syndicated note were the first two listings (Zinkia and Imaginarium) in the Confirming which, with the co-operation of the Risks, Alternative Stock Market (MAB), successfully conducted by Resources and Technology Area, was launched in 2009. our teams.
• The versatility of products such as factoring (all types) In order to be the number one in enabled us to offer our clients considerable help in optimising their management of the collection risk, company banking, you have to know particularly important when uncertainty grips markets. your clients very well Industrial and service companies maximise their revenue generation if they are able to dedicate all their resources to those activities where they have a comparative advantage. The peace of mind in managing payment collection brought Being the best bank for companies is not just a question of by factoring enables clients to concentrate on production numerical ranking. In order to be number one, you have to and management. know your clients very well. Banesto realises that profound knowledge of clients is the only way to be able to provide the • Foreign trade was another significant product in a period best solutions for their needs. Identification and establishing characterised by the fall in domestic demand. Many the appropriate dialogue enables us to understand and companies took advantage of the experience of our correctly satisfy the requirements of our clients. specialists in this field to diversify their revenues and increase the proportion generated in international markets. A key element here has been the development of continuous team training, strongly backed by management of knowledge. • Banesnet, the electronic banking service, continued to be The latter has strengthened our capacity to identify business an important tool in the daily business of our clients. With opportunities as well as provide a quality service which, almost 100% presence (all clients have the service), coupled with the team work with other areas (Capital Markets, progress continued to be made in migration from traditional Treasury, Factoring, Foreign Trade, etc) made 2009 yet transaction operations to the online channel. This is giving another excellent year. clients greater control over their collection and payment flows, while lowering costs and optimising their administrative structures.
Lastly, co-operation with the rest of the bank’s areas, especially the Treasury area. The evolution of markets, which has not always been predictable, tested the coordination and joint management capacity of the Treasury unit with the sales force, a challenge which was successfully met as the business figures show. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 12_WHOLESALE BANKING_2 16/2/10 12:43 Página 30
30 Annual Report 09
WHOLESALE BANKING
THIS AREA PROVIDES SPECIALISED PRODUCTS AND SERVICES AND HELPS TO RESOLVE CLIENTS’ FINANCING, INVESTMENT AND COVERAGE NEEDS
Evolution of the The Wholesale Banking area, like the bank’s other areas, conducted its activity in 2009 in a complex environment, which profitability of meant adapting various businesses to the different market corporate banking situations. in relation to risk All Wholesale Banking activities were developed with a focus on 1.63% financial prudence and cost 1.25% 1.14% 1.08% control
The area’s business and earnings continued to rise, creating value for both Banesto and its clients. This improvement was achieved in an orderly fashion and with strict control of risks 2006 2007 2008 2009 and maintaining high quality service. The area met all its targets for the year.
Number of Treasury Operations 34,500
20,086 20,007
14,271
2006 2007 2008 2009 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 12_WHOLESALE BANKING_2 16/2/10 12:44 Página 31
Banesto 31
“Thanks to Banesto’s support, Imaginarium met its goal of listing on the Alternative Stock Market and obtained the capital needed to finance its expansion plan for the next few years.”
Félix Tena, Chairman of Imaginarium.
Markets This group comprises the units of Distribution, Institutions and Credit, Books, Banesto Bolsa (stock market), Capital Market, Corporate Finance and International Financial Institutions and Trade Finance. The units are responsible for finding the best solutions to clients’ needs in everything to do with markets’ activity.
More than 34,500 operations were formalised in 2009, underscoring clients’ recognition of the usefulness of our products. Market activity generated a 41% increase in revenues. Corporate banking This unit provides services to Banesto’s large corporate clients The various market units conducted who, because of their size, particular features and complexity of their operations, require tailored solutions. As a result, the 34,500 transactions with clients in range of transaction products also includes others of value- 2009 added such as Treasury, Capital Market and Corporate Finance.
Corporate Banking’s earnings were 9% higher than in 2008, Banesto, via its Capital Markets unit, continued in 2009 to be lending increased 8% and exposure to stable risk was one of the leading banks in Spain for financing business maintained. Funds grew 16% and contributed to the bank’s projects. Of note were the operations by various renewable liquidity position. energy and environmental companies, underscoring our commitment to these sectors. Corporate Banking continued to The Corporate Finance and Stock Market units worked together to make the first listing of a Spanish company in the new improve its profitability Alternative Stock Market (MAB).
Banesto Factoring and the New York office round off the In short, Wholesale Banking demonstrated in 2009 its capacity Wholesale Area’s global offer, enabling the bank to have a to adapt to different situations and so provide a quality service specialised range of products for clients. to its clients and generate value for Banesto.
The Corporate Finance and Banesto Bolsa units were the first to list a company on Spain’s Alternative Stock Market (MAB) WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 13_THE BANESTO SHARE_2 16/2/10 12:48 Página 32
32 Annual Report 09
THE BANESTO SHARE
THE RETURN ON THE BANESTO SHARE WAS 13.19% IN 2009 (from January 1 to December 31, 2009, including dividends)
The world’s main stock market indices fell until early March Shareholder remuneration and then began to recover and reach levels higher than those The Board of Directors of Banco Español de Crédito approved before the crisis. The Banesto share ended 2009 at €8.56, up the dividend policy to be implemented unless there are 5.94% over 2008. extraordinary circumstances. Its features are:
Capital stock 1. A pay-out of around 50% of the bank’s recurrent profit. € The capital stock stood at 543,035,570.42 (FIVE HUNDRED 2. Quarterly dividends charged to the year’s earnings paid in AND FORTY THREE MILLION THIRTY FIVE THOUSAND FIVE August, November and February and a final ordinary HUNDRED AND SEVENTY AND FORTY TWO CENTIMES), dividend agreed at the AGM of shareholders. represented by 687,386,798 shares of €0.79 nominal value each, numbered from 1 to 687,386,798, both inclusive, which are fully subscribed and disbursed and constitute a single series.
These shares are traded on Spain’s four stock exchanges (Madrid, Barcelona, Valencia and Bilbao) via the continuous market.
The international macroeconomic environment, particularly the financial, continued to be in the doldrums in 2009
The share price performance during 2009 (data to december 09)
Price change 20% Total shareholder return
10%
0%
-10%
-20%
-30%
-40% Jan.09 Mar.09 May.09 Jul.09 Sept.09 Nov.09 Feb.09 Apr.09 Jun.09 Aug.09 Oct.09 Dec.09 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 13_THE BANESTO SHARE_2 16/2/10 12:48 Página 33
Banesto 33
Ratings by agencies (data at december 09)
Long term Short term S&P AA A-1+ Moody’s Aa3 P1 Fitchratings AA F1+
Each interim dividend will be subject to a specific agreement by Coverage and trading the Board and its implementation will occur once the existence We continued to actively communicate with analysts and of sufficient profits and liquidity is confirmed in order to investors during 2009 in order to foster the growth and trading proceed to payment in accordance with the applicable of the Banesto share. There are currently 22 analysts covering regulations. the share and their recommendations are constantly updated.
The dividend per share in 2009 was €0.46. Banesto continued to be in 2009 one of the favourite stocks of analysts covering Spain’s banking sector. Market capitalisation Banesto’s market capitalisation at the end of 2009 was €5,884 million, making it the 17th largest Spanish company in the Ibex-35 index and the fourth largest bank.
Distribution of the share capital by type of shareholder (data at december 09)
Shareholders Shares % of share capital
Board of Directors 14 694,073 0.10 Institutional* 106 649,950,902 94.55 Individuals 82,616 36,741,823 5.35 82,736 687,386,798 100.00
*Including the majority shareholder Banco Santander, wich has a direct and indirect stake of 89.28%.
Distribution of the share capital by number of shares (data at decenber 09)
Number of shares held Shareholders Shares % of share capital
1 - 250 56,893 5,249,698 0.76 251 - 500 11,500 4,130,249 0.60 500 - 1,000 7,632 5,521,537 0.80 1,001 - 5,000 5,697 11,689,946 1.70 More than 5,000* 1,014 660,795,368 96.13 82,736 687,386,798 100.00 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 14_CSR_1 16/2/10 12:51 Página 34
34 Annual Report 09
CORPORATE SOCIAL RESPONSIBILITY (CSR)
BANESTO’S CSR IS BASED ON ITS VISION AND VALUES AND RESTS ON A FORMALLY DEFINED STRATEGY THAT GUARANTEES RESPONSIBLE MANAGEMEMT
CSR at Banesto has an integral focus stemming from the 2. Cooperation with other companies and institutions to bank’s vision and values and rests on a strategy and policies multiply the impact of initiatives through networks of co- approved by the Board. These aspects constitute a starting operation with public and private agents. point for combining business objectives and the needs and expectations of stakeholders, thereby creating constant and The hallmarks of our CSR balanced value in conditions of social and environmental The hallmark of our strategy is to foment the entrepreneurial sustainability. spirit together with innovation, dissemination of new technologies and protecting the environment. Responsible management comes from complying with legislation and commitments. It is centred on making the Banesto believes a country’s prosperity is linked to the customer the focal point of activity, quality management, entrepreneurial capacity of its citizens. This philosophy transparency with shareholders, the importance of people, risk inspires our support for SMEs and is aligned with Banesto’s control and extending responsible behaviour to the whole strategy of becoming the reference bank for companies. supply chain. This framework lays the foundation for increasing CSR’s impact on society and contributes to a more sustainable Access to new technologies is a key aspect for the environment. modernisation and competitiveness of society. For this reason its dissemination among collectives who have more difficulties Commitment to our stakeholders in accessing them is a priority area of our CSR. For Banesto, CSR represents a commitment to all its stakeholders to create constant and balanced value and in Respect for the environment in all the bank’s actions is another conditions of social and environmental sustainability. issue of great importance. The Ecobanesto Plan to protect the environment sets out our actions. The CSR policy is based on two fundamental principles:
1. Alignment with the bank’s vision and values, generating internal synergies between foundations and the business areas.
This video is at http://www.banesto.es/ WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 14_CSR_1 16/2/10 12:51 Página 35
Banesto 35
BANESTO’S CSR FRAMEWORK
Dialogue with stakeholders
Vision and values
Strategy and policy
Strategy Policy Organisation
Responsible management
Compliance Risks Quality Shareholder Employees Suppliers value
Impact on society Sustainable environment
Fomenting the Innovation Rural Solidarity Strategy, Ecobanesto Financing the entrepreneurial and new development initiatives policy and Plan environment spirit technologies management
Dialogue with Dialogue with stakeholders stakeholders
Main CSR advances in 2009 Banesto held its position in the FTSE4Good IBEX, a selective index for only those companies that comply with the highest The bank’s CSR received a boost in 2009 which consolidated CSR standards, following reviews in March and September its trajectory. 2009. And in line with our commitment to meet the main international standards, our CSR report is drawn up on the Strategy and policy basis of the Global Reporting Initiative (GRI) in its maximum level (A+). The strategy and policy approved by the Board in 2008 was consolidated in 2009. As regards the main CSR standards, Banesto renewed its commitment to adhere to the ethical CLASSIFICATION LEVEL A+ principles of the United Nations Global Compact and voluntarily presented its Progress Report (available at OPTIONAL Self-declaration www.pactomundial.org).
COMPULSORY GRI verification WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 14_CSR_1 16/2/10 12:51 Página 36
36 Annual Report 09
Responsible management companies with more than €6 million of financing and the formation of 160 teams of entrepreneurs. Banesto deepened its compliance, internal control and risks The online TV channel emprendedoresTV.com was beefed up model in 2009, particularly regarding systems, tools and with more than 500 entrepreneurial experiences and 3 million internal training. The Risk Mentoring programme disseminated videos seen. The weekly magazine The Next Big Thing was practical knowledge, skills and risk management to 500 new launched with the aim of becoming a global reference for the employees, The Permanent Classroom for Risks was also latest social, entrepreneurial and technological trends. launched to train retail branch managers. The environmental rating system was consolidated too and new tools to track and assess. The Q10 Model for quality was enhanced with the addition of: • a Customers’ Panel, • a customer segments observatory and • “The customer experience” project.
The reference indicator for quality (Q10) improved by 0.56. The Banesto Solidaria account in favour of UNICEF had 47,400 accounts at the end of 2009 and €40 million. The commitment to providing shareholders and investors with transparent information led to 678 consultations, 12 road Portal of emprendedorestv.com shows, attending international conferences on banking and the financial sector and more than 220 meetings with investors.
In the sphere of Human Resources, the following initiatives The Banesto Enisa Sepi Desarrollo venture capital fund were put into effect: invested in a new project in 2009, bringing the total number to - The Human Resources Master Plan was consolidated. 17 and job creation to 697. The Innotex fund was established - The iCRM system to deepen knowledge of employees was in January 2009 to invest in Andalusian SMEs. launched and quarterly meetings held with the main heads Solidaridad x 2 developed three “Haz algo extraordinario con tu of each business unit. paga extra” (do something extraordinary with your extra pay) - The Centre for the Development of Quality Leadership was campaigns. created, in which individual development plans were drawn • The first one took place in December 2008 and raised up aligned with strategic objectives and of the post held. €114,828 for Unicef’s Plumpy’nut project. This sum was - The Banesto GPS Professional website was launched to sufficient to deal with the malnutrition of more than 8,000 support career development. children, feeding them three times a day for two weeks, the - A new productivity model was introduced. minimum period for overcoming severe under Impact on society nourishment. The cheque was delivered to Unicef in March 2009. The Global Business Trip (GBT) and the Yuzz contest got off • Together with the Entreculturas Foundation, a campaign to the ground in 2009. support the schooling of young refugees in Kenya was conducted in July 2009 and raised €72,586, sufficient to educate 238 children. The GBT initiative, fostered by the Banesto Foundation, organises business meetings in the US to support Spanish companies in their internationalisation efforts. The first visit to Silicon Valley was made at the end of 2009 by 12 people. The Yuzz (www.yuz.org) contest was launched in December in a bid to strengthen the collaborative intelligence of young entrepreneurs and provide them with infrastructure, advice, training and business knowledge and enhance the possibilities of success of their ideas. The Banespyme School was more active in 2009, training 2,000 SMEs. The eighth edition of the Banespyme-Orange project was held and led to the formation of 70 technology The cheque from the Plumpy’nut Campaign is handed to Unicef. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 14_CSR_1 16/2/10 12:51 Página 37
Banesto 37
• In December, the Unicef Niger campaign raised €65,000 Solidarity and Sustainable for the schooling of children. Niger is one of the world’s Tourism Project in Africa poorest countries and its school enrolment among the The “Sube a la Banda” lowest. As well as increasing the access of young children Project was started in to schools, one of the objectives of the Unicef programme 2009 to disseminate in is to eliminate inequality between male and female rural communities the education. use of new technologies The Solidarity and Sustainable Tourism Project enabled more in order to reduce the than 300 establishments to be certificated and more than 25 digital divide. Twenty eight events were held and attended by alternative routes in 12 African countries to be drawn up. In more than 700 people in various places around Spain. 2009, 14 Banesto employees co-operated on a voluntary basis in support of the project. Andandoo.org, an online publication Sustainable environment (web 2.0), was launched jointly with the Banesto Foundation and Amanecer por África which fosters responsible tourism. Banesto strengthened its environmental policy during 2009 on three fronts: • Fulfilling the Ecobanesto Plan for Protection of the Environment. • Consolidating Banesto’s leadership in the environmental and renewable energy project finance market in Spain. • Cut by 12% Banesto’s consumption of electricity, water, paper, toners, natural gas and petrol.
Banesto also co-operated in the second edition of the CONAMA Prize for the Sustainability of Small and Medium Municipalities.
The cheque for the Schooling Campaign in Kenya is handed to the Entreculturas Foundation.
RECOGNITIONS
The first bank chosen by the magazine Actualidad World prize for innovation for the iCRM Banesto Económica as the best company to work for in 2009. project. Global Winner – Ken Ernst Innovation Award Third in the global ranking and for seven years 2009 – Accenture. running among the seven best companies to work for.
The first bank to obtain the Family-Responsible Banesto was chosen as a Top Employers 2009 Company Certificate (EFR) and renewed in 2009. company, a project that assesses aspects such as labour conditions, salaries and profits, training and development, career paths and corporate culture.
Human Resources Innovation Prize - GPS professional Project Banesto. Expansión&Empleo. We have won four prizes in human resources innovation in the last five years. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 15_ CORPORATE GOVERNANCE_1 16/2/10 12:56 Página 38
38 Annual Report 09
CORPORATE GOVERNANCE
BANESTO’S CORPORATE GOVERNANCE MODEL IS BASED ON FULL EQUALITY OF SHAREHOLDERS’ RIGHTS AND MAXIMUM TRANSPARENCY
Banesto has its own corporate governance model, which is The chairman of the Appointments and Remuneration driven by the Board and adapted to the main national and Committee and of the Audit and Compliance Committee are international standards. independent directors, in accordance with the Unified Code of Good Governance. The Appointments and Remuneration The main elements behind the model are full equality of Committee held five meetings in 2009 and the Audit and shareholder rights and maximum transparency in information. Compliance Committee 13. Board of Directors The Board vouches for ensuring Banesto’s board is made up of people with a high degree of professionalism, integrity and independence of criteria. A large that all legally required information majority of its members are non-executive directors (10 out of is put at the disposal of shareholders a total of 14), seven of whom are independent directors.
The Appointments and Remuneration Committee developed the requirements which establish the Board’s Regulations for being proposed as a director, so that the people appointed Shareholders’ rights have recognised skills, experience and solvency, as well as Banesto’s commitment to full equality of shareholder rights enjoying a good reputation for a career of respect for revolves around two key elements: mercantile laws and others which regulate economic activity • One share is sufficient: only one share needs to be registered and business life and good commercial, financial and banking in the name of the shareholder in order to attend practices. Shareholder meetings and exercise the corresponding rights. Also required, in accordance with the criteria set by the • Participation of shareholders in Meetings: attendance and Committee, are that a majority of the Board members have voting can be at a distance by electronic means, held, for at least five years, senior positions in management, incorporating separate voting for each point on the agenda. control or advice in banks or similar functions in other public As regards financial intermediaries which appear legitimated or private institutions of a dimension comparable to that of as shareholders but who act for various customers, the Board’s banking, in line with the regulatory rules for banks. Regulations contemplate the possibility that, in accordance Lastly, the Board’s Regulations include the ban on being with Recommendation 6 of the Unified Code of Good appointed an independent director contained in the Governance, they can request as many attendance cards for recommendations of the Unified Code of Good Governance, the Meeting as they have customers they are representing, which regards as such those who appointed for their personal when that is required to fulfil the instructions from them. and professional qualities, can carry out their functions without The Board will ensure that before the Shareholders’ Meeting being conditioned by relations with the company, its significant all information that is legally required will be made available to shareholders or its executives. shareholders, as well as compliance with the right of The Board held nine meetings in 2009 and the Executive information before the Meeting as set out in articles 6 and 7 of Committee met on 51 occasions, the same number as the the Board’s Regulations. Delegated Risks Committee. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 15_ CORPORATE GOVERNANCE_1 16/2/10 12:56 Página 39
Banesto 39
Transparency The 2009 AGM again presented, in accordance with the Transparent information is a key element in generating Board’s Regulations, the Annual Report on the Remuneration confidence and security in the markets. The ample information Policy for 2008 drawn up by the Board following the proposal offered through various channels clearly underlines our of the Appointments and Remuneration Committee. commitment to transparency. Our corporate governance model is recognised by external Since 2006, the Annual Report has provided details of the institutions, enabling us to renew our presence in the remuneration of each director, including executive ones. FTSE4Good Ibex index after reviews conducted in March and September 2009.
Our commitment to transparency is reflected in the detailed information we provide through various channels WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 40
40 Annual Report 09
FINANCIAL INFORMATION
ROE NON-PERFORMING LOAN RATIO
10.5 % 2.94 %
BIS RATIO COST-TO-INCOME (EFFICIENCY) RATIO
11.3 % 38.9 % WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 41
Banesto 41
Summary of 2009 42 2009 Income statement 43 Net interest income 44 Net fees 45 Gains on financial transactions and exchange rate differences 46 Other operating results and net results of non-financial affiliates 46 Gross income 46 Gross income by business areas 46 Retail Banking 47 Domestic Corporate Banking 48 Markets 48 Operating Costs 49 Net operating income 50 Losses from asset impairment 50 Other net income 50 Results and extraordinary provisions 51 Profits 51 2009 balance sheet 52 Customer loans 53 Doubtful loans 55 Foreclosed assets 56 Customer funds 56 Shareholders’ equity 58 Financial information of the main entities of the Banesto Group 60 2005-2009 performance 62 Results 62 Customer lending 62 Customer funds 63 Shareholders’ equity 64 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 42
42 Annual Report 09
Summary of 2009
Business in 2009 was conducted in a difficult environment for As a result, Banesto ended 2009 with noteworthy indicators: the financial system: economic activity was lower and this reduced the growth in banking business and increased the • Non-performing loan ratio of 2.94% and coverage of 63%. volume of non-performing loans. Meanwhile, interest rates were These ratios were better than the banking sector as a whole. at historically low levels. • The level of capitalisation is well above the minimum required Against this background of recession, Banesto continued to (surplus of more than €2,200 million). This BIS ratio is demonstrate its strong capacity to generate revenues and 11.3% and Tier I 8.7%. recurring profits. The excellent results of our business model in growth and customer linkage strengthened the bank’s • The net liquidity position is sufficient to meet medium- and competitive position. long-term debt maturities until 2011.
Ordinary profits before tax amounted to €1,157 million. Net This situation is recognised by rating agencies, highlighted by attributable profit before extraordinary results and provisions Banesto’s current rating of AA, the highest among Spanish and writedowns and after deducting taxes and minority banks. interests was €824.0 million, 0.3% higher than in 2008.
In order to strengthen the Group’s financial situation, €78 million of extraordinary capital gains generated in 2009 and additional provisions of €377 million (€264.2 million net, after taking into account the tax charge) were assigned. This figure includes a voluntary allocation to generic loan-loss provisions of €100 million. Net attributable profit was €559.8 million, 28.2% less than in 2008. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 43
Banesto 43
2009 Income Statement
Banesto Group - consolidated income statement Data at December 2009 and compared with 2008 Million euros Difference 31/12/2009 31/12/2008 Absolute % change
Interest and similar revenues 3,700.47 5,384.07 -1,683.60 -31.3 Interest and similar expenses 1,969.80 3,805.64 -1,835.84 -48.2
Net interest income 1,730.67 1,578.43 152.24 9.6
Income from capital instruments 44.57 59.21 -14.64 -24.7 Income from companies accounted by equity method 3.27 1.87 1.40 74.4 Net fees and commissions 607.58 619.14 -11.56 -1.9 From mutual and pension funds 98.19 139.13 -40.94 -29.4 From services 509.39 480.01 29.39 6.1
Gains on financial transactions 157.02 151.41 5.61 3.7 Other operating results -33.10 -24.51 -8.59 35.0 Net income from non-financial affiliates 52.17 59.80 -7.63 -12.8
Gross income 2,562.17 2,445.34 116.83 4.8
Administration costs 894.74 889.15 5.58 0.6 a) personnel 651.71 655.29 -3.58 -0.5 b) general 243.03 233.87 9.16 3.9
Depreciation and amortization 103.05 100.19 2.86 2.9
Net operating income 1,564.38 1,456.00 108.39 7.4
Loan losses 381.97 299.76 82.21 27.4 Impairment of other assets 27.85 28.99 -1.15 -4.0 Other results and provisions 2.93 18.41 -15.48 n,s,
Ordinary profit before taxes 1,157.50 1,145.66 11.84 1.0
Corporate tax 333.79 324.21 9.58 3.0
Ordinary consolidated profit 823.70 821.44 2.26 0.3
Minority interests -0.28 -0.40 0.12 -30.3
Ordinary attributable profit 823.98 821.84 2.14 0.3
Net extraordinary capital gains, provisions and writedowns -264.18 -42.00 -222.18 n.s.
Net attributable profit 559.80 779.84 -220.04 -28.2 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 44
44 Annual Report 09
Net interest income Net consolidated profit million euros million euros
1,730.67 1,578.43 779.84
559.80 +9.6% -28.2%
2008 2009 2008 2009
Net interest income Average total assets amounted to €105,732 million, 2.2% Net interest income was 9.6% higher than in 2008 at €1,730.7 more than in 2008. This growth, the result of the business million. Despite the pressure exerted by the interest rate model developed during the year, was focused on the most environment, net interest income increased by €152 million, profitable assets. Customer loans accounted for 63% of loans due to the business derived from the capturing and linking of and generated 80% of total revenues (79% in 2008). The customers, selective growth in lending and management of the growth in business was largely financed by customer deposits; balance sheet and of spreads. they rose by €2,697 million and strengthened the Group’s liquidity position. The table sets out the structure of net interest income and of income from capital instruments, with the average balances, The average yield on total assets in 2009 was 3.54% compared the revenues and costs associated with them and the interest to 5.26% in 2008, while the average cost of funds declined rates received and paid for the respective items. from 3.68% to 1.86%, in line with the market’s evolution. Consequently, the good management of prices and spreads produced an increase from the interest rate effect of €243 million and more than offset the lower volume impact of €106 million from management of the balance sheet.
Average return on assets million euros 2009 2008 Average % av. Average % av. ASSETS balance int. rate Revenue balance int. rate Revenue
Cash and credit entities 20,495.25 1.88 384.34 17,771.95 4.32 768.29 Customer lending 65,280.69 4.48 2,927.20 68,978.93 6.09 4,203.63 Public sector 1,457.48 2.42 35.21 793.52 4.12 32.68 Residents 61,789.41 4.61 2,847.67 66,554.93 6.16 4,097.00 Non-residents 2,033.80 2.18 44.32 1,630.48 4.54 73.94 Lending in foreign currency 1,660.89 3.13 51.93 1,717.84 5.10 87.66 Securities portfolio and financial assets 11,345.87 2.86 324.37 9,666.59 3.34 323.17 Average income-yielding assets 98,782.70 3.73 3,687.85 98,135.31 5.49 5,382.75
Equity stakes 320.79 0.00 0.00 288.09 0.00 0.00 Tangible assets 1,166.92 0.00 0.00 1,148.23 0.00 0.00 Other assets 5,461.63 1.05 57.19 3,834.48 1.58 60.53 Total average assets 105,732.05 3.54 3,745.04 103,406.11 5.26 5,443.28 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 45
Banesto 45
Average cost of funds million euros 2009 2008 Average % av. Average % av. LIABILITIES balance int. rate Costs balance int. rate Costs
Due to credit entities and other financial liabilities 5,195.81 2.06 106.98 4,798.51 4.27 204.85 Customer funds (euros) 57,701.85 1.78 1,028.44 55,328.21 3.43 1,895.73 Public sector 5,652.06 1.99 112.67 5,558.41 3.40 188.76 Private sector 32,384.16 1.81 586.39 31,793.19 2.96 939.98 Non-residents 8,379.33 2.14 179.65 8,183.27 4.60 376.77 REPOs 11,286.31 1.33 149.73 9,793.33 3.98 390.23 Customer funds in foreign currency 2,928.55 1.58 46.38 2,604.05 3.93 102.29 Debt securities 28,582.43 2.32 662.78 30,332.42 4.75 1,440.94 Subordinated debt 2,438.55 3.16 77.17 2,110.09 5.61 118.47 Total funds with costs 96,847.19 1.98 1,921.75 95,173.28 3.95 3,762.29
Other funds 3,574.45 1.34 48.05 3,537.59 1.23 43.36 Shareholders’ equity 5,310.41 0.00 4,695.24 0.00 0.00 Total average funds 105,732.05 1.86 1,969.80 103,406.11 3.68 3,805.64
Net fees Net fees for services Net fees, whose structure is shown in the table, amounted to million euros €607.6 million, 1.9% less than in 2008. Excluding revenue from management of mutual and pension funds, growth was 6.1%. 480.01 509.39 Fee income million euros +6.1%
2009 2008 % change
Fees for services 624.43 606.35 3.0% 2008 2009 Services charged and paid for 293.12 315.93 -7.2% Risks 105.79 93.58 13.0% The increase was largely due to the larger volume of Securities services 24.44 34.32 -28.8% transactions and linkage of our customers. Of note were Insurance 65.18 56.77 14.8% commissions from insurance, which at €65.2 million were Other 135.91 105.74 28.5% 14.8% higher than in 2008 and from risks (€105.8 million; Management of mutual +13.0%). and pensions funds 98.19 139.13 -29.4%
Commissions paid -115.04 -126.34 -8.9% Fees from payments and collections amounted to €293.1 million and although 7.2% lower than in 2008 were still the TOTAL 607.58 619.14 -1.9% main component of this revenue line (47% of the total). Their evolution, furthermore, should be analysed bearing in mind the fees paid by this activity, which also dropped. Net fees for Fees for services and insurance rose 3% to €624.4 million and collections and payments were almost the same as in 2008. growth of all the lines was balanced. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 46
46 Annual Report 09
Fees from mutual and pension funds dropped 29.4% to €98.2 Other operating income and net income from million. This was due to the lower volume of these funds which non-financial affiliates meant that the average balance maintained in 2009 was lower Other operating income and costs covers items not related to than in 2008. The trend, however, changed during 2009 and ordinary activity. In 2009, the amount was €33.1 million of net raised the prospect of an optimum situation in coming years. cost, up from €24.5 million in 2008. The main component, on the cost side, was the contribution to the Deposit Guarantee Fees paid amounted to €115.0 million, 8.9% less than in Fund and, on the revenue side, commissions. The lower growth 2008. This drop was due to the evolution of business, which in lending in 2009 and the evolution of balances subject to meant lower payments to agents, as well as the reduced coverage by the Deposit Guarantee Fund were the main volume of fees for collection and payment services. reasons for the change.
Gains on financial transaction and Net income from non-financial affiliates largely comes from exchange-rate differences property companies and offering non-financial services, as well Gains on financial transactions increased 3.7% to €157.0 as the insurance subsidiary. million. The net figure was €52.2 million, 12.8% less than in 2008 and mainly due to lower results from property activity as revenue from the insurance company increased 10.5%.
million euros Gross income € 2009 2008 % change Gross income was 4.8% higher than in 2008 at 2,562.2 million. Its high degree of recurrence is underscored by net Trading operations interest income, net fees and revenue from the distribution of and hedging 8.30 7.74 7.2% treasury products to customers accounting for more than 96% Distribution to customers 140.70 138.66 1.5% of total gross income. Also indicative is that 89.2% of gross Securitization of assets 8.02 5.01 60.1% income was generated by domestic banking (commercial and Total 157.02 151.41 3.7% corporate).
Gross income million euros The main component was once again revenue from the distribution of treasury products to customers, which rose 1.5% to €140.7 million and represented 89.5% of the total (denoting 2,445.34 2,562.17 a significant level of recurrence). Gains on financial transactions also include fees from securitization funds which at €8 million were higher than in 2008 (€5.0 million). +4.8 Lastly, the gains from management of positions amounted to €8.3 million (€7.7 million in 2008). They accounted for 5.3% of the total, in line with the Group’s policy of controlling the share of this activity, but optimising opportunities in the markets. 2008 2009 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 47
Banesto 47
Gross income by Retail Banking
Business Areas The retail banking area conducted its activity in a recession. (%) 1.3% As a result, the evolution of the balance sheet was determined 7.2% by the necessary selection of asset operations and by the lower demand for loans. At the same time, the competition to capture 9.5% funds was much stiffer. The area therefore focused on capturing customers selectively, linkage and active management of spreads, backed by specific campaigns for funds, particularly to payroll cheques (“vamos” and “Wii” video game console campaigns), and for loans (“smash” product, among others).
million euros 82.0% 2009 2008 % change
Net interest income 1,467.40 1,403.59 4.5% Corporate activities Net fees 579.69 556.55 4.2% Corporate Gains on financial transactions 71.40 70.98 0.6% Markets Other operating income -18.65 -16.92 10.2% Retail Gross income 2,099.85 2,014.20 4.3%
Gross Income by Business Areas Net interest income amounted to €1,467.4 million, 4.5% more The following table sets out the distribution and evolution of than in 2008. gross income by business areas: Net fees rose 4.2% to €579.7 million, thanks to greater customer linkage, and gains from financial transactions were €71.4 million. million euros
2009 2008 % Change Gross income increased 4.3% to €2,099.9 million.
Retail 2,099.85 2,014.20 4.3% Corporate 185.10 169.81 9.0% Markets and international 244.09 223.03 9.4% Corporate activities 33.13 38.31 -13.5% 2,562.17 2,445.34 4.8% Gross Income Retail Banking million euros
Domestic Banking (Retail, Companies and Corporate) 2,014.20 2,099.85 generated €2,284.9 million and Markets 9.5% of the total.
Gross operating income from Corporate Activities, which +4.3% includes asset management, dividends received, earnings from securitization and other revenues and costs not assigned to business areas, was slightly lower than in 2008 at €33.1 million, largely due to the impact of interest rates and lower 2008 2009 revenue from property subsidiaries. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 48
48 Annual Report 09
Corporate Banking Markets and International
This segment’s results are the fruit of its capacity to adapt to the In accordance with the Group’s business model, this area market’s new circumstances. Selective growth in lending focuses on offering solutions that meet all the needs of clients focused on risk that can be assumed and appropriate return, in markets. together with a parallel increase in funds produced net interest income of €120 million, 13.2% higher.
Corporate Banking Markets and International million euros million euros 2009 2008 % change 2009 2008 % change
Net interest income 120.00 106.00 13.2% Net interest income 140.91 129.08 9.2% Net fees 52.91 51.95 1.8% Net fees 23.33 22.91 1.9% Gains on financial Gains on financial transactions 12.61 12.22 3.2% transactions 80.07 71.04 12.7% Other operating income -0.42 -0.36 16.7% Other operating income -0.23 – n.s Gross income 185.10 169.81 9.0% Gross operating income 244.09 223.03 9.4%
The dimension and complexity of these customers requires a The main source of revenues is the distribution of treasury strong capacity to provide solutions tailored to the needs of products to customers and our leadership in capital markets each client. The bank’s response, backed by its developed operations. This generates a recurring base of revenues which technology, consists of value-added services which coupled complements the results from services in the capital, stock and with traditional products generated fee income of €59.2 financial markets. million, 1.8% more than in 2008, and gains on financial transactions of €12.6 million. Gross income rose 9.4% to €244.1 million. Net interest income increased 9.2% to €140.9 million, net fees and Gross income rose 9.0% to €185.1 million. commissions amounted to €23.3 million and gains on financial transactions were €80.1 million (+12.7%).
These results were also achieved with a noteworthy degree of Gross Income Corporate customer diversification; operations were conducted in 2009 Banking with more than 23,800 clients. million euros
169.81 185.10 Gross Income Markets and International +9.0% million euros
244.09 223.03
2008 2009
+9.4% 2008 2009 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 49
Banesto 49
Operating expenses Personnel costs were 0.5% lower at €651.7 million, the result Banesto’s proven capacity in operational and management of a drop of 4.8% in the average headcount and an increase in efficiency is a key advantage in the current situation. Discipline the average cost of 4.3%. In 2009, 424 employees retired early in costs, enhanced by the development of measures and and a pension fund for them charged to 2009’s earnings was specific actions, is enabling the bank to make successful established. progress in its business model. Thanks to this policy, administration costs and depreciation and amortisation General costs were 3.9% higher at €243.0 million. There were increased by only 0.9% in 2009, largely due to completing the rises in expenses related to installations, IT, taxes and Menara Plan. This plan was launched three years ago to particularly outsourcing, while advertising expenditure dropped achieve a continuous improvement in operational and 32.8%. The structure of costs at the end of 2009 allowed for commercial efficiency. greater flexibility in their management.
As a result of operating costs rising at a much lower pace than Depreciation and amortisation amounted to €103.1 million, gross income, the cost-to-income (efficiency) ratio made a 2.9% more than in 2008, in line with the evolution of fixed further gain in 2009 to 38.9% (40.5% in 2008). assets.
Operating costs Cost-to-income million euros (efficiency) ratio 2009 2008 % change (%)
Personnel 651.71 655.29 -0.5% 40.46% Wages and salaries 485.81 479.81 1.3% 38.94% Social security 122.36 122.26 0.1% -3.8% Other 43.54 53.22 -18.2% General expenses 243.03 233.87 3.9% Premises, installations and material 67.88 66.18 2.6% IT and communications 60.91 57.34 6.2% 2008 2009 Advertising 11.28 16.78 -32.8% Other concepts 88.45 79.58 11.2% Taxes (excluding income tax) 14.51 13.99 3.8% Operating costs Depreciation million euros and amortisation 103.05 100.19 2.9%
989.35 Total 997.79 989.35 0.9% 997.79
Cost-to-income 655.29 651.71 (efficiency) ratio 38.94% 40.46% +0.9%
233.87 243.03 100.19 103.05 2008 2009
Depreciation and amortisation
General
Personnel WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 50
50 Annual Report 09
Net Operating Income Recovery of generic provisions for loan losses amounted to Higher recurring revenue and containment of operating €393.5 million. At the end of 2009, there were still €690 expenses produced a rise of 7.4% in net operating income to million of generic provisions, much higher than the annual €1,564.4 million. recourse to this fund in previous years.
Net Operating Income Loan-loss provisions million euros million euros and %
0.9 / 0.1% 1,564.38 689.7 / 42.3% 1,456.00
+7.4%
2008 2009
Losses from deterioration of assets The net impairment loss on lending amounted to €382.0 million, 24.7% more than in 2008. This figure is net of specific provisions for loan losses, recovery of assets previously 936.4 / 57.6% classified as bad debts and recovery of generic provisions made in previous years. Specific provisions amounted to €808.2 million, the result of the growth in non-performing Country risk loans during 2009, which in Banesto’s case is at a slower pace Specific than the banking system as a whole. This amount includes €122.4 million of provisions to cover risks. Although still Generic evolving normally, the bank decided to be prudent because of the economic environment.
Recovery of risks previously classified as bad debts amounted to €32.8 million.
Allocation adjustments resulting from the deterioration of other assets amounted to €27.8 million (€29.0 million in 2008), Losses from impairment of assets basically for foreclosed property in the event of possible price million euros falls derived from the downturn in the real estate market. 2009 2008 % change Other results and provisions Net loan-loss provisions 414.72 332.16 24.9% This line embraces a series of different items. The main Generic -393.49 -149.44 n.s. components of the net figure of €2.9 million were: Specific 808.21 481.90 67.7% Country risk 0.00 -0.30 -100.0% Losses of €11.8 million from the sale of fixed assets (€0.9 Loan-loss recoveries -32.75 -32.40 1.1% million in 2008). Total 381.97 299.76 27.4% WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_1c 16/2/10 13:01 Página 51
Banesto 51
Other non-recurring income and recoveries net of special funds from the disappearance or materialisation of contingencies mentioned in previous paragraphs amounted to €14.7 million (€19.3 million in 2008).
Net extraordinary capital gains, provisions and writedowns In order to continue to strengthen the Group’s financial situation the extraordinary capital gains of €78 million obtained in 2009 from the sale of Banesto bonds maintained in portfolio were assigned to provisions and additional provisions of €377 million were made. The total provisions made were €455 million, as follows:
- Voluntary provision of €100 million to strengthen the generic provisions for loan losses. - Writedowns of property acquired and awarded (€206 million). - Early retirement fund allocation of €69 million. - Writedown of securities (€80 million).
Profits Ordinary profit before taxes was €1,157.5 million, 1.0% higher than in 2008.
After the corporate tax charge of €338.8 million and minority interests, ordinary attributable profit before results and extraordinary provisions and writedowns was €824.0 million, 0.3% more than in 2008.
Net attributable profit, after taking into account extraordinary provisions and writedowns, net of the tax impact, was €559.8 million, 28.2% less than in 2008. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 52
52 Annual Report 09
Balance Sheet 2009
The evolution of the balance sheet in 2009 reflected the impact of recession. In this context, optimising the return was one of the key management drivers. At the end of 2009 total assets stood at €122,301 million, 4.4% more than in 2008. In addition, the Group managed off-balance sheet pension and mutual funds and insurance products of €10,920 million. Total assets were 5.0% higher than at €133,221 million.
Consolidated balance sheet million euros 2009 2008 % change
Assets Cash on hand and at central banks 1,683.84 1,688.15 -0.3% Trading portfolio, derivatives and other financial assets 16,272.26 12,115.18 34.3% Customer lending 75,616.61 77,881.72 -2.9% Other loans 22,323.05 20,127.48 10.9% Equity stakes 324.29 307.58 5.4% Tangible assets 1,181.78 1,159.55 1.9% Intangible assets 67.61 56.88 18.9% Other assets 4,831.08 3,849.89 25.5%
Total 122,300.52 117,186.42 4.4%
2009 2008 % change
Liabilities Trading portfolio and other financial liabilities 5,684.13 4,870.51 16.7% Customer deposits 57,075.74 58,179.50 -1.9% Marketable debt securities 29,980.46 28,315.10 5.9% Subordinated debt 2,593.41 2,236.84 15.9% Other financial liabilities at amortised cost 18,011.52 15,058.87 19.6% Other liabilities 923.01 877.93 5.1% Provisions 2,599.43 2,534.64 2.6% Minority interests 1.44 1.72 -16.3% Valuation adjustments 132.01 41.55 n,s, Share capital and reserves 4,739.56 4,289.92 10.5% Profit for the year 559.80 779.84 -28.2%
Total liabilities 122,300.52 117,186.42 4.4% WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 53
Banesto 53
Total Assets • Share capital amounted to €543.0 million. Total shareholders’ funds stood at €5,299 million, 4.5% higher, due to the million euros allocation of the prior year’s income, net of the dividends paid to shareholders.
Customer Loans € 117,186.42 122,300.52 The Group’s volume of lending was 75,927 million at the end of 2009, 2.9% less than a year earlier. +4.4% The trend of lower demand intensified during the year. Nevertheless, Banesto continued its policy of selective growth and rigorous selection of operations, focusing on the private sector. The year ended with a better evolution than that of the 2008 2009 Spanish economy as a whole. In the second half of the year, new lending gathered pace, both mortgages and loans to SMEs and companies. The focus on consolidating the most profitable assets and liabilities and strengthening liquidity produced the following The portfolio of commercial bills was one of the products that changes: most felt the lower demand. It amounted to €4,200 million at the end of 2009, down 21.5%. • Customer lending dropped 2.9% to €75,617 million. This decline was less than that of Spain’s GDP. Secured loans amounted to €37,364 million, 0.2% more than in 2008. New operations with individual customers, mainly for € • The portfolio of equity stakes amounted to 324 million, up first homes, offset the decline in financing real estate promoters € from 308 million at the end of 2008. This increase was due and property companies. to the valuation of companies accounted for by the equity method, their results, net of dividends distributed, and changes in their net worth. Customer loans • The trading portfolio, derivatives and other financial assets million euros amounted to €16,272 million in assets and €5,684 million in liabilities. Most of these amounts correspond to treasury operations with customers. 78,201.75 75,927.06 • Tangible assets increased 1.9% (€22 million), largely because of IT investments and improvements to the branch network. -2.9%
• Customer deposits declined by only 1.9% to €57,056 million. Given the increase in off-balance-sheet funds, overall growth was 0.1%. 2008 2009 • Marketable debt securities amounted to €29,980 million, up 5.9%. Other credits and loans, mainly to companies, SMEs, shops • Subordinated debt increased by €356 million, €500 million and the self-employed, declined 5.3% to €28,322 million. of which corresponds to the net rise in issues preferred shares and €131 million to amortisation of an issue made in Lending to the public sector, of high quality, increased 35.6% 2003. to €1,964 million, while that to the non-resident sector declined 20.2% to €3,244 million. • Valuation adjustments at the end of 2009 amounted to €132 million (€42 million in 2008). Most of the change was due to the impact on the valuation of ordinary fixed-income portfolios of interest rates. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 54
54 Annual Report 09
Customer lending million euros
2009 2008 % change
Public sector 1,963.79 1,447.77 35.6% Private sector 69,885.46 72,559.29 -3.7% Commercial bills 4,200.16 5,352.15 -21.5% Secured loans 37,363.53 37,291.92 0.2% Other credits and loans 28,321.77 29,915.22 -5.3% Non-resident sector 3,243.59 4,063.58 -20.2%
Total 75,092.84 78,070.64 -3.8%
Doubtful loans 2,492.47 1,396.09 78.5% Less: provisions for non-performing loans -1,524.00 -1,417.62 7.5% Valuation adjustment -134.25 152.64 n.s.
Total 75,927.06 78,201.75 -2.9%
The structure and diversification of lending by amounts, type of customer and economic sector remained highly suitable, as shown below.
Customer loans: Customer loans: customers amounts (%) (%) 3.1
15.9 33.3
42.6
36.7
20.7
9.0 21.1 17.6
Institutions up to €50,000 Individuals 50,000 to €150,000 Large companies €150,000 to €500,000 Medium-sized companies €500,000 to €5 million
more than €5 million WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 55
Banesto 55
Customer loans: Doubtful Loans Non-performing loans (NPLs) rose significantly in 2009 sectors because of the recession. Banesto did not escape this, but its (%) 3.6% relative situation was better. Its doubtful loans at the end of 2009 amounted to €2,566 million and although the NPL ratio rose from 1.62% to 2.94% it was still well below the average of 65.7% 30.7% its rivals.
Doubtful loans million euros 2009 2008
Non-performing loans: Balance at January 1 1,441.45 410.80 Entries 2,233.84 1,577.17 Recoveries -907.61 -420.98 Write-offs -201.72 -125.54 Balance at December 31 2,565.96 1,441.45
Provisions: Primary Balance at January 1 1,518.83 1,353.51 Net provisions 611.39 368.15 Secondary Provisions released -124.65 -35.69 Tertiary Other movements -379.41 -167.15 Balance at December 31 1,626.16 1,518.82
Detail of provisions Specific 936.44 492.82 As well as loans, the Group has other non-lending risks Generic 689.72 1,026.01 (guarantees, documentary credits and other sureties) which at TOTAL 1,626.16 1,518.82 the end of 2009 amounted to €10,167 million, 6.8% less than in 2008. NPL ratio (%) 2.94% 1.62% NPL coverage (%) 63.37% 105.37%
Guarantees million euros Banesto developed firm and proactive anticipative event management during 2009. Although new entries of NPLs 2009 2008 % change increased 41.6% to €2,234 million, recoveries of NPLs were more than double those in 2008. Total net entries were only Guarantees and 1.7% higher at €1,326 million. other sureties 9,775.42 10,587.64 -7.7% Guarantees for Doubtful loans that became write-offs totalled €202 million, up commercial paper and from €126 million in 2008. bills of exchange 98.26 205.96 -52.3% Other obligations 9,677.16 10.381.68 -6.8% Loan-loss provisions amounted to €1,626 million at the end of Documentary credits 391.09 317.90 23.0% 2009, 7.1% more than a year earlier and providing coverage of NPLs of 63.4%. They include both generic and specific Total 10,166.51 10,905.54 -6.8% provisions, with €204 million to cover risks, which although evolving completely normally the bank believed prudent to constitute, due to the recession.
The generic provision amounted to €690 million, only €336 million less than at the end of 2008 and well above the minimum required. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 56
56 Annual Report 09
Ratio of Non-performing loans Foreclosed assets A key element in tracking and recovering risks is anticipating (%) problems. In the current context of a sharp rise in non- 2.94% performing loans, assigning the assets of borrowers who have defaulted on their loans is an effective instrument for strengthening the bank’s balance sheet and improving the 1.62% possibilities of total recovery.
The bank was awarded assets in 2009 which served to cancel loans, whose recovery by other means was difficult.
The amount of these assets at the end of 2009 was €1,034 million. Given that the value in the books is always the lower 2008 2009 figure between the market value and the net value of provisions of the assets applied in their acquisitions, this should not mean any loss. Furthermore, for all the assets awarded before Coverage of Non-performing January 1, 2009, the bank increased the provisions assigned to them up to 25% coverage. The total provisions for these loans assets were €199 million, which represented coverage of (%) 19.3%. 105.37 Customer Funds Customer funds, including mutual and pension funds and 63.37 insurance-based savings plans, amounted to €67,996 million, 0.1% more than in 2008. 2008 2009
Customer funds million euros
2009 2008 % change
Public sector 8,208.81 10,091.46 -18.7% Private sector 44,595.36 44,872.94 -0.6% Current and savings accounts 17,727.11 15,005.60 18.1% Time deposits 15,529.35 19,244.03 -19.3% Repos and other accounts 11,338.91 10,623.31 6.7% Non-resident sector 4,271.57 3,215.10 32.9% On-balance sheet funds 57,075.74 58,179.50 -1.9%
Managed funds 10,920.53 9,745.41 12.1% Mutual funds 7,369.69 6,814.59 8.1% Pension funds 1,416.34 1,409.66 0.5% Insurance-savings policies 2,134.50 1,521.16 40.3%
Total managed funds 67,996.27 67,924.91 0.1% WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 57
Banesto 57
The policy of capturing funds focused in 2009 on transaction funds and mutual funds, all in search of optimising the mix of Mutual funds products and management of spreads. Private sector funds million euros were 0.6% lower at €44,595 million, but the evolution by items 7,369.69 shows a significant improvement in the most profitable 6,814.59 products. Off-balance-sheet funds consolidated the recovery begun at the end of the first half and grew 12.1%, while current accounts increased 18.1%. +8.1% Public sector funds were 18.7% lower than in 2008 at €8,209 million, due to the policy of optimising spreads and only accepting deposits that offer an adequate return. Non-resident sector funds increased 32.9% to €4,272 million. 2008 2009 Customer funds million euros
67,924.91 67,996.27 Managed pension funds amounted to €1.416 million, 0.5% higher. Individual funds have the largest share, as the table below shows.
+0.1% Pension funds million euros 2008 2009 2009 2008 % change
Individuals 1,330.78 1,326.25 0.3% Associated 9.47 10.27 -7.8% Off-balance sheet funds grew 12.1%, a much higher pace that Employment 76.09 73.15 4.0% the sector’s average, to €10,921 million. Mutual funds managed by the Banesto Group amounted to €7,370 million, Total 8.1% more than in 2008. The table below itemises the type of 1,416.34 1,409.66 0.5% funds.
Mutual funds million euros
2009 2008 % change
Money market 953.07 1,356.92 -29.8% Fixed income 2,174.34 2,548.49 -14.7% Mixed 2,029.66 783.46 159.1% Equity 133.97 107.31 24.8% International 67.50 62.44 8.1% Guaranteed 953.34 960.12 -0.7% Simcavs 232.81 253.22 -8.1% Unit Linked 55.79 72.25 -22.8% Real estate 287.69 371.22 -22.5% External management 481.50 299.17 60.9%
Total 7,369.69 6,814.59 8.1% WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 58
58 Annual Report 09
Pension funds Customer funds: million euros by amount (%) 4.8% 1,409.66 1,416.34 36.7% 19.2%
+0.5%
2008 2009
The structure of customer funds is shown below. Individuals accounted for a notable 63.8% of the total and balances under 13.3% €250,000 for 61.4%. 6.4% 19.6%
Up to €5,000 € € Customer funds: 5,000 to 25,000 by customer €25,000 to €50,000 (%) € € 5.0% 50,000 to 150,000 10.9% €150,000 to €250,000 21.0% More than €250,000
Shareholders’ equity Banesto’s level of capitalisation is well above the minimum requirements and made significant progress during 2009. At the end of 2009, the new BIS ratio was 11.30%, with Tier 1 of 8.72% and core capital of 7.70%. Grupo Banesto thus has a level of capitalisation and financial strength enabling it to conduct its business in coming years from a solid position.
63.1% Shareholders’ equity - Tier I Large companies million euros SMEs 5,933.09 5,246.01 Individuals
Institutions
+13.1%
2008 2009 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 59
Banesto 59
Capital base Banco Santander Central Hispano remained the majority shareholder with a direct and indirect stake of 89.28%. The million euros section on “The Banesto share” gives detailed information on 2009 2008 % change shareholders.
Core Capital 5,238.06 4,889.07 7.1% Moody’s, Standard & Poor’s and Fitch Ibca continued to issue Tier 1 5,933.09 5,246.01 13.1% short-and long-term debt ratings for Banesto, as shown below: Tier 2 1,752.78 2,014.88 -13.0% Total 7,685.86 7,260.89 5.9% Ratings by agencies (at december 09) Our dividend policy enabled core capital to continue to grow and reach €5,238 million at the end of 2009, 7.1% more than Long term Short term in 2008. Moody’s Aa3 P1 Reserves were strengthened by the increase arising from Standard & Poor’s AA A1+ including income generated in the prior year, net of the Fitch Ibca AA F1+ dividends paid to shareholders.
Furthermore, the net profit in 2009, subject to authorisation by the Shareholders’ Meeting when they approve the year’s accounts, will be added to reserves and, of course, net of dividends paid (€0.46 per share).
In addition, €500 million of preferred shares were placed and an issue of €131 million made in 2003 amortised.
Tier 1 equity stood at €5,933 million at the end of 2009 (+13.1%) and Tier II at €1,753 million. No new issues of subordinated nor cancellations of subordinated debt were made in 2009. The rest of the change in Tier II was basically due to the lower amount of generic provisions for non- performing loans. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 60
60 Annual Report 09
Financial information of the main entities of the Banesto Bolsa is the Group’s broker-dealer and is part of the Banesto Group Wholesale Banking Area. Its main activity is brokerage in domestic and international markets. It provides services to the Banco Español de Crédito is the parent company of the bank’s customers and to domestic and international clients. consolidated Banesto Group. The group’s main activity is Although trading volumes in all markets declined significantly commercial banking in Spain, particularly retail banking for in 2009, Banesto Bolsa continued to gain more customers and individuals, SMEs, businesses and professionals. It also carries provide new tools such as the broker of securities. In a year out wholesale banking and capital markets activities. when there were hardly any IPOs in the international markets, it was also noteworthy that Banesto Bolsa was the only Banesto has direct and indirect stakes in financial, insurance, institution that listed two companies on the new Alternative industrial, commercial and real estate companies. Stock Market (MAB).
For its purely banking and financial activities the group used Mutual and pension funds are handled by Santander Gestión Banesto Banco de Emisiones and Banesto Renting in 2009. de Activos, SA and Santander Pensiones, SA part of Grupo Factoring was directly assumed by the bank after absorbing its Santander, in each of which Banesto has 20% stakes. subsidiary Banesto Factoring. Insurance products distributed by our network are covered by Banesto Banco de Emisiones is the Group’s financial vehicle, Santander Seguros, 39% owned by Banesto. capturing funds through issues of commercial paper, long-term debt and subordinated financing. These funds are loaned to The main figures of the group’s companies are set out below. Banesto which uses them to finance the group’s ordinary activity.
Banesto Renting is a wholly owned subsidiary of Banesto, which designs, produces and conducts renting operations, either directly or through the group’s distribution channels. Backed by the group’s technological strength and innovative capacity, it offers a wide range of products. Business growth rates have been significant year after year, making it one of the leaders in its field. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 61
Banesto 61
Financial Group Information / Banks million euros Banesto Banesto B. Emisiones Banesto Bolsa
2009 2008 2009 2008 2009 2008
Income statement
Net interest income and dividends 1,788.9 1,626.0 1.5 1.5 2.1 4.4 Net fees and insurance activity 581.5 567.2 - - 8.4 12.9 Gains on financial transactions 160.5 97.7 -0.0 - -0.5 -0.5 Other operating results -43.2 -28.9 - - - - Gross income 2,487.7 2,262.0 1.5 1.5 10.0 16.7 Operating expenses 978.7 968.2 0.2 0.2 7.2 8.1 Net operating income 1,509.0 1,293.8 1.3 1.3 2.8 8.7 Loan losses 376.6 330.0 - - 0.0 Other results -81.1 43.4 - - - - Profit before taxes 1,051.3 1,007.2 1.3 1.3 2.8 8.6
Balance Sheet
Customer loans 79,335.5 76,662.3 - - - - Lending portfolio to maturity 2,076.3 - - - - 0.0 Other financial assets 23,650.9 22,802.6 - - 92.1 124.1 Due from credit entities 20,365.9 21,364.3 7,059.2 9,750.9 33.6 11.8 Other assets 2,190.0 2,345.0 54.3 114.9 1.6 0.4 Total assets/liabilities 127,618.6 123,174.2 7,113.5 9,865.8 127.2 136.3 Customer funds 66,804.9 67,542.3 - - - - Marketable debt securities 18,990.3 16,503.2 6,441.2 9,135.1 - - Subordinated financing 2,540.7 2,186.9 515.9 514.7 - - Due to credit entities 20,930.1 21,418.8 - - 13.0 21.6 Other liabilities 13,324.3 10,751.7 54.3 114.9 4.6 5.2 Capital, reserves and earnings 5,028.3 4,771.4 102.0 101.1 109.6 109.6
Other companies
million euros Banesto Renting 2009 2008
Income statement Net interest income 9.0 4.4 Net fees and insurance activity 0.6 -0.1 Gains on financial transactions 0.1 1.8 Gross income 9.7 6.2 Operating expenses 2.7 3.5 Net operating income 7.0 2.6 Loan losses 5.1 0.8 Other results -1.2 -0.5 Profit before taxes 0.6 1.4
Balance Sheet Customer loans 296.9 347.7 Other financial assets 7.4 1.9 Due from credit entities - - Other assets 27.2 29.5 Total assets/liabilities 331.5 379.1 Subordinated financing - - Due to credit entities 313.3 361.9 Other liabilities 7.6 4.8 Capital, reserves and earnings 10.6 12.4 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 62
62 Annual Report 09
2005-2009 performance Net Operating Income million euros This section sets out the Group’s performance over the last five years. The tables and graphs give one a better perspective to 1,564 gauge the business performance and the progress in the 1,456 income statement. 1,320
Various changes to the way in which financial statements are 1,071 925 presented were made in 2009 which, while not changing the results, largely consist of the creation of a new definition of net interest income, which is the former one excluding dividends and eliminating the line of insurance activity, and the creation of gross income, which adds to the previous one the results of non-financial affiliates and other operating income and costs. In order to make the 2009 figures comparable with those of previous years, the latter have been restated in accordance 2005 2006 2007 2008 2009 with the new structure.
Income statement All the items of the income statement performed well. Gross Net Consolidated Profit income rose 43% between 2005 and 2009 to €2,562 million, million euros with significant growth in net interest income, net fees and gains on financial transactions.
Personnel and general expenses and depreciation remained 765 780 stable over the five year period. In current euros cumulative 606 annual growth was only 3.0%, the result of successful 570 560 efficiency plans to reduce the head count, mainly through early retirements, streamlining structures and costs and optimising branch networks and distribution channels.
The combined effect of higher revenues and contained operating costs produced a constant and significant improvement in the efficiency ratio (operating costs as a percentage of gross income) from 48.8% in 2005 to 38.9% in 2005 2006 2007 2008 2009 2009 (better than the banking sector’s average).
Net operating income rose by €639 million to €1,564 million Business performance (cumulative annual growth of 14.0%). The business progress is shown in the following charts. There was sustained growth in lending and in funds, with cumulative During this period the Group implemented a conservative growth rates of 56% and 34%, respectively. policy for loan-loss provisions as well as for special reserves. As a result, coverage of non-performing loans was 63.4% at Lending the end of 2009, higher than the average for the banking Lending rose 56% to €75,927 million at the end of 2009. The sector. main driver, in line with our policies, was lending to the private sector whose balance at the end of 2009 was €69,885 million, Lastly, net ordinary profit (excluding extraordinary results, 49% more than in 2005. Growth was balanced, enhancing the provisions and writedowns) reached €824 million in 2009 structure of lending which was highly diversified by customer (cumulative annual growth of 9.6%). segments and types of loan. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 63
Banesto 63
Customer Loans Coverage of Non-performing million euros Loans (%) 78,202 74,835 75,927 392.7 61,826 371.7 329.5 48,746
105.4 63.4
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
Growth in lending went hand in hand with control of credit risk, Customer Funds enabling Banesto to enjoy a solid financial position and tackle Total managed funds (deposits, mutual and pension funds and with guarantees the change in the economic cycle that took insurance-based savings) rose 34% between 2005 and 2009 place in 2008. As a result, Banesto’s rise in non-performing to €67,996 million. loans, from the current environment, was much lower than the banking sector’s average: Deposits increased by €21,276 million and at the end of 2009 were 59% higher than in 2005, while off-balance sheet funds • The non-performing loans ratio from 0.49% in 2005 to dropped by €4,132 million to €10,921 million. 2.49% in 2009, below the banking sector’s average. • NPL coverage at the end of 2009 was 63.4%, higher than the average.
Managed Customer Funds million euros Non-performing Loan ratio (%) 66,763 67,925 67,996 60,549 50,853 13,423 9,745 10,921 2.94 15,387 15,053 58,179 57,076 53,340 45,162 1.62 35,800
0.49 0.42 0.47 2005 2006 2007 2008 2009
2005 2006 2007 2008 2009 On-balance sheet funds Mutual and pension funds and insurance WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 64
64 Annual Report 09
Shareholders’ equity Long-term ratings Shareholders’ equity – core capital – increased on a sustained basis from €3,346 million in 2005 to €5,238 million in 2009. This was the result of retained earnings, net of dividends paid, 2005 2009 and reductions of capital with the return of contributions to shareholders. Moody’s Aa3 Aa3 Standard & Poor’s A+ A1 The BIS ratio remained at an appropriate level. At the end of Fitch Ibca AA- AA 2009, it was 11.3%, with Tier 1 of 8.72% and core capital of 7.70%.
Bis Ratio (%)
11.35 11.18 11.30 10.44 10.66 2.58 4.29 3.75 3.46 2.96 8.72 7.70 7.06 7.43 6.98
2005 2006 2007 2008 2009
Tier I
Tier II
Over the last five years rating agencies have recognised Banesto’s progress in business growth, profitability and solvency and this has been reflected in continuous improvements in ratings. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 16ANNU_FINANCIAL_2b 16/2/10 13:01 Página 65
Banesto 65 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 66
66 Annual Report 09
RISK MANAGEMENT AT BANESTO
PRUDENT RISK MANAGEMENT AT BANESTO IS NOT ONLY A GENERAL PRINCIPLE, BUT ALSO THE FOCUS OF A COMPETITIVE ADVANTAGE IN THE CURRENT ECONOMIC ENVIRONMENT
Non-performing loan ratio Everyone at Banesto is involved in risk management, and only through this involvement do we obtain a competitive advantage. (%) The Risks and Lending Area develops risk management as it is 2.94% responsible for meeting the objectives of credit quality and growth in loans set in the strategic plans and the annual budgets. This area comprises units dedicated to integral management of credit and market risk differentiated by segments: retail, companies, corporate, real estate, and 1.62% consumer.
Banesto has the methodologies to identify and assess risks, as well as the necessary skills and technologies.
0.42% 0.47% 1.- Main Principles of Risk Management • The risks function is independent of the decision-making process for assuming risks. • Prudence in admitting risks enables management of it to 06 07 08 09 be predictive. • Anticipation through monitoring (assessment and updated information on customers). • Involvement of senior management, actively participating in risk admission and monitoring. Expected loss (TTC) • Adapting policies and structure to the market situation and (%) maintaining the appropriate balance between risks and prices. 0.41% • Advanced management techniques based on methodologies 0.38% of analysis, valuation and measurement specialised by 0.30% customer segments.. 0.28% • Business support, maintaining a healthy loan portfolio, appropriate profitability and customer service quality • Adapting to the New Capital Accord (Basel II) by validating the capital requirement model.
2.- Corporate Governance of the Risks Function The Risks Committee created under article 12 of the Board’s 06 07 08 09 Regulations proposes the risks policies to the Executive Committee, which carries them out in accordance with the powers delegated by the Board in article 13 of the Board’s WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 67
Banesto 67
Regulations and article 24 of the corporate by-laws. The 3.1 Credit risk Executive Committee delegates some its powers in risks committee lower down the hierarchy according to the General Credit risk is the possibility of default by a counterparty which Map of Risk Attributions. produce losses for the Bank. Banesto manages risk on the basis of the type of customer and their features. The Risks Committee is responsible for coordinating and centralising all risks that occur in Banesto, ensuring that the The Credit Risk Cycle Bank’s actions are consistent with the limits of tolerance to The risks cycle is structured in three phases: admission, risk, setting and reviewing, on the basis of the established time approval and monitoring and management of recoveries. In frame, the global limits to the main risk exposures and admission, risk management is structured on the basis of resolving all those operations which exceed the powers customer segmentation and seeking to ensure homogeneous delegated in organs lower down the hierarchy. criteria for each one of them and sharing common objectives:
The Lending and Risks Area comprises the Top Management • Maintain a portfolio of quality risks. of Lending and Risks, which is responsible for proposing, • Improve our efficiency and capacity to respond to managing, transmitting and implementing the risk policies customers. and ensuring they are fulfilled, and the Global Risk Unit, • Adjust the admission processes to the risks’ profile of which manages and controls risk from a global standpoint, as each customer. well as ensuring the strategic objectives in risk management are fulfilled. a. Retail Risk Management of retail risk during 2009 was characterised by The Top Management of Lending and Risks manages and prudent and responsible criteria, with policies in accordance directly controls credit and market risks, the Financial Area with the economic environment and particular attention paid manages the structural risk of the balance sheet and the to maintaining the quality risks of our portfolio. Resources Area the operational risk. The admission strategy for retail risks is based on rigorous 3.- Risk Management Derived from the Bank’s Own selection of customers, differentiated treatment by business Activity segments and homogeneous criteria for each one of them. The risks assumed, covered and, therefore, managed by the Bank are derived from its lending activity, off-balance sheet operations, hedging and proprietary trading. These risks can be grouped as follows:
• Credit risk (counterparty, sovereign, concentration, environmental). • Market risk (structural and Treasury). • Operational risk (technological risk). • Reputational risk (the responsibility of the Compliance Area in coordination with Risk and Business). WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 68
68 Annual Report 09
Banesto has advanced systems that combine automated c. Real Estate Risk models of admission and teams of analysts with a high degree This sector remained in the doldrums (begun in 2007) as far of experience in managing retail risk, which constitute our main as demand is concerned. Property companies continued to be value. in difficulties due to their large volumes of debt and very low demand for homes. Banesto has a Risk Analysis Centre (RAC) consisting of highly specialised analysts structured by business segments This spurred companies to adapt their situation to the market (individuals, SMEs and agriculture) who ensure that operations reality, as the recovery will be slow and moderate over the next have the standards of quality risk demanded by the Bank. The few years. branches also provide personalised advice when handling the requests of customers. Banesto’s risks policy has long given us a portfolio of controlled risk, based on mortgage guarantees and housing promotions For individual customers, the advanced tools of performance destined as first residence. However, in order to respond to the analysis (scores) incorporated into our systems constitute an difficult situation of our customers, we continued to strengthen efficient instrument for assessing and tracking risk. the Real Estate Risks Unit with more specialists in financing.
In SME admission, our Expected Loss model has enabled us to d. Wholesale Risk improve the management of operations by our analysts, as well Risk management in large clients (companies, financial as the possibility of adjusting the necessary guarantees to each institutions and sovereigns) is conducted through analysis, customer profile. valuation (assignment of a rating) and classification (setting a risks limit) for each economic group. Banesto has a risks unit b. Risks of Companies specialised by type of client/sector and making a distinction Admission of these risks aims to maintain a portfolio with a high between large corporate clients and financial institutions and standard of quality above that of the market’s average. country risk.
It has resources and tools which enable us to assess risks The team of specialised experts has advanced tools for analysis appropriately, give our clients a rating and classify them with and assessment, which combined with proximity to the operational limits of risks that quicken our response capacity commercial manager of wholesale banking gives the risks and facilitate the contribution of risks to achieving our manager a closer relation with the client. commercial objectives. The Corporate Banking portfolio continued to be assessed The analysis systems, adapted to the various types of clients, every year and given an environmental rating, following analysis have proven to be an efficient tool for managing the risks of of the main variables regarding the socio environmental impact. each customer, facilitating the assignment of a rating, which is a crucial factor today for determining the basic parameters of As regards approval of risks, the Bank’s general map of risks. attributions establishes the framework under which the Executive Committee delegates in risk committees, bodies 2009 was a very complex and difficult year from the economic lower down the hierarchy, the taking of decisions by the vote of standpoint, and the outlook is one of continued difficulties in members on the basis of the level of risk exposure. This follows the coming months. a report on the risks, the rating and the appetite for risks while maintaining a balanced risk/return. As a result, the admission processes meet strict criteria of prudence and contribute to the growth with select and new The third phase is monitoring and recovery of risks. Over and customers, as well as helping to facilitate the viability of those above the involvement of the whole network in controlling the company clients most sensitive to the problems of our credit quality of the Bank’s portfolio, there is the specific economic environment. function of risk monitoring. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 69
Banesto 69
e. Monitoring of risks Contracts lower than a certain amount and consumer loans are We have the resources for this, both technological as well as handled with the support of a large network of recovery human, so that our tools, processes and systems ensure early companies and managers (outside Banesto), which are detection of events that could affect the evolution of our measured every six months by efficiency ratios and stimulated customers’ risk. to achieve success. These same structures support the relevant recovery levels of non-performing loans to which Banesto has The continuous process of monitoring is articulated around always given attention different to that of the rest of the sector, tracking and anticipation committees at all levels of the Bank’s underscoring its recovery capacity and contribution to the hierarchy and involving senior management. income statement.
We are helped in this by the information provided by systems The already consolidated model for judicial management, such as the SAR (System of Anticipating Risks with 120 articulated in the Astrea tool and monitored by a centre, has performance variables); information and tracking of those given Banesto a clear advantage over all its competitors in clients identified as the most worrying via the FEVE (special management of the recovery cases and enables it to tackle the watch); monitoring and permanent updating of the portfolio’s future challenges from a position of strength. rating and of clients; tracking tools and predicting the performance of individual customers, etc. In 2009, we continued to improve the new version of the Recovery Management System which contributed to greater The objective of the monitoring is to ensure a close, up-to-date efficiency and speed. and profound (continuous) knowledge of our customers, assigning a rating adjusted to their credit quality and At the start of 2009, Banesto formed Aktua Soluciones anticipating the future evolution of our risks in order to put into Financieras SA in order to create a specialised area for effect the opportune measures to offset possible events in the managing the recovery of mortgages. This new instrument has future. made the whole recovery management process more efficient, friendly and judicial and also incorporates the business activity f. Recoveries and management of foreclosed assets of residential assets. Latest generation tools have been created The activity of recovery integrated with management and for greater efficiency and techniques and methodology commercialisation of foreclosed assets has been adapted to adjusted to the current situation and the special features of the complex economic environment, creating instruments that these markets developed. quickly respond to the new needs, adjusting recovery policies and the sale of assets and applying specialised management by customer segment. All of this is backed by cutting edge technology and strengthening resources for this activity.
The policy of putting firms under individualised management with risks of more than a certain amount was strengthened again by an increase in the number of managers in recoveries, in accordance with the current economic situation and very goal orientated. This focused the recovery strategy, by debt type, and enabled us to respond immediately in each one of the maters when they occur. The job of the managers specialised in companies is to manage technically and efficiently the increasing number of auctions in this segment. Specific recovery strategies focused on SMEs were established and, via individual business plans, individual customers segmented are managed. Of note is the high recovery capacity in mortgages, backed by a model of differentiated management. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 70
70 Annual Report 09
3.2 Market Risk (swaps, collars and swaptions). The instrument chosen depends on factors such as cost, the instrument’s efficiency and Structural Risk of the Balance Sheet the possible impact on liquidity and capital. In the case of derivative products, we have to meet (and we do) the Interest rate risk is inherent in Banesto’s activity as a financial requirements in Bank of Spain Circular 4/2004 and IAS 39 for intermediary. This risk exists because the balance sheet is them to be considered coverage for accounting purposes. composed of assets and liabilities sensitive to interest rate movements which are repriced in different maturities and Management Methodology tranches and, coupled with a large volume of liabilities in In order to measure the structural risk of the balance sheet, current accounts, can cause undesired fluctuations in net Banesto has IT systems which provide all the relevant interest income and in the value of the Bank’s economic information on the effects of structural risk (dates, rates, capital. accruals, etc) for each of the contracts, and all tallied with the Bank’s accounting. In addition, we have invested in Policy and Management Strategy applications and systems which enable us to develop models The main objective is to provide stability to net interest income that provide a considerable capacity for risk analysis. in the face of interest rate changes, while preserving at the same time the Bank’s economic value. Banesto’s management of the The Bank analyses and manages interest rate risk by structural risk of interest rates minimises the sensitivity of net simulating a variety of representative scenarios and time frames interest income to movements in the yield curve. in accordance with its risk profile. When analysing the sensitivity of risk the performance of the financial margin in The Assets and Liabilities Committee is responsible for scenarios of high and low interest rates is compared for parallel approving the lending strategies and setting the policies of shifts in the implicit market yield curve considered as the base management, hedging, measurement and control of risks scenario, as well as scenarios of flattening and steepening to associated with interest rate movements. Treasury positions are reflect the risk of the curve’s slope. The margin is modelised in excluded as they are managed and measured separately by the each of these scenarios under a considerable combination of Markets Area in accordance with its own methodologies. factors that embrace the risk of reinvestment produced by prepayments, new contracts or balances budgeted, spreads, In the framework of risk management, the Bank contracts etc, which produce a detailed simulation of the financial hedging operations to reduce its interest rate risk. These could margin. be fixed-income instruments such as interest rate derivatives
Sensitivity of Net Interest Income Sensitivity of the Economic Value
+100 p.b. -100 p.b.
12% 0.35 0.30% 7.81% 8% 0.25 4.32% 4% 0.15 0% 0.05 -4% -0.05 -8% -4.86% -0.15 -0.10% -8.67% -12% Down100 Up100 year 1 year 2 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 71
Banesto 71
In the sensitivity analysis, Banesto mainly centres on the first Risks of Treasury Activities year and in more detail on the second year, as the latter reflects more clearly the exposure of interest rate risk once the Bank’s Treasury activities are mainly measured in credit and market. whole balance sheet has been repriced. As one would expect, Banesto has a Unit of Risks of Market Activities (URMA)which Banesto’s exposure to interest rate risk is moderate in terms of monitors and measures these risks. The unit has three areas for negative sensitivity of the financial margin with -8.69% (€122 analysing these risks: market, credit and one for market million) and particularly flat in the case of the economic value valuation and prices which assesses positions. This structure of capital with 0.3% with parallel shifts of the curve of 100 b.p. draws together measurement of all Treasury risks with an integrated focus and systems. A very detailed monitoring of the Liquidity Risk risks in Treasury activities was required in 2009, because of the very volatile financial markets. The aim of liquidity risk management is to guarantee compliance with the Bank’s commitments in an effective and 1. Credit risk in Treasury activity efficient way, paying particular attention to the cost and with a Credit risk is measured in Treasury activities as the positive medium- and long-term view. We also increased the position in value that any financial instrument could potentially acquire in highly liquid assets, in accordance with our conservative policy the future if the counterparty failed to meet its contractual in this sphere. obligations. This failure would generate capital losses for Banesto as the cost of replacement of an instrument with a Banesto continued in 2009 to improve its net monetary positive value would represent a loss. position, due to prudent and efficient management of wholesale financing and the increase in positions in liquid Evolution of the credit risk of Treasury assets. The financing from wholesale markets amounted to Wholesale banking grew at a slower pace in 2009. However, €6,000 million. as a result of the big push from the marketing of Treasury products in previous years, the number of client operations with In a year of enormous volatility and uncertainty in the wholesale derivative products was very high. The credit risk of Treasury markets, Banesto was among a small group of banks that was products is managed and controlled in the URMA. Estimates able to successfully go to the markets on a recurring basis are made of the potential values of each financial instrument throughout the year, taking advantage of its good standing during its life with a confidence level of 97.725%. This means among investors and its flexibility in adapting to their that in the event of a customer’s bad debt, Banesto’s loss would requirements, without the need for recourse to the Treasury’s be less than the estimated loss in 97.725% of cases. guarantee.
As well as the good functioning of traditional programmes such as structured issues or institutional domestic paper and the consolidation of the programme of Euro Commercial Paper, of note were issues of two mortgage bonds (€2,250 million) and a senior debt bond (€1,000 million).
Profile of exposure and limit
20
18 Exposure 16 Limit 14 12 10 8 Billion euros 6 4 2 0 Today 1 week 3 months 9 months 18 months 30 months 42 months 54 months 6 years 8 years 10 years 15 years 25 years higher WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 72
72 Annual Report 09
The URMA calculates and controls the exposure to risk to each The conditions in markets made it necessary to closely track client with different time frames. This analysis facilitates greater limits which are very dynamically being revised for those control and more dynamic and efficient management of the counterparties where the perceived credit quality could have limits established by the admission units. Every day, the suffered significant deterioration. By doing this, Banesto admission units and wholesale banking are informed of each remained alert to changing market situations and monitored in client’s credit risk positions, with a high degree of disintegration. a very detailed way the lines approved to counterparties for Every week detailed information of Banesto’s exposure is operations of market financial instruments, with particular presented to senior management via the Risks Committee and attention to derivative products. In addition, the sharp fall in the Executive Committee, aggregating the information by interested rates consolidated in 2009 caused the consumption segment, product, rating, maturities and risk factors. During of interest rate swaps in which customers pay a fixed rate in 2009, the URMA improved the processes for estimating the previous years to increase considerably and so lifted the Bank’s exposure to risk, applying the most advanced simulation global consumption of this type of derivative product. models. 2. Market Risk of Treasury Activity At the end of 2009, the risk exposure was €13,388 million and The market risks that affect treasury activity (interest rates, wholesale banking accounted for 95.1% of it compared to exchange rates, equities, spreads on loans, implicit volatilities, 4.4% for company banking, 0.2% real estate and 0.3% retail correlations, etc) are managed and controlled by using the banking. standard methodology of Value at Risk (VaR) through historic simulation. The VaR provides a homogeneous risk figure which Consumption was concentrated in 2009 in short maturities represents the maximum expected loss in the face of adverse (three months). The levels of use of the limits assigned movements in the market, with a confidence level of 99% remained low as can be seen in the graph. assumed. The VaR is calculated and reported to senior management every day, and is controlled through a system of limits that affect the total position as well as each one of the portfolios. Senior management is continuously informed and Exposure of Treasury activities involved in market risk management via committee meetings by segment every two weeks under the framework of the Risks Committee, as well as via the Assets and Liabilities Committee.
The average daily VaR during 2009 was around €5.2 million, of which €1.8 million reflect the level of market risk really assumed and €3.4 million other technical risks of the market which are systematically covered through provisions, in accordance with Banesto’s policy.
VaR Distribution in 2009
Wholesale banking Real estate Company banking Retail banking 20.3% 19.9% 18.0% 14.5%
Number of days (%) 7.8% 5.9% 4.3% 3.5% 2.7%3.1% 0.0% 3.52 3.87 4.22 4.57 4.92 5.27 5.62 5.97 6.32 6.67
VaR in million euros 7.02 and more WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 73
Banesto 73
Measurement of market risk via VaR is complemented with 3.3 Operational Risk analysis of tension scenarios in which the impact on the value of portfolios in certain extreme circumstances is simulated. Banesto’s operational risk management model was defined in Historic and hypothetical scenarios are assessed with various accordance with the requirements of the Basel II accord, the degree of losses and probability, and the conclusions reached EU directive on capital requirements for credit institutions and are discussed regularly with senior management via the Bank of Spain Circular 3/2008 on solvency. aforementioned reporting cycles. Banesto also regularly estimates the average of extreme losses which could occur in The main objectives are: the event of exceeding the VaR level, through conditional VaR, which is also reported every day to senior management and • Identify and eliminate the focus of operational risk, before analysed in depth by the committees. The conditional VaR in they cause losses (anticipation). 2009 was around €8.7 million. • Reduce operational risk losses, establishing corrective plans on the basis of the type of risk and the business The Bank of Spain is assessing Banesto’s model for market risk affected (mitigation). measurement so that it can be used internally for determining the minimum capital for this concept. The relevant audits of We consolidated in 2009 the operational risk management the model were satisfactorily carried out in 2009 before being model, completing the view of this function as a transformation presented to the supervisory authority, whose inspection is initiative, incorporating new operational and information underway. Internally, Banesto monitors and fine tunes on a resources and obtaining results both from a standpoint of continuous basis the quality of the model through a programme improvements in transactional and commercialisation of backtesting, which systematically compares the model’s processes, as well as reducing events and losses. predictions with the reality of the results of treasury activities. The results of the retrospective tests were verified by the Banesto is solidly positioned in the standard method within the Group’s auditing departments and by rating agencies, fulfilling regulatory framework, with wide coverage of requirements, both the requirements recommended by international regulators. qualitative and quantitative, which, in turn, constitute a large part of the requirements for applying advanced methods.
Operational risk management in wholesale banking achieved VaR evolution during 2009 notable results thanks to the NORMA project, which revolves around five items of the commercial network: cash VaR/EaR/Result 2009 management, operational and documentary normalisation, security, order and image and other operational risks. NORMA was extended in 2009 to company banking and will be applied to other business areas. 20.000.000 15.000.000 NORMA has incorporated operational risk to Banesto’s 10.000.000 management framework, from the branch and zone level to
5.000.000 territorial and central committees of operational risk. They
0 receive information every two weeks on their management focuses. The incorporation of the NORMA indicator to the -5.000.000 branch network’s model of incentives is an important milestone -10.000.000 in consolidating global management of operational risk. jul09 jan09 oct09 feb09 jun09 apr09 sep09 nov09 aug09 dec09 mar09 may09 New mechanisms to identify risks were incorporated, Total VaR Total EaR Result increasing the coverage of the map of operational risks. Among others, and along with self-assessment questionnaires, events, new products, customer complaints and other matters which could cause losses are monitored, from detection to resolution. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 74
74 Annual Report 09
Our data base of losses already covers five years, and its level (Banesto since 2005), and it is a leading forum in research and of automation and detail in capturing information enables all development of standards within operational risk management. Banesto’s centres, and in particular all branches, to know immediately the operational risk events that have occurred. During 2009, active management of events and the This data base also allows us to draw up reports that compare implementation of corrective measures led to a significant Banesto with other banks and, specifically, with Spanish reduction in the number of operational risk events, particularly institutions in the Operational Riskdata eXchange Association in the types of risk errors in executing processes and practices (ORX). The main objective of this association is to exchange with customers. The business line that registered the largest operational risk losses data anonymously. It is used in each reduction in losses was retail banking, in accordance with the bank to modelise this risk and validate internal capturing of previous comments on the NORMA project. events. ORX has more than 50 members internationally
Distribution of losses Distribution of losses by business lines by type of risk Data at December 2009 Data at December 20099
1.4% 1.1% 2.1% 6.4% 3.1% 0.5% 0.4%
61.1% 12.1% 27.4%
27.5% 32.8% 24.2%
Retail banking Company banking Treasury Execution, delivery and management Central services Wholesale banking Channels of processes
Practices with Damage to material Events and clients, products assets failures in systems and businesses
External fraud Internal fraud Labour relations
Banesto’s Operational Risk Department is also responsible for general strategies and the response mechanisms on the basis the function of Business Continuity, through which its critical of the risks detected. Banesto is a member of the Spanish processes are defined and the requirements for continuing to Consortium of Business Continuity and participates in the operate in the event of something serious. We have a Continuity Working Groups of Definitions and Coordination with Critical Management Committee, which approved and defines the sectors and Institutions. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 75
Banesto 75
4. Global Risk adjusted by corrective coefficients on the basis of their use (pricing, internal provisions, regulatory capital, economic, etc) 1. Quantifying Risk and scenarios defined by senior management.
a/ Measurement and quantifying as the basic element for risk management Ratings Retail Global and effective risk management requires methodologies 40% Mortgage Personal and models to quantify the basic parameters of measurement, 35% Rest such as expected and unexpected loss. It is also very necessary 30% to have tools which enable us to establish adequate protection measures against risks, as well as systems to identify business 25%
growth areas which always take into account the Bank’s EAD 20% appetite for risk. 15%
10% For many years Banesto has used quantitative models to estimate these parameters, on the basis of four basic elements: 5% the Probability of Default (PD), the Exposure at Default (EAD), 0% the Loss Given Default (LGD) and Asset Correlation (AC). 12345678910 Bands of rating TtC The modelisation of these parameters is already both acyclical (Through the Cycle, TtC) as well as cyclical so that the situation of the macroeconomic cycle is reflected from a Point in Time (PiT). The instability in 2009 made it vital to analyse and Company Ratings quantify the sensitivity of the components of risk, in the face of 90% Corporate Companies certain macroeconomic scenarios as well as changes in the 80% SMEs Bank’s features. 70% Promoters
60% The different performance of portfolios/customers in the 50% changed environment makes it necessary to have increasingly EAD granular modelisation in order to provide management tailored 40% to the needs of each customer and not implement the same 30% policies to profile of different risks. 20% 10%
Probability of Default (PD) 0% All our rating/scoring models (corporate, banks, companies, 12345678910 real estate promoters, SMEs, consumer lending, mortgages, Bands of rating TtC credit cards and performance of individuals) are gauged for probabilities of default. Exposure at Default (EAD) This calibration is backed by a statistical process which, on the This concept measures the potential risk by estimating the use basis of the internal record of non-payment by various a contract would have when entering into default. It is customers/operations, assigns to each risk category calculated on the basis of committed lines of credit, such as (rating/score) a probability of suffering a non-payment of more credit accounts. than 90 days over the course of a year. These probabilities of default are the homogeneous term that enable comparisons to Loss Given Default (LGD) be made between different segments, and also serves as the After knowing the probability of occurrence default and the objective measure for comparing the risk profile of banks. amount exposed, the LGD enables the definitive loss incurred by the bank after the recovery process to be measured. This In line with a modelisation subject to the impact of process is conducted on the basis of the historic experience of macroeconomic effects, our probabilities of default are customers in recovery management. As with the PD, the LGD WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 76
76 Annual Report 09
is determined by the moment of the economic cycle, as non- As in previous cases, this expected loss depends on the performing loans, asset prices and other factors significantly management objective and the scenario foreseen for it. affect recoveries and so the loss. On the basis of our internal estimates, Banesto's average expected loss (point in time) is 0.63% and the through cycle Losses in company portfolio 0.382%.
80% Asset correlation and Diversification 70% This is the fourth factor. It measures the contribution that the 60% joint movement of financial assets makes to the distribution of
50% credit risk losses.
40% LGD The key element in capital models and thus of their appropriate 30% measurement depends on ensuring the bank’s solvency during 20% extreme moments of an adverse cycle. 10%
0% In an environment like the current one it is a very important Guarantees Credits Commercial Leasing Secured Personal discount loans loans competitive advantage to have a diversified portfolio. Banesto pays particular attention to measuring and managing this parameter and for this reason created a post for constant analysis of the portfolio and controlling concentrations by In order to incorporate this cyclical effect the modelisation takes individuals and sectors and setting maximum limits for them into account those variables that most affect the final loss such on the basis of the most used standard indicators (Herfindahl- as the recovery time, the probability of legal proceedings, the Hirschman, ICS BdE, Gini). recovery distribution in the event of proceedings, etc. Every year Banesto reviews the correlation models, checking Using the same factors as for PD enables us to assess the the prior estimates and the methodologies used. correlation between PD and LGD and the joint impact on expected loss of specific stress scenarios of both parameters. Risk Adjusted Exposure
Losses in retail portfolio 3.0% 3.0% 80% 18.0% 70%
60%
50% 28.0% 40% LGD 30%
20%
10%
0% Credits Mortgage Personal Cards 29.0% loan 3.0%
7.0%
Expected Loss 9.0%
This comes from the combination of the three previous Corporate SMEs concepts and is the annual risk cost associated with our credit Medium-sized Self-employed Personal exposure, which, since 2008, shows up in the income companies statement. Promoters Mortgages Other retail WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 77
Banesto 77
Expected Loss Economic Capital
% % 3.0 8.0% % 3.0 4.0 18.0% 12.0%
14.0%
26.0% 2.0% 15.0%
9.0%
4.0% 32.0%
12.0% 18.0% 20.0%
Corporate SMEs Corporate SMEs
Medium-sized Self-employed Personal Medium-sized Self-employed Personal companies companies Promoters Mortgages Other retail Promoters Mortgages Other retail
Expected Loss/Exposure at Default (%) % EL/EAD TTC Economic Capital /Exposure at Default (%) % EL/EAD PIT 4.0% 9% 7.68 3.5% 8% 2.43 3.0% 7% 1.71 6% 2.5% 4.60 4.66 5% 4.08 2.0% 1.37 3.73 3.72 0.74 0.97 0.84 4% 1.5% 0.88 0.57 2.63 0.55 0.64 0.61 0.34 3% 1.83 1.0% 0.26 0.28 0.23 2% 0.13 0.5% 1% 0.0% 0% SMEs SMEs Personal Personal Corporate Corporate Promoters Promoters Mortgages Mortgages Other retail Other retail companies companies Medium-sized Medium-sized Self-employed Self-employed
Economic Capital 2. Integration in Credit Risk Management Although the expected loss is one of the key elements of credit Once the regulations emanating from BIS II were in place and risk management, it is not sufficient if we take into account that our internal models approved by our supervisory authority, all this loss is not stable. A tool is therefore needed which provides efforts have been concentrated on enhancing risk information on the variability of these losses. This information management, strengthening parameters and integrating them is provided by the economic capital, which seeks to measure fully into Banesto’s strategy. the impact on the bank of these losses in exceptional situations. Banesto has two objectives: on the one hand, to minimise this a/ A new cycle of management volatility and ensure the best return for shareholders and, on 2009 was characterised by instability and uncertainty due to the other, maintain a maximum level of solvency during stress the global economic and financial crisis and risk models were situations. one of the most critical aspects, not only in Banesto but also in other banks. The need to strengthen analysis and quantification of the sensitivity of risk components to certain macroeconomic scenarios as well as to changes in the features of the Bank’s portfolios became even more important. It also became increasingly important to constantly review the metrics WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 78
78 Annual Report 09
not only from the regulatory standpoint, but also the This new cycle of management has also produced a greater management. integration of risk metrics in the management of the bank in two aspects – from the standpoint of daily management as well In such a dynamic environment, continuous reviewing, analysis as strategic definition and planning. and where appropriate realignment of forecasts are necessary. In daily management, this means: In this scenario, the work lines and activities of global risk management were defined in accordance with the following • Changing the admission policies. Analysing the evolution of cycle: the parameters of the portfolios under different perspectives, not just traditional ones, changes are detected which can lead to modifications to the admission policies. Global Risk Management Cycle • Development of new business strategies by identifying new niches for growth in lending. TOP-DOWN • More exhaustive monitoring of customers/operations, guaranteeing regular review and analysis of the REGULATORY VISION/MANAGEMENT SENSITIVITY/MACROECONOMIC assessments and establishing anticipative measures. ENVIRONMENT All of this ensures fulfilment of the risk profile established by Banesto.
As regards the more global or strategic perspective: METRICS POLICIES
FOCUS • Knowledge of the likely evolution of the risk profile of different portfolios focused on a more proactive management, coupled with a framework of business forecasts, enables all aspects related to the risk profile and capital to be determined, thereby realigning the strategies and operational aspects from MANAGEMENT day to day.
BOTTOM-UP
Framework of projections
1 Lending
Exposure Credit Return Quality Sensitivity by factor • Limits • PD • Spreads • Drawn • LGD • … Macroeconomic Stress testing • CCF scenarios model
2 Capital required
Risk Weighted Assets (RWA) Economic Capital (Ecap)
Sensitivities of Input PD/LGD in macro 3 Impact on Income statement scenarios
Non-performing loans Provisions Impact
• By age • Specific • By calendar • Generic • Voluntary Projection model 4 Solvency
Generation Solvency Coverage of capital ratios ratios WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 79
Banesto 79
b/ New metrics framework of risk In this line of adjustment of the management metrics, various This greater and more intensive integration in management of projects were developed to eliminate the biases in order not to the model meant adapting the regulatory metrics in order to transfer to business aspects inherent in the modelisations. An provide increasingly granular measures and adjusted to various example of this was analysis of the procyclicity of the Probability needs: business/risks, admission/monitoring, pricing/fee, etc. of Default (PD), in which the cause of this was examined and the alternatives so as not to over estimate or under value the The metrics used in management aim to provide prospective risk during this period of crisis. views and so are in general more cyclical measures, characterised by great dynamism, as they have to be adapted The cyclicity of the metrics, combined with the economic crisis, to Banesto’s business plans and to changes in the made clear the need to quantify the sensitivity of risk to environment. The regulatory changes, however, are mostly changes in macroeconomic scenarios. acyclical, static and more anchored in historic observation. Stress testing is part of this framework. This tool of management for credit risk enables us to understand the sensitivity of Banesto’s portfolio to changes in the main risk • STABLE REGULATORY factors (unemployment, inflation, GDP, house prices, etc). • ACYCLICAL METRICS • HISTORIC This quantifies in an agile way the impact of a certain • STABLE macroeconomic scenario on each sub portfolio of credit MANAGEMENT • ACYCLICAL analysed. The granularity is a key element for management, as METRICS • HISTORIC well as ensuring convergence of the top down and bottom up focuses.
REGULATIONS This model make it possible to use the tool from various perspectives: on the one hand, adjusting the global risk quantification for coming years. On the other hand, and given REGULATORY METRICS the granularity obtained, it supports anticipation of specific threats, identifying the most sensitive loans in terms of increased non-performing loans or losses in the face of macroeconomic changes. It also allows new opportunities or MANAGEMENT pockets of business to be detected, identifying the profiles METRICS which, in the face of a specific macro scenario, are the least CHANGES IN NEW sensitive to risk. THE MACRO MANAGEMENT ENVIRONMENT NEEDS
2.0 1.5 1.0 0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 mar88 mar89 mar90 mar91 mar92 mar93 mar94 mar95 mar96 mar97 mar98 mar99 mar00 mar01 mar02 mar03 mar04 mar05 mar06 mar07
40 10% 9% 35 Ciclo Medio 8% 30 Crisis suave 7% Bonanza 25 6% 20 5% 15 4% 10 3% 2% 5 1% 0 0% jun90 jun93 oct97 oct00 oct03 dic05 jun08 12345678910
EL increase (%)
Portfolio 1 1% Portfolio 2 15% Portfolio 3 -3% WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 17_MANAGEMENT_2 16/2/10 13:02 Página 80
80 Annual Report 09
With this information and being in such a dynamic Management of risks in three levels environment, both in macroeconomic terms as well as very proactive in the anticipation measures adopted, the forecasts made for the components of risk have to be reviewed LEVEL MANAGEMENT continuously. This is particularly necessary given the high penetration of risk metrics in the management model, as they EXTREME RISKS • MAKE AN INVENTORY are incorporated both to the income statement of branches, via • ESTABLISH PREVENTION Expected Loss, as well as in planning which helps us to MEASURES THAT MITIGATE THE measure the provisions and capital needed for the following IMPACT years.
• ESTABLISH METRICS TO QUANTIFY THE EXPOSURE AT DIFFERENT LEVELS: HISTORIC LOSSES, EXPECTED LOSSES ENVIRONMENT AND EXTREME LOSSES LEVEL 1 RISKS • EVALUATION OF THE DEGREE OF CONTROL AND MANAGEMENT
• SELF-ASSESSMENT AND ESTABLISHMENT OF METRICS POLICIES TO QUANTIFY THE EXPOSURE • EVALUATION OF THE DEGREE RISK FACTORS OF CONTROL AND MANAGEMENT • AGGREGATION FOR ANALYSIS OF RISK LEVEL 1 AND 3. Constructing a new “architecture of risks.” ANALYSIS OF CONTRIBUTION The events of the last two years show that developments increasingly happen more quickly, making it vital to take decisions more speedily, and it is impossible to examine risks • Extreme risks are those that can affect business continuity in an isolated way, as they have connections and are or significantly damage results. These risks are not interdependent. quantified but are in the inventory and analysed so that measures can be established that either avoid them The fruit of these needs in 2009 was the launch of the Global happening or mitigate the impact in the event that the risk Map of Risks focused on strategy management in order to occurs. improve the management environment and control at all levels and in an agile way. • Level 1 risks are the large types of risk (credit, market, operational, etc). A series of metrics are established on The Risks Map does not aim to be an inventory and quantitative these risks that try to quantify its exposure and the degree control panel of all risks, but goes further by analysing the of control and management of them. causality and their possible relations, assessing their relevance and degree of control, as well as serving as the base for • Risk factors are different sub types of risk that influence prioritising development plans of continuous improvement. level 1 risks. Not only is a series of metrics established for them that evaluate the exposure to them, but also we seek The objective is to establish a strategic and dynamic their causality and analyse both the impact and the management model of risks on the basis of their relative probability of occurrence, as well as the control measures importance and tending to their causes. We work on three to mitigate the residual risk. levels of risks: All of this enables us to draw up plans for improvement and act as a tool for defining strategies WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 81
Banesto 81
REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE
Banesto created its Audit and Compliance Committee on Compliance December 18, 2002. It is regulated by the 18th additional disposition of the Securities Market Act (introduced by article Supervise compliance with: 47 of Law 44/2002), in article 18 of the corporate by-laws and article 14 of the Board’s Regulations. • The Group’s Code of Conduct in the Securities Markets. • The manuals and procedures for the prevention of money The functions of the Audit and Compliance Committee are set laundering. out in Appendix 1, and are summarised as follows: • The actions and measures that are the result of the steps Shareholders taken by the supervisory authorities. • The rules and procedures of corporate governance.. • Inform Shareholders’ Meetings. • Reply to questions regarding matters within its sphere. Financial information
Internal auditing • Review the annual financial statements. • Ensure compliance with the legal requirements.. Supervise the Internal Auditing services by: • Ensure the correct application of accounting principles. • Annual planning of work. • Be familiar with and supervise the drawing up of financial • Reports on activities. information. • Monitoring the conclusions and recommendations of its • Review, before dissemination, the regular financial reports. information supplied to the National Securities Market Commission. External auditing • Receive, treat and keep the complaints (internal and • Propose the appointment of the auditing firm and the external) received by the Bank on issues related to the conditions of the contract. process of generating financial information, auditing and internal controls. • Supervise compliance with the contract and assess the results. Internal control systems
• Act as a channel of communication between the Board and • Be familiar with and supervise the internal control systems. the auditing firm. • Be familiar with and supervise the risk management control • Seek to obtain clear and precise reports. systems. • Vouch for the auditing firm’s independence. • Report on, before approval by the Board or the Executive Committee, the creation or acquisition of participations in special purpose entities or those domiciled in tax havens.
• Report on linked operations submitted for the Board’s approval. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 82
82 Annual Report 09
Composition of the committee Internal Auditing The Audit and Compliance Committee consisted of four directors and a Secretary (not a director) at the end of 2009. The maximum executive of Internal Auditing met three times Of the four members, two are independent directors, one non- with the Committee during 2009 to inform it of the work plan executive proprietary and the other non-executive: for the year, its development, the recommendations and conclusions reached and the monitoring and implementation Chairman: Belén Romana García of these recommendations. Members: José Luis López Combarros In addition, Internal Auditing also informed the Bank’s Board David Arce Torres of the work done and their conclusions. Matías Rodríguez Inciarte During 2009, there 212 auditing jobs, reviews of processes Secretary: Mónica López- Monís Gallego and visits to branches were conducted. As a result, 79 reports and auditing notes were issued. There was one change in the Audit and Compliance Committee in 2009. At the Board’s meeting on May 12, 2009, The auditors focused on: Mr. Victor Manuel Menéndez Millán resigned as a director and • Reviewing the Bank’s internal control model. so stopped being a member of the committee. The Board approved at this meeting, at the proposal of the Appointments • Credit risks, reviewing all segments, criteria and admission, and Remuneration Committee, the incorporation to the monitoring and recovery procedures, as well as the correct committee of David Arce Torres, in his capacity as a non- classification of the portfolio and its level of provisions. executive director. • Other financial risks; market, structural of the balance sheet and liquidity, verifying compliance with the established Activities during 2009 of the audit and compliance policies and procedures. committee The Audit and Compliance Committee met 14 times during • Operational risk, with emphasis on the risk control model, 2009 in order to carry out the tasks entrusted it by the Board correct documentation of operations, main operational of Directors. There were also frequent contacts with the processes, security policies, contingency plans and external auditors, the internal auditors, the Directorate of continuity of business. Corporate Development and Finances, the Group’s financial • Correct compliance with rules and regulations, particularly controller, the Directorate of Internal Control and Compliance, regarding prevention of money laundering and all internal and as well as with most of the Bank’s executives in order to obtain external regulations concerning the marketing of products. information and receive the pertinent explanations about the Group. • The Group’s financial information, criteria and procedures used, in accordance with the rules of the Bank of Spain and A brief summary is given below of the aforementioned the SOX model functions. The opinion of internal auditing on Banesto’s risk control systems and its internal control model was good. Financial Shareholders statements were drawn up in accordance with prevailing regulations. At the Shareholders’ Meeting in February, 2009 the work of the Audit and Compliance Committee during 2009 was As part of this favourable opinion, and as a result of the explained. The Meeting in February 2010 will report on the principles of Internal Auditing regarding the contribution of activities in 2009. value to the audited units, recommendations, aspects to be WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 83
Banesto 83
improved and suggestions on best practices, were issued in The Bank’s Board decided that the half yearly consolidated and order to guarantee, improve and perfect the control models. The summarised information at June 30, 2009 to be sent to the implementation of these recommendations is monitored every CNMV should be subject to auditing, and the auditor’s report month and the progress reported to senior management and issued on July 22 was without qualifications. the Audit and Compliance Committee. The Committee was told by the partner responsible for auditing The committee expressed its satisfaction with the work carried that during the work the team had access to all the necessary out by the Internal Auditing Department in supervising the information and received full cooperation from the Group’s compliance, effectiveness and efficiency of the Group’s internal employees. The external auditor also reported on compliance control systems, as well as the reliability and quality of the with the rules of independence established in the Auditing of accounting information. Accounts Law.
External Auditing Article 39 of the Board’s Regulations does not allow an auditing firm to be hired when the fees it charges to the Group The Audit and Compliance Committee proposed at its meeting represent more than 2% of its total fees. This article also on January 19, 2009 the re-election of Deloitte S.L. as the establishes that the partner responsible for the auditing team auditing firm of the Bank’s and the Group’s financial statements allocated to the Group must be replaced every seven years and during 2009, and the professional scope of its mandate. services other than those of auditing which could put at risk the auditor’s independence will not be contracted. The Committee held five meetings with the external auditors during 2009 at which it was informed of the process of auditing Regarding these stipulations in the regulations, we would like the 2009 financial statements, and the inherent aspects, to point out that: problems and considerations. 1. The bill for auditing the Group in 2009 and other non- The auditors also attended the presentation to the committee auditing services provided by the auditor is duly set out in by the Financial Controller and the Directorate of Corporate note 42 in the section on the annual financial statements. Development and Finances of the public information on the The total amount charged by Deloitte was €2,239,000. quarterly and annual results. 2. The auditing fees of Deloitte, S.L for services other than The auditing reports on the 2009 individual statements of the auditing amounted to €754,000 (€105,000 for work Bank and the consolidated ones of the Group were clean required by supervisory bodies and which can be done by (without qualifications) and the auditors stated that: the same auditor).
a) the annual financial statements faithfully reflect, in all 3. The partner responsible for responsible for the team significant aspects, the Bank’s and the Group’s shareholders’ auditing the Group began in 2009, making it the first year equity and financial situation at December 31, 2009, the auditing the accounts of the Banesto Group. results of the Bank’s and the Group’s operations, the changes in net worth and their cash flows and The Audit and Compliance Committee also verified that the work contracted with the auditor and requested by supervisory b) the Bank’s and the consolidated Group’s annual financial bodies complied with the requirements of independence statements contain the necessary and sufficient information to established in Law 19 of July 12, 1988 on Auditing of be interpreted and adequately understood, in accordance with Accounts. the International Financial Reporting Standards adopted by the European Union (for the consolidated Group), and in The fees charged to the Banesto Group by Deloitte in 2009 accordance with the principles and accounting rules set out in worldwide represented 0.009% of their global total and those Bank of Spain Circular 4/2004 (for the Bank), and are in charged by Deloitte (Spain) 0.51% of its turnover. uniformity with the rules used to draw up the previous year’s statements. As a result, the Audit and Compliance Committee concludes there are no objective reasons for questioning the auditing In accordance with Royal Decree 1362 of October 19, 2007, firm’s independence. which regulates the financial information that the Bank, as a listed company, has to approve and send to the National The committee agreed at its meeting on January 19, 2010 to Securities Market Commissions (CNMV), consolidated and propose to the Board the re-election of Deloitte, S.L. as the firm summarised half yearly financial statements were drawn up to audit the Bank’s and the Group’s financial statements for and sent to the supervisor, corresponding to the first half of the 2010. year, whose submission to the auditing firm is voluntarily decided by each company. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 84
84 Annual Report 09
Compliance The Committee was also informed of the communications received from the supervisory and control authorities, as well as The Audit and Compliance Committee held meetings with the measures taken to comply with the requirements and those in charge of: recommendations of these bodies. • Implementing the EU’s Markets in Financial Instruments The Corporate Governance report, which is included in the Directive (MiFID) annual public information, was also reviewed. We • Control and monitoring of compliance with the requirements acknowledged there are reasonable rules and procedures to of Basel and the Bank of Spain meet the requirements, and the contents of this report, which will be submitted for the Board’s approval, were favourably • Prevention of money laundering reported on. • Compliance with the Code of Conduct in the Securities Market The Committee received information on linked operations and the assessment criteria used, and the measures underway • Areas subject to the control and inspection of the regarding their documentation and information. administrative authorities
• Compliance with the rules and procedures of corporate Financial information governance. The Audit and Compliance Committee held several meetings in order to prove the existence of the required compliance with the Group’s financial controller in order to know in detail procedures. the process for drawing up the Bank’s and the Group’s annual and quarterly financial statements. The MFID directive, incorporated to Spanish law by Law 47 of December 19, 2007, established the requirements which The Group’s controller and the auditing firm reported on the certain companies and financial institutions have to adapt in regular public information sent to the supervisory authority order to develop their activity of providing investment services. during 2009 and on the individual and consolidated financial statements for 2009, which were drawn up in accordance with During 2008 and 2009, the Bank implemented all the the Bank of Spain Circular 4 of December 22, 2004 and with regulations, developing various policies and internal the International Financial Reporting Standards adopted by the procedures and validating and reviewing their implementation. European Union, which follow criteria consistent with 2008. A new map of regulations in risks, integrated into the Internal Control Model, was installed in order to be able to appropriately Information was also requested to verify whether the criteria monitor the correct implementation of the various used were in line with the applicable accounting regulations requirements. and principles and so ensure that the financial statements truly reflect the Group’s financial and net worth situation as well as The monitoring in 2009 focused on ensuring the models were the results of its operations. The Committee reported favourably in line with the requirements contained in the regulations on the definitive texts of the annual statements for 2009, as regarding the marketing and distribution of products and well as the regular information published as a listed company services, marketing and publicity actions with customers and during 2009. the circuit for creating and launching new products.
The Group’s lawyers were also asked to provide information on In money laundering, information was received on the new the legal and fiscal eventualities and confirm they were developments in the regulatory framework underway, the appropriately treated in the financial information. training activities and the compliance of manuals and internal procedures. The result obtained is reasonable and we would Regarding the measure implemented in 2007 that anyone like to point out that the external expert’s report as required by involved in the Bank can communicate any event or irregularity article 11, item 7, of Royal Decree 325/1995, for 2008 and of potential importance, particularly financial or of an 2009, makes this clear and includes a series of accounting nature, that occurs in the sphere of the Bank to the recommendations for improvement that the Bank is taking into Audit and Compliance Committee, we point out that during consideration. 2009 we received no such internal or external notification. The Committee also supervised compliance with the Code of Conduct in the Securities Market , which affects 654 people in Grupo Banesto. Compliance executives reported on the control activities, the results, the training courses given, as well as the improvements being made to strengthen control of compliance with the Code. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 85
Banesto 85
Internal control systems Basel II
The Audit and Compliance Committee dedicated several Banco Español de Crédito consolidated in 2009 meetings to knowing and evaluating the internal control implementation of the Internal Rating Based (IRB) model for systems of the Group’s operating areas, especially the credit, credit risk, as well as making significant progress in developing market and financial areas as well as the systems, computer advanced models to calculate market and operational risks. processes and the policies and procedures for the control and management of risks, mainly credit, market and operational. The following issues were tackled:
Internal Control Model • As regards credit risk, once the recurrent process was launched in 2008 to calculate capital under the IRB model Since 2006, Banco Español de Crédito has used an Internal for all relevant portfolios, the Bank advanced in improving Control Model to ensure the transparency and reliability of all aspects related to it: methodologies, greater automation financial reports through reviewing and systemising internal of calculation processes, establishment of additional controls. This model meets the requirements of the Sarbanes- controls and convergence with the management and Oxley Act of July 2002, to which Grupo Santander is subject internal reporting models. and hence Banco Español de Crédito. Particular attention was paid to integration of management, This model provides a framework of control that identifies and furthering its use in all levels of the organisation. In 2009, all documents the critical processes linked to the generation of those aspects related to the Strategic Planning of the Risk financial information, the risks inherent in these activities and Profile and Capital were developed. guarantees the sufficiency and efficiency of the controls associated. These advances were in response to all those recommendations for improvement made by the Bank of The Internal Control Model is a dynamic one which reviews and Spain, focused on ensuring the model is suitable and updates the risks permanently. At the end of 2009, the model continuously adapted to the features of the investment had 580 sub processes, 1,425 identified risks and 1,839 portfolio and the evolution of the macroeconomic associated controls. environment.
In 2009, 53 new risks were incorporated and 79 controls that Of note was the work on the cyclicity of capital models, a mitigate them. Among the new elements incorporated to the sphere which is so relevant today, developing model were those related to property activity, the framework of methodologies that seek to avoid the undesired effects of control of Management of Portfolios (private banking) and the the economic cycle and its impact on the models used as Model of Collaborating Agents. the basis for quantifying risk and, hence, capital needs
The level of accounting coverage reached with the controls • In market risk, 2009 was a key year when the management documented at the end of 2009 was around 99% of the Bank’s model was reviewed and improved from an integral financial statements. standpoint which embraces aspects such as organisation, methodology, technology, auditing and validation. All of this Furthermore, this model is perfectly integrated into all the before presenting to the Bank of Spain a formal request to Bank’s areas and units, and is coordinated and supervised in use it to estimate capital requirements. an independent way by the Internal Control Unit. The request has been made, and the model will be As in other years, the model was internally certificated by the validated by the supervisory authority during 2010 and is Bank without qualifications. This process involved 250 people, expected to be approved for regulatory purposes. including all the general directorates, as well as the Group’s chief financial officer and the Chairman. • In operational risk, Banco Español de Crédito is solidly positioned in the standard method, with wide coverage of its Also, the model was ratified by Internal Auditing, which qualitative and quantitative requirements, essential elements validated its updating of the model and the Bank’s internal self- for applying the advanced models. evaluation, as well as proving the effectiveness of the controls established. The auditing firm also issued a positive opinion on In 2009, the Bank of Spain reviewed the management the model in its report dated April 14, 2009 on the closing of model in order to ensure it complied with the requirements the 2008 accounts, and is currently reviewing those of 2009. and so authorise the continued application of the standard method for the purposes of calculating capital. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 86
86 Annual Report 09
• Lastly, during 2009, and in line with the best practices Conclusion established by the Basel Committee and the Bank of Spain, a new Risks Map model was developed. This map covers The Audit and Compliance Committee informed the Board in all the risks to which the Bank is exposed through its detail of its work during 2009 on two occasions and held 14 activity, assessing the suitability of the management meetings. It was also in close contact with those responsible framework from the standpoint of measurement, control, for the various areas mentioned in this report, enabling the reporting, integration into management and governance. committee to fulfil the functions assigned to it by the Board of Banco Español de Crédito, S.A. Substantial progress is envisaged in 2010 in response to the new approaches of the Basel Committee concerning the quality and consistency of the capital base, review of the framework of counterparty risk, establishment of a new leverage ratio as an adjustment in Pillar 1, reducing the procyclicity of capital models and setting a new regulatory framework for liquidity risk management.
Credit risk
Given the economic situation of companies in 2009, the Committee continued to dedicate several of its meetings to knowing the steps which the Bank’s management is taking to reduce as much as possible the impact on the income statement of customer insolvency.
We believe the measures taken, as well as prudence in granting loans, the existence of a risks functions independent of the business areas, the tracking procedures and defining and implementing explicit policies, etc, have had a positive impact on reducing the percentage of non-performing loans. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 87
Banesto 87
APPENDIX I a) To report, through its Chairman or Secretary, to the Shareholders’ Meeting on any matters raised thereat by Regulations of the audit and compliance committee the shareholders on which the committee has authority.
The Audit and Compliance Committee is regulated by the 18th b) To Propose to the Board for submission to the additional regulation of the Securities Market Act (introduced Shareholders’ Meeting the appointment of an external by article 47 of Law 44/2002) and articles 18 of the corporate auditor. by-laws and 14 of the Board’s Regulations, which are as follows: c) To supervise the internal auditing services.
Article 18 of the Corporate Bylaws d) To be familiar with the financial reporting process and the Bank’s internal control systems. The Board will appoint from among its members its Chairman and one or more Vice-Chairmen, determining, if appropriate, e) To take charge of the relations with the external auditors the order of preference. If the Chairman is not available, the in order to receive information on any issues which might Board will be chaired by one of the Vice-Chairmen, on the basis jeopardise the independence of the auditors and any of the order of preference determined, and, if none of them are other matters related to the process of auditing, as well available, by the oldest director. as other communications envisaged in the legislation on auditing and in the technical rules of auditing. It can also appoint one or more Chief Executive Officers, and an Executive Committee and as many Committees or f) To examine compliance with the Group’s Code of Conduct Commissions as are deemed necessary or convenient for the relating to the securities markets, with the anti-money Company’s smooth running. laundering manuals and procedures and, in general, the Bank’s rules of governance, and to make the required If the Board makes use of the power conferred in the previous proposals for their improvement. In particular, the paragraph, it will specify the responsibilities of the Chief committee must receive information and, if appropriate, Executive Officers and the Committees and Commissions issue reports on disciplinary measures for members of designated. senior management.
The Board will appoint a Secretary and a deputy Secretary who The Board will appoint the Chairman of the Audit and does not have to be a director but can be. If the Secretary or the Compliance Committee and he or she will be replaced every deputy Secretary meets the legally required conditions they can four years. The outgoing Chairman can be re-elected a year also be the Board’s Legal Advisor. If the Secretary is not after departing the post. available the deputy Secretary will exercise the functions and if he is not available then the Board will appoint a director to do The Audit and Compliance Committee will meet, at least, four this from among those attending the meeting. Unless there is times a year and as many times as deemed necessary by its a Board decision otherwise, the Secretary will also be the Chairman or as required by agreement of the committee or at Secretary of the Committees set up in the Board’s sphere. the request of at least two of its members. All members of the management team or employees are obliged to attend its The Chairman, Vice-chairmen and, if appropriate, the Secretary meetings, if so required, and collaborate with it and provide and/or deputy Secretary of the Board who are re-elected access to the information they have. The auditing firm can also members of the Board by agreement of the Shareholders’ be required to attend. One of its meetings will be used to Meeting will continue to hold the posts they previously had in evaluate the efficiency and compliance with the rules and the sphere of the Board without the need for new election and procedures of governance and prepare the information that the without detriment to the power of revoking those posts which Board has to approve and include within its annual public corresponds to the Board. This rule will not apply to the Chief documentation. Executive Officers or to members of the Executive Committees. The Audit and Compliance committee, via its Chairman, will The Board will always appoint an Audit and Compliance inform the Board at least twice a year. Committee. The Board’s Regulations will develop and complement the This Committee will consist of a minimum of three and a previous rules. As regards everything not envisaged in laws, the maximum of five members, all of them non-executive directors. corporate by-laws and the Board’s regulations, the Board’s The minimum powers of the committee are as follows: functioning will be governed by the Board’s rules to the extent WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 88
88 Annual Report 09
they are compatible with the nature of the committee and with e) To be familiar with and supervise the drawing up and the the independence of its activities. integrity of the Bank’s financial information and, where appropriate, the Group’s, reviewing compliance with the Article 14. of the Board’s Regulations on the Audit and regulatory requirements, the appropriate delimiting of the Compliance Committee perimeter of consolidation and correct application of the accounting criteria. Article 14. The Audit and Compliance Committee f) To serve as communication channel between the Board of 1. The Audit and Compliance Committee consists of a Directors and the auditing firm, and assess the findings of minimum of three and a maximum of five members, all of each audit and the replies of the management team to them non-executive directors. They are appointed by the the firm’s recommendations and mediate in cases of Board, bearing in mind, particularly for the Chairman, their discrepancies between it and the Board concerning the knowledge and experience in accounting, auditing or risk applicable principles and criteria when drawing up management. financial statements.
The Committee’s Chairman must be independent, and will g) To monitor fulfilment of the auditing contract, ensuring be replaced every four years. The outgoing Chairman can be that the opinion on the annual financial statements and re-elected one year after departing the post. the main contents of the auditing report are clearly and precisely written. 2. The Committee’s functions are as follows: h) Keep watch over the auditing firm’s independence, paying a) To report, through its Chairman or Secretary, at the Annual attention to those circumstances or issues that could put General Meeting, to whom approval of the annual it at risk and to anything else related to the auditing financial statements is submitted, on any matters raised process, as well as receive information and maintain with thereat by the shareholders on whom the committee has the auditor the communications envisaged in the authority. The Committee is responsible for knowing and, legislation on auditing and on the technical rules of where appropriate, responding to initiatives, suggestions auditing. And, specifically: or complaints raised by shareholders on its sphere of functions, and those submitted by the Bank’s Secretary i. require information on the percentage that the fees General. charged for all concepts represent against the total worldwide fees of the auditing firm and on the number b) To propose to the Board for submission to the of years that the partner responsible for the auditing Shareholders’ Meeting the appointment of the auditors, team providing service to the Bank has spent with it, as the terms of their engagement, the scope of their services well as warn the firm of the limit referred to in article 39 and, if appropriate, their revocation or non-renewal. of these regulations.
c) To review the Bank’s financial statements and the Group’s ii. If the auditing firm quits, examine the reasons for this. consolidated financial statements, vouch for compliance with legal requirements and correct application of iii. Keep watch over why the change in auditing firm is generally accepted accounting principles, as well as communicated as a relevant fact and, where report on proposed changes to these principles and appropriate, disseminate a communiqué on the criteria suggested by management. existence of disagreements with the outgoing firm in the event that this is the case. d) To supervise the internal auditing services. They must present every year to the Committee their work plan and i) To review, before dissemination, the regular financial inform it directly of events during its development, information which, as a listed company, the Bank must submitting a report at the end of the year. In order to make make public and ensure it is prepared in accordance with this supervision possible, the Bank’s Internal Auditing the same principles and practices as those used for the services will tend to the Committee’s information annual financial statements, for which purpose the requirements. auditing firm can revise the information to a limited extent. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 18_AUDIT_COMPLIANCE_2 16/2/10 13:04 Página 89
Banesto 89
j) To supervise compliance with the Group’s Code of 4. The Committee will meet, at least, four times a year and as Conduct in the securities markets, with the anti-money many times as called by its Chairman or as required by laundering manuals and procedures and, in general, the agreement of the committee or at the request of at least two Bank’s rules of governance, and make the required of its members. All members of the management team or proposals for their improvement. In particular, the employees are obliged to attend its meetings, if so required, Committee must receive information and, if appropriate, and collaborate with it and provide access to the information issue reports on disciplinary measures for members of they have. The auditing firm can also be required to attend. senior management. All of this without detriment to the One of its meetings will be used to evaluate the efficiency rules approved for prevention of money laundering. and compliance with the rules and procedures of governance and prepare the information that the Board has k) To be familiar with the reports and inspection activities of to approve and include within its annual public the supervision and control authorities and review documentation. compliance with the actions and measures that emanate from them. 5. The Committee can obtain external advice under the terms of article 23 of the Regulations. l) To adopt the necessary measures to: (1) receive, treat and keep the complaints received by the Bank on issues 6. The Committee, via its Chairman, will inform the Board of its related to the process of generating financial information, activity at the meetings called for this purpose, or in the first audits and internal controls; and (ii) make it possible for one afterwards when the Committee’s Chairman considers it employees, confidentially and, if considered appropriate, necessary. The minutes of the meetings are available to all anonymously to report irregularities of potential members of the Board who request them. significance, especially financial and accounting ones, detected within the sphere of the Bank. ******
m)To inform on the proposed changes to these regulations before their approval by the Board.
n) To supervise the internal control and management risk systems so that the main risks are identified, managed and known in sufficient time.
ñ) To report on, before approval by the Board or the Executive Committee, the creation or acquisition of participations in special purpose entities or domiciled in territories regarded as tax havens.
o) To report on linked operations submitted for the Board’s approval.
p) To report on the process of assessing its functioning.
3. The internal auditing services are within the Board’s sphere and report to it. Without detriment to this, the Committee will vouch for the independence and effectiveness of internal auditing, reporting on the proposals regarding the election, appointment, re-election and dismissal of the person in charge of the Bank’s internal auditing service. The Committee will receive regular information on the activities of internal auditing and will verify that senior management takes into account the conclusions and recommendations of its reports. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 19_COMPLIANCE_INTER-CONTROL 16/2/10 13:05 Página 90
90 Annual Report 09
COMPLIANCE AND INTERNAL CONTROL
THE COMPLIANCE AND INTERNAL CONTROL AREA, PART OF THE PRESIDENCY AREA, INTEGRATES THE FUNCTIONS REGARDING COMPLIANCE WITH VARIOUS REGULATIONS
LEGAL, INTERNAL RULES AND CONTROL AND MONITORING OF THE DIFFERENT INDICATORS AND PARAMETERS THE BANK HAS ESTABLISHED
Compliance Unit All areas and units involved in launching a new product participate and agree to the launch, guaranteeing that the 1. Conduct necessary work has been done and that the internal procedures for correct marketing have been fulfilled. Of note among the functions and activities is integral management of codes and monitoring application of policies, In 2009, the whole portfolio of lending products was reviewed, particularly: as well as the information provided to customers, both before • Banesto Group’s Code of Conduct. the marketing as well as afterwards with post-contractual information. The main elements are: • The Group’s Code of Conduct in the Securities Market, • Code of Conduct of Analysis Activity. • Launch of products, with the requirements that integrally • Conflict of Interests Policy. affect the product’s technical and commercial • Marketing of Products. development. • Guide to Commercial Actions, which regulates the The dissemination of codes and policies involves a series of marketing and publicity procedures related to the launch communication and training measures for all employees in key of products. aspects which they apply to their daily activity. The formal • Internal Manual of Product Marketing, designed to internal channel of communication is the Intranet Portal of establish the steps to be taken for selling to customers. Compliance, whose structure facilitates navigation by all users who want to access compliance material. All products and services launched involve: • Training the people who are going to sell them. 2. Prevention of Money Laundering • Documenting and preparing the support materials. Banesto has regulations for the prevention of money • Steps to be taken laundering, in accordance with the Group’s rules, in order to cooperate in the fight against drug trafficking, terrorism and Customers are provided with information of maximum organised crime. All the Bank’s units and all employees have to transparency and they are treated equally, as well as apply and comply with the regulations and are subject to the guaranteeing the confidentiality of their operations. training processes.
3. Marketing of products
Banesto has a demanding policy for the marketing of products and services. Its procedures and measures cover the while life cycle of products and services. The decision-making body that sets the policy is the Committee of Products. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 19_COMPLIANCE_INTER-CONTROL 16/2/10 13:05 Página 91
Banesto 91
INTERNAL CONTROL MODEL
THE MODEL WAS FLESHED OUT IN 2009 WITH A PANEL OF INDICATORS TO IMPROVE MANAGEMENT AND MONITORING OF THE BANK’S ELEMENTS OF CONTROL
Internal Control Model Certification Control Panel: CONTROL + The model implemented in 2007 under the most demanding In 2009, the internal control model was fleshed out with a panel international guidelines (Committee of Sponsoring of indicators of control based on international standards (COSO Organisations for the Commission on Fraudulent Financial II), broken down by types of risk in accordance with BIS II Reporting, Treadway Commission) continued its normal guidelines and adapted to our specific needs. development: One of the objectives is to have an integral view of the sphere Internal processes of supervision and contrasting of internal control, enabling us to access the information in great detail from various standpoints. There are certifications and assessments twice a year of all those involved in the model, as well as validations on its It is therefore integrated as a management tool in the areas and functioning by Internal Auditing. units so that it can be regularly used as a source of information, measurement and decisions. The Internal Control Unit watches over and supervises the model. The methodology for preparing the panel consists of:
It ensures the quality, consistency and updating of the 1. Definition of levels (areas and units, territorial zones, etc) model, reporting the results to senior management and the and focal points of control (operational, documentary, Board. technology, laws, accounting, etc). 2. Selection and classification of indicators to form the basic Certification by the auditing firm unit of the panel. Every year the control model is examined by the auditing 3. Objectivation and assessment of each indicator. firm in compliance with the Sarbanes-Oxley Law. 4. Weighted aggregation from lower to higher hierarchies. The objective of this law is to reduce the risk that the published information is uncertain, incomplete or wrong. It imposes obligations on all those involved in producing, certificating and analysing financial information.
The auditor certifies that “Banesto maintains effective internal controls in the generation of the financial information in the annual consolidated statements drawn up in accordance with the international rules on financial information adopted by the European Union.” WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 20-1-4_AUDIT_REPORT_FINANN_1 16/2/10 19:11 Página 92
92 Annual Report 09
AUDITOR’S REPORT AND CONSOLIDATED FINANCIAL STATEMENT WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 20-1-4_AUDIT_REPORT_FINANN_1 16/2/10 19:11 Página 93 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e Responsibility for the information
The Board of Directors of Banco Español de Crédito, S.A. expressly undertakes the general function of supervision of the Group's operations and discharges its duties in this respect directly and on a non- delegation basis.
Its Audit and Compliance Committee is entrusted, inter alia, with the following duties in the areas of information, accounting control and assessment of the compliance system:
1. To report, through its Chairman or Secretary, to the Annual General Meeting on any matters raised thereat by the shareholders on which the Committee has authority.
2. To propose the appointment of the auditors, the terms of their engagement, the scope of their services and, if appropriate, their revocation or non-renewal.
3. To review the Bank's financial statements and the Group's consolidated financial statements, monitoring compliance with legal requirements and the proper application of generally accepted accounting principles.
4. To serve as a communication channel between the Board of Directors and the auditors, and assess the findings of each audit and the replies of the management team to the auditors' recommendations.
5. To be familiar with the financial reporting process and the internal control systems.
6. To monitor any situations which might jeopardise the independence of the auditors and, specifically, to check the percentage that the fees paid to them in all connections represents with respect to the auditors' total revenues. The fees paid must be disclosed publicly.
7. To review, before public disclosure, the periodic financial information furnished by the Bank and Group to the markets and to their supervisory bodies, making sure that this information is prepared in accordance with the same principles and practices as those used for the financial statements.
8. To examine compliance with the Group's Code of Conduct relating to the securities markets, with the anti- money laundering manuals and procedures and, in general, with the Bank's rules of governance, and to make the required proposals for improvement.
For these purposes, the Audit and Compliance Committee meets whenever it deems it appropriate with the persons in charge of the Group's business areas and with those in charge of the support and risk management areas, in particular with the Controller and with the Group's Internal Audit Division, and with the external auditors to analyse their reports and recommendations.
Our external auditors, Deloitte, examine each year the financial statements of substantially all the companies composing the Group to issue their professional opinion thereon. The external auditors are regularly informed of our controls and procedures; they define and perform their audit tests with full freedom and have free access to the Bank's Chairwoman, Deputy Chairman and CEO, to set forth their conclusions and discuss their recommendations for improving the efficiency of the internal control systems.
The Audit and Compliance Committee meets periodically with the external auditors to ensure the effectiveness of their audit and to analyse any situations which might jeopardise their independence. In this connection, following the most advanced practices in shareholder information transparency (as described in Note 42 to the consolidated financial statements), it is hereby reported that in 2009 the fees paid for the WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e financial audits performed by the Deloitte worldwide organisation amounted to EUR 1,482 thousand, those paid for other reports required by the supervisory bodies amounted to EUR 105 thousand and those paid for other work amounted to EUR 649 thousand.
To facilitate analysis of the situations which might jeopardise the independence of our auditors from a quantitative and qualitative standpoint, we set forth below significant information relating to the criteria established by the O'Malley Panel and in other relevant international documents for the purpose of evaluating the effectiveness of the external audit function:
1. In 2009 the ratio of the amount billed by our main auditor for non-attest work to the fees for financial audits and for other reports required by the supervisory bodies was 40.89%.
The services commissioned from our auditors meet the independence requirements stipulated by Law 44/2002, of 22 November, on Financial System Reform Measures and by the Regulations governing the Bank's Board of Directors.
2. The relative importance of the fees generated by a given customer with respect to the total fees of the audit firm:
The Group has adopted the policy of not engaging audit firms if the estimated fees for all services exceed 2.0% of their total revenues.
In the case of Deloitte and the Deloitte worldwide organisation, this ratio was 0.51% and 0.012% of their total revenues.
Based on the foregoing, the Audit and Compliance Committee considers that there are no objective reasons to question the independence of our auditors.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e Banco Español de Crédito, S.A. and Companies composing the Banco Español de Crédito Group (Banesto Group)
Consolidated Financial Statements and Directors’ Report for the year ended 31 December 2009, together with Auditors’ Report
Translation of a report originally issued in Spanish based on our work performed in accordance with generally accepted auditing standards in Spain and of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
BANCO ESPAÑOL DE CRÉDITO GROUP CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros)
ASSETS Note 2009 2008(*) LIABILITIES AND EQUITY Note 2009 2008(*)
CASH AND BALANCES WITH CENTRAL BANKS 1,683,846 1,688,153 LIABILITIES FINANCIAL LIABILITIES HELD FOR TRADING: 4,578,804 3,950,718 FINANCIAL ASSETS HELD FOR TRADING: 6,836,998 5,083,815 Trading derivatives 9 4,418,011 3,913,573 Debt instruments 7 1,026,643 402,154 Short positions 160,793 37,145 Equity instruments 8 1,456,905 472,996 OTHER FINANCIAL LIABILITIES AT FAIR VALUE Trading derivatives 9 4,353,450 4,208,665 THROUGH PROFIT OR LOSS - -
OTHER FINANCIAL ASSETS AT FAIR VALUE FINANCIAL LIABILITIES AT AMORTISED COST: 107,095,326 103,445,656 THROUGH PROFIT OR LOSS: 2,272,313 2,191,162 Deposits from central banks 17 2,526,643 1,952,343 Loans and advances to credit institutions 6 1,751,237 1,793,839 Deposits from credit institutions 17 11,501,181 10,454,275 Debt instruments 7 383,149 253,887 Customer deposits 18 56,717,721 57,589,628 Equity instruments 8 137,927 143,436 Marketable debt securities 19 29,664,452 28,315,103 Subordinated liabilities 20 2,593,414 2,236,835 Other financial liabilities 21 4,091,915 2,897,472
AVAILABLE-FOR-SALE FINANCIAL ASSETS: 7,617,523 6,742,582 CHANGES IN THE FAIR VALUE OF HEDGED ITEMS Debt instruments 7 7,270,941 6,620,409 IN PORTFOLIO HEDGES OF INTEREST RATE RISK 31 806,418 440,135 Equity instruments 8 346,582 122,173 HEDGING DERIVATIVES 11 301,029 577,091 LOANS AND RECEIVABLES: 98,878,760 98,209,587 Loans and advances to credit institutions 6 22,616,417 19,700,685 LIABILITIES ASSOCIATED WITH NON-CURRENT Loans and advances to customers 10 75,632,681 77,772,663 ASSETS HELD FOR SALE - - Debt instruments 7 629,662 736,239 LIABILITIES UNDER INSURANCE CONTRACTS 13 4,387,146 3,435,629 HELD-TO-MATURITY INVESTMENTS 7 2,076,328 - PROVISIONS: 22 2,599,571 2,532,290 CHANGES IN THE FAIR VALUE OF HEDGED Provisions for pensions and similar obligations 2,175,466 2,215,208 ITEMS IN PORTFOLIO HEDGES OF INTEREST Provisions for contingent liabilities and commitments 112,966 102,092 RATE RISK 31 61,448 - Other provisions 311,139 214,990
HEDGING DERIVATIVES 11 1,394,098 1,194,849 TAX LIABILITIES: 23 293,766 394,822 NON-CURRENT ASSETS HELD FOR SALE 14 2,030,878 1,556,174 Current 242,993 326,095 Deferred 50,773 68,727 INVESTMENTS 12 18,623 16,722 OTHER LIABILITIES 16 686,043 548,442 TOTAL LIABILITIES 120,748,103 115,324,783 INSURANCE CONTRACTS LINKED TO PENSIONS 22 227,609 248,025 SHAREHOLDERS' EQUITY: 26 5,299,362 5,069,766 Share capital REINSURANCE ASSETS 13 152,824 199,411 Registered 27 543,036 543,036 Reserves 28 4,449,451 4,055,165 TANGIBLE ASSETS: 14 1,258,723 1,225,546 Accumulated reserves 4,444,247 4,052,869 Property, plant and equipment Reserves of entities accounted for using the equity method 5,204 2,296 For own use 1,133,388 1,154,954 Other equity instruments - - Investment property 125,335 70,592 Treasury shares 29 (29,527) (36,074) Profit for the year attributable to the Parent 559,803 779,844 INTANGIBLE ASSETS: 15 69,200 58,524 Dividends and remuneration (223,401) (272,205) Other intangible assets 69,200 58,524 VALUATION ADJUSTMENTS: 25 132,009 41,541 TAX ASSETS: 23 959,864 1,099,929 Available-for-sale financial assets 20,843 (48,614) Current 51,662 205,235 Cash flow hedges 111,180 90,115 Deferred 908,202 894,694 Exchange differences and other (14) 40
OTHER ASSETS: 16 681,604 964,494 NON-CONTROLLING INTERESTS: 24 41,165 42,883 Inventories 440,443 566,876 Other 41,165 42,883 Other 241,161 397,618 TOTAL EQUITY 5,472,536 5,154,190 TOTAL ASSETS 126,220,639 120,478,973 TOTAL LIABILITIES AND EQUITY 126,220,639 120,478,973 Memorandum items: Contingent liabilities 30 10,159,684 10,896,866 Contingent commitments 30 14,365,941 16,218,347
(*) Presented for comparison purposes only.
The accompanying Notes 1 to 49 and Appendices I to V are an integral part of the consolidated balance sheet at 31 December 2009. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
BANCO ESPAÑOL DE CRÉDITO GROUP CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros) Income/(Expenses) Note 2009 2008 (*) INTEREST AND SIMILAR INCOME 33 3,717,540 5,471,597 INTEREST EXPENSE AND SIMILAR CHARGES 34 (1,921,101) (3,756,531) RETURN ON EQUITY REFUNDABLE ON DEMAND - - NET INTEREST INCOME 1,796,439 1,715,066 INCOME FROM EQUITY INSTRUMENTS 35 44,570 59,237 SHARE OF RESULTS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD 36 3,269 1,874 FEE AND COMMISSION INCOME 37 662,111 705,699 FEE AND COMMISSION EXPENSE 38 (120,082) (144,025) GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net) 39 208,315 109,400 Held for trading 110,293 80,848 Financial instruments not measured at fair value through profit or loss 98,041 29,260 Hedge accounting transactions not included in interest 31 (154) - Other 134 (708) EXCHANGE DIFFERENCES (net) 26,707 41,867 OTHER OPERATING INCOME 40 1,588,882 2,189,420 Income from insurance and reinsurance contracts issued 1,517,059 2,000,274 Sales and income from the provision of non-financial services 47,278 75,401 Other 24,545 113,745 OTHER OPERATING EXPENSES 40 (1,546,760) (2,199,840) Expenses of insurance and reinsurance contracts (1,459,473) (2,027,516) Changes in inventories (2,500) (18,107) Other (84,787) (154,217) GROSS INCOME 2,663,451 2,478,698 ADMINISTRATIVE EXPENSES (920,372) (921,049) Staff costs 41 (664,555) (673,383) Other general administrative expenses 42 (255,817) (247,666) DEPRECIATION AND AMORTISATION CHARGE 14, 15 (105,092) (102,317) PROVISIONS (net) 2-v, 22 (229,166) (16,271) IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net) (517,269) (321,922) Loans and receivables 10 (451,594) (299,799) Other financial instruments not measured at fair value through profit or loss 8 (65,675) (22,123) PROFIT FROM OPERATIONS 891,552 1,117,139 IMPAIRMENT LOSSES ON OTHER ASSETS (net): (26,218) (6,882) Goodwill and other intangible assets 15 6 4 Other assets 14,16 (26,224) (6,886) GAINS/(LOSSES) ON DISPOSAL OF ASSETS NOT CLASSIFIED AS NON-CURRENT ASSETS HELD FOR SALE 43 (1,501) (455) NEGATIVE GOODWILL ON BUSINESS COMBINATIONS - - GAINS/(LOSSES) ON NON-CURRENT ASSETS HELD FOR SALE NOT CLASSIFIED AS DISCONTINUED OPERATIONS 14 (84,496) (28,515) PROFIT BEFORE TAX 779,337 1,081,287 INCOME TAX 23 (220,513) (306,278) PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS 558,824 775,009 PROFIT FROM DISCONTINUED OPERATIONS (net) - - CONSOLIDATED PROFIT FOR THE YEAR 558,824 775,009 PROFIT ATTRIBUTABLE TO THE PARENT 559,803 779,844 LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS (979) (4,835) EARNINGS PER SHARE: Basic earnings per share (euros) 4 0.82 1.14 Diluted earnings per share (euros) 4 0.82 1.14 (*) Presented for comparison purposes only. The accompanying Notes 1 to 49 and Appendices I to V are an integral part of the consolidated income statement for 2009. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
BANCO ESPAÑOL DE CRÉDITO GROUP CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros)
2009 2008 (*) A) CONSOLIDATED PROFIT FOR THE YEAR 558,824 775,009 B) OTHER RECOGNISED INCOME AND EXPENSE 90,468 155,965 Available-for-sale financial assets 125,422 (28,659) Revaluation gains (losses) 186,546 11,016 Amounts transferred to income statement (61,124) (39,675) Cash flow hedges 44,309 264,609 Revaluation gains (losses) 77,480 245,420 Amounts transferred to income statement (33,171) 19,189 Hedges of net investments in foreign operations - - Exchange differences (57) 91 Revaluation gains (losses) (57) 91 Non-current assets held for sale - - Actuarial gains (losses) on pension plans - - Entities accounted for using the equity method 3 (4,553) Revaluation gains (losses) 3 (4,694) Amounts transferred to income statement 141 Other recognised income and expense - - Income tax (79,209) (75,523) TOTAL RECOGNISED INCOME AND EXPENSE (A + B) 649,292 930,974 C 1) Attributable to the Parent 650,271 935,809 C 2) Attributable to non-controlling interests (979) (4,835)
(*) Presented for comparison purposes only. The accompanying Notes 1 to 49 and Appendices I to V are an integral part of the consolidated statement of recognised income and expense for 2009. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
BANCO ESPAÑOL DE CRÉDITO GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros)
EQUITY ATTRIBUTABLE TO THE PARENT SHAREHOLDERS' EQUITY Reserves of Entities Accounted for Profit Using the Other Less: Attributable Less: Total Non- Share Share Accumulated Equity Equity Treasury to the Dividends and Shareholders' Valuation Controlling Capital Premium Reserves Method Instruments Shares Parent Remuneration Equity Adjustments Total Interests Equity Balance at 01/01/09 543,036 - 4,052,869 2,296 - (36,074) 779,844 (272,205) 5,069,766 41,541 5,111,307 42,883 5,154,190 Adjustments due to changes in accounting policies ------Adjustments due to errors ------Adjusted beginning balance 543,036 - 4,052,869 2,296 - (36,074) 779,844 (272,205) 5,069,766 41,541 5,111,307 42,883 5,154,190 Total recognised income/(expense) ------559,803 - 559,803 90,468 650,271 (979) 649,292 Other changes in equity Distribution of dividends ------(336,133) (336,133) - (336,133) - (336,133) Transactions involving own equity instruments (net) (Note 29) - - (621) - - 6,547 - - 5,926 - 5,926 - 5,926 Transfers between equity items - - 391,999 2,908 - - (779,844) 384,937 - - - - - Other increases (decreases) in equity ------(739) (739)
Balance at 31/12/09 543,036 - 4,444,247 5,204 - (29,527) 559,803 (223,401) 5,299,362 132,009 5,431,371 41,165 5,472,536
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
BANCO ESPAÑOL DE CRÉDITO GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2008 AND 2007 (NOTES 1 TO 4) (Thousands of Euros)
EQUITY ATTRIBUTABLE TO THE PARENT SHAREHOLDERS' EQUITY Reserves of Entities Accounted for Profit Using the Other Less: Attributable Less: Total Non- Share Share Accumulated Equity Equity Treasury to the Dividends and Shareholders' Valuation Controlling Capital Premium Reserves Method Instruments Shares Parent Remuneration Equity Adjustments Total Interests Equity Balance at 01/01/08 548,521 - 3,768,093 1,809 1,778 (86,917) 764,567 (249,959) 4,747,892 (114,424) 4,633,468 46,728 4,680,196 Adjustments due to changes in accounting policies ------Adjustments due to errors ------Adjusted beginning balance 548,521 - 3,768,093 1,809 1,778 (86,917) 764,567 (249,959) 4,747,892 (114,424) 4,633,468 46,728 4,680,196 Total recognised income/(expense) ------779,844 - 779,844 155,965 935,809 (4,835) 930,974 Other changes in equity Capital reductions (5,485) - (78,321) - - - - - (83,876) - (83,876) - (83,806) Distribution of - dividends ------(411,071) (411,071) - (411,071) - (411,071) Transactions involving own equity instruments (net) (Note 29) - - (12,088) - - 50,843 - - 38,900 - 38,900 - 38,900 Transfers between equity items - - 375,255 487 - - (764,567) 388,825 - - - - - Equity-instrument-based payments (Note 29) - - - - (1,778) - - - (1,778) - (1,778) - (1,778) Other increases (decreases) in equity - - (215) - - - - - (215) - (215) 990 775
Balance at 31/12/08 543,036 - 4,052,869 2,296 - (36,074) 779,844 (272,205) 5,069,766 41,541 5,111,307 42,883 5,154,190
(*) Presented for comparison purposes only. The accompanying Notes 1 to 49 and Appendices I to V are an integral part of the consolidated statement of changes in total equity for 2009.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
BANCO ESPAÑOL DE CRÉDITO GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros)
2009 2008 (*)
1. CASH FLOWS FROM OPERATING ACTIVITIES 2,423,261 982,724 Profit for the year attributable to the Parent 558,824 775,009 Adjustments made to obtain the cash flows from operating activities: Depreciation and amortisation charge 105,092 102,317 Other adjustments 1,842,502 2,027,167 Net increase/decrease in operating assets: Financial assets held for trading- 1,753,183 478,008 Debt instruments 624,489 (379,388) Other equity instruments 983,909 (1,163,073) Trading derivatives 144,785 2,020,469 Other financial assets at fair value through profit or loss- 81,151 698,400 Loans and advances to credit institutions (42,602) 888,548 Loans and advances to customers - (504) Debt instruments 129,262 (31,587) Other equity instruments (5,509) (158,057) Available-for-sale financial assets- 839,102 828,806 Debt instruments 614,693 1,071,380 Other equity instruments 224,409 (242,574) Loans and receivables- 943,770 3,096,279 Loans and advances to credit institutions 2,738,735 (119,731) Loans and advances to customers (1,688,388) 3,005,931 Debt instruments (106,577) 210,079 Other operating assets 416,349 2,148,724 Net increase/decrease in operating liabilities: Financial liabilities held for trading- 628,086 1,321,820 Trading derivatives 504,438 1,381,554 Short positions 123,648 (59,734) Financial liabilities at amortised cost- 3,795,440 4,706,884 Deposits from credit institutions 1,046,906 112,834 Deposits from central banks 574,300 (3,317) Customer deposits (871,907) 4,842,180 Marketable debt securities 1,715,632 (421,979) Other financial liabilities 1,330,509 177,166 Other operating liabilities (502,199) (564,422) Income tax recovered/paid 29,071 (135,834) WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
BANESTO GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros)
2009 2008 (*)
2. CASH FLOWS FROM INVESTING ACTIVITIES (2,220,281) (154,753) Payments Tangible assets (135,101) (276,709) Intangible assets (45,043) (48,708) Investments (4,924) - Proceeds (2,076,328) Tangible assets 39,620 168,562 Intangible assets - 2,102 Investments 1,495 - 3. CASH FLOWS FROM FINANCING ACTIVITIES (29,718) (371,944) Payments Dividends (358,128) (403,656) Subordinated liabilities (140,887) (500,000) Redemption of own equity instruments - (5,485) Other payments related to financing activities (28,169) (75,648) Proceeds Subordinated liabilities 497,466 611,855 Other proceeds related to financing activities - 990 4. EFFECT OF FOREIGN EXCHANGE RATE CHANGES (572) 10,276 5. NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS (1+2+3+4) 172,690 466,303 6. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,390,043 1,923,740 7. CASH AND CASH EQUIVALENTS AT END OF YEAR 2,562,733 2,390,043 MEMORANDUM ITEMS COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR Cash 255,025 263,073 Cash equivalents at central banks 1,428,821 1,425,080 Other financial assets 878,887 701,890 Less: Bank overdrafts refundable on demand - - TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR 2,562,733 2,390,043
(*) Presented for comparison purposes only. The accompanying Notes 1 to 49 and Appendices I to V are an integral part of the consolidated statement of cash flows for 2009. WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49). In the event of a discrepancy, the Spanish-language version prevails.
Banesto Group
Notes to the Consolidated Financial Statements for the year ended 31 December 2009
1. Introduction, basis of presentation of the consolidated financial statements, use of estimates, basis of consolidation and other information
a) Introduction
Banco Español de Crédito, S.A. (“the Bank” or “Banesto”) 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 the website of the Group (www.banesto.es) and at its registered office at Gran Vía de Hortaleza, 3, Madrid.
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, the Banco Español de Crédito Group (“the Group” or “the Banesto Group”). Therefore, the Bank is obliged to prepare, in addition to its own individual financial statements, the Group's consolidated financial statements.
b) Basis of presentation of the consolidated financial statements
The consolidated financial statements for 2008 were prepared by the Bank's directors at the Board meeting on 20 January 2009 in accordance with International Financial Reporting Standards as adopted by the European Union and with Bank of Spain Circular 4/2004, of 22 December, using the basis of consolidation, accounting policies and measurement bases set forth in Note 2 to the 2008 consolidated financial statements, which were approved by the shareholders at the Annual General Meeting held on 25 February 2009.
The Group's consolidated financial statements for 2009 were prepared by the Bank's directors at the Board meeting on 20 January 2010 in accordance with International Financial Reporting Standards as adopted by the European Union and with Bank of Spain Circular 4/2004, of 22 December, and, accordingly, they present fairly the Group's equity and financial position at 31 December 2009, and the consolidated results of its operations, the changes in consolidated equity and the consolidated cash flows in the year then ended. These consolidated financial statements for 2009 have not yet been approved by the shareholders at the Annual General Meeting. However, the Bank's Board of Directors considers that the aforementioned consolidated financial statements will be approved without any changes.
All the figures relating to 2008 included in these notes to the consolidated financial statements are presented for comparison purposes only.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The following standards and interpretations adopted by the European Union and by the Group came into force in 2009, without having a material effect on the consolidated financial statements:
IFRS 8 Operating Segments: IFRS 8 sets out requirements for disclosure of information about an entity’s operating segments and replaces IAS 14. The main new development introduced by this new standard is that it requires an entity to adopt a management approach when reporting on the financial performance of its business segments. The information to be reported will generally be that used internally by management to assess the profit or loss of the segments and to allocate resources among them.
Revised IAS 23 Borrowing Costs: the elimination of the option of the immediate recognition as an expense of borrowing costs relating to assets that take a substantial period of time to get ready for use or sale.
Amendment to IFRS 2 Share-based Payment: the objective of the amendment to IFRS 2 is basically to clarify the concepts of vesting conditions and cancellations in share-based payments.
Interpretation IFRIC 13 Customer Loyalty Programmes: this interpretation indicates how to recognise certain loyalty awards granted to customers in the form of points that provide discounts on future purchases of other goods or services.
Interpretation IFRIC 14 on the scope of application of IAS 19: this interpretation provides general guidance on how to ascertain the limit in IAS 19 Employee Benefits on the amount of the surplus that can be recognised as an asset. It also explains how pension assets or liabilities can be affected when there is a statutory or contractual minimum funding requirement and establishes that the entity needs to recognise an additional liability if it has a contractual obligation to make additional contributions to the plan and its capacity to recover them is restricted.
Amendments to IAS 1 Presentation of Financial Statements: these amendments change certain requirements for the presentation of financial statements and require additional disclosures in certain circumstances, in order to improve users’ ability to analyse and compare the information provided in financial statements. The amendments distinguish between changes in equity arising from transactions with owners acting in their capacity as owners (e.g. dividends and share buy- backs) and changes arising from “non-owner” transactions. IAS 1 also introduces new reporting requirements when the entity applies a change in accounting policy retrospectively, makes a restatement or reclassifies items in previously issued statements.
Amendments to IAS 32 Financial Instruments and IAS 1 Presentation of Financial Statements: these amendments relate to the classification of certain financial instruments issued which, although because of their characteristics it might be concluded that they evidence a residual interest in the entity, should be classified as financial liabilities, since their features include that of being redeemable. The amendments enable the classification of certain of these financial instruments as equity, provided they meet certain criteria, e.g. that at all times they evidence a residual interest in the net assets of the entity and are the most subordinated class.
Amendment to IFRS 7 Financial Instruments: Disclosures: require extended disclosures about fair value measures and liquidity risk, the most significant for the former being the disclosure requirement for financial instruments measured at fair value to be classified using the fair value measurement hierarchy.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Amendment to IFRIC 9 and IAS 39 Embedded Derivatives: the amendment makes clear that, on reclassification of a financial instrument initially classified as “at fair value through profit or loss”, the entity would be required to assess whether an embedded derivative is required to be separated from the host contract. If the fair value of an embedded derivative cannot be measured separately, the financial instrument containing the embedded derivative may not be reclassified.
At the date on which these consolidated financial statements were authorised for issue certain new standards had been adopted by the European Union that will come into force for the Group in 2010. The directors consider that the entry into force of these standards will not have a significant impact on the Group’s consolidated financial position:
Amendment to IAS 39 Financial Instruments: Recognition and Measurement: the aim of this amendment is to clarify two specific hedge accounting issues: (a) when inflation can be designated as a hedged risk and (b) in which cases purchased options can be designated as a hedging instrument. Under the amendment, inflation can only be designated as a hedged risk if the inflation portion is a contractually specified portion of the cash flows to be hedged. With respect to options, only the part related to the intrinsic value, and not that related to the time value, can be designated as a hedging instrument.
The revised IFRS 3 Business Combinations and the amendments to IAS 27 Consolidated and Separate Financial Statements: give rise to significant changes in several matters relating to accounting for business combinations, which generally place greater emphasis on the use of fair value. The significant changes include the accounting treatment of acquisition costs, which must be expensed, as opposed to the current accounting treatment of recognising them as an increase in the cost of the business combination; in step acquisitions the acquirer must remeasure its investment at fair value on the date that control is obtained; and there is an option to measure at fair value the non-controlling interests of the acquiree, as opposed to the single current treatment of measuring them as the proportionate share of the fair value of the net assets acquired.
Interpretation IFRIC 12 Service Concession Arrangements: addresses how service concession operators should apply existing IFRSs to account for the obligations they undertake and the rights they receive in arrangements whereby a government of other public entity grants contracts for the supply of public services.
IFRIC 15 Agreements for the Construction of Real Estate: this interpretation indicates when revenue from the construction of real estate should be recognised, on the basis of whether the agreement involves a construction contract, a sale of goods or the rendering of services.
IFRIC 16 Hedges of a Net Investment in a Foreign Operation: this interpretation specifies the nature of the hedged risk and the amount of the hedged item for which a hedging relationship may be designated, when the parent entity holds the investment directly or through subsidiaries.
IFRIC 17 Distributions of Non-Cash Assets to Owners: this interpretation addresses the accounting treatment of the distribution of non-cash assets to owners (“dividends”), although its scope does not include distributions of assets within a group or between jointly controlled entities. The interpretation requires an entity to measure the dividend payable at the fair value of the assets to be distributed and to recognise any difference with respect to the carrying amount of the asset in profit or loss.
Interpretation IFRIC 18 Transfers of Assets from Customers: this interpretation clarifies the accounting treatment of transfers of items of property, plant and equipment received from customers or of cash to acquire or construct an item of property, plant and equipment.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Amendment to IAS 32 Classification of rights issues: when rights issues (rights, options or warrants) denominated in a foreign currency are offered to acquire a fixed number of shares for a fixed amount, they are considered equity instruments, regardless of the currency in which this fixed amount is denominated and provided other requirements of the standard are met.
Set forth below are the Standards and Interpretations not yet adopted by the European Union, together with the expected date of adoption for the Group based on the application date required by the Standard. The impact of the application of these Standards has not yet been assessed:
Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement (1 January 2013): The application of IFRIC 14 obliged entities in certain circumstances to recognise prepayments of a minimum funding requirement for a defined benefit plan as an expense. This amendment would remove this effect and these prepayments would be treated in the same way as any other and, accordingly, would be recognised as an asset.
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (1 July 2010): this interpretation addresses the accounting treatment when a debtor issues equity instruments to a creditor to extinguish all or part of a financial liability. The interpretation is not applicable in this type of transaction if the counterparties in question are shareholders or related parties and act as such or if the exchange of debt for equity instruments was provided for in the terms of the original agreement. In this case, the issue of equity instruments would be measured at fair value at the maturity date of the liability and any difference between this value and the carrying amount of the liability would be recognised in profit or loss.
Amendment to IFRS 2 Share-based Payment (1 January 2010): at times share-based payments are not settled by the entity that receives the goods or services, but rather by its parent or another group entity. The proposed amendment indicates that, even in this case, the entity that receives the goods must recognise this transaction regardless of whether another group entity settles the related amount and of whether settlement is made in cash or in shares.
Revised IAS 24 Related Party Disclosures (1 January 2011): this addresses the disclosures to be made on related parties in financial statements. It introduces a partial exemption for certain disclosures when the relationship arises between subsidiaries or with entities related to the state (or equivalent government institution), revises the definition of related party and clarifies certain relationships that were not previously explicit in the standard.
IFRS 9 Financial Instruments (1 January 2013): in the future this will replace the current part of IAS 39 relating to classification and measurement. There are very significant differences from the current standard, including the approval of a new classification model based on only two classifications (those measured at amortised cost and those measured at fair value), the disappearance of current classifications such as “held-to-maturity investments” and “available-for- sale financial assets”, impairment analysis only for assets carried at amortised cost and the non- bifurcation of embedded derivatives in financial instruments.
The principal accounting policies and measurement bases applied in preparing the Group's consolidated financial statements for 2009 are described in Note 2. All mandatory accounting policies and measurement bases with a material effect on the consolidated financial statements for 2009 were applied in their preparation.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
c) Use of estimates
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 Group's consolidated financial statements for 2009 estimates were occasionally made by the senior executives of the Group and of the consolidated entities, later ratified by the directors, in order to quantify certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates relate basically to the following:
- The impairment losses on certain assets (see Notes 6, 7, 8, 9, 10, 12 and 14);
- The assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments (see Notes 2-v and 2-w);
- The useful life of the tangible and intangible assets (see Notes 14 and 15); and
Although these estimates were made on the basis of the best information available at 2009 year-end, future events might make it necessary to change these estimates in coming years. Changes in accounting estimates would be applied prospectively in accordance with the requirements of IAS 8, recognising the effects of any change in estimates in the related consolidated income statement. d) Basis of consolidation
i. Subsidiaries
“Subsidiaries” are defined as entities over which the Bank has the capacity to exercise management control; this capacity 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, for example, there are agreements with other shareholders of the investee that give the Bank control. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all material balances and transactions between consolidated entities and between consolidated entities and the Bank are eliminated on consolidation.
On acquisition of a subsidiary, its assets, liabilities and contingent liabilities are recognised at fair value at the date of acquisition. Any positive differences between the acquisition cost and the fair values of the identifiable net assets acquired are recognised as goodwill. Negative differences are charged to income on the date of acquisition.
Additionally, the share of third parties of the Group's equity is presented under “Non-Controlling Interests” in the consolidated balance sheet (see Note 24) and their share of the profit for the year is presented under “Profit Attributable to Non-Controlling Interests” in the consolidated income statement.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
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.
ii. Interests in joint ventures (jointly controlled entities)
“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”) undertake a business activity which is subject to joint control so as to share the power to govern the financial and operating policies of an entity, or another business activity, in order to benefit from its operations. Therefore, any strategic financial or operating decision affecting the joint venture requires the unanimous consent of the venturers.
The financial statements of investees classified as joint ventures are proportionately consolidated with those of the Bank and, therefore, the aggregation of balances and subsequent eliminations are made only in proportion to the Group's ownership interest in the capital of these entities.
iii. Associates
“Associates” are entities over which the Bank is in a position to exercise significant influence, but not control or joint control, usually because it holds 20% or more of the voting power of the investee.
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.
iv. Acquisitions and disposals
Appendices I, II and III contain salient information on the subsidiaries, jointly controlled entities and associates, respectively. Note 3-b provides information on the most significant acquisitions and disposals in 2009 and 2008. e) Challenges of corporate resolutions
In 1995 and 1996, the former directors of the Bank who had been replaced by decision of the Bank of Spain's Executive Council on 28 December 1993 filed claims challenging certain corporate resolutions adopted by the shareholders at the Annual General Meetings in 1994 and 1995, which approved, inter alia, the Bank's financial restructuring plan and the 1994 financial statements of the Bank and the Group. In 2000 Madrid Provincial Appellate Court decisions dismissed all the appeals filed by the plaintiffs in connection with the claim filed challenging the legality of the resolutions adopted by the Annual General Meeting approving the financial restructuring plan; the plaintiffs subsequently filed cassation appeals against these decisions. On 27 March 2009, the Supreme Court handed down judgment dismissing these appeals, thereby upholding the judgments in first and second instance that were favourable to the Bank. The claim filed against the approval of the 1994 financial statements was also dismissed in 2000 by the Court of First Instance and this decision was subsequently appealed against by the plaintiffs. In 2003 the Provincial Appellate Court dismissed in full the appeal and the notice given by the appellants of their intention to file a cassation appeal. The appellants subsequently filed an appeal for reconsideration, which was again rejected by the Provincial Appellate Court, and, consequently, they filed an appeal against the
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
denial of leave to appeal before the Supreme Court. The Bank's directors and its legal advisers consider that these claims will not have any effect. f) Capital
Bank of Spain Circular 3/2008, of 22 May, on the calculation and control of minimum capital requirements, regulates the minimum capital requirements for Spanish credit institutions -both as individual entities and as consolidated groups- and how to calculate them, as well as the various internal capital adequacy assessment processes they should have in place and the information they should disclose to the market.
Bank of Spain Circular 3/2008 establishes the elements that should be classified as capital for the purpose of compliance with the minimum capital requirements set forth therein. Under this Circular, capital is classified into Tier 1 and Tier 2 capital; it differs from the capital calculated in accordance with EU-IFRSs, since the Circular considers certain items as capital and establishes certain mandatory deductions from capital which are not envisaged under EU-IFRSs. Additionally, the consolidation and measurement bases to be applied to investees for the purpose of calculating the Group's minimum capital requirements pursuant to current standards differ from those applied in the preparation of these consolidated financial statements, which also gives rise to differences in the calculation of capital under Bank of Spain standards and EU-IFRSs.
The minimum capital requirements established by Bank of Spain Circular 3/2008 are calculated on the basis of the Group's exposure to credit risk and dilution risk (on the basis of the assets, obligations and other memorandum items that present these risks, depending on their amounts, characteristics, counterparties, guarantees, etc.), to counterparty risk and position and settlement risk in the trading book, to foreign exchange risk (on the basis of the overall net foreign currency position) and to operational risk. Additionally, the Group is subject to compliance with the risk concentration limits established in Circular 3/2008 and with the requirements concerning internal corporate governance, internal capital adequacy assessment, measurement of interest rate risk and information to be disclosed to the market also set forth therein. With a view to guaranteeing compliance with the aforementioned objectives, the Group performs integrated management of these risks, in accordance with its internal policies (see Note 48).
At 31 December 2009 and 2008, and throughout these years, the eligible capital of the Group and of the Group entities subject to this requirement at individual level exceeded the minimum required under the regulations then in force.
The calculation of the minimum regulatory capital requirements, the so-called Pillar 1, is supplemented with an internal capital adequacy assessment and supervisory review process, also called Pillar 2. The Group's internal capital adequacy assessment process is based on the internal model for the quantification of the economic capital required on the basis of the Group's overall risk profile to maintain a target rating of AA. Finally, Basel II standards establish, through Pillar 3, strict transparency requirements regarding the information on risks to be disclosed to the market. g) Deposit Guarantee Fund
The Bank participates in the Deposit Guarantee Fund. The contributions made to this Fund amounted to EUR 19,693 thousand in 2009 (2008: EUR 17,296 thousand) and this expense is recognised under “Other Operating Expenses” in the consolidated income statement for 2009 (see Note 40).
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
h) Environmental impact
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.
i) Customer care service annual report
As required by Article 17 of Ministry of Economy Order ECO/734/2004, of 11 March, on Customer Care Departments and Services and the Customer Ombudsmen of Financial Institutions, the Annual Report presented by the Head of the Service to the Board meeting held on 20 January 2010 is summarised in the Directors' Report.
j) Events after the reporting period
From 1 January 2010 to the date on which these consolidated financial statements were authorised for issue no events took place having a material effect on the consolidated financial statements that have not been described in the other notes to the financial statements.
2. Accounting policies and measurement bases
The accounting policies and rules and measurement bases applied in preparing the Group's consolidated financial statements were as follows:
a) Definitions and classification of financial instruments
i. Definitions
A “financial instrument” is any contract that gives rise to a financial asset of one entity and to a financial liability or equity instrument of another entity.
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 a specified variable, sometimes called the underlying (such as an interest rate, financial instrument price, commodity price, foreign exchange rate, credit rating or index thereof), 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.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
“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:
- Investments in associates (see Note 12).
- Rights and obligations under employee benefit plans (see Notes 2-v and 2-w).
- Rights and obligations under insurance contracts (see Note 13).
- Contracts and obligations relating to transactions involving payments based on own equity instruments (see Note 41). ii. Classification of financial assets for measurement purposes
Financial assets are generally 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 do not meet the definition of a financial guarantee contract and have not been designated as hedging instruments.
- Other financial assets at fair value through profit or loss: this category includes hybrid financial instruments containing one or more embedded derivatives that do not significantly modify the cash flows that otherwise would be generated by the instrument and whose separation is prohibited. These instruments must be assigned to this category from their initial recognition, and can only be assigned thereto if this reduces accounting mismatches or if they are part of a group of financial instruments whose performance is evaluated in accordance with a documented risk management or investment strategy.
Financial instruments classified in this category are permanently subject to an integrated and consistent system of measuring, managing and controlling risks and profit or loss that enables all the financial instruments involved to be monitored and identified and allows the effective reduction of risk to be checked. Financial assets may only be included in this category on the date they are acquired or originated.
- Held-to-maturity investments: this category includes debt instruments traded in an active market, with fixed maturity and fixed or determinable cash flows, for which the Group has, from inception and at any subsequent date, both the intention and proven financial ability to hold to maturity.
- Available-for-sale financial assets: this category includes debt instruments not classified as “held-to- maturity investments” or as “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 at fair value through profit or loss”.
- Loans and receivables: this category includes financing granted to third parties, based on the nature thereof, irrespective of the type of borrower and the form of financing, including finance lease transactions in which the consolidated entities act as the lessors.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
iii. Classification of financial assets for presentation purposes
Financial assets are presented in the consolidated balance sheet classified into the various categories used for management and measurement purposes (section ii. above), unless they have to be presented as “non-current assets held for sale” or they relate to “cash and balances with central banks”, “hedging derivatives” or “investments”, which are reported separately.
Financial assets are classified by type of instrument into the following items in the consolidated balance sheet:
- Cash and balances with central banks: cash balances and deposits with the Bank of Spain and other central banks.
- Loans and advances to credit institutions: credit of any nature in the name of credit institutions.
- Loans and advances to customers: all credit granted by the Group, other than that represented by marketable securities, money market operations through central counterparties, finance lease receivables and loans and advances to credit institutions.
- Debt instruments: bonds and other securities that create a debt for their issuer, that generate an implicit or explicit interest return at a contractually agreed rate, and that are in the form of certificates or book entries, irrespective of the issuer.
- Other equity instruments: financial instruments issued by other entities, such as shares and non-voting equity units, 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 favour of the Group of derivatives which do not form part of hedge accounting.
- Changes in the fair value of hedged items in portfolio hedges of interest rate risk: includes the net balance of the positive or negative changes in the fair value of the hedged amount of financial assets included in portfolio hedges of interest rate risk, attributable exclusively to such risk.
- Other financial assets: other debit balances in favour of the Group in respect of transactions which do not have the nature of credit (such as cheques drawn on credit institutions, the amounts receivable from clearing houses and settlement agencies for transactions on the stock exchange and organised markets, bonds given in cash, capital calls, and fees and commissions receivable for financial guarantees).
- Hedging derivatives: includes the fair value in favour of the Group of derivatives designated as hedging instruments in hedge accounting. iv. Classification of financial liabilities for measurement purposes
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): includes financial liabilities issued with the intention to repurchase them in the near future, assumed for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives that do not meet the definition of a financial guarantee contract and have not been designated as hedging instruments, and
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
financial liabilities arising from the outright sale of financial assets purchased under resale agreements (reverse repos) or borrowed (“short positions”).
- Other financial liabilities at fair value through profit or loss: this category includes all hybrid financial instruments containing one or more embedded derivatives that do not significantly modify the cash flows that otherwise would be generated by the instrument and whose separation therefrom is prohibited. These financial instruments must be assigned to this category from their initial recognition, and can only be assigned thereto if this significantly reduces accounting mismatches or if they are part of a group of financial instruments whose performance is evaluated in accordance with a documented risk management or investment strategy.
- Financial liabilities at fair value through equity: financial liabilities associated with available-for-sale financial assets arising as a result of transfers of assets in which the consolidated entities, acting as transferors, neither transfer nor retain substantially all the risks and rewards of ownership of the assets.
- Financial liabilities at amortised cost: financial liabilities not included in any of the above categories which arise from the ordinary borrowing activities carried on by financial institutions, irrespective of their instrumentation and maturity. v. Classification of financial liabilities for presentation purposes
Financial liabilities are presented in the consolidated balance sheet classified into the various categories used for management and measurement purposes (see section iv. above), unless they have to be presented as “liabilities associated with non-current assets held for sale” or they relate to “hedging derivatives” and “equity having the substance of a financial liability”, which are reported separately.
Financial liabilities are classified by type of instrument into the following items:
- Deposits from central banks and from credit institutions: deposits of any nature, including credit and money market operations received from the Bank of Spain or other central banks, and credit received and money market operations in the name of credit institutions.
- Customer deposits: includes all repayable balances received in cash by the Group, other than those represented by marketable securities, money market operations through central counterparties and subordinated liabilities.
- Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than those that have 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 of the Group's liability in respect of derivatives which do not form part of hedge accounting.
- Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets purchased under reverse repurchase agreements or borrowed.
- Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
- Other financial liabilities: includes the amount of payment obligations having the substance of financial liabilities not included under any other item.
- Changes in the fair value of hedged items in portfolio hedges of interest rate risk: includes the net balance of the positive or negative changes in the fair value of the hedged amount of financial liabilities included in portfolio hedges of interest rate risk, attributable exclusively to such risk.
- Hedging derivatives: includes the fair value of the Group's liability in respect of derivatives designated as hedging instruments in hedge accounting. b) Measurement of financial assets and liabilities and recognition of fair value changes
In general, financial instruments are initially recognised at fair value which, in the absence of evidence to the contrary, is deemed to be their acquisition cost. Financial assets and liabilities are subsequently measured at each year-end as follows:
i. Measurement of financial assets
Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their sale or other form of 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 organised, transparent and deep market (“quoted price” or “market price”).
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. However, the inherent limitations of the valuation techniques used and the possible inaccuracies of the assumptions made under these techniques may result in a fair value of a financial instrument which does not exactly coincide with the price at which the instrument could be bought or sold at the date of measurement.
All derivatives are recognised in the balance sheet at fair value from the trade date. If the fair value is positive, they are recognised as an asset and if the fair value is negative, they are recognised 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 recognised in “Gains/Losses on Financial Assets and Liabilities (Net)” in the consolidated income statement. Specifically, the fair value of standard financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure OTC derivatives.
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”)
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
using valuation techniques that are commonly used by the financial markets: “net present value”, option pricing models and other methods.
“Loans and Receivables” and “Held-to-Maturity Investments” are measured at amortised cost using the effective interest method. Amortised cost is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortisation (taken to the consolidated income statement) of the difference between the initial cost and the maturity amount. In the case of financial assets, amortised cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognised in the consolidated income statement.
The “effective interest rate” is the discount rate that exactly matches the initial amount of a financial instrument to its estimated cash flows during its estimated life, based on the contractual terms, but disregarding future credit losses. 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 that, because of their nature, can be equated with a rate of interest. 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 of other entities 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 recognised represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, the Bank has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral and insurance. ii. Measurement of financial liabilities
In general, financial liabilities are measured at amortised cost, as defined above, except for those included under “Financial Liabilities Held for Trading” and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value. iii. Valuation techniques
Following is a summary of the various valuation techniques used by the Group to measure the financial instruments recognised at fair value at 31 December 2009 and 2008:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Percentage 2009 2008 Market Value Based on Assets Liabilities Assets Liabilities
Public price quotations in active markets 58% 25% 64% 19% Internal valuation models with observable market data 42% 74% 36% 80% Internal valuation models with non-market data - 1% - 1% 100% 100% 100% 100%
The main techniques employed in the “internal valuation models” are as follows:
- In the valuation of financial instruments permitting static hedging (basically, forwards and swaps) the “present value” method is employed.
- In the valuation of financial instruments requiring dynamic hedging, the Black-Scholes model is mainly employed.
- In the valuation of financial instruments exposed to interest rate risk, the “Heath-Jarrow-Morton” model is employed to analyse the correlation by currency.
- Credit risk is measured with dynamic models similar to those used in the measurement of interest rate risk.
The Bank's directors consider that the financial assets and liabilities recognised in the consolidated balance sheet and the income arising from these financial instruments are reasonable and reflect their market value.
The detail of the financial instruments, by valuation method, at 31 December 2009 and 2008 is as follows:
Thousands of Euros 2009 2008 Public Price Public Price Quotations in Quotations in Active Internal Active Internal Markets Models Total Markets Models Total
Financial assets held for trading 2,397,630 4,439,368 6,836,998 860,411 4,223,404 5,083,815 Other financial assets at fair value through profit or loss 521,076 1,751,237 2,272,313 2,189,143 1,219 2,191,162 Available-for-sale financial assets 7,583,929 33,594 7,617,523 6,709,546 33,036 6,742,582 Hedging derivatives (assets) 1,394,098 1,394,098 - 1,194,849 1,194,849 Financial liabilities held for trading 689,866 3,888,939 4,578,804 609,214 3,341,504 3,950,718 Hedging derivatives (liabilities) 301,029 301,029 - 577,091 577,091 Liabilities under insurance contracts 1,643,438 2,743,708 4,387,146 930,694 2,504,935 3,435,629
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
iv. Recognition of fair value changes
As a general rule, changes in the fair value of financial instruments are recognised in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest or dividends, which are recognised under “Interest and Similar Income”, “Interest Expense and Similar Charges” and “Income from Equity Instruments”, as appropriate; those arising from the impairment of asset quality; and those arising for other reasons, which are recognised at their net amount under “Gains/Losses on Financial Assets and Liabilities (net)” in the consolidated income statement.
Exceptionally, adjustments due to changes in fair value arising from “Available-for-Sale Financial Assets” are recognised temporarily in consolidated equity under “Valuation Adjustments”, unless they relate to exchange differences on monetary financial assets, in which case they are recognised in the consolidated income statement. Items charged or credited to “Valuation Adjustments” remain in the Group's equity until the asset giving rise to them is derecognised, at which time they are recognised in the consolidated income statement. v. Hedging transactions
The consolidated entities use financial derivatives for the purpose of trading with customers who request these instruments in order to manage their own market and credit risks and for their structured financial transactions; for the purpose of managing the risks of the Group entities' own positions and assets and liabilities (“hedging derivatives”); or for the purpose of obtaining gains from changes in the prices of these derivatives.
A derivative qualifies for hedge accounting if all the following conditions are met:
1. The derivative hedges one of the following three types of exposure:
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”).
2. It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:
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”).
The consolidated entities ascertain the prospective and retrospective effectiveness of their hedges as follows:
In fair value hedges, the ratio of the change in the fair value of the hedged item during the measurement period to the change in the fair value of the hedging instrument during the same
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
period is calculated retrospectively. The hedge is deemed to be effective if this ratio is within a range of 80% to 125%. Prospective effectiveness is calculated by comparing the sensitivity of the hedged item (to changes in the interest rate curve) with the sensitivity of the hedging instrument. The hedge is deemed to be effective if this comparison shows that the two sensitivities offset each other.
In cash flow hedges, retrospective effectiveness is assessed by calculating the ratio of the interest cash flows generated by the hedged item during the measurement period to the interest cash flows generated by the hedging instrument during the same period. The hedge is deemed to be effective if this ratio is within a range of 80% to 125%. Prospective effectiveness is calculated by comparing the future interest cash flows (obtained from the related market interest rate curve) of the hedged item and the hedging instrument. The hedge is deemed to be effective if the related cash flows offset each other.
3. There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and the manner in which this effective hedge was intended to be achieved and measured, provided that this is consistent with the Group's management of own risks.
The changes in value of financial instruments qualifying for hedge accounting are recognised 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 recognised directly in the consolidated income statement.
In the case of fair value hedges of the interest rate exposure of a portfolio of financial instruments, the gains or losses due to changes in the fair value of the hedged amount (attributable to the hedged risk) are recognised 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.
b. In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognised temporarily in equity under “Valuation Adjustments - Cash Flow Hedges” until the forecast transactions occur, when it is recognised in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability. The ineffective portion of the change in value of the hedging derivatives is recognised directly under “Gains/Losses on Financial Assets and Liabilities (Net)” in the consolidated income statement.
When fair value hedges are discontinued, the adjustments relating to the hedged item previously recognised under “Valuation Adjustments” are transferred to profit or loss at the effective interest rate re- calculated at the date of hedge discontinuation. The adjustments must be fully amortised at maturity.
When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognised in equity under “Valuation Adjustments” (while the hedge was effective) remains in equity until
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
the forecast transaction occurs, at which time it is recognised in income, unless the transaction is no longer expected to occur, in which case the gain or loss is recognised immediately in income.
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”.
Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives. c) Derecognition of financial assets and liabilities
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:
1. If the Group transfers substantially all the risks and rewards to third parties -unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitisation of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases-, the transferred financial asset is derecognised and any rights or obligations retained or created in the transfer are recognised simultaneously.
2. If the Group retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, and other similar cases-, the transferred financial asset is not derecognised and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognised:
a. An associated financial liability, which is recognised for an amount equal to the consideration received and is subsequently measured at amortised cost, unless it meets the requirements to be classified as a financial liability at fair value through profit or loss.
b. The income from the transferred financial asset not derecognised and any expense incurred on the new financial liability.
3. If the Group neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitisation of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases- the following distinction is made:
a. If the transferor does not retain control of the transferred financial asset, the asset is derecognised and any rights or obligations retained or created in the transfer are recognised.
b. If the transferor retains control of the transferred financial asset, it continues to recognise it for an amount equal to its exposure to changes in value and recognises a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortised cost of the rights and obligations retained, if the transferred
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
asset is measured at amortised 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 derecognised when 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 derecognised when the obligations they generate have been extinguished or when they are acquired (with the intention either to cancel them or to resell them).
In 2009 financial instruments totalling approximately EUR 2,075 million were transferred in relation to securitisations but not derecognised (2008: approximately EUR 4,300 million -see Note 10). d) Offsetting of financial instruments
Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the Group entities currently have a legally enforceable right to set off the recognised amounts and intend either to settle on a net basis, or to realise the asset and settle the liability simultaneously. e) Impairment of financial assets
i. Definition
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 year in which the impairment becomes evident. The reversal, if any, of previously recognised impairment losses is recognised in the consolidated income statement for the year in which the impairment ceases to exist or is reduced.
Balances are deemed to be impaired 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 recognise the accrued interest and the remainder, if any, 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 recognised amount is considered unlikely, the amount is written off, 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.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
ii. Debt instruments carried at amortised cost
The amount of an impairment loss incurred on a debt instrument carried at amortised 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.
Impairment losses are assessed as follows:
- Individually, for all significant debt instruments.
- Collectively: the Bank classifies transactions on the basis of the nature of the obligors, the conditions of the countries in which they reside, transaction status and type of collateral or guarantee, age of past-due amounts, etc. For each risk group, it establishes the impairment losses that are to be allocated to specific transactions. In addition, the Group identifies any homogenous groups of debt instruments and contingent liabilities which, although not classifiable as impaired, evidence weaknesses that may give rise to losses higher than those for the categories described above, since they belong to a group that is experiencing difficulties. In this case, the impairment losses are determined as the difference between the amount recognised in assets for these instruments and the present value of the cash flows expected to be received, discounted at the average contractual interest rate.
The total allowances recognised at any given time are the sum of the allowances for losses on specific transactions, for losses on transactions of homogenous groups of debt instruments evidencing weaknesses, and for inherent impairment losses (losses incurred at the date of the financial statements, calculated using statistical methods), and the allowance for the risk exposure of groups experiencing difficulties.
Interest accrual is suspended for all 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. iii. Debt or equity instruments classified as available for sale
Impairment losses on these instruments are the difference between the acquisition cost of the instruments (net of any principal repayment or amortisation, in the case of debt instruments) and their fair value less any impairment loss previously recognised in the consolidated income statement.
When there is objective evidence that the losses arising on measurement of these assets are due to impairment, they are no longer recognised in equity under “Valuation Adjustments - Available-for-Sale Financial Assets” and are recorded in the consolidated income statement. If all or part of the impairment losses on debt instruments are subsequently reversed, the reversed amount is recognised in the consolidated income statement for the year in which the reversal occurs (with a balancing entry under “Valuation Adjustments - Available-for-Sale Financial Assets” in the consolidated balance sheet). If all or part of the impairment losses on equity instruments are subsequently reversed, the reversed amount is recognised directly in equity under “Valuation Adjustments”. iv. Equity instruments carried at cost
The impairment loss on equity instruments carried at cost is the difference between the carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Impairment losses are recognised 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. f) Repurchase agreements and reverse repurchase agreements
Purchases (sales) of financial assets under a non-optional resale (repurchase) agreement at a fixed price (“repos”) are recognised in the consolidated balance sheet as financing granted (received) based on the nature of the debtor (creditor) under “Loans and Advances to Credit Institutions” or “Loans and Advances to Customers” (“Deposits from Credit Institutions” or “Customer Deposits”).
Differences between the purchase and sale prices are recognised as interest over the contract term. g) Non-current assets held for sale and Liabilities associated with non- current assets held for sale
“Non-Current Assets Held for Sale” in the consolidated balance sheet 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 probable and is expected to occur within one year from the date of the accompanying consolidated financial statements. 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.
Similarly, “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.
The gains and losses arising on the disposal of assets and liabilities classified as held for sale, as well any related impairment losses recognised or reversed, are recorded under “Gains (Losses) on Non-Current Assets Held for Sale not Classified as Discontinued Operations”. All other income and expenses relating to these assets and liabilities are classified in the corresponding income statement items based on their nature. Their fair value does not differ significantly from their carrying amount. h) Reinsurance assets and Liabilities under insurance contracts
“Reinsurance Assets” in the consolidated balance sheet 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. In the event of impairment of these assets, the related loss is recognised directly in the consolidated income statement against these assets.
“Liabilities under Insurance Contracts” in the consolidated balance sheet includes the technical provisions recorded by the consolidated insurance entities to cover obligations arising from insurance contracts in force at year-end.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
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 each reporting date the Group assesses whether the insurance contract liabilities recognised in the consolidated balance sheet are adequately measured. 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 value recognised in the consolidated balance sheet for insurance liabilities (see Note 13), net of any related deferred acquisition costs or 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 amount is charged to the consolidated income statement. i) Tangible assets
“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:
i. Property, plant and equipment for own use
Property, plant and equipment for own use are presented at acquisition cost revalued, where appropriate, pursuant to the applicable legislation, less the related accumulated depreciation and any impairment losses (net 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 recognised 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):
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Annual Rate
Buildings for own use 2.0% Furniture 7.7% Fixtures 6.0% Office and IT equipment 25.0% Leasehold improvements 7.0%
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 recognise the reversal of the impairment loss recognised in prior periods and adjust the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognised in prior years.
The estimated useful lives 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 recognised 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 recognised as an expense in the period in which they are incurred.
ii. Investment property
“Investment Property” in the consolidated balance sheet reflects, at acquisition cost, the net values of the land, buildings and other structures held either to earn rentals or for capital appreciation. The fair value of the investment property does not differ significantly from its carrying amount.
The criteria used to recognise the acquisition cost of investment property, to calculate its depreciation and its estimated useful life and to recognise the impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use. j) Accounting for leases
i. Finance leases
Finance leases are leases that transfer to the lessee substantially all the risks and rewards incidental to ownership of the leased asset.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
When the consolidated entities act as lessors of an asset, the sum of the present value of the lease payments receivable from the lessee plus the guaranteed residual value (which is generally the exercise price of the purchase option of the lessee at the end of the lease term) is recognised as lending to third parties and is therefore included under “Loans and Receivables” in the consolidated balance sheet.
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, recognise a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise price of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use.
In both cases, the finance income and finance expense arising from these contracts is credited or debited, respectively, to the consolidated income statement so as to achieve a constant rate of return over the life of the lease contracts.
ii. Operating leases
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” in the consolidated balance sheet. 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 recognised in the consolidated income statement on a straight-line basis.
When the consolidated entities act as lessees, lease expenses, including any incentives granted by the lessor, are charged to the consolidated income statement on a straight-line basis.
Where transactions involve the sale to a third party of a Group asset that is simultaneously leased back, the terms and conditions of the lease agreement are analysed to determine whether it should be considered a finance or an operating lease. If it is determined to be a finance lease, the gain arising on the sale is not recognised immediately, but deferred and recognised in the consolidated income statement over the lease term. However, if the leaseback is an operating lease and the sale price is the fair value of the property, any profit or loss on the sale is recognised in the consolidated income statement. k) Intangible assets
Computer software developed internally by the consolidated entities
The costs of internally developed computer software are recognised as an intangible asset if, among other requisites (basically the capacity to be used or sold), the software can be identified and its ability to generate future economic benefits can be demonstrated. These assets are amortised over three years.
Expenditure on research activities is recognised as an expense in the year in which it is incurred and cannot be subsequently capitalised.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
l) Tax assets
“Tax Assets” in the consolidated balance sheet includes the amount of all the assets of a tax nature, distinguishing between: “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 and tax credit carryforwards). m) Other assets and Other liabilities
“Other Assets” in the consolidated balance sheet includes the amount of assets not recorded in other items, which relate basically to the following:
- 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 are measured at the lower of cost and net realisable value at year- end, which is the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and the estimated costs required to make the sale. Any impairment losses are recognised as adjustments for the year in which the impairment or loss occurs. Subsequent reversals are recognised in the consolidated income statement for the year in which they occur.
- Prepayments and accrued income, excluding accrued interest, which is recognised in the same item as the financial instruments giving rise to it.
- Other: the amount of guarantees provided mainly as a result of operations in organised markets and the amount of other assets not included in other items.
“Other Liabilities” includes the payment obligations having the substance of financial liabilities not included in any other category and accrued expenses and deferred income. o) Provisions and contingent liabilities
Provisions are present obligations arising from past events which are clearly specified as to their nature at the reporting date but are uncertain as to their amount or settlement date. The settlement of these obligations on maturity will foreseeably give rise to an outflow of cash embodying economic benefits for the Group.
Contingent liabilities are 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 Group. They include present obligations of the Group when it is not probable that an outflow of cash resources embodying economic benefits will be required to settle them or when their amount cannot be quantified in a sufficiently reliable manner.
The 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. Contingent liabilities are not recognised in the consolidated financial statements, but rather are disclosed in the notes to the financial statements.
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
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
specific obligations for which they were originally recognised. Provisions are fully or partially reversed when such obligations cease to exist or are reduced.
Provisions are classified according to the obligations covered as follows:
- Provisions for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including commitments to early retirees and similar obligations.
- Provisions for contingent liabilities and commitments and other provisions: includes the amount of the provisions made to cover contingent liabilities, which are defined as 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, which are defined as irrevocable commitments that may give rise to the recognition of financial assets; and the amount of other provisions made by the consolidated entities. p) Litigation and/or claims in process
In addition to the disclosures made in Note 1, at the end of 2009 certain litigation and claims were in process against the consolidated entities arising from the ordinary course of their operations. The Group's legal advisers and directors consider that the economic loss, if any, that may derive from litigation and claims will not have a material effect on the consolidated financial statements (see Note 22). q) Foreign currency transactions
i. Functional currency
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”.
The equivalent euro value of the total assets and liabilities denominated in foreign currency held by the Group at 31 December 2009 amounted to EUR 3,809,218 thousand and EUR 5,578,538 thousand, respectively (31 December 2008: EUR 4,326,264 thousand and EUR 5,947,715 thousand, respectively). Approximately 74% of these amounts relate to US dollars and the remainder mostly to currencies quoted in the Spanish market.
ii. Translation of foreign currency balances
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 Group 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 not located in EMU countries are initially recognised in their respective currencies. Monetary assets and liabilities in foreign currency are
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
subsequently translated to their functional currencies using the closing rate, which is defined as the average spot exchange rate prevailing at the date of the consolidated financial statements.
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 exchange rate on the transaction date or using the average exchange rate for the period for all the transactions performed during the year.
- 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 same as the reporting currency, the debit and credit balances denominated in the functional currency are translated to the reporting currency as follows:
- Assets and liabilities, at the average exchange rate prevailing on the Spanish spot foreign exchange market at year-end.
- Income and expenses, at the exchange rate on the transaction date or using an average exchange rate for the period for all the transactions performed during the year.
- Equity items, at the historical exchange rates.
iii Recognition of exchange differences
The exchange differences arising on the translation of foreign currency balances to the functional currency are generally recognised at their net amount under “Exchange Differences (Net)” in the consolidated income statement.
The exchange differences arising on the translation to euros of the financial statements in functional currencies other than the euro are recognised under “Valuation Adjustments - Exchange Differences” in the consolidated balance sheet until the related item is derecognised, when they are recognised in profit or loss. r) Own equity instruments
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 unfavourable to the issuer.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
- 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 recognised in the consolidated financial statements. Consideration received or paid in exchange for such instruments is directly added to or deducted from equity. s) Recognition of income and expenses
The most significant criteria used by the Group to recognise its income and expenses are summarised as follows:
i. Interest income, interest expenses and similar items
Interest income, interest expenses and similar items are generally recognised on an accrual basis using the effective interest method. Dividends received from other companies are recognised as income when the consolidated entities' right to receive them arises.
ii. Commissions, fees and similar items
Fee and commission income and expenses are recognised in the consolidated income statement using criteria that vary according to their nature. The main criteria are:
- Fee and commission income and expenses relating to financial assets and liabilities measured at fair value through profit or loss are recognised when collected.
- Those arising from transactions or services that are performed over a period of time are recognised over the life of these transactions or services.
- Those relating to the provision of a service in a single act, which are recognised when the single act is carried out.
iii. Non-finance income and expenses
These are recognised for accounting purposes on an accrual basis.
iv. Deferred collections and payments
These are recognised for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
t) Financial guarantees
A financial guarantee contract is a contract that requires the issuer to make payments to reimburse the creditor for the loss incurred when a specific debtor fails to meet its payment obligations in accordance with the original or modified terms and conditions of a debt instrument, irrespective of the legal form it may have (guarantee, insurance contract or credit derivative).
The Group recognises these financial guarantees -other than contracts issued by insurance entities- when they are issued on the liability side of the balance sheet at their fair value which, on initial recognition is the premium received, plus, where appropriate, the present value of the cash flows to be received (fees and commissions), using an interest rate similar to that of the financial assets granted by the Group with a similar term and risk. Simultaneously, the Group recognises as a balance receivable on the asset side of the consolidated balance sheet the present value of the future cash flows receivable using the aforementioned interest rate.
Financial guarantees, irrespective 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 measured at amortised cost.
If a provision is required for these financial guarantees, the unearned commissions recognised under “Other Liabilities” in the consolidated balance sheet are reclassified to “Provisions for Contingent Liabilities and Commitments”. u) Assets under management
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. Information on third-party assets managed by the Group at 31 December 2009 is disclosed in Note 32. v) Post-employment benefits
Under the collective labour agreement currently in force, the Bank has undertaken to supplement the public social security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability, death of spouse or death of parent, and other benefits.
i. Defined benefit plans
The Group recognises under “Provisions - Provisions for Pensions and Similar Obligations” on the liability side of the consolidated balance sheet the present value of its defined benefit obligations, net of the fair value of the plan assets and of the unrecognised cumulative actuarial gains or losses, using a corridor approach.
“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.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
- They can only be used to pay or finance post-employment benefits and are not available to the Group's creditors, even in the event of bankruptcy. They cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all obligations of the plan and of the entity relating to benefits for current or former employees, or to reimburse employee benefits already paid by the Group.
- When the assets are held by a long-term post-employment employee benefit entity (or fund), they are not non-transferable financial instruments issued by the entity.
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 recognises its right to reimbursement which, in all other respects, is treated as a plan asset, under “Insurance Contracts Linked to Pensions” on the asset side of the consolidated balance sheet.
“Actuarial Gains and Losses” are deemed to be those arising from differences between previous actuarial assumptions and what has actually occurred in the plan and from changes in the actuarial assumptions used. The Group uses, on a plan-by-plan basis, the corridor method and recognises either directly in reserves in the consolidated statement of recognised income and expense or in the consolidated income statement the amount resulting from deferring over five years the net amount of the cumulative actuarial gains and/or losses not recognised at the beginning of the year which exceeds 10% of the present value of the obligations or 10% of the fair value of the plan assets at the beginning of the year, whichever amount is higher.
Post-employment benefits are recognised 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 “Administrative Expenses - 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”.
- The expected return on plan assets and the gains or losses on the value of the plan assets, less any plan administration costs and less any applicable taxes, under “Interest and Similar Income”.
- The actuarial gains and losses calculated in accordance with the corridor approach are recognised under “Provisions (Net)”, unless the Entity opts to recognise them directly in equity. ii. Defined contribution plans
The ordinary and extraordinary contributions made in this connection in each year are recognised under “Personnel Expenses” and “Provisions (Net)”, respectively, in the consolidated income statement. The amounts not yet contributed at each year-end are recognised, at their present value, under “Provisions - Provisions for Pensions and Similar Obligations” on the liability side of the consolidated balance sheet.
In 2009 the Group contributed EUR 9,324 thousand to defined contribution plans (2008: EUR 8,521 thousand), of which EUR 7,039 thousand were recognised under “Staff Costs” (2008: EUR 6,198 thousand - see Note 41) and the remainder, EUR 2,285 thousand, under “Provisions (Net)” because they were extraordinary contributions. At 31 December 2009 and 2008, there were no accrued contributions to be made in this connection.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
w) Other long-term employee benefits
Commitments to early retirees -defined as 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, commitments 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 recognised immediately in the consolidated income statement. x) Transactions involving payments based on equity instruments
Equity instruments delivered to employees in consideration for their services, if the instruments are delivered once the specific period of service has ended, are recognised as an expense for services (with the corresponding increase in equity) in the period the services are rendered by employees. At the grant date the services received (and the related increase in equity) are measured at the fair value of the equity instruments granted.
When the requirements stipulated in the remuneration agreement include external market conditions (such as equity instruments reaching a certain price), the amount ultimately to be recognised in equity will depend on the other conditions being satisfied by the employees, 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 recognised in equity are not reversed, even if the employees do not exercise their right to receive the equity instruments. y) Termination benefits
Under current legislation, the Spanish entities are required to pay termination benefits to employees terminated without just cause. There are no redundancy plans making it necessary to record a provision in this connection. z) Income tax
The current income tax expense is recognised in the consolidated income statement, except when it results from a transaction recognised directly in equity, in which case the related tax effect is also recognised in equity, or from a business combination in which the related deferred tax is recognised as one of its assets or liabilities.
The current income tax expense is calculated as the tax payable with respect to the taxable profit for the year, adjusted for the amount of the changes in the year arising from temporary differences, tax credits and other tax benefits and prior years’ tax loss carryforwards effectively used in 2008.
Deferred tax assets and liabilities include the temporary differences arising from the different bases used for accounting and tax purposes to measure the assets, liabilities and certain of the entity’s own equity instruments, insofar as they have an impact on the future tax charge.
Temporary differences are classified as: taxable temporary differences, which will give rise to larger amounts of tax to be paid or smaller amounts of tax to be refunded in future years; and deductible temporary differences, which will give rise to smaller amounts of tax to be paid or larger amounts of tax to be refunded in future years.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Deferred tax assets (deductible temporary differences, the right to offset tax losses in future years, unused tax credits and other unused tax benefits) are only recognised to the extent that it is probable that the Group will have sufficient future taxable profits against which these assets can be utilised.
Deferred tax liabilities are always recognised except when goodwill is recognised or they arise in accounting for investments in subsidiaries or associates or interests in joint ventures where the investor 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 future. Notwithstanding the foregoing, deferred tax assets and liabilities are not recognised if they arise from the initial recognition of an asset or liability other than a business combination that at the time of recognition affects neither accounting profit nor taxable profit.
The deferred tax assets and liabilities recognised and unrecognised are reassessed at year-end either in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the analyses performed (see Note 23), or in order to recognise any deferred tax asset not previously recognised, provided that it is probable that the Group will have sufficient future taxable profit against which the deferred tax asset can be utilised.
Income and expenses recognised directly in equity are accounted for as temporary differences. 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.
- 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.
In preparing the consolidated statement of cash flows, short-term highly liquid investments that are subject to an insignificant risk of changes in value were classified as “cash and cash equivalents”. Accordingly, the Group classifies as cash and cash equivalents the balances recognised under “Cash and Balances with Central Banks” in the consolidated balance sheet and the demand deposits recognised under “Loans and Advances to Credit Institutions”. ab) Consolidated statement of recognised 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 recognised in the consolidated income statement for the year and the other income and expenses recognised, in accordance with current regulations, directly in consolidated equity.
Accordingly, this statement presents:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
a) Consolidated profit/loss for the year.
b) The net amount of the income and expenses recognised temporarily in consolidated equity under “Valuation Adjustments”.
c) The net amount of the income and expenses recognised definitively in consolidated equity.
d) The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associates or jointly controlled entities accounted for using the equity method, which are presented net.
e) Total consolidated recognised income and expense, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to non- controlling interests.
The amount of the income and expenses relating to entities accounted for using the equity method recognised directly in equity is presented in this statement, irrespective of the nature of the related items, under “Entities Accounted for Using the Equity Method”.
The changes in income and expenses recognised in equity under “Valuation Adjustments” are broken down as follows:
a) Revaluation gains (losses): includes the amount of the income, net of the expenses incurred in the year, recognised directly in consolidated equity. The amounts recognised under this line item in the year remain there, even if in the same year they are transferred to the consolidated income statement, to the initial carrying amount of other assets or liabilities or are reclassified to another line item.
b) Amounts transferred to income statement: includes the amount of the revaluation gains and losses previously recognised in consolidated equity, albeit in the same year, which are recognised in the consolidated income statement.
c) Amount transferred to initial carrying amount of hedged items: includes the amount of the revaluation gains and losses previously recognised in consolidated equity, albeit in the same year, which are recognised in the initial carrying amount of the assets or liabilities as a result of cash flow hedges.
d) Other reclassifications: includes the amount of the transfers made in the year between valuation adjustment items in accordance with current regulations.
The amounts of these items are presented gross and, except as indicated above for the items relating to valuation adjustments of entities accounted for using the equity method, the related tax effect is recognised under “Income Tax” in this statement. ac) Consolidated statement of changes in total equity
This statement includes all the changes in equity, including those due to changes in accounting policies and to 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:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
a) Adjustments due to changes in accounting policies and to errors: include the changes in consolidated equity arising as a result of the retrospective restatement of the balances in the consolidated financial statements due to changes in accounting policies or to the correction of errors.
b) Income and expense recognised in the year: includes, in aggregate form, the total of the aforementioned items recognised in the consolidated statement of recognised income and expense.
c) Other changes in equity: includes the remaining items recognised in equity, including, inter alia, increases and decreases in the endowment fund, distribution of profit, transactions involving own equity instruments, equity-instrument-based payments, transfers between equity items and any other increases or decreases in consolidated equity.
3. Banesto Group a) Banco Español de Crédito, S.A.
Banesto is the parent of the Banesto Group. At 31 December 2009, the Bank’s assets represented substantially all the Group’s consolidated assets; the Bank’s equity represented 92.5% of the Group’s equity, and the Bank’s net profit for 2009 represented 90.1% of the consolidated net profit attributable to the Group (31 December 2008: 93.33% and 86.09%, respectively).
At 31 December 2009 and 2008, the Bank conducted its business in Spain through 1,772 and 1,914 branch offices, respectively, located throughout the country and had 138 agents to which Bank of Spain Circular 5/1995 was applicable (the detail is shown in Appendix V). As additional support for its international activities, the Bank also one branch abroad and controls certain financial institutions which operate exclusively outside Spain.
The Bank's condensed 2009 and 2008 balance sheets, income statements, statements of recognised income and expense, statements of changes in total equity and statements of cash flows are as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
BANCO ESPAÑOL DE CRÉDITO, S.A.
CONDENSED BALANCE SHEETS AT 31 DECEMBER 2009 AND 2008 (Thousands of Euros)
ASSETS 2009 2008 LIABILITIES AND EQUITY 2009 2008
CASH AND BALANCES WITH CENTRAL BANKS 1,683,840 1,688,142 LIABILITIES FINANCIAL ASSETS HELD FOR TRADING 7,380,918 5,677,350 FINANCIAL LIABILITIES HELD FOR TRADING 5,125,464 4,447,440 OTHER FINANCIAL ASSETS AT FAIR VALUE FINANCIAL LIABILITIES AT AMORTISED COST 112,726,093 109,658,146 THROUGH PROFIT OR LOSS - - CHANGES IN THE FAIR VALUE OF HEDGED ITEMS AVAILABLE-FOR-SALE FINANCIAL ASSETS 9,585,588 10,992,558 IN PORTFOLIO HEDGES OF INTEREST RATE RISK 806,418 440,136 LOANS AND RECEIVABLES 100,331,070 98,762,850 HEDGING DERIVATIVES 301,028 577,261 HELD-TO-MATURITY INVESTMENTS 2,076,328 - PROVISIONS 2,665,687 2,477,127 CHANGES IN THE FAIR VALUE OF HEDGED ITEMS TAX LIABILITIES 254,664 347,751 IN PORTFOLIO HEDGES OF INTEREST RATE RISK 61,449 - OTHER LIABILITIES 710,931 454,979 HEDGING DERIVATIVES 1,394,099 1,196,011 TOTAL LIABILITIES 122,590,285 118,402,840 NON-CURRENT ASSETS HELD FOR SALE 856,058 355,821 INVESTMENTS 624,344 659,720 INSURANCE CONTRACTS LINKED TO PENSIONS 1,435,023 1,496,732 TANGIBLE ASSETS 1,084,179 1,111,582 EQUITY INTANGIBLE ASSETS 67,492 55,981 VALUATION ADJUSTMENTS 128,326 39,625 TAX ASSETS 891,983 879,866 SHAREHOLDERS' EQUITY 4,899,987 4,731,749 OTHER ASSETS 146,227 297,601 TOTAL EQUITY 5,028,313 4,771,374 TOTAL ASSETS 127,618,598 123,174,214 TOTAL LIABILITIES AND EQUITY 127,618,598 123,174,214 Memorandum items: Contingent liabilities 10,280,407 11,026,642 Contingent commitments 14,771,348 16,904,405
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
BANCO ESPAÑOL DE CRÉDITO, S.A.
CONDENSED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (Thousands of Euros)
Income/(Expenses) 2009 2008
INTEREST AND SIMILAR INCOME 3,957,125 5,638,283 INTEREST EXPENSE AND SIMILAR CHARGES (2,218,873) (4,091,918) NET INTEREST INCOME 1,738,252 1,546,365 INCOME FROM EQUITY INSTRUMENTS 50,652 79,676 FEE AND COMMISSION INCOME 691,198 681,680 FEE AND COMMISSION EXPENSE (109,714) (114,498) GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net) 209,966 57,405 EXCHANGE DIFFERENCES (net) 28,573 40,329 OTHER OPERATING INCOME 22,764 27,041 OTHER OPERATING EXPENSES (65,938) (55,974) GROSS INCOME 2,565,753 2,262,024 ADMINISTRATIVE EXPENSES (874,686) (866,348) DEPRECIATION AND AMORTISATION CHARGE (103,977) (101,879) PROVISIONS (net) (312,901) 3,527 IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net) (512,933) (349,957) PROFIT FROM OPERATIONS 761,256 947,369 IMPAIRMENT LOSSES ON OTHER ASSETS (net) (38,796) (5,438) GAINS/LOSSES ON DISPOSAL OF ASSETS NOT CLASSIFIED AS NON-CURRENT ASSETS HELD FOR SALE 3,595 7,481 GAINS/LOSSES ON DISPOSAL OF NON-CURRENT ASSETS HELD-FOR SALE NOT CLASSIFIED AS DISCONTINUED OPERATIONS (51,793) (2,233) PROFIT BEFORE TAX 674,262 947,179 INCOME TAX (169,880) (275,791) PROFIT FROM ORDINARY ACTIVITIES 504,382 671,388 PROFIT FOR THE YEAR 504,382 671,388
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
BANCO ESPAÑOL DE CRÉDITO, S.A.
CONDENSED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (Thousands of Euros)
2009 2008
PROFIT FOR THE YEAR 504,382 671,388 OTHER RECOGNISED INCOME AND EXPENSE 88,701 190,900 Available-for-sale financial assets 122,588 1,721 Cash flow hedges 44,309 264,657 Income tax (78,196) (75,478) TOTAL INCOME AND EXPENSES FOR THE YEAR 593,083 862,288
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
BANCO ESPAÑOL DE CRÉDITO, S.A.
CONDENSED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (Thousands of Euros)
SHAREHOLDERS' EQUITY Other Less: Profit Less: Total Share Share Equity Treasury for the Dividends and Shareholders’ Valuation Total Capital Premium Reserves Instruments Shares Year Remuneration Equity Adjustments Equity Balance at 01/01/08 548,521 - 3,596,460 1,778 - 660,286 (249,959) 4,557,086 (151,275) 4,405,811 Total recognised ------income/(expense) 671,388 671,388 190,900 862,288 Other changes in - - - equity (5,485) 193,070 (1,778) (660,286) (22,246) (496,725) (496,725) Balance at 31/12/08 543,036 - 3,789,530 - - 671,388 (272,205) 4,731,749 39,625 4,771,374 Total recognised ------income/(expense) 504,382 504,382 88,701 593,083 Other changes in - - - - equity 286,440 (671,388) 48,804 (336,144) - (336,144) Balance at 31/12/09 543,036 - 4,075,970 - - 504,382 (223,401) 4,899,987 128,326 5,028,313
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
BANCO ESPAÑOL DE CRÉDITO, S.A.
CONDENSED CASH FLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (Thousands of Euros)
2009 2008 A. CASH FLOWS FROM OPERATING ACTIVITIES 2,351,476 1,221,867 Profit for the year 504,382 671,388 Adjustments made to obtain the cash flows from operating activities: Depreciation and amortisation charge 103,977 101,879 Other adjustments 1,086,303 620,914 Net increase/decrease in operating assets: Financial assets held for trading 1,703,568 159,497 Other financial assets at fair value through profit or loss - (504) Available-for-sale financial assets (1,341,747) 1,134,795 Loans and receivables 1,821,912 4,466,549 Other operating assets 258,790 156,095 Net increase/decrease in operating liabilities: Financial liabilities held for trading 678,023 1,011,221 Financial liabilities at amortised cost 2,910,516 5,531,382 Other operating liabilities (516,861) (997,940) Income tax recovered/paid 27,659 (132,823) B. CASH FLOWS FROM INVESTING ACTIVITIES (2,131,718) (335,943) Payments Tangible assets (66,246) (275,341) Intangible assets (47,143) (45,710) Held-to-maturity investments (2,076,328) - Investments (115,683) (86,094) Other payments related to investing activities - (214,239) Proceeds Tangible assets 22,308 167,948 Investments - 117,494 Other proceeds relating to investing activities 151,374 - C. NET CASH FLOWS FROM FINANCING ACTIVITIES (31,115) (360,935) Payments Dividends (358,128) (403,656) Subordinated liabilities (143,633) (500,000) Redemption of own equity instruments - (5,485) Other payments related to financing activities (26,820) (63,560) Proceeds Subordinated liabilities 497,466 611,766 Other proceeds related to financing activities - - D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES 1,073 (3,779) E. NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS (A+B+C+D) 189,716 521,210 F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,316,708 1,795,498 G. CASH AND CASH EQUIVALENTS AT END OF YEAR 2,506,424 2,316,708 MEMORANDUM ITEMS COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR Cash 255,019 263,062 Cash equivalents at central banks 1,428,821 1,425,080 Other financial assets 822,584 628,566 TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR 2,506,424 2,316,708
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
b) Changes in Group structure
The salient changes and events in the Group in relation to its scope of consolidation in 2009 and 2008 were as follows:
2009
1. Absorption of Banesto, S.A.U., Gedinver e Inmuebles, S.A.U. and Banesto Factoring, S.A.U.
At the Annual General Meeting held on 25 February 2009, the shareholders approved the merger by absorption of Banesto, S.A.U., Gedinver e Inmuebles, S.A.U. and Banesto Factoring, S.A.U. (absorbed entities) into Banco Español de Crédito, S.A., with the dissolution without liquidation of the absorbed entities and the transfer en bloc, by universal succession, of their assets and liabilities to the Bank, which would acquire, by universal succession, the rights and obligations of the absorbed entities. This merger was registered at the Mercantile Registry on 1 July 2009 and the transactions made by the absorbed entities are deemed to have been performed by the Bank from 1 January 2009. The condensed merger balance sheets of these three entities at 31 December 2008 are as follows:
Thousands Banesto Factoring, E.F.C., S.A.U. of Euros ASSETS- Cash and balances with central banks 2 Loans and receivables 2,281,458 Hedging derivatives 170 Tangible assets 27 Tax assets 1,315 Other assets 974 Total assets 2,283,946 LIABILITIES AND EQUITY- Financial liabilities at amortised cost 2,124,162 Hedging derivatives 1,163 Tax liabilities 2,972 Other liabilities 30,415 Share capital 19,500 Share premium 97,086 Reserves (947) Profit for the year 9,595 Total liabilities and equity 2,283,946
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros Gedinver e Banesto, Inmuebles, S.A.U. S.A.U. ASSETS- Property, plant and equipment - 43 Trade and other receivables - 433 Current financial assets 1 2 Current prepayments and accrued income - 3 Cash and cash equivalents 48 6,152 Total assets 49 6,633 EQUITY AND LIABILITIES- Share capital 60 3,348 Reserves (10) 2,805 Profit (Loss) for the year (2) 135 Long-term provisions - 161 Non-current payables to Group companies and associates - 86 Trade and other payables 1 27 Current accrued expenses and deferred income - 71 Total equity and liabilities 49 6,633
2.- Absorption of Mercado de Dinero, S.A.U., Diseño e Integración de Soluciones, S.A.U. and Corpobán, S.A.U. by Hualle, S.A.
At the Universal Extraordinary General Meeting of Hualle, S.A. (absorbing entity) held on 30 June 2009, the shareholders approved the merger by absorption of Mercado de Dinero, S.A.U., Coprobán, S.A.U. and Diseño e Integración de Soluciones, S.A.U. (absorbed companies) into Halle, S.A., with the extinguishment of the absorbed companies and the acquisition by Hualle, S.A., by universal succession, of the assets and liabilities of the absorbed companies. This merger was registered at the Mercantile Registry on 5 October 2009 and the transactions performed by absorbed companies are deemed for accounting purposes to have been performed by the absorbing company from 1 January 2009. This transaction did not have an effect on the consolidated financial statements.
3.- Absorption of Alhambra 2000, S.L.U. and Larix Spain S.L.U. by Elerco, S.A.
At the Universal Extraordinary General Meeting of Elerco, S.A. (absorbing company) held on 30 June 2009, the shareholders approved the merger by absorption of Alhambra 2000, S.L.U. and Larix Spain, S.L.U. (absorbed companies), with the extinguishment of the two absorbed companies and the acquisition by Elerco, S.A., by universal succession, of the equity of the absorbed companies. This merger was registered at the Mercantile Registry on 2 October 2009 and the transactions performed by the absorbed companies are deemed for accounting purposes to have been performed by the absorbing entity from 1 January 2009. This transaction did not have an effect on the consolidated financial statements.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
4.- Liquidation of Habitat Elpi, S.L.
At the Universal, Extraordinary and Annual General Meeting of Habitat Elpi, S.L. held on 30 June 2009, the shareholders approved the dissolution and liquidation of the company.
5.- Liquidation of Banesto Preferentes, S.A.
At the Universal Extraordinary General Meeting held on 5 November 2009, the shareholders approved the dissolution and simultaneous liquidation of Banesto Preferentes, S.A. At 31 December 2009, this resolution had not yet been registered at the Mercantile Registry.
6.- Acquisition of 40% of Digerfin, S.L.
On 30 December 2009, Mesena Servicios de Gestión Inmobiliaria, S.A. (formerly Grupo Inmobiliario la Corporación Banesto, S.A.) subscribed to 24,000 shares of Digerfin, S.L. representing 40% of its share capital.
2008
1. Acquisition of Promodomus Desarrollo de Activos, S.L.
2. Sale of Cambios Sol, S.A.
3. Liquidation of Proyecto Europa, S.A.
4. Sale of Desarrollo Informático, S.A.
5. Liquidation of Banesto Delaware Inc.
6. Liquidation of Banesto Issuances Ltd.
7. Change in the name of Larix Ltd. to Larix Spain S.L. and relocation of its registered office to Spain.
4. Distribution of the Bank's profit and Earnings per share a) Distribution of the Bank's profit
The distribution of the Bank's net profit for 2009 that the Board of Directors will propose for approval by the shareholders at the Annual General Meeting is as follows:
Thousands of Euros
Dividends 316,198 Voluntary reserves 188,184 Net profit for the year 504,382
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
At its meetings on 21 July, 26 October and 22 December 2009, the Board of Directors of the Bank resolved to distribute three interim dividends out of 2009 profit for a total of EUR 223,401 thousand. The dividend declared at the Board of Directors Meeting on 22 December 2009 will be paid on 1 February 2010 and, accordingly, it is recognised under "Other Financial Liabilities" on the liability side of the accompanying consolidated balance sheet (see Note 21).
The provisional accounting statements prepared on each of the dates indicated below by the Board of Directors of Banco Español de Crédito, S.A., pursuant to Article 216 of the Consolidated Companies Law, to evidence the existence of sufficient liquidity for the distribution of the interim dividends are as follows:
Thousands of Euros 30/06/09 30/09/09 30/11/09
Profit before tax at 30 November, 30 September and 30 June 2009 (*) 478,868 674,978 778,063 Less: Estimated income tax (96,566) (141,625) (168,154) Dividends paid - (82,486) (154,662) Liquidity 382,302 450,867 455,247 Interim dividend to be distributed 82,486 72,176 68,739 Gross dividend per share (euros) 0.120 0.105 0.100 Date of payment 01/08/09 02/11/09 01/02/10 (*) The latest balance sheet at the date of each Board of Directors Meeting.
At their meeting on 20 January 2010, the Bank’s Board of Directors agreed to submit for approval by the shareholders’ at the Annual General Meeting a final dividend of EUR 0.135 per share, for a total of EUR 92,797 thousand, which will be paid out on 3 May 2010. b) Earnings per share
i. Basic earnings per share
Basic earnings per share are calculated by dividing the net profit or loss 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:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
2009 2008
Net profit for the year attributed to the Parent (in thousands of euros) 559,803 779,844 Net profit for the year from ordinary activity attributed to the Parent (thousands of euros) 559,803 779,844 Weighted average number of shares outstanding 684,286,081 685,211,431 Basic earnings per share (euros) Of net profit for the year 0.82 1.14 Of net profit from ordinary activities 0.82 1.14
ii. Diluted earnings per share
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, warrants and convertible debt instruments).
At 31 December 2009 and 2008, the Group had no issues outstanding of debt instruments convertible into Bank shares or conferring privileges or rights which might, due to any contingency, make them convertible into shares. The Bank’s share-based incentive plans outstanding at 31 December 2008 (see Note 41) had a dilutive effect on the earnings per share equal to an increase of 245,907 shares. At 31 December 2009, the Bank did not have any share-based incentive plans that gave rise to deliveries of shares and, accordingly, there was not a dilutive effect of any kind.
Accordingly, 2009 and 2008 diluted earnings per share were calculated as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
2009 2008
Net profit for the year attributed to the Parent (in thousands of euros) 559,803 779,844 Dilutive effect of changes in profit for the year arising from potential conversion of ordinary shares - - 559,803 779,844 Weighted average number of shares outstanding 684,286,081 685,211,431 Dilutive effect of: Share options - 245,907 Adjusted average number of shares for the calculation 684,286,081 685,457,338 Diluted earnings per share (euros) 0.82 1.14
5. Remuneration and other benefits paid to the Bank's directors and senior executives
a) Remuneration of directors
Following is an individualised detail of the remuneration earned in 2009 by the Bank's directors, in their capacity as such, in respect of the by-law-stipulated share of profits and attendance fees corresponding to them for the collective supervisory and decision-making functions discharged as members of the Board of Directors, in accordance with Article 27 of the bylaws:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Euros 2009 2008 Bylaw-Stipulated Directors' Emoluments Attendance Fees Audit and Other Executive Compliance Risk Attendance Directors Board Committee Committee Committee Board Fees Total Total
José Antonio García Cantera 59,400 26,100 - - 13,500 - 99,000 99,000 Víctor Manuel Menéndez Millán 24,750 9,788 9,787 - 6,000 7,500 57,825 137,100 José María Nus Badía 59,400 26,100 26,100 13,500 - 125,100 125,100 Juan Delibes Liniers 59,400 26,100 26,100 12,000 - 123,600 125,100 Federico Outón del Moral ------40,650 Isabel Polanco Moreno ------16,350 Rafael del Pino y Calvo-Sotelo 59,400 - - - 12,000 - 71,400 69,900 Francisco Daurella Franco 59,400 - - - 9,000 - 68,400 68,400 José Luis López Combarros 59,400 17,400 26,100 - 13,500 15,000 131,400 124,050 Carlos Sabanza Teruel 59,400 26,100 - 26,100 13,500 - 125,100 125,100 Carlos Pérez de Bricio Olariaga 59,400 - - - 12,000 - 71,400 27,750 Belén Romana García 59,400 - 45,900 - 13,500 15,000 133,800 91,875 David Arce Torres 44,550 - 13,702 - 7,500 4,500 70,252 - Rosa María García García 34,650 - - - 4,500 1,500 40,650 - Total 2009 638,550 131,588 95,489 78,300 130,500 43,500 1,117,927 Total 2008 594,000 130,500 91,575 78,300 120,000 36,000 1,050,375
The foregoing table shows the amounts earned in 2008 and 2009 by Victor Manuel Menéndez Millán and in 2008 by Federico Outón del Moral and Isabel Polanco Moreno, who at 31 December 2009 and 2008, respectively, were not members of the Board, but who earned attendance fees for the meetings that they attended and all other remuneration to which they were entitled in proportion to the amount of time served by them as members of the Board.
The other members of the Bank's Board of Directors did not receive any remuneration.
At the Bank's Annual General Meeting on 28 February 2006 the shareholders approved a medium- to long-term Incentive Plan to grant options on shares of Banco Santander, S.A. to the beneficiaries and, if the terms of the plan are met, shares of Banco Español de Crédito, S.A. will be delivered to the senior executives and an amount in cash will be paid to the other beneficiaries.
As the terms of the Plan were met, the detail of the shares of Banco Español de Crédito, S.A. delivered to the members of the Board of Directors of the Bank in 2008 is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Number of Shares Medium-/long-term Incentive Plan: Ana Patricia Botín-Sanz de Sautuola y O'Shea 54,166 José Antonio García Cantera 16,920 Federico Outón del Moral 43,834 Juan Delibes Liniers 26,015 José María Fuster Van Bendegem 18,570 José María Nus Badía 15,566 175,071 (*)
(*) See Note 41.
Federico Outón del Moral ceased to discharge his duties on the Board prior to 31 December 2008.
The detail of the options on shares of Banco Santander, S.A. that were granted to members of the Board of Directors of the Bank, and the number of options exercised in 2008, is as follows:
Number Date of Date of of Exercise Commencement Expiry of Number Share Price of Exercise Exercise of Options Options (Euros) Period Period Exercised
Medium-/long-term Incentive Plan: Ana Patricia Botín-Sanz de Sautuola y O'Shea 293,692 9.09 02/03/08 15/01/09 - José Antonio García Cantera 91,743 9.09 02/03/08 15/01/09 91,743 Federico Outón del Moral 237,672 9.09 02/03/08 15/01/09 237,672 Juan Delibes Liniers 141,055 9.09 02/03/08 15/01/09 141,055 José María Fuster Van Bendegem 100,688 9.09 02/03/08 15/01/09 100,688 José María Nus Badía 84,403 9.09 02/03/08 15/01/09 - 949,253
Federico Outón del Moral ceased to discharge his duties on the Board prior to 31 December 2008.
On 27 June 2007, the Bank’s Extraordinary General Meeting approved an Incentive Plan which entails the delivery, if the terms of the plan are met, of shares of Banco Español de Crédito, S.A. to certain executives, including executive directors and senior executives (see Note 41).
The maximum number of shares of Banco Español de Crédito, S.A. to be delivered, no later than 31 July 2010, to each of the executive directors who are beneficiaries of the Plan is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Maximum Number of Shares
Medium-/long-term Incentive Plan: Ana Patricia Botín-Sanz de Sautuola y O'Shea 22,798 José Antonio García Cantera 39,729 Juan Delibes Liniers 37,457 José María Nus Badía 20,148 120,132
As the compulsory prerequisite of the Plan was not met, the directors who are beneficiaries will not receive shares of Banesto under the Incentive Plan.
Additionally, at the aforementioned Extraordinary General Meeting, the shareholders approved the first cycle (2007-2008) and the second cycle (2007-2009) of the Target-Based Share Plan and the first cycle (2008-2010) of the Obligatory Investment Share Plan of Banco Santander, S.A., which entails the delivery, if the terms of the plans are met, of the following number of shares of Banco Santander, S.A. to Ana Patricia Botín-Sanz de Sautuola y O'Shea:
Price Number (Euros per of Delivery Share) Shares Deadline
First cycle of Target-Based Share Plan 13.46 (*) 27,929 31 July 2009 Second cycle of Target-Based Share Plan 13.46 (*) 41,835 31 July 2010 First cycle of Obligatory Investment Share Plan (**) 13,610 1 April 2011
(*) Average market price of the shares of Banco Santander, S.A. weighted by daily volume in the 15 trading days prior to 7 May 2007. (**)The obligatory investment was made at an average price of EUR 11.80 per share.
As the terms of the first cycle (2007-2008) of the Target-Based Share Plan were met, in 2009 25,537 shares of Banco Santander, S.A. were delivered to Ana Patricia Botín-Sanz de Sautuola y O’Shea.
b) Remuneration of executive directors and senior executives
The detail of the remuneration of the Bank's executive directors and senior executives in 2009 and 2008, including the fixed remuneration in 2009 and 2008 and the variable remuneration recognised in income for those years, is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Number of Thousands of Euros Executive Directors and Senior Executives at 31 Salary Other December Fixed Variable Total Remuneration Total
2008 16 6,300 6,909 13,209 5,621 18,830 2009 16 6,123 6,997 13,120 277 13,397
The 2009 amounts include those received by Jaime Pérez Renovales until he joined Banco Santander, S.A.
The figures in the foregoing table include the amounts, by item, corresponding to Ana P. Botín-Sanz de Sautuola y O'Shea, José Antonio García Cantera, Juan Delibes Liniers, José María Fuster Van Bendegem and José María Nus Badía for the provision of services other than those of directors, pursuant to the last paragraph of Article 27 of the bylaws. Bank of Spain Circular 4/2004 only requires that the remuneration received by the executive directors be indicated in aggregate form, together with the remuneration of the other senior executives, as shown in the foregoing table. However, set forth below are the individualised amounts corresponding to the executive directors at 31 December 2009 for the provision of services other than the supervisory and decision-making functions discharged by them in their capacity as directors:
Thousands of Euros 2009 2008 Salary Other Fixed Variable Total Remuneration Total Total
Ana Patricia Botín-Sanz de Sautuola y O'Shea 1,295 1,786 3,081 209 3,290 3,668 José Antonio García Cantera 747 832 1,579 2 1,581 2,222 Juan Delibes Liniers 584 846 1,430 11 1,441 2,252 José María Nus Badía 494 455 949 1 950 1,074 Total 2009 3,120 3,919 7,039 223 7,262 Total 2008 3,030 3,725 6,755 2,461 9,216
The foregoing tables include, under other remuneration, the income arising from the delivery of shares of Español de Crédito, S.A. the exercise of options on shares of Banco Santander, S.A. and the amounts received in cash under the Plan approved by the shareholders at the Annual General Meeting of 28 February 2006.
As beneficiaries of the Plan, non-director executives exercised a total of 348,668 options on Banco Santander, S.A. shares and in 2008 they received a total of 70,836 Banco Español de Crédito, S.A. (see Note 41) shares and EUR 514 thousand in cash.
The maximum number of shares of Banco Español de Crédito, S.A. to be delivered to the non-director executives who are beneficiaries of the Incentive Plan approved by the Extraordinary General Meeting of
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
the Bank on 27 June 2007 is 150,113 shares (see Note 41). As the compulsory prerequisite was not met, the executives who are beneficiaries of this Plan will not receive Banesto shares under this Incentive Plan.
Following is a detail, by item, explaining the changes in the remuneration of executive directors in relation to the Bank’s profit and share price (Article 25.2 of the Regulations governing the Bank’s Board of Directors):
Thousands of Euros 2009 2008
Overall remuneration of executive directors for the collective supervisory and decision-making functions discharged by them 348 349 Overall remuneration of executive directors for functions discharged by them other than those discharged in their capacity as directors 7,262 9,216 Total remuneration of executive directors 7,610 9,566 Profit attributable to the Group 559.803 779.844 Change in share price 5.9% (39.3%)
c) Pension, insurance and other obligations
The actuarial liability recognised in connection with post-employment benefits earned by current and former senior executives and directors of the Bank amounted to approximately EUR 46,873 thousand at 2009 year-end (31 December 2008: EUR 43,005 thousand). Approximately EUR 3,084 thousand were charged to the consolidated income statement in this connection in 2009 (2008: EUR 3,018 thousand).
The following table details the defined benefit pension obligations to executive directors at 31 December 2009 and 2008:
Euros Vested Obligations 2009 2008
Ana Patricia Botín-Sanz de Sautuola y O'Shea 23,775,177 21,736,799 José Antonio García Cantera 2,891,579 2,396,917 Juan Delibes Liniers 9,109,334 8,598,210 José María Nus Badía 5,707,437 5,193,608
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The amounts under “Vested Obligations” in the foregoing table relate to the accrued present actuarial value of the future payments to be made by the Bank. These amounts were obtained using actuarial calculations based on, in the case of Ana Patricia Botín-Sanz de Sautuola y O'Shea, 100% of the sum of the fixed annual salary received at the date of effective retirement plus 30% of the arithmetical mean of the last three variable salary payments received. For the other executive directors the calculations are based on the sum of 100% of the fixed salary.
At 31 December 2009 and 2008, the capital guaranteed by life insurance policies for executive directors amounted to EUR 4,244 thousand and EUR 4,174 thousand, respectively. d) Loans
At 31 December 2009 and 2008, the direct risk exposure to directors of the Bank amounted to EUR 187 thousand and EUR 206 thousand, respectively. e) Termination benefits
The executive directors have indefinite-term employment contracts. However, executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If the contracts are terminated for reasons attributable to the Bank or due to objective circumstances (such as those affecting the executive directors' functional and organic statute), the directors will be entitled, at the date of termination of their employment relationships with the Bank, to the following:
1) In the case of Ana Patricia Botín-Sanz de Sautuola y O'Shea, to receive a termination benefit of up to five years' annual fixed salary payments, as established in the related contract, based on the date on which the contract is terminated.
2) In the case of José Antonio García Cantera, to receive a termination benefit of three years’ annual fixed salary payments, as established in the related contract.
3) In the case of Juan Delibes Liniers, to receive a termination benefit equal to half of 80% of the annual fixed salary multiplied by the number of years of recognised service in the banking industry, as established in the related contract.
4) In the case of José María Nus Badía, to receive a termination benefit of EUR 811,366.
In all cases these amounts are incompatible with the receipt of any other pension supplement.
Additionally, other members of the Bank'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 only recognised as personnel expenses when the employment relationship between the Bank and its directors is terminated before the normal retirement date.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
f) Detail of the directors' investments in companies with similar business activities and performance by directors, as independent professionals or as employees, of similar activities
Pursuant to Article 127 ter.4 of the Spanish Companies Law, in order to reinforce the transparency of listed companies, set forth below are the ownership interests held by the members of the Board of the Directors in entities whose company object is to engage in: (i) banking, financing or lending; (ii) insurance; (iii) management of collective investment undertakings; or (iv) securities brokerage; and the management or executive functions, if any, that the directors discharge thereat:
Line of % of Director Corporate Name Business Ownership Functions
Ana P. Botín-Sanz de Banco Santander, S.A. Banking 0.110 Director Sautuola y O’Shea Assicurazioni Generali, S.P.A. Insurance Director Santander Investment Services, S.A. Banking Director Banco Santander de Negocios Portugal Banking Director Matías Rodríguez Inciarte Banco Santander, S.A. Banking 0.012 Third Deputy Chairman and Executive Director Rafael del Pino Calvo-Sotelo Pactio Gestión, SGIIC, S.A. CIU 22.30 management - company - Banco Pastor, S.A. Banking 1.12 Member of the European The Blackstone Group International Ltd. Investments - Advisory Board David Arce Torres Banco Santander, S.A. Banking 0.017 General Manager Juan Delibes Liniers Santander Seguros y Reaseguros, Cía. Insurance - Director Aseguradora, S.A. José Luis López Combarros Bankinter, S.A. Banking 0.006 - Mapfre, S.A. Insurance 0.002 - Francisco Daurella Franco Banco Vitalicio de España, Cía Anónima de Insurance - Director Seguros y Reaseguros, S.A. Carlos Sabanza Teruel Banco Santander, S.A. Banking 0.006 - José María Fuster Van Bendegem Banco Santander, S.A. Banking 0.002 General Manager Abbey National Bank Banking Director Sistemas 4B, S.A. Means of Director payment
Banking Open Bank Santander Consumer, S.A. Director Banking Santander Consumer Bank Germany Director
Certain members of the Board of Directors hold ownership interests of less than 0.001% in the following listed companies: BBVA and Banco Santander.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
None of the members of the Board of Directors perform, as independent professionals or as employees, activities similar to those detailed above. Additionally, as required by Article 114.2 of the Securities Market Law, it is hereby stated that in 2009 and 2008 the Bank's directors did not perform, either on their own behalf or through an intermediary, any transaction with the Bank or with other Group companies other than those conducted in the ordinary course of operations or on an arm's length basis.
6. Loans and advances to credit institutions
The detail, by classification, type and currency of the transaction, of "Loans and Advances to Credit Institutions" on the asset side of the consolidated balance sheets is as follows:
Thousands of Euros 2009 2008
Classification: Other financial assets at fair value through profit or loss 1,751,237 1,793,839 Loans and receivables 22,616,417 19,700,685 24,367,654 21,494,524 Type: Reciprocal accounts 210 165 Time deposits 13,466,900 9,951,882 Reverse repurchase agreements 8,437,009 8,737,545 Other accounts 2,196,951 2,468,039 24,100,070 21,157,631 Add- Valuation adjustments 267,584 336,893 Of which: Accrued interest 369,367 335,943 Impairment losses (1,786) (1) Other adjustments 3 951 24,367,654 21,494,524 Currency: Euro 22,244,715 19,468,799 Foreign currencies 2,122,939 2,025,725 24,367,654 21,494,524
The impairment losses on financial assets classified as loans and receivables are disclosed in Note 10.
Note 44 contains a detail of the terms to maturity of these assets at 2009 and 2008 year-end and of the average interest rates in 2009 and 2008.
7. Debt instruments
The detail, by classification, type and currency, of “Debt Instruments” on the asset side of the consolidated balance sheets is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Classification: Financial assets held for trading 1,026,643 402,154 Other assets at fair value through profit or loss 383,149 253,887 Available-for-sale financial assets 7,270,941 6,620,409 Loans and receivables 629,662 736,239 Held-to-maturity investments 2,076,328 11,386,723 8,012,689 Type: Spanish government debt securities- Treasury bills 708,125 163,291 Government bonds 7,280,569 4,363,750 Accrued interest 42,461 24,368 Foreign government debt securities 121,034 137,632 Issued by financial institutions 1,660,636 1,353,576 Other fixed-income securities 1,584,679 1,986,373 11,397,504 8,028,990 Valuation adjustments (10,781) (16,301) Of which: Impairment losses (10,781) (16,301) 11,386,723 8,012,689 Currency: Euro 11,376,995 7,958,682 Foreign currencies 9,728 54,007 11,386,723 8,012,689
At 31 December 2009, the nominal amount of debt instruments assigned to Group or third-party commitments amounted to approximately EUR 13,180 thousand (31 December 2008: EUR 10,660 thousand).
The impairment losses on available-for-sale financial assets are disclosed in Note 8-d.
Note 44 contains a detail of the terms to maturity of these assets at 2009 and 2008 year-end and of the average interest rates in 2009 and 2008.
8. Other equity instruments
a) Breakdown
The detail, by currency, classification and type, of “Other Equity Instruments” in the consolidated balance sheets is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Currency: Euro 1,915,688 726,667 Foreign currencies 25,726 11,938 1,941,414 738,605 Classification: Financial assets held for trading 1,456,905 472,996 Other financial assets at fair value through profit or loss 137,927 143,436 Available-for-sale financial assets 346,582 122,173 1,941,414 738,605 Type: Shares of Spanish companies 1,759,346 466,937 Shares of foreign companies 116,545 61,432 Investment fund units and shares 76,927 72,413 Other securities 137,927 143,436 2,090,745 744,218 Less- Impairment losses (149,331) (5,613) 1,941,414 738,605
b) Acquisitions and disposals
As a result of the partial debt restructuring, on 20 February 2009, certain Cresa-Sacresa Group companies executed in a public deed a private dation in payment agreement with certain creditors whereby the Bank received 6,356,191 shares of Metrovacesa, S.A. representing 9.56% the share capital. The exchange value of the repayment of the debt was set at EUR 57 per share. The debt repaid amounted to EUR 326 million of principal plus the accrued interest.
At 31 December 2009, these shares were valued at EUR 34.91 per share using the net asset value (NAV) as reference since the quoted price on the stock market was not deemed representative due to its limited trading volume.
On 16 November 2009, the conversion of the two loans for a combined total of EUR 18,182 thousand into participating loans was completed.
The other acquisitions and disposals effected in 2009 and 2008 relate to changes in financial assets held for trading and purchases and sales of investment fund units and shares. c) Notifications of acquisitions of investments
The notifications made by the Bank, in compliance with Article 86 of the Spanish Companies Law and Article 53 of Securities Market Law 24/1988, of the acquisition and sale of holdings in investees are listed in Appendix IV.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
d) Impairment losses
Following is a summary of the changes in the impairment losses in the foregoing table and those on debt instruments classified as available-for-sale (see Note 7) in 2009 and 2008:
Thousands of Euros 2009 2008
Balance at beginning of year 21,914 18,671 Impairment losses charged to income for the year 97,547(**) 2,123 Other changes 40,651(*) 1,120 Balance at end of year 160,112 21,914
(*) Of which EUR 38,137 thousand constitute a transfer of the impairment losses on “Loans and Advances to Customers” associated with the debt assigned to the Cresa-Sacresa Group exchange (see Notes 8-b and 10).
(**) Of which EUR 31,872 thousand are recognised under "Gains/Losses on Financial Assets and Liabilities (Net) – Financial Instruments Not Measured at Fair Value through Profit or Loss" in the consolidated income statement.
9. Trading derivatives (assets and liabilities)
The detail, by type of inherent risk, of the fair value of the trading derivatives arranged by the Group at 31 December 2009 and 2008 is as follows:
Thousands of Euros 2009 2008 Balance Balance Balance Balance Receivable Payable Receivable Payable
Interest rate risk 2,878,228 2,825,139 2,325,533 2,289,170 Currency risk 300,029 298,680 370,139 322,882 Price risk 1,109,525 1,288,642 1,460,110 1,249,750 Credit risk 2,092 5,549 51,575 50,463 Other 63,576 1 1,308 1,308 4,353,450 4,418,011 4,208,665 3,913,573
10. Loans and advances to customers
The detail, by loan type and status, borrower sector, geographical area of residence and interest rate formula, of “Loans and Advances to Customers” on the asset side of the consolidated balance sheets is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
By loan type and status: Commercial credit 4,701,837 5,905,809 Secured loans 37,715,952 37,614,501 Reverse repurchase agreements 3,412,874 4,873,678 Personal loans 14,702,497 14,842,798 Credit accounts 6,470,164 7,489,257 Other term loans 1,966,578 2,258,037 Finance leases 1,622,070 2,271,165 Receivable on demand and other 921,192 1,398,485 Impaired assets 2,492,467 1,396,085 Other 3,275,683 988,800 77,281,314 79,038,615 Less: Valuation adjustments (1,648,633) (1,265,952) Of which: Prepayments and accrued income and other adjustments (134,560) 151,668 Impairment losses (1,514,073) (1,417,620) 75,632,681 77,772,663 By borrower sector: Public sector - Spain 1,980,938 1,466,929 Other resident sectors 70,405,919 72,233,071 Non-residents 3,245,824 4,072,663 75,632,681 77,772,663 By geographical area: Spain 73,155,509 75,730,528 European Union (excluding Spain) 2,564,867 1,934,819 United States and Puerto Rico 378,746 258,507 Other OECD countries 630,477 481,402 Latin America 367,635 425,328 Rest of the world 184,080 208,031 77,281,314 79,038,615 By interest rate formula: Fixed interest rate 22,422,982 21,129,858 Floating interest rate 54,858,332 57,908,757 77,281,314 79,038,615
Note 44 contains a detail of the terms to maturity of these assets at 2009 and 2008 year-end and of the average interest rates in 2009 and 2008.
At 31 December 2009 and 2008, there were no loans and advances to customers for material amounts without fixed maturity dates.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Finance leases
The reconciliation of the total gross investment in finance leases and the present value of the minimum finance lease payments receivable at 31 December 2009 and 2008 is as follows:
Thousands of Euros 2009 2008 Minimum finance lease payments 1,552,145 2,166,244 receivable Unguaranteed residual values 108,974 136,140 Gross investment in finance leases 1,661,119 2,302,384
At 31 December 2009 and 2008, the impairment losses covering bad debts relating to the minimum finance lease payments receivable amounted to EUR 16,075 thousand and EUR 4,681 thousand, respectively. At 31 December 2009 and 2008, unearned finance income amounted to EUR 28,447 thousand and EUR 19,431 thousand, respectively.
Securitisation In 2009 and 2008 the Bank securitised loans, the type and amount of which are as follows:
Millions of Euros Origin of the Collection Rights 2009 2008
Commercial loans 2,075 4,337 Of which: Mortgage-backed loans - 2,557 Loans with other collateral 2,075 1,780
All the securities issued were subscribed by securitisation vehicles set up by Santander de Titulización, Sociedad Gestora de Fondos de Titulización, S.A. This securitisation did not give rise to the derecognition of the loans from the balance sheet since, as a result of the terms and conditions agreed upon for the transfer of the assets, the Bank retained the substantial risks and rewards inherent thereto (mainly the credit risk of the transferred transactions) and, accordingly, the Bank’s exposure to the changes in the present values of the future cash flows of these financial assets did not change substantially (see Note 2-c). At 31 December 2009 and 2008, the total carrying amount of the transferred assets amounted to EUR 6,671 million and EUR 7,521 million, respectively, of which EUR 752 million and EUR 951 million, respectively, had been derecognised. At 31 December 2009 and 2008, outstanding securitisation bonds issued by the aforementioned SPVs (relating to derecognised transferred assets the total face value of which amounted to EUR 295,738 thousand and EUR 523,887 thousand, respectively) were owned by Group.
At 31 December 2009 and 2008, the carrying amount of the liabilities associated with financial assets which were not derecognised amounted to EUR 742 million and EUR 716 million, respectively, and this amount is recognised under “Marketable Debt Securities” in the consolidated balance sheets at those dates. The remaining bonds issued in securitisation transactions were subscribed in full by the Bank.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Other disclosures At 31 December 2009 and 2008, the Group had recognised loans amounting to EUR 25,770 thousand and EUR 24,149 thousand, respectively, of financing granted to its employees to acquire shares of the Bank and of Banco Santander, S.A.
In addition, the Bank has in certain cases financed acquisitions of its own shares by third parties, and has granted loans to third parties secured by shares of the Bank or of Banco Santander, S.A. At 31 December 2009 and 2008, these financing and guarantee arrangements amounted to EUR 1,730 thousand and EUR 1,732 thousand, respectively, net of the related impairment losses, and a restricted reserve was recorded for the carrying amount thereof where appropriate, as required by Articles 75, 79, 80 and 81 of the Consolidated Spanish Public Limited Liability Companies Law (see Note 28).
Impairment losses
The changes in 2009 and 2008 in the balance of the impairment losses in the foregoing table and of those on “Loans and Receivables - Loans and Advances to Credit Institutions” (see Note 6) were as follows:
Thousands of Euros 2009 2008
Balance at beginning of year 1,417,621 1,238,866 Impairment losses charged to income for the year: Individually assessed 869,768 393,998 Collectively assessed - 10,693 Impairment losses reversed with a credit to income (385,423) (72,491) Net impairment losses for the year 484,345 332,200 Net write-off of impaired balances and other changes (*) (386,107) (153,445) Balance at end of year 1,515,859 1,417,621 By method of assessment: Individually 922,638 486,883 Collectively 593,221 930,738
(*) Of which, EUR 38,137 thousand relate to a transfer to impairment losses on "Other Equity Instruments" in 2009 (see Note 8-d) and EUR 97,725 thousand and EUR 31,872 thousand relate to transfers to impairment losses on non-current assets held for sale in 2009 and 2008, respectively (see Note 14).
Written-off loans recovered in 2009 amounted to EUR 32,751 thousand (2008: EUR 32,401 thousand), and this amount is presented as a reduction of "Impairment Losses on Financial Assets (Net) - Loans and Receivables" in the consolidated income statement.
Impaired assets
Following is a detail of the financial assets classified as “Loans and Receivables – Loans and Advances to Customers” and considered to be impaired due to credit risk at 31 December 2009, classified by age of the oldest past-due amount and those assets which, although not matured, are considered impaired due to other factors:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros
With Balances Past Due by Less than 6 6 to 12 12 to 18 18 to 24 More than Months Months Months Months 24 Months Total
2009 1,388,367 336,785 332,072 178,227 257,016 2,492,467 2008 699,455 340,548 115,074 20,982 220,026 1,396,085
Of this amount, at 31 December 2009 and 2008, approximately 99.6% and 99.1%, respectively, related to Spanish residents.
11. Hedging derivatives
The detail, by type of risk hedged, of the fair value of the derivatives qualifying for hedge accounting is as follows:
Thousands of Euros 2009 2008 Assets Liabilities Assets Liabilities
Fair value hedges Micro-hedges 1,439 29,372 58,450 177,036 Macro-hedges 1,300,548 216,179 866,721 337,296 Cash flow hedges 92,111 55,478 269,678 62,759 Of which: Recognised in equity (Note 25) - 111,180 - 90,115 1,394,098 301,029 1,194,849 577,091
Cash flow hedges are used to reduce the cash flow fluctuations (attributable to the interest rate) generated by the hedged items (loans and receivables tied to a floating interest rate). These hedges use interest rate derivatives to convert the floating interest rate on the loans and receivables to a fixed interest rate.
The Bank has two fair value hedges of interest rate risk of a portfolio of financial instruments and of the issues that it guarantees. The purpose of the hedge is to maintain the economic value of the hedged assets, which are loans and fixed-interest marketable debt securities, hedged mainly by IRSs (see Note 31).
As a result of the discontinuation of certain cash flow hedges, the balance of "Valuation Adjustments – Cash Flow Hedges” at 31 December 2009 included EUR 92 million relating to the measurement of the hedging derivatives when they were discontinued and, pursuant to current legislation, this amount will be recognised in the consolidated income statement symmetrically to the recognition of the cash flows generated by the hedged items.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
12. Investments
"Investments" includes equity instruments issued by associates owned by the Bank.
“Associates” are defined as entities over which the Bank is in a position to exercise significant influence, but not control or joint control. Significant influence generally exists when the Bank holds 20% or more of the voting power of the investee.
Appendix III contains a detail of the investments in associates, indicating the percentage of direct and indirect ownership and other relevant information.
The changes in 2009 and 2008 in “Investments" in the consolidated balance sheets were as follows:
Thousands of Euros 20 09 2008
Balance at beginning of year 16,722 16,258 Purchases and capital increases 4,924 - Disposals and capital reductions (1,495) - Exchange differences and other (1,528) 464 Balance at end of year 18,623 16,722
Following is a summary of the financial information on the associates (obtained from the information available at the reporting date):
Thousands of Euros 2009 2008
Total assets 531,824 371,238 Total liabilities (437,506) (268,662) Net assets 94,318 102,576 Group's share of the net assets of associates 24,210 23,027 Total income 132,026 210,103 Total profit 1,345 52,909 Group's share of the profit of associates 3,269 1,874
13. Liabilities under insurance contracts and Reinsurance assets
The detail of “Liabilities under Insurance Contracts” in the consolidated balance sheets at 31 December 2009 and 2008 is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008 Direct Inward Direct Inward Technical Provisions for: Insurance Reinsurance Total Insurance Reinsurance Total
Unearned premiums and unexpired risks 90,760 52,733 143,493 110,920 65,910 176,830 Life insurance: Unearned premiums and risks 76,863 6,811 83,674 85,112 9,316 94,428 Mathematical provisions 1,549,618 - 1,549,618 797,630 - 797,630 Claims outstanding 114,398 20,264 134,662 112,723 15,644 128,367 Bonuses and rebates 3,546 - 3,546 4,881 2,315 7,196 Life insurance policies where the investment risk is borne by the policyholders 2,430,608 - 2,430,608 2,181,312 - 2,181,312 Other technical provisions 17,864 23,681 41,545 - 49,866 49,866 4,283,657 103,489 4,387,146 3,292,578 143,051 3,435,629
At 31 December 2009 and 2008, the consolidated insurance entities had balances receivable from reinsurance companies amounting to EUR 152,824 thousand and EUR 199,411 thousand, respectively, which are recognised under “Reinsurance Assets” in the consolidated balance sheets.
The consolidated insurance entities do not operate in lines of insurance giving rise to significant concentrations of insurance risk and they apply controls and procedures which enable them to limit and control any such concentration additionally, which is also mitigated by reinsurance contracts.
Risk management
The consolidated insurance entities analyse the various risk categories related to their activities. In order to obtain an accurate diagnosis of the efficiency of the internal control environment, the consolidated insurance entities have a system of pre-controls (through the definition of exposure limits), of continuous controls (to ensure the proper monitoring of the efficiency of the control map) and post-control systems (to validate the efficiency of the control environment through a subsequent analysis of the Company’s activities).
14. Tangible assets and Non-current assets held for sale
Tangible assets
a) Changes
The changes in 2009 and 2008 in "Tangible Assets" in the consolidated balance sheets were as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros Property, Plant and Equipment Investment for Own Use Property Total
Cost: Balances at 1 January 2008 1,695,943 75,237 1,771,180 Additions 273,828 5,076 278,904 Disposals (300,070) (81) (300,151) Exchange differences (net) 41 (4) 37 Transfers and other (138) - (138) Balances at 31 December 2008 1,669,604 80,228 1,749,832 Additions 72,635 62,466 135,101 Disposals (38,135) (2,986) (41,121) Exchange differences (net) 1 - 1 Transfers and other 188 - 188 Balances at 31 December 2009 1,704,293 139,708 1,844,001
Accumulated depreciation: Balances at 1 January 2008 567,855 4,053 571,908 Disposals (130,557) (47) (130,604) Charge for the year 77,872 413 78,285 Exchange differences, transfers and other (520) - (520) Balances at 31 December 2008 514,650 4,419 519,069 Disposals (11,546) (258) (11,804) Charge for the year 67,890 1,407 69,297 Exchange differences (89) - (89) Balances at 31 December 2009 570,905 5,568 576,473 Impairment losses: Balances at 1 January 2008 - (5,376) (5,376) Amounts used and other net changes - 159 159 Balances at 31 December 2008 - (5,217) (5,217) Charge for the year (12,268) 104 (12,164) Amounts used and other net changes 12,268 (3,692) 8,576 Balances at 31 December 2009 (8,805) (8,805) Tangible assets, net: Balances at 31 December 2008 1,154,954 70,592 1,225,546 Balances at 31 December 2009 1,133,388 125,335 1,258,723
Direct write-downs due to the impairment of tangible assets amounted to EUR 12,164 thousand in 2009 (2008: EUR 7,199 thousand).
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
b) Property, plant and equipment for own use
The detail, by type of asset, of the items composing "Property, Plant and Equipment for Own Use" in the consolidated balance sheets at 31 December 2009 and 2008 is as follows:
Thousands of Euros Accumulated Carrying Cost Depreciation Amount
Buildings 820,776 147,474 673,302 Furniture 103,540 73,390 30,150 Fixtures 469,369 185,834 283,535 Office and IT equipment 148,299 75,084 73,215 Other 127,620 32,868 94,752 Balances at 31 December 2008 1,669,604 514,650 1,154,954
Land and buildings 828,628 155,220 673,408 Furniture 100,943 71,987 28,956 Fixtures 470,606 203,002 267,604 Office and IT equipment 157,627 91,963 65,664 Other 146,489 48,733 97,756 Balances at 31 December 2009 1,704,293 570,905 1,133,388
At 31 December 2009 and 2008, the Group had rights on assets used under finance leases amounting to EUR 21,721 thousand and EUR 20,821 thousand, respectively.
The Bank has put up for sale 23 properties which house certain branches in various locations throughout Spain, the carrying amount of which amounts to approximately EUR 17 million. At the same time of the sale, the Bank will arrange operating lease agreements with the buyers of the aforementioned branches with compulsory lease terms of 15 years, renewable at the discretion of the Bank. The purchase-sale agreements include a purchase option at the end of the compulsory lease term, the price of which shall be the market value of the property at that time. c) Investment property
In 2009 and 2008 the rental income earned from investment property owned by the consolidated entities amounted to approximately EUR 2,452 thousand and EUR 2,005 thousand, respectively, (see Note 40) while the operating expenses of all kinds related to such investment property amounted to approximately EUR 3,412 thousand (2008: approximately EUR 254 thousand).
Non-current assets held for sale
The detail of “Non-Current Assets Held for Sale” is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Investment property 1,167,075 1,192,331 Foreclosed assets 861,017 363,728 Assets recovered from finance leases 2,786 115 2,030,878 1,556,174
At 31 December 2009 and 2008, substantially all the assets classified as non-current held for sale relate to residential property assets at different stages of development: from plots earmarked for construction to completed housing units. Substantially all of these assets were measured through an appraisal performed by a valuer authorised by the Bank of Spain.
In 2009 and 2008 the Bank and other Group companies acquired assets amounting to EUR 893 million and EUR 1,192 million, respectively, with the aim of settling certain loan transactions.
Impairment losses of EUR 281,699 thousand and EUR 110,548 thousand were deducted from the balance of “Non-Current Assets Held for Sale” at 31 December 2009 and 2008, respectively. The changes in “Non- Current Assets Held for Sale” in 2009 and 2008 were as follows:
Thousands of Euros 2009 2008
Balance at beginning of year 110,548 42,738 Impairment losses charged to income for the year 75,917 28,258 Transfer of impairment losses from “Loans and Advances to Customers” (Note 10) 97,725 31,872 Other variations, net (2,491) 7,680 Balance at end of year 281,699 110,548
The net impairment losses for 2009 are recognised under “Gains/(Losses) on Non-Current Assets Held for Sale Not Classified as Discontinued Operations”.
In 2009 and 2008 assets with a carrying amount of EUR 272,696 thousand and EUR 28,900 thousand, respectively, were sold. The net loss arising from the sale of these assets (EUR 8,579 thousand and EUR 257 thousand in 2009 and 2008, respectively) is recognised under “Gains/(Losses) on Non-Current Assets Held for Sale not Classified as Discontinued Operations" in the consolidated income statements.
The fair value of substantially all the non-current assets held for sale was estimated through an appraisal by a valuer authorised by the Bank of Spain and was deemed to be the value obtained from this appraisal pursuant to Ministerial Order 805/2003.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
15. Intangible assets – Other intangible assets
The detail of “Intangible Assets – Other Intangible Assets" in the consolidated balance sheets is as follows:
Estimated Thousands of Euros Useful Life 2009 2008
With finite useful life: IT developments 3 years 158,094 111,936 Concessions and other 3 to 50 3,290 4,405 years 161,384 116,341 Less- Accumulated amortisation (92,032) (57,659) Impairment losses (152) (158) Total, net 69,200 58,524
Changes
The changes in “Intangible Assets – Other Intangible Assets” in the consolidated balance sheets in 2009 and 2008 were as follows:
Thousands of Euros 2009 2008 Cost: Balance at beginning of year 116,341 173,175 Net additions (disposals) 45,043 (56,834) Balance at end of year 161,384 116,341
Accumulated amortisation: Balance at beginning of year (57,659) (125,109) Net charges (35,795) (24,032) Disposals and other changes 1,422 91,482 Balance at end of year (92,032) (57,659)
Impairment losses: Balance at beginning of year (158) (162) Net reversals 6 4 Balance at end of year (152) (158) Net balance at end of year 69,200 58,524
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
16. Other assets and Other liabilities
The detail of “Other Assets” and “Other Liabilities" in the consolidated balance sheets is as follows:
Thousands of Euros Assets Liabilities 2009 2008 2009 2008
Inventories 440,443 566,876 - - Guarantees on futures transactions and other 1 130,271 224 245 Unmatured accrued income/expenses 130,632 128,553 250,036 263,740 Prepayments 7,486 19,608 42,786 78,121 Accrued expenses - - 221,560 196,901 Other 103,042 119,186 171,437 9,435 681,604 964,494 686,043 548,442
Inventories
The detail of “Inventories” at 31 December 2009 and 2008 is as follows:
Thousands of Euros 2009 2008
Developments in progress 63,393 332,209 Raw materials 62,095 75,454 Finished goods 329,110 164,690 Less- Impairment losses (14,155) (5,477) 440,443 566,876
In 2009 impairment losses amounting to EUR 12,038 thousand were recognised under “”Impairment Losses on Other Assets (Net) – Other Assets”.
The impairment losses on the developments in progress were determined based on the valuations performed by independent experts.
17. Deposits from central banks and Deposits from credit institutions
The detail, by classification, counterparty, type and currency, of “Deposits from Central Banks" and “Deposits from Credit Institutions" on the liability side of the consolidated balance sheets is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Classification: Financial liabilities at amortised cost 14,027,824 12,406,618
Counterparty: Central banks 2,526,643 1,952,343 Credit institutions 11,501,181 10,454,275 14,027,824 12,406,618 Type: Reciprocal accounts 16,145 825 Time deposits 6,664,550 6,369,261 Hybrid financial liabilities 463 2,150 Repurchase agreements 6,314,872 5,272,125 Other accounts 1,021,423 609,668 14,017,453 12,254,029 Add- Valuation adjustments 10,371 152,589 Of which: Accrued interest 10,371 152,426 Other adjustments - 163 14,027,824 12,406,618 Currency: Euro 11,591,169 9,705,371 Foreign currencies 2,436,655 2,701,247 14,027,824 12,406,618
At 31 December 2009 and 2008, the limit established by the Bank of Spain for the Group for the system of loans guaranteed by public debt securities and other assets amounted to EUR 4,193,640 thousand and EUR 3,468,931 thousand, respectively. The amount drawn down at those dates corresponds to that recognised under “Central Banks” in the foregoing table.
Note 44 contains a detail of the terms to maturity of these liabilities at 2009 and 2008 year-end and of the average interest rates in 2009 and 2008.
18. Customer deposits
The detail, by classification, type and currency, of “Customer Deposits” in the consolidated balance sheets is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Classification: Financial liabilities at amortised cost 56,717,721 57,589,628
Type: On demand- Current accounts 15,110,685 13,543,773 Savings accounts 7,147,397 6,204,063 Other demand deposits 260,915 320,284 Time deposits- Fixed-term deposits 15,261,348 17,718,068 Home-purchase savings accounts 63,939 58,161 Discount deposits 240 246 Hybrid financial liabilities 2,823,957 3,853,773 Other time deposits 13,781 12,824 Repurchase agreements 15,756,851 15,671,107 56,439,113 57,382,299 Add- Valuation adjustments 278,608 207,329 Of which: Accrued interest 280,980 208,747 Other adjustments (2,372) (1,418) 56,717,721 57,589,628 Currency: Euros 54,071,139 54,970,183 Foreign currencies 2,646,582 2,619,445 56,717,721 57,589,628
Note 44 contains a detail of the terms to maturity of these liabilities at 2009 and 2008 year-end and the average interest rates in 2009 and 2008.
19. Marketable debt securities
a) Breakdown
The detail, by classification and type, of “Marketable Debt Securities” in the consolidated balance sheets is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Classification: Financial liabilities at amortised cost 29,664,452 28,315,103
Type: Bonds and debentures outstanding 6,044,688 5,894,424 Hybrid securities 2,819,074 3,339,757 Mortgage-backed bonds (“cédulas hipotecarias”) 18,426,120 14,917,885 Promissory notes 1,547,480 2,602,478 Other securities associated with transferred financial assets (Note 10) 204,970 716,457 Mortgage bonds (Note 10) 216,777 435,450 29,259,109 27,906,451 Add- Valuation adjustments 405,343 408,652 Of which: Accrued interest and other 416,576 437,002 Adjustments due to hedges (11,233) (28,350) 29,664,452 28,315,103
Note 44 contains a detail of the terms to maturity of these liabilities at 2009 and 2008 year-end and of the average interest rates in 2009 and 2008. b) Bonds and debentures outstanding
The detail, by issue currency and interest rate, of “Bonds and Debentures Outstanding” in the foregoing table is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Annual Thousands of Euros Interest Maturity Currency of Issue 2009 2008 Rate Date
Euro: 3-month Euribor + Non-convertible bonds issued by the Bank - 1,000,000 0.12% June 2009 3-month Non-convertible bonds issued by Banesto Banco de Euribor + Emisiones, S.A. 1,000,000 1,000,000 0.05% February 2010 3-month Non-convertible bonds issued by Banesto Financial Euribor + Products 5,044,688 3,660,897 floating spread Until February 2038 US dollar: Floating rate- Non-convertible bonds issued by the Bank - 233,527 3 month Libor - Until April 2012 0.01% (*) Ending balance 6,044,688 5,894,424 (*) Redeemed early on 11 February 2009.
c) Mortgage-backed bonds (“cédulas hipotecarias”)
Disclosures required pursuant to Law 2/1981, of 25 March, regulating the mortgage market and to Royal Decree 716/2009, of 24 April, implementing certain provisions of the aforementioned Law.
These mortgage-backed bonds 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 Bank's unlimited liability) and, where appropriate, by the replacement assets and by the cash flows generated by the derivative financial instruments associated with each issue.
The mortgage-backed bonds include the holder’s financial claim on the Bank, 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 favour and, where appropriate, in relation to the replacement assets and the cash flows generated by the derivative financial instruments associated with the issues.
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 9 July. Without prejudice to the foregoing, in accordance 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.
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 realising the replacement assets set aside to cover the issue and, if this is not sufficient, they must obtain financing to meet the mandated payments to the holders of the mortgage-backed bonds, and the finance provider must be subrogated to the position of the bond-holders.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
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 members of the Board of Directors hereby state that the Bank has specific policies and procedures in place to cover all activities relating to the issues launched by the Bank in the mortgage market, which guarantee strict compliance with the mortgage market regulations applicable to these activities.
Disclosures relating to the issues of mortgage-backed bonds (“cédulas hipotecarias”)
The detail, by currency of issue and interest rate, of “Mortgage-Backed Bonds” is as follows:
Annual Maturity Thousands of Euros Interest Date Currency of Issue 2009 2008 Rate (%)
Euro: March 2002 issue 960,389 1,000,000 5.75 March 2017 May 2003 issue 1,488,176 1,500,000 4 May 2010 February 2004 issue 1,991,060 2,000,000 3.75 February 2011 September 2004 issue 1,741,796 1,695,000 4.25 September 2014 January 2005 issue 1,998,024 2,000,000 3.50 January 2015 September 2005 issue 1,989,314 2,000,000 2.75 September 2012 January 2006 issue 1,997,652 2,000,000 3.50 January 2016 July 2006 issue 966,274 935,000 4.25 July 2013 February 2007 issue 1,697,498 1,687,885 4.25 February 2014 February 2008 issue 50,000 50,000 6-month February 2010 Euribor + 0.12% February 2008 issue 50,000 50,000 6-month February 2013 Euribor + 0.25% December 2008 issue 704,287 - 4.00% December 2011 February 2009 issue 557,400 - 3.50% February 2012 June 2009 issue 995,972 - 3.63% June 2013 September 2009 issue 1,238,278 - 2.63% February 2013 Balance at end of year 18,426,120 14,917,885
On 17 February, 4 June and 14 September 2009, the Bank launched issues of mortgage-backed bonds with nominal values of EUR 557.4 million, EUR 1,000 million and EUR 1,250 million and maturing on 17 February 2012, 4 June 2013 and 28 February 2013, respectively. These issues are represented by 5,574, 10,000 and 12,500 mortgage-backed bonds of EUR 100,000 face value each.
The face value of all mortgage loans and credits, including those eligible in accordance with the provisions of the applicable legislation for the purposes of calculating the mortgage-backed bond issue limits, is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009
Nominal value of the Bank’s outstanding loan portfolio 35,191,876 Face value of the outstanding mortgage-backed loans eligible for the purposes of calculating the limit of mortgage-backed bond issues in accordance with Article 3 of Royal Decree 716/2009, of 24 April 25,011,323
Mortgage-backed bond issuers have an early redemption option solely for the purpose of complying with the limits on the volume of outstanding mortgage bonds stipulated by mortgage market regulations.
86% of the mortgage loans and credits assigned to the issues of the Bank's mortgage-backed bonds at 31 December 2009 had uncollected amounts less than 80% of the last fair value of the guarantees securing the loans (LTV).
None of the mortgage-backed bonds issued by the Bank had replacement assets assigned to them.
d) Promissory notes
All the promissory notes were issued by Banesto Banco Emisiones, S.A. and are recognised at discount. At 31 December 2009 and 2008, their face value amounted to EUR 1,557,866 thousand and EUR 2,758,350 thousand, respectively. All promissory notes outstanding at 31 December 2008 matured in 2009 and those outstanding at 31 December 2009 mature between January and October 2010.
20. Subordinated liabilities
a) Breakdown
The detail, by currency of issue and interest rate, of “Subordinated Liabilities” in the consolidated balance sheets is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros Issuer 2009 2008 Currency Interest Rate/ Dividends Maturity
Banco Español de Crédito, S.A.: 3-month Euribor + 0.32%, Subordinated deposit 600,000 600,000 Euros +0.5% from the fifth year June 2014 Subordinated deposit 600,000 600,000 Euros 3-month Euribor + 2.50% September 2018 Floating CMS + 0.125% (fixed coupon of 6% in the Preferred participating securities 125,000 125,000 Euros first year) Perpetual Preferred participating securities 200,000 200,000 Euros Fixed coupon of 5.5% Perpetual Preferred participating securities 497,466 - Euros Fixed coupon of 6% (a) Banesto Banco Emisiones, S.A.: Subordinated debentures 500,000 500,000 Euros Mid IRS at one year + 0.6% March 2016
Banesto Preferentes, S.A.: Subordinated deposit - 131,145 Euros 3-month Euribor + 0.2% Perpetual
Banesto Holding, Ltd. Preference shares 53,648 51,684 US dollar 10.5% (a) 2,576,114 2,207,829 Add- Valuation adjustments 17,300 29,006 Of which: Accrued interest 19,047 32,120 Hedge accounting (1,747) (3,114) Ending balance 2,593,414 2,236,835
(a) Redeemable at the discretion of the issuer with the prior consent of the Bank of Spain.
On 29 June 2009, the Bank launched an issue of 500,000 preference shares of EUR 1,000 par value each.
On 23 June 2009, Banesto Preferentes redeemed all its preference shares following authorisation from the Bank of Spain.
The issues of the preference shares of EUR 125 million, EUR 200 million and EUR 497 million are redeemable subject to authorisation from the Bank of Spain in April 2011, May 2010 and June 2014, respectively.
b) Other disclosures
For debt seniority purposes preference shares are junior to all general creditors and to subordinated deposits. The payment of dividends on these shares, which have no voting rights, depends on the obtainment of sufficient distributable profit and on the limits imposed by Spanish banking regulations on equity. If for these reasons remuneration is not paid on the preference shares, the Bank will not pay dividends on its ordinary shares. They are redeemable in November 2009 and April 2011, subject to authorisation from the Bank of Spain.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The other issues are subordinated and, therefore, for debt seniority purposes they are junior to all general creditors. The issues launched by subsidiaries are guaranteed by Banesto or by restricted deposits arranged at Banesto for this purpose.
At 31 December 2009 and 2008, no issues were convertible into shares of Banesto or granted privileges or rights which, in certain circumstances, make them convertible them into shares.
The preference shares issued by Banesto Holding Ltd. relate to the issue launched in 1992 for USD 100 million and guaranteed by Banesto. The preference shares do not carry voting rights, pay a fixed dividend of 10.5% per annum and are fully or partially redeemable at the discretion of the issuer, with the prior consent of the Bank of Spain. The outstanding balance at 31 December 2009 amounted to EUR 53,648 thousand, equivalent to USD 77,285,400 (31 December 2008: EUR 51,684 thousand equivalent to USD 77,285,400).
The interest accrued on subordinated liabilities amounted to approximately EUR 107,391 thousand in 2009 (EUR 121,350 thousand in 2008).
Note 44 contains a detail of the terms to maturity of these liabilities at 2009 and 2008 year-end and of the average interest rates in 2009 and 2008.
21. Other financial liabilities
The detail of “Other Financial Liabilities” in the consolidated balance sheet is as follows:
Thousands of Euros 2009 2008
Trade payables (*) 989,918 1,470,806 Public sector 309,584 432,892 Other 2,792,413 993,774 4,091,915 2,897,472
(*) Including EUR 68,739 thousand and EUR 90,735 thousand relating to the unpaid interim dividends declared by the Bank’s Board of Directors at 31 December 2009 and 2008, respectively (see Note 4).
Note 44 shows a detail of the residual maturities of these liabilities at 31 December 2009 and 2008.
22. Provisions
a) Breakdown
The detail of “Provisions” in the consolidated balance sheets is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Provisions for pensions and similar obligations 2,175,466 2,215,208 (Notes 2-v and 2-w) Provisions for contingent liabilities and commitments 112,966 102,092 Other provisions 311,139 214,990 Provisions 2,599,571 2,532,290
b) Changes
The changes in “Provisions” in 2009 and 2008 were as follows:
Thousands of Euros 2009 2008
Beginning balance 2,532,290 2,614,307 Additions charged to income 330,391 121,656 Of which: Finance expense (Note 34) 90,856 95,050 Staff costs (Note 41) 12,654 12,658 Period provisions 226,881 13,948 Provisions for pensions and similar obligations 87,685 4,946 Other provisions 139,196 9,002 Payments to retired employees (76,328) (84,214) Payments to early retirees (130,298) (122,807) Insurance premiums paid (3,160) (7,748) Provisions used, exchange differences and other changes (53,324) 11,096 Ending balance 2,599,571 2,532,290
c) Provisions for pensions and similar obligations
The detail of the present value of the Group's post-employment benefit obligations at 31 December 2009 and 2008, showing the funding status of these obligations, the fair value of the plan assets funding them and the present value of the unrecognised obligations at those dates, is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Present value of the obligations: To current employees 340,787 361,885 To retired employees (vested) 1,415,415 1,470,807 1,756,202 1,832,692
Fair value of plan assets 184,279 193,106 Unrecognised actuarial losses 101,969 108,476 Unrecognised past service cost 6,291 6,951 Provisions - Provisions for pensions 1,463,663 1,524,159 Of which- Insurance contracts linked to pensions: Other insurers 227,609 248,025 1,756,202 1,832,692
Al 31 December 2007, 2006 y 2005, the present value of the obligations amounted to EUR 1,823,470 thousand, EUR 1,821,116 thousand and EUR 1,829,954 thousand, respectively; the fair value of the plan assets amounted to EUR 191,823 thousand, EUR 203,244 thousand and EUR 211,289 thousand, respectively; and the unrecognised actuarial losses amounted to EUR 97,280 thousand, EUR 73,245 thousand and EUR 80,387 thousand, respectively.
The amount of these obligations was determined by independent insurance actuaries using, under their own responsibility, the following valuation criteria, inter alia:
1. Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.
2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:
2009 2008
Discount rate 4% 4% Mortality tables PERM/F 2000 PERM/F 2000 Cumulative annual CPI growth 1.5% 1.5% Annual salary increase rate 2.9% 2.9% Annual social security pension increase rate 1.5% 1.5%
3. The estimated retirement age of each employee is the first at which the employee is entitled to retire or the agreed-upon age, as appropriate.
The fair value of insurance contracts was determined as the amount of the mathematical provisions made by the related insurer, taking into account the following assumptions:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
2009 2008
Expected rate of return on plan assets 4.0% 4.0% Expected rate of return on reimbursement rights 4.0% 4.0%
The changes in 2009 and 2008 in the fair value of the plan assets were as follows:
Thousands of Euros 2009 2008
Fair value of plan assets at beginning of year 193,106 191,823 Expected return on plan assets 7,499 7,653 Actuarial gains / (losses) (3,836) (2,308) Contributions (1,137) 8255 Benefits paid (11,353) (12,317) Fair value of plan assets at end of year 184,279 193,106
The expected return on plan assets was determined on the basis of the interest rates guaranteed by the insurance companies that underwrite the related policies.
In 2009 the actual return on the plan assets was EUR 3,663 thousand (2008: EUR 5,490 thousand).
At 31 December 2009 and 2008, each major category of plan assets accounted for the following percentages of the fair value of the plan assets:
Thousands of Euros 2009 2008 Insurance policies taken out with non-Banesto Group insurance companies 95.6% 95.7% EPSV 4.4% 4.3% Total 100% 100%
The net amount of the experience adjustments arising on the plan assets and liabilities, expressed as an amount or percentage of these assets and liabilities in 2009 and in the four preceding years is as follows:
2009 2008 2007 2006 2005 0.37% (0.61)% (1.32)% 0.39% (0.17)%
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The changes in 2009 and 2008 in the cumulative net unrecognised actuarial losses were as follows:
Thousands of Euros 2009 2008
Beginning balance 108,476 97,280 Increases/(decreases) due to: Net actuarial losses/(gains) arising in the year (6,507) 11,196 Ending balance 101,969 108,476
The Group expects to make ordinary transfers to the reserves for post-retirement benefit obligations amounting to EUR 13,637 thousand in 2010. d) Other long-term employee benefits
In 2009 and 2008, Banesto offered certain employees the possibility of taking early retirement. Accordingly, provisions were made in both years to cover the obligations (in terms of both salaries and other employee welfare costs) to early retirees from the date of early retirement to the date of effective retirement, amounting to EUR 127,337 thousand and EUR 11,817 thousand, respectively.
The present value of the obligations and the fair value of the plan assets and the reimbursement rights at 31 December 2009 and 2008, were as follows:
Thousands of Euros 2009 2008
Present value of the obligations: To early retirees 707,311 687,853 Long-service bonuses and other benefits 4,492 3,196 711,803 691,049
Provisions - Provisions for pensions 711,803 691,049 711,803 691,049
At 31 December 2007, 2006 and 2005, the present value of the obligations amounted to EUR 771,084 thousand, EUR 887,805 thousand and EUR 672,264 thousand, respectively.
The amount of these obligations was determined by independent actuaries using, under their own responsibility, the same techniques as those applied to quantify defined benefit obligations (see Note 22- c). e) Other provisions
The balance of “Provisions - Other Provisions”, which includes, inter alia, provisions for the estimated costs to sell of the non-current assets held for sale (see Note 14) and tax and legal litigation, was
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
estimated using prudent calculation procedures in keeping with the uncertainty inherent in the obligations covered. 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 date depends on litigation in progress. f) Litigation
i. Tax litigation
The main tax litigation affecting Banesto at 31 December 2009 can be divided into two groups according to its origin: firstly, that arising from a difference in the criteria used by the State Tax Agency and that used by the Entity for the regularisation of the relevant taxes; and secondly, that arising from the introduction by the Extremadura Autonomous Community Government of the tax on deposits at credit institutions, against which an appeal has been filed at the Spanish Constitutional Court.
A) Difference in the criteria used by the State Tax Agency and the Bank.
a) Litigation currently in progress arising from the calculation of the VAT pro rata: the difference in the criteria used relates to the type of services which it is considered must be included in the VAT calculation. The amount of net VAT payable relating to this litigation, for all the years, is approximately EUR 3,156 thousand.
b) Withholdings from income from movable capital: the litigation arose from a difference in the criteria used for the inclusion of income from movable capital and the withholdings applicable to certain amounts paid by the Bank. The potential liability of Banesto in this connection is approximately EUR 2,621 thousand.
B) Tax on deposits at credit institutions introduced by the Extremadura Autonomous Community Government.
The Extremadura Autonomous Community Government approved a tax on the deposits held by credit institutions in its territory, which was applied for the first time in 2002.
An appeal against the tax has been filed at the Spanish Constitutional Court. Consequently, the Bank files its returns in due time, challenges the self-assessment, posts a bond for the related amount and then files an appeal. The Extremadura High Court decided not to consider the merits of the case until the Constitutional Court hands down a decision on the unconstitutional nature or otherwise of the tax.
The amount relating to this litigation totals EUR 25,877 thousand.
The above amount includes the enforced collection surcharges that the Bank was unable to avoid, except the enforced collection surcharge for 2008, which had not yet been issued by the tax authorities.
If the Spanish Constitutional Court were to declare that the legislation establishing this tax is constitutional, since the debt is suspended the late-payment interest would fall due. This interest amounted to EUR 3,822 thousand at 31 December 2009.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
ii. Other litigation
In addition to the challenges of corporate resolutions (see Note 1-d), the main non-tax litigation affecting the Bank at 31 December 2009, on the basis of the amount thereof, was as follows:
Trustees in the bankruptcy of Ágora, Corporación de Inversiones Inmobiliarias, S.A. The insolvency of this entity and the related bankruptcy order has given rise to several lawsuits and ancillary proceedings related mainly to the backdating of the bankruptcy order and, as a result thereof, the intention to terminate certain financing agreements and debt repayments. The most noteworthy in this respect is the claim to annul the collection of a debt of EUR 5,409 thousand received by the Bank in 1994.
Claims filed against the Bank by companies which received supplementary income tax returns from the tax authorities of the Navarre Autonomous Community Government with respect to transactions performed with the Bank. One of the two ongoing proceedings concluded with a firm court decision which dismissed in full the claim of the plaintiff company. In the other proceeding, in which a claim was made totalling EUR 1,812 thousand, the plaintiff’s claim has been dismissed at first instance and on appeal. The plaintiff has filed an extraordinary appeal on a point of law against the dismissal of the appeal, which has been challenged by Banesto, on which a decision has not yet been handed down.
Claim by the bankruptcy liquidator of the French company Frahuil S.A. In 1999 Banesto filed a claim at the Marseille (France) courts against Frahuil (parent of Spanish company Frint España S.A., both of which are engaged in the commercialisation of oil) for the amount not repaid of two loans granted by Banesto to the parent company, Frahuil S.A., supposedly secured by pledges on oil, and of a third loan granted to the Spanish subsidiary Frint España S.A., guaranteed by the parent Frahuil S.A. After filing the claim, Frahuil S.A. opened insolvency proceedings, which resulted in bankruptcy. Banesto also filed a claim against the Azria brothers, the main shareholders of the group, for misrepresentation in documents, fraudulent accounting practices and fraud. On 2 June 2008, the Tribunal de Grande Instance of Marseille handed down judgment in the criminal case, finding the Azria brothers guilty of three criminal offences and ordering them to pay Banesto EUR 18,063,681, plus two other amounts of EUR 6,983,425 and EUR 5,000. An appeal was made against part of this sentence. In 2006 the bankruptcy liquidator of Frahuil filed a claim against Banesto for “misuse of credit”, which is an offence under French law, alleging that Banesto had granted credits to the Frahuil Group amounting to more than EUR 20 million in an extortionate manner from 1996 to 1998, thereby contributing to create an artificial appearance of solvency subject to liability, which it provisionally calculated to be equal to the amount of the negative net worth of Frahuil SA at the time it declared itself insolvent. The Commercial Court of Marseille has listed the trial for 10 February 2010.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Claim filed by American Express Bank Limited (“Amex”) against Banco Español de Crédito, S.A. at the United States District Court in New York in respect of certain counterguarantees given by a company financed by the Bank in 1995. The Bank is being petitioned to pay USD 3,557,143 and PKR 10,873,000 plus costs and damage or loss incurred by American Express in this connection. The disputed guarantees were issued by Amex’s branch in Pakistan to the Pakistani company WAPDA, with the related counterguarantees of Banco Español de Crédito, S.A. (all by order and for the account of the company) to Amex (the “counterguarantees”). The guarantees and counterguarantees were executed in 2004 but Banco Español de Crédito, S.A. was unable to pay due to an injunction issued by a court of first instance of Madrid initially served on the Bank and subsequently extended in June 2006 to Amex, which prohibited the payment of any amount to WAPDA or to any third party in connection with the guarantees until an award had been rendered by the International Chamber of Commerce (ICC) in the arbitration taking place in Paris between the parties concerning the commercial agreement for which the guarantees were given. In February 2007, the Court of Arbitration of the ICC rendered an award ordering WAPDA not to execute the guarantees given to it. On 11 February 2009, the United States District Court of New York issued judgment and put an end to the proceedings in first instance and dismissed all the claims of Amex against Banesto. Amex (now Standard Chartered International (USA) Ltd. following the integration of both entities' businesses) announced its intention to appeal against the judgment at the United District Court of Appeals for the Second Circuit of New York. The deadline for filing the aforementioned appeal is 8 March 2010. In December 2009, WAPDA delivered the original guarantees to Isolux -which are now in the possession of Amex- and withdrew the claim filed in Lahore (Pakistan) against Amex to execute the aforementioned guarantees, thereby complying with the settlement agreement entered into by WAPDA and Isolux in July 2009.
- Claim for the execution of a decision filed by Malce, S.L. and others against Corporación Industrial y Financiera de Banesto, S.A., currently Banco Español de Crédito, S.A. In the claim filed on 25 April 2007 at the Court of First Instance no. 2 of El Ejido, Malce S.L. and others requested the execution of the decision handed down by the Supreme Court on 14 December 2006 which, by overturning the decision of the Almería Provincial Appellate Court, upheld the cassation appeal filed by the plaintiffs and ordered Quash S.A. and Área de Servicios Agrícolas S.A. (currently Banco Español de Crédito S.A. due to the absorption of Corporación Industrial y Financiera de Banesto S.A. which, in turn, had taken over the aforementioned companies) to execute the sale transaction in a public deed and to transfer the water wells, auxiliary facilities and the property on which the wells and facilities are located to the plaintiffs, to whom they had been sold by the aforementioned companies in the agreement dated 27 November 1995 and the supplementary agreement of 8 January 1994. By interlocutory order of 2 April 2008, the Supreme Court clarified that its decision of 14 December 2006 did not include and were accordingly not deliverable, the water wells and auxiliary facilities required to establish the Comunidad de Regantes Tierras de Almería (association of irrigation water users of Almería) to which they were sold by Quash S.A. and Área de Servicios Agrícolas S.A. in a deed dated 2 November 1995 (in which reference was made to the lawsuit described), being the only water wells and auxiliary facilities referred to in the contingency. An enforcement proceeding has been brought at the Court of First Instance no. 2 of El Ejido to identify and demarcate the wells that must be delivered to the plaintiff, which is currently being processed.
- Complaint in an ordinary proceeding filed by a former Bank employee claiming EUR 5,003 thousand in consideration for the professional services which the plaintiff declared to have provided to the Bank. The plaintiff’s relationship with the Bank was terminated through a justified dismissal resulting from a firm court decision. The hearing was held on 16 December 2009.
- Claim filed by an association called “Grouping of the Shareholders of Banesto” against Mario Conde, Enrique Lasarte Pérez Arregui and the Bank. With respect to the Bank, certain third-party
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
liability claims were filed relating to the actions of the other two defendants which gave rise to the intervention of the Bank of Spain on 28 December 1993 in what is known as the “Banesto case”. The claim did not specify the amount in question. The proceeding was initially allocated to the Court of First Instance no. 2 of Alicante. However, the defendants filed a declinatory exception with the Court arguing that it did not have regional jurisdiction. The declinatory exception was upheld as the jurisdiction was deemed to correspond to the Courts of First Instance of Madrid which motivated the referral of the court orders to the Senior Court of Madrid. The claim was allocated to the Court of First Instance no. 41 of Madrid. By court order of 10 October 2008, the Court refused leave to proceed with the claim and dismissed the proceedings due to the lack of standing of the plaintiff association. The plaintiff has filed an appeal against this court order, which was allowed by the Provincial Appellate Court order of 15 June 2009 and was granted leave to proceed. The proceedings were referred to the instance court. In an order dated 28 September 2009, the Court authorised the publication of the leave to proceed of the claim in the manner set forth in Article 15.1 of the Civil Procedure Law. The plaintiff has filed several incidental proceedings and issues that are currently being processed against this order and certain subsequent actions.
- Claim in an ordinary proceeding filed at Pamplona Court of First Instance no. 5 by Analistas Financieros de Navarra 2006, S.L. and others against Banesto. The amount claimed by the plaintiff was EUR 6,866.93, relating to commissions supposedly earned in the performance of the activity of financial agent of Banesto pursuant to the financial agency agreement entered into by Analistas Financieros de Navarra 2006, S.L. with Banesto on 23 April 2007, which was terminated on the grounds of breach of contract by the financial agent, plus damages of EUR 49,116.11. At the preliminary hearing, the amount of the claim was raised to EUR 5,590,796.18. Banesto contested the claim, arguing that the aforementioned financial agency agreement had been terminated for breach of the agent’s contractual obligations because the agent had improperly received commissions from customers of the financial agency and had provided consultancy services to other financial institutions through a company related to the financial agent. The termination of the agreement did not give rise to the payment of any amount to the plaintiff. On 14 December 2009, a decision was handed down totally dismissing the claim and the plaintiff was ordered to pay costs. On 28 December 2009 the plaintiff filed an appeal against the decision.
At 31 December 2009, there were other less material lawsuits of a tax and legal nature. At 31 December 2009 and 2008, the Bank had recognised reasonable provisions to cover any payments it may be required to make as a result of all of the aforementioned litigation.
23. Tax matters
a) Consolidated Tax Group, reconciliation and other information
Since 1999 the Bank has filed consolidated tax returns as part of the corporate Group of which Banco Santander, S.A. is the parent (see Note 27).
The balance of “Financial Liabilities at Amortised Cost - Other Financial Liabilities” in the accompanying consolidated balance sheets includes the liability for the various applicable taxes.
At 31 December 2009 deferred tax assets amounted to EUR 908,202 thousand (31 December 2008: EUR 894,694 thousand). In 2009, EUR 29,981 thousand, EUR 57,386 thousand and EUR 29,384 thousand relating to payments to pensioners and early retirees in those years, provisions for inherent losses in the outstanding loan portfolio and other items, respectively, were credited to deferred tax assets. These items relate basically
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
to income directly recognised in equity due to valuation adjustments. EUR 35,729 thousand of provisions for pensions, EUR 76,460 thousand of other provisions and EUR 18,070 thousand of unused tax credits were charged to deferred tax assets.
At 31 December 2009, deferred tax liabilities amounted to EUR 50,773 thousand (31 December 2008: EUR 68,727 thousand). They relate basically to income directly recognised in equity due to valuation adjustments.
Since 1999 the companies which until 1998 were part of the consolidated tax group headed by Banco Español de Crédito, S.A. have filed consolidated tax returns together with the consolidated tax group headed by Banco Santander, S.A. Following is the estimated reconciliation of the accounting profit to the income tax for the year prepared on the assumption that the consolidated tax group headed by Banco Español de Crédito, S.A. still existed at 31 December 2009 and 2008:
Thousands of Euros 2009 2008 Consolidated profit before tax: From ordinary activities 779,337 1,081,287 779,337 1,081,287 Income tax at 30% 233,801 324,386 Decreases due to permanent differences (60,149) (5,376) Increases due to permanent differences 16,930 13,772 Elimination of the tax effect of dividends paid between Group companies (1,412) (7,832) Elimination of the tax effect of the results of intra-group transactions (9,132) 3,623 Other, net 40,475 (22,295) Current income tax 220,513 306,278
Ordinary activities 220,513 306,278 Discontinued operations - -
This calculation includes the dividends of EUR 4,707 thousand at 31 December 2009 received from companies belonging to the consolidated tax group (31 December 2008: EUR 26,107 thousand) and other positive and negative adjustments to be made amounting to approximately EUR 47,906 thousand and EUR 78,345 thousand, respectively (31 December 2008: EUR 26,409 thousand and EUR 14,333 thousand, respectively), since they will be eliminated from the consolidated tax group's return.
For the purpose of determining the income tax expense recognised by the Group, regard should be had to the fact that the tax losses incurred at the Group companies before the extinction of the consolidated tax Group headed by Banco Español de Crédito, S.A. can only be carried forward for offset by the entities at which they arose. After filing the 2009 and 2008 tax returns, the tax loss carryforwards at the Banco Español de Crédito Group companies amounted to approximately EUR 57,133 thousand and EUR 61,950 thousand at 31 December 2009 and 2008, respectively:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros Last Year for 2009 2008 Offset Tax loss for the year: 1993 - 3,187 2008 1994 14,271 14,467 2009 1995 11,864 11,864 2010 1996 9,228 9,795 2011 1997 1,167 1,167 2012 1998 4,606 5,473 2013 1999 2,413 2,413 2014 2000 1,435 1,435 2015 2001 1,321 1,321 2016 2002 1,546 1,546 2017 2003 7,149 7,149 2018 2004 1,967 1,967 2019 2005 141 141 2020 2006 25 25 2021 57,133 61,950
In 2009 the Group did not obtain any gains on the transfer of assets for consideration (2008: EUR 33,182 thousand), to which the tax credit for reinvestment of extraordinary income stipulated in Article 42 of Legislative Royal Decree 4/2004, of 5 March, approving the Consolidated Corporation Tax Law is applicable.
The Bank has the years from 2005 to date open for review by the tax authorities in relation to income tax and the other main taxes. The varying interpretations which can be made of certain tax regulations applicable to the Group's operations might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Bank's directors and its tax advisers consider that the tax charge, if any, which might arise from future inspections by the tax authorities or from inspections already performed pending final resolutions, would not have a material effect on the Group's consolidated financial statements for the year ended 31 December 2009.
In 2009 transactions were carried out through which Banco Español de Crédito, S.A. absorbed Banesto Factoring S.A.U., Gedinver e Inmuebles, S.A.U. and Banesto, S.A.U.; Hualle S.A. absorbed Mercado de Dinero S.A.U., Diseño e Integración de Soluciones S.A.U. and Corpoban S.A.U., and Elerco S.A. absorbed Alhambra 2000 S.L.U. and Larix Spain S.L.U. (see Note 3). When approving these transactions, at the General Meetings of these companies the shareholders opted to apply the provisions of Chapter VIII – Title VII of Legislative Royal Decree 4/2004, of 5 March, approving the Consolidated Corporation Tax Law. In order to comply with the provisions of Article 93 of the aforementioned Law, Note 3 (attached) includes the latest balance sheets prepared by the transferring entities.
Also, it is important to note that the value of the items acquired by the absorbing entity is that at which they were held at the transferring entity at the merger date. The depreciation and amortisation allowances and provisions recognised at the transferring entity for the transferred items appear in the transcribed balance sheets. The carrying amounts of the items delivered by the transferring companies to the acquiring company match and appear in the aforementioned balance sheets. The items acquired by the transferors have been depreciated and amortised by applying the depreciation and amortisation tables approved by Royal Decree 1777/2004, of 30 July, approving the Corporation Tax Regulations.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The Banco Español de Crédito Group companies included in the consolidated tax group, the parent of which is Banco Santander, S.A., are Banco Español de Crédito, S.A., Banesto Bolsa, S.A., S.V.B., and 23 and 26 other companies, respectively, at 31 December 2009 and 2008.
The other Group companies will file individual tax returns in accordance with the tax regulations applicable in their countries of residence.
24. Non-controlling interests
The balance of “Non-Controlling Interests” in the consolidated balance sheets shows 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.
a) Breakdown
The detail, by Group company, of the balance of “Equity – Non-Controlling Interests” in the consolidated balance sheets is as follows:
Thousands of Euros 2009 2008
Alcaidesa Holding, S.A. 33,417 33,875 Costa Canaria de Veneguera, S.A. 3,786 3,816 Clínica Sear, S.A. 2,171 2,339 Aljarafe Golf, S.A. 1,124 1,136 Other 667 1,717 41,165 42,883
b) Changes
The changes in 2009 and 2008 in “Non-Controlling Interests” in the consolidated balance sheets are summarised as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Beginning balance 42,883 46,728 Change in proportion of ownership interest (740) 980 Attributed profit for the year (979) (4,835) Of which: Alcaidesa Holding, S.A. (457) (4,647) Other (522) (188) Other changes 1 10 Ending balance 41,165 42,883
25. Valuation adjustments
The balances of “Valuation Adjustments” in the consolidated balance sheets include the amounts, net of the related tax effect, of adjustments to the assets and liabilities recognised temporarily in equity through the statement of changes in equity until they are extinguished or realised, at which point they are recognised definitively as shareholders’ equity through the consolidated income statement. The amounts arising from subsidiaries, jointly controlled entities and associates are presented, on a line by line basis, in the appropriate items according to their nature.
“Valuation Adjustments” includes the following items:
a) Available-for-sale financial assets
“Valuation Adjustments - Available-for-Sale Financial Assets” includes the net amount of unrealised changes in the fair value of assets classified for measurement purposes as available-for-sale financial assets.
b) Cash flow hedges
“Valuation Adjustments - Cash Flow Hedges” includes the net amount of changes in the value of derivatives designated as hedging instruments in cash flow hedges, for the portion of these changes considered as “effective hedges” (see Note 11). This amount will be reversed to the consolidated income statement from 2010 to 2022.
The consolidated statement of recognised income and expense for 2009 and 2008, which is an integral part of the consolidated statement of changes in equity, shows the changes in this item in the consolidated balance sheets in 2009 and 2008.
26. Shareholders’ equity
“Shareholders' Equity” in the consolidated balance sheets includes the amounts of equity contributions from shareholders, accumulated profit or loss recognised through the consolidated income statement, and components of compound financial instruments having the substance of permanent equity. Amounts arising from subsidiaries and jointly controlled entities are presented in the appropriate items based on their nature.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
27. Issued capital
At 31 December 2009 and 2008, the Bank’s share capital consisted of 687,386,798 fully subscribed and paid shares of EUR 0.79 par value each, all with identical voting and dividend rights and listed on the Spanish stock exchanges.
At 31 December 2009 and 2008, the Bank's majority shareholder was the Santander Group, which held 89.28% of the Bank's share capital (31 December 2008: 89.28%).
At the Annual General Meeting held on 26 February 2008, the shareholders resolved to reduce capital by EUR 5,485,207, through the redemption of 6,943,300 treasury shares with a charge to voluntary reserves. This capital reduction was registered in the Madrid Mercantile Register on 20 June 2008 and a reserve for retired capital was recognised for an amount equal to the par value of the redeemed shares. Therefore, at 31 December 2008, the Bank’s share capital consisted of 687,386,798 shares of EUR 0.79 par value each.
At the Annual General Meeting on 25 February 2009, the shareholders authorised the Board of Directors to implement the derivative acquisition of shares of the Bank and its parent by the Bank and its subsidiaries within the legally stipulated limits.
At 31 December 2009 and 2008, the Group held 3,382,126 and 6,272,646 treasury shares with an acquisition cost of EUR 29,527 thousand and EUR 36,074 thousand, respectively (see Notes 28 and 29).
28. Reserves
a) Definitions
The balance of “Shareholders' Equity - Reserves - Accumulated Reserves” in the consolidated balance sheets includes the net amount of the accumulated profit or loss recognised in previous years through the consolidated income statement that, in the distribution of the profit, was assigned to equity. The balance of “Shareholders' Equity - Reserves of Entities Accounted for Using the Equity Method” in the consolidated balance sheets includes the net amount of the accumulated profit or loss generated in previous years by entities accounted for using the equity method, recognised through the consolidated income statement.
b) Breakdown
The breakdown of the balances of “Shareholders' Equity - Reserves - Accumulated Reserves” and “Shareholders' Equity - Reserves of Entities Accounted for Using the Equity Method” at 31 December 2009 and 2008 is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Accumulated reserves: Restricted reserves- Legal reserve 216,460 216,460 Reserve for treasury shares (Notes 27 and 29) and for loans for the purchase of shares of the Bank and of Banco Santander, S.A. (Note 10) 37,214 43,770 Redenomination of the share capital in euros 2,480 2,480 For retired capital 5,485 5,485 Unrestricted reserves- Voluntary reserves 3,814,331 3,521,335 Consolidation reserves attributed to the Bank (9,481) (109,229) Reserves at subsidiaries 377,758 372,568 4,444,247 4,052,869 Reserves of entities accounted for using the equity method: Associates- Of which: Sistemas 4B 3,202 886 Other 2,002 1,410 5,204 2,296 4,449,451 4,055,165
Legal reserve
Under the Consolidated Companies Law, Spanish entities must transfer 10% of net profit for each year 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.
Reserves for treasury shares
Pursuant to the Consolidated Companies Law, a restricted reserve has been recorded 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.
Reserves for retired capital
Pursuant to the Consolidated Spanish Public Limited Liability Companies Law, a restricted reserve was recognised for an amount equal to the par value of the Bank shares redeemed in 2008 (see Note 27).
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Reserves at subsidiaries
The detail, by company, of the balance of these reserves, based on the subsidiaries' contribution to the Group (considering the effect of consolidation adjustments) is as follows:
Thousands of Euros 2009 2008
Elerco, S.A. 113,530 152,181 Banesto Bolsa, S.A., S.V.B. 74,661 67,511 Dudebasa, S.A. 8,663 9,021 Oil-Dor, S.A. 31,210 27,125 Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. 134,409 97,673 Santander Pensiones, E.G.F.P., S.A. 6,024 5,060 Banesto Holding, Ltd. (4,462) (5,719) Mesena Servicios de Gestión Inmobiliaria, S.A. (8,369) (8,397) Inversiones Turísticas, S.A. (22,870) (487) Hualle 80,449 36,328 Programa Hogar Montigalá, S.A. (50,456) 9 Aljarafe Golf, S.A. 11,779 2,836 Other companies 3,190 (10,573) Total 377,758 372,568
29. Treasury shares
The balance of “Shareholders' Equity – Treasury Shares” in the consolidated balance sheets includes the amount of equity instruments held by the Group entities.
Transactions involving own equity instruments, including their issuance and cancellation, are deducted directly from equity, and no profit or loss may be recognised as a result of them. The costs of any transaction involving own equity instruments are deducted directly from equity, net of any related tax effect.
The Bank shares owned by the Banesto Group entities accounted for 0.49% of issued capital at 31 December 2009 (31 December 2008: 0.56%).
The average purchase price of the Bank shares was EUR 7.86 per share in 2009 and the average selling price was EUR 7.86 in that year (2008: EUR 10.9 and EUR 11.08, respectively).
The net gains or losses on transactions involving Bank shares (losses of EUR 622 thousand in 2009 and EUR 11,943 thousand in 2008) were recognised as an addition to/reduction of reserves, as appropriate.
30. Memorandum items
“Memorandum Items” includes 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 entered into by the consolidated entities although they may not impinge on their net assets.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
a) Contingent liabilities
“Contingent Liabilities” includes all transactions under which the consolidated entities guarantee the obligations of a third party and which result from financial guarantees granted by the entities or from other types of contract. The detail of this item is as follows:
Financial guarantees
Financial guarantees are the amounts that would be payable by the consolidated entities on behalf of third parties as a result of the commitments assumed by those entities in the course of their ordinary business, if the parties who are originally liable to pay failed to do so.
The detail of “Financial Guarantees” at 31 December 2009 and 2008 is as follows:
Thousands of Euros 2009 2008
Bank guarantees and other indemnities provided 9,120,702 9,798,966 Credit derivatives sold 647,892 780,000 Irrevocable documentary credits 391,089 317,898 10,159,683 10,896,864
A significant portion of these guarantees will expire without any payment obligation materialising for the consolidated entities and, therefore, the aggregate balance of these commitments cannot be considered as an actual future need for financing or liquidity to be provided by the Group to third parties.
Income from guarantee instruments is recognised 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. b) Contingent commitments
“Contingent Commitments” includes those irrevocable commitments that could give rise to the recognition of financial assets.
The detail of “Contingent Commitments” at 31 December 2009 and 2008 is as follows:
Thousands of Euros 2009 2008
Drawable by third parties (undrawn credit facilities) 11,387,525 12,897,760 Regular way financial asset purchase contracts 1,294,249 1,410,793 Other contingent commitments 1,684,167 1,909,794 14,365,941 16,218,347
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
31. Notional amounts of trading and hedging derivatives
The detail of the notional and/or contractual amounts of the trading and hedging derivatives held by the Group at 31 December 2009 and 2008 is as follows:
Thousands of Euros 2009 2008 Notional Market Notional Market Amount Value (*) Amount Value (*)
Trading derivatives: Interest rate risk- Forward rate agreements 7,346,000 (3,545) 650,000 (2,218) Interest rate swaps 139,656,551 (73,993) 132,121,853 27,368 Options and futures 88,358,687 197,301 102,992,447 108,024 Currency risk- Foreign currency purchases and sales 5,189,403 2,131 4,930,523 48,311 Foreign currency options: 799,117 (383) 1,409,096 (4,859) Currency swaps 3,173,346 3,290 3,687,841 3,806 Securities and commodities derivatives 26,249,344 (189,362) 18,734,249 114,660 270,772,448 (64,561) 264,526,009 295,092 Hedging derivatives: Interest rate risk- Interest rate swaps 42,981,725 1,101,562 23,206,508 551,746 Options and futures 647,887 (8,493) 7,191,839 66,012 Securities and commodities derivatives - - 20,838 - 43,629,612 1,093,069 30,419,185 617,758 Total 314,402,060 1,028,508 294,945,194 912,850
(*) See Notes 2-a and 2-b.
The Group manages the credit risk exposure of these contracts through netting agreements with its main counterparties and by taking assets as collateral of its risk function.
The fair value of hedging derivatives, by type of hedge, is as follows:
Millions of Euros 2009 2008
Fair value hedges 1,056,436 410,389 Cash flow hedges 36,633 206,919 1,093,069 617,758
As stated in Note 2-b, the fair value of hedging 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.
Following is a description of the main hedges (including the results of the hedging instrument and the hedged item attributable to the hedged risk):
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
i. Fair value hedges
The Bank basically hedges the interest rate risk of the issues secured by it. At 2009 year-end the Bank held IRS contracts and interest rate options for a nominal amount of EUR 29,615 million (2008 year-end: EUR 17,572 million). The accumulated gains on these transactions amounted to EUR 806 million (2008: EUR 440 million), which was offset by the losses of the same amount on the hedged items, and this amount is recognised under “Changes in the Fair Value of Hedged Items in Portfolio Hedges of Interest Rate Risk” on the asset side of the consolidated balance sheet.
In 2009 the Bank arranged a fair value hedge of the interest rate risk of a portfolio of financial instruments. The purpose of the hedge is to maintain the economic value of the hedged transactions, which are basically fixed-interest loans with original maturities at long-term, hedged by IRSs. The accumulated losses on these transactions amounted to EUR 61 million, which was offset by the gains of the same amount on the hedged items, and this amount is recognised under “Changes in the Fair Value of Hedged Items in Portfolio Hedges of Interest Rate Risk” on the liability side of the consolidated balance sheet.
In 2009 a revenue of EUR 370,881 thousand and an expense of EUR 371,035 thousand, attributable to the hedged risk, were recognised in profit or loss on the hedging instruments and on the hedged items, respectively, and these items are recognised under “Gains/Losses on Financial Assets and Liabilities (Net) – Hedge Accounting Transactions not Included in Interest” in the consolidated income statement.
ii. Cash flow hedges
The Bank hedges the interest rate risk arising from the fluctuations in the cash flows from mortgage loans tied to floating interest rates.
Following is a detail of the years in which the flows hedged by the cash flow hedges will foreseeably take place:
Thousands of Euros 2010 2011 2012 2013 2014 >2014 37,479 30,293 24,728 20,809 17,619 72,152
The Bank did not recognise any charge in profit or loss attributable to the ineffectiveness of the cash flow hedges in 2009 and 2008.
The notional and/or contractual amounts of the aforementioned contracts do not reflect the actual risk assumed by the Bank, since the net position in these financial instruments is the result of offsetting and/or combining them. This net position is used by the Bank basically to hedge the interest rate, underlying asset price or currency risk.
32. Off-balance-sheet funds under management
The detail of off-balance-sheet funds managed by the Group at 31 December 2009 and 2008 is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Investment funds 7,391,148 6,838,078 Pension funds 1,416,343 1,409,663 Assets under management 2,134,495 1,521,157 10,941,986 9,768,898
33. Interest and similar income
“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 revenue as a consequence of hedge accounting. Interest is recognised gross, without deducting any tax withheld at source.
The detail of the main items of interest and similar income earned by the Group in 2009 and 2008 is as follows:
Thousands of Euros 2009 2008
Balances with central banks 12,286 37,873 Financial assets held for trading 9,283 53,861 Available-for-sale financial assets 238,761 234,027 Loans and receivables 3,339,843 4,988,016 Held-to-maturity investments 44,576 - Adjustments to financial assets as a result of hedging transactions (8,763) 5,482 Insurance contracts linked to pensions 58,837 58,837 Insurance activity income 22,717 93,501 3,717,540 5,471,597
34. Interest expense and similar charges
“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 consequence of hedge accounting; and the interest cost attributable to pension funds.
The detail of the main items of interest expense and similar charges earned by the Group in 2009 and 2008 is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Financial liabilities held for trading 733 7,277 Financial liabilities at amortised cost 2,132,335 3,450,008 Adjustments to financial liabilities as a result of hedging transactions (305,073) 197,346 Pension funds (Note 22) 90,856 95,050 Insurance activity expense (Note 40) - 3 Other liabilities 2,250 6,847 1,921,101 3,756,531
35. Income from equity instruments
“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:
Thousands of Euros 2009 2008
Equity instruments classified as: Financial assets held for trading 44,341 55,438 Available-for-sale financial assets 229 3,799 44,570 59,237
36. Share of results of entities accounted for using the equity method
“Share of Results of Entities Accounted for Using the Equity Method” comprises the amount of profit or loss attributable to the Group generated during the year by associates, as well as by jointly controlled entities when the equity method has been chosen for their measurement.
The detail of this item is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Associates: Compañía Concesionaria del Túnel de Soller, S.A. 712 476 Grupo Agres, S.A. 117 145 Carnes Estelles, S.A. - 14 Aguas de Fuensanta, S.A. (369) (8) Sistemas 4B, S.A. 2,646 1,217 Other 163 30 3,269 1,874
37. Fee and commission income
“Fee and Commission Income” comprises the amount of all fees and commissions accruing in favour of 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 Income” is as follows:
Thousands of Euros Fee and Commission Income Arising from: 2009 2008
Financing granted to third parties: Commitment fees 21,629 20,157
Management and administration services: Investment funds and other collective investment undertakings 71,352 123,564 Pension funds and plans 31,840 34,093 Assets owned by third parties 1,126 2,297 104,318 159,954 Investment services: Underwriting and placement of securities issued by third parties 1,943 5,681 Securities market brokerage 13,384 18,142 Custody services 8,021 8,078 23,348 31,901 Other: Foreign exchange 3,353 1,772 Financial guarantees 83,982 73,192 Collection and payment services 339,599 366,382 Other fees and commissions 85,882 52,341 512,816 493,687 662,111 705,699
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
38. Fee and commission expense
“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:
Thousands of Euros 2009 2008
Fees and commissions assigned to third parties 69,656 86,876 Other fees and commissions 50,426 57,149 120,082 144,025
39. Gains/losses on financial assets and liabilities (net)
“Gains/Losses on Financial Assets and Liabilities (net)” 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, recorded in the consolidated income statement, and the gains or losses obtained from the sale and purchase thereof.
The detail, by type of instrument, of this item is as follows:
Thousands of Euros 2009 2008
Fixed-income 109,210 (8,103) Equities 11,544 191,357 Financial derivatives and other 87,561 (73,854) 208,315 109,400
40. Other operating income and Other operating expenses
“Other Operating Income” and “Other Operating Expenses” include the income and expenses from other operating activities of the Group’s credit institutions not included in other items.
The detail of these items in the consolidated income statements is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros Income Expenses 2009 2008 2009 2008
Insurance and reinsurance premium income 1,374,262 1,960,455 - Reinsurance premiums paid - 32,267 71,490 Reinsurance income 142,797 39,819 - Claims paid and other insurance-related expenses - 654,784 574,614 Net provisions for insurance contract liabilities - 772,422 1,381,412 Sales and income from the provision of non-financial services 44,826 73,396 - Cost of sales - 10,360 35,375 Exploitation of investment property and operating leases (Note 13) 2,452 2,005 - Commissions on financial instruments that compensate for related direct costs 16,534 21,513 - Expenses recovered through their addition to the cost of sale of goods and services: 4,623 78,805 - Other 3,388 13,427 - Contribution to the Deposit Guarantee Fund (Note 1-g) - - 19,693 17,296 Investment property and other expenses - - 57,234 119,653 1,588,882 2,189,420 1,546,760 1,497,959
Insurance activity income
The detail of the net amount of the contribution to gross income from subsidiaries that are insurance or reinsurance companies, is as follows:
Thousands of Euros 2009 2008 Life Non-Life Total Life Non-Life Total
Premiums collected 1,333,178 41,084 1,374,262 1,935,271 25,184 1,960,455 Reinsurance premiums paid (28,206) (4,061) (32,267) (68,473) (3,017) (71,490) Net premiums 1,304,972 37,023 1,866,798 1,341,995 22,167 1,888,965 Claims paid and other insurance-related expenses (572,381) (82,403) (654,784) (550,365) (24,249) (574,614) Reinsurance income 1,512 141,285 142,797 4,448 35,371 39,819 Net provisions for insurance contract liabilities (744,929) (27,493) (772,422) (1,361,910) (19,502) (1,381,412) Finance income 19,837 2,880 22,717 87,179 6,322 93,501 Finance expense (Note 34) - - - (3) - (3)
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Sales and income from the provision of non-financial services and Cost of sales
“Sales and Income from the Provision of Non-Financial Services” and “Cost of Sales” show, respectively, the amount of the sales of assets and income from the provision of services that constitute the typical activity of non-financial entities and the related costs of sale. The main lines of business of these entities are as follows:
Thousands of Euros 2009 2008 Sales/ Cost of Sales/ Cost of Line of Business Income Sales Income Sales
Real estate 26,419 6,624 46,068 28,713 Services 3,923 589 3,667 607 IT and other 14,484 3,147 23,661 6,055 44.826 10,360 73,396 35,375
41. Staff costs
“Staff Costs” comprises all the remuneration of the personnel on the pay-roll, whether permanent or temporary, irrespective of their functions or activity, accruing in the year for whatever reason, including the current service cost in respect of pension plans, remuneration based on own equity instruments and expenses capitalised as part of the value of assets.
a) Breakdown
The detail of “Staff Costs” is as follows:
Thousands of Euros 2009 2008
Wages and salaries 496,178 493,897 Social security costs 104,786 106,890 Additions to internal pension provisions (Note 22) 12,654 12,658 Contributions to external pension funds (Note 2-v) 7,039 6,198 Other staff costs 43,898 53,740 664,555 673,383
b) Headcount
The average number of employees in the Group, by professional category and gender, was as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Headcount 2009 2008 Men Women Men Women
Senior executives 13 2 13 1 Other line personnel 4,997 2,751 5,252 2,723 Clerical staff 706 625 827 744 General services personnel 5 1 7 4 Staff at subsidiaries and branches abroad 32 21 37 25 Other non-financial companies 309 182 438 249 6,062 3,582 6,574 3,746
c) Equity-instrument-based employee remuneration
At the Extraordinary General Meeting on 27 June 2007, the shareholders approved a three-year Bank share-based Incentive Plan, which is tied to the achievement of several targets and divided into two tranches:
Top A: appreciation of the Bank’s share price; appreciation of the share price of Banco Santander S.A. and growth in earnings per share. 55 Group executives are covered by this tranche of the plan, including those belonging to the Management Committee and executive directors (see Notes 5-a and 5-b).
Top 10: growth in gross income and the average amount of the net charge for impaired loans and receivables assessed individually. 170 Group executives are covered by this tranche of the plan.
The shares must be delivered no later than 31 July 2010. The maximum number of Banesto shares to be delivered under this plan was 1,041,495 (0.15% of share capital).
In 2008 and 2009 since the non-market related conditions were not met, the Bank did not recognise any amount in this connection.
On 28 February 2006, the Bank's Annual General Meeting approved a medium- to long-term Incentive Plan, which basically entailed the grant to the beneficiaries of options on shares of Banco Santander, S.A. and, if the terms of the plan are met, the delivery of shares of Banco Español de Crédito, S.A. to senior executives and the payment of an amount in cash to the other beneficiaries. The number of beneficiaries, including directors and senior executives was 271. The Plan led to the grant of 5,084,000 options on Banco Santander, S.A. shares and the delivery of the 245,907 Banesto shares referred to in Notes 5-a and 5-b. The number of options exercised was 3,551,819.
42. Other general administrative expenses
The detail of “Other General Administrative Expenses” in the consolidated income statement is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros 2009 2008
Technology, systems and communications 65,515 60,396 Advertising and technical reports 19,107 24,295 Property and fixtures 69,838 68,159 Taxes other than income tax 14,828 15,289 Surveillance and cash courier services 12,686 11,575 Insurance premiums 1,275 1,248 Other administrative expenses 72,568 66,704 255,817 247,666
The detail of the fees paid to the respective auditors for the audits of the Group companies (see Appendixes I, II and III) is as follows:
Thousands of Euros 2009 2008
Audit of the separate and consolidated annual financial statements of the Group (*) audited by the Deloitte worldwide organisation 1,482 1,524 Work required of auditors by Spanish supervisors and performed by Deloitte 105 254 Other work and reports by Deloitte 649 967 Fees for audits performed by other firms 55 59 Other services provided by other firms 79 32 2,370 2,836
(*) Including the fees paid for the internal control audit required by the US Sarbanes-Oxley Act, with which the Santander Group is obliged to comply (see Note 27).
43. Gains/(losses) on disposal of assets not classified as non-current assets held for sale
“Gains/(Losses) on Disposal of Assets Not Classified as Non-Current Assets Held for Sale” in the consolidated income statement include the income and expenses arising from non-ordinary activities not included in other items. This basically includes the net gain/loss on the sale of tangible and intangible assets and investments.
44. Residual maturity periods and average interest rates
The detail, by maturity, of the balances of certain items in the consolidated balance sheets at 31 December 2009 and 2008, and of the average interest rates in 2009 and 2008 is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Thousands of Euros Average Annual Less than 1 1 to 3 3 to 12 More than 5 Interest 2009 Demand Month Months Months 1 to 5 Years Years Total Rate (%)
Assets: Cash and balances with central banks 255,025 1,428,821 - - - - 1,683,846 1.02% Loans and receivables- Loans and advances to credit institutions 878,887 5,770,787 7,368,538 6,562,036 557,349 1,478,820 22,616,417 2.00% Loans and advances to customers 3,093,281 3,108,218 3,539,619 9,136,581 14,540,892 42,214,090 75,632,681 4.27% Debt instruments- Financial assets held for trading - 122,267 93,557 670,355 131,910 8,554 1,026,643 1.45% Available-for-sale financial assets - 134,327 14,018 121,650 4,738,963 2,261,983 7,270,941 3.60% Loans and receivables - - - - - 629,662 629,662 1.90% Held-to-maturity investments - - - - 1,992,764 83,564 2,076,328 3.05% 4,227,193 10,564,420 11,015,732 16,490,622 21,961,878 46,676,673 110,936,518 Liabilities: Financial liabilities at amortised cost- Deposits from central banks and credit institutions 193,449 11,566,740 1,299,159 930,853 - 37,623 14,027,824 2.28% Customer deposits 21,429,517 17,114,958 12,795,927 4,594,590 339,737 442,992 56,717,721 1.94% Marketable debt securities 423,027 2,197,141 3,240,164 2,840,495 14,562,399 6,401,226 29,664,452 2.32% Subordinated liabilities 17,300 - - - 600,000 1,976,114 2,593,414 3.16% Other financial liabilities 3,483,931 248,941 69,105 234,819 51,735 3,384 4,091,915 - 25,547,224 31,127,780 17,404,355 8,600,757 15,553,871 8,861,339 107,095,326
Average Thousands of Euros Annual Less than 1 1 to 3 3 to 12 More than 5 Interest 2008 Demand Month Months Months 1 to 5 Years Years Total Rate (%)
Assets: Cash and balances with central banks 263,073 1,425,080 - - - - 1,688,153 3.24 Loans and receivables- Loans and advances to credit institutions 701,890 6,927,529 6,473,772 3,689,019 359,345 1,549,130 19,700,685 4.41 Loans and advances to customers 2,512,189 3,119,406 6,160,379 10,910,999 13,576,362 41,493,328 77,772,663 5.70 Debt instruments- Financial assets held for trading - 5,578 15,832 176,325 191,642 12,777 402,154 3.43 Available-for-sale financial assets - 60,163 10,360 106,083 3,041,520 3,402,283 6,620,409 4.36 Loans and receivables - - - - - 736,239 736,239 4.54 3,477,152 11,537,756 12,660,343 14,882,426 17,168,869 47,193,757 106,920,303 Liabilities: Financial liabilities at amortised cost- Deposits from central banks and credit institutions 101,447 8,438,192 2,951,605 695,554 13,432 206,388 12,406,618 4.29 Customer deposits 20,252,872 17,935,619 13,344,980 4,992,067 385,203 678,887 57,589,628 3.56 Marketable debt securities 40,065 931,645 2,217,268 4,318,652 10,037,747 10,769,726 28,315,103 4.80 Subordinated liabilities - - - - - 2,236,835 2,236,835 6.10 Other financial liabilities 1,772,688 555,574 93,032 115,868 322,342 37,988 2,897,472 - 22,167,052 27,861,030 18,606,885 10,122,141 10,758,724 13,929,824 103,445,656 -
This table does not reflect the Group's liquidity position since it considers demand deposits and other customer deposits as any other liability, whereas their stability is a typical feature of commercial banking. Considering this effect, the differences between assets and liabilities for each of the maturity periods are
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
within reasonable thresholds in view of the business volume managed. Note 48 contains a detailed description of the liquidity management function performed by the Group.
45. Business segment reporting
Basis of segmentation
Segment reporting is structured by the Group's various business segments. The distribution by geographical segment is not significant, since substantially all the profit is obtained in Spain. The business lines described below were established on the basis of the Banesto Group's organisational structure at 2009 year-end, taking into account, on the one hand, the nature of the goods and services offered and, on the other, the customer segments at which they are targeted.
In 2009 the Banesto Group focused its activities on the following business segments:
- Commercial Banking (households and SMEs)
- Corporate Banking (large companies)
- Markets and International.
Income and expenses that cannot be specifically attributed to any operating line or that are the result of decisions affecting the Group as a whole -and, among them, expenses incurred in projects or activities affecting several lines of business, income from strategic investments, impairment losses recognised for goodwill, etc. - are attributed to a “Corporate Unit” to which the reconciling items arising from the reconciliation of the result of integrating the financial statements of the various lines of business (prepared using a management approach) to the Group's consolidated financial statements are also allocated.
Basis and methodology for business segment reporting
The segment information below is based on monthly reports prepared using the data provided by a management control computer application.
The reporting structure is designed as if each business segment were a stand-alone business and had its own separate equity that is distributed on the basis of the risk to which the assets allocated to each segment are subject, based on an internal cost percentage allocation system.
The business lines' net interest income and gross income are calculated by applying to their respective assets and liabilities transfer prices which are consistent with current market rates. Income from equity securities is allocated among the various lines of business on the basis of their share.
Administrative expenses include direct and indirect costs and are allocated among the lines of business and support service units on the basis of the internal use of these services.
Segment assets include financial assets held for trading, investment securities and loans and advances to credit institutions and customers, net of impairment losses. The liabilities and shareholders' equity allocated to the various business segments include deposits from credit institutions, customer deposits and shareholders' equity. The other asset and liability items and the items reconciling the total assets, liabilities and
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
shareholders' equity allocated to the various business segments to those shown in the Group's consolidated balance sheet are allocated to the Corporate Unit.
Thousands of Euros
Markets and Commercial Banking Corporate Banking International Corporate Unit Total Group 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008
Interest and similar income 2,628,389 3,526,983 564,492 968,206 411,916 5,471,597 Interest expense and similar charges (1,160,985) (2,123,389) (458,491) (894,717) (279,934) (3,756,531) Net interest income 1,467,404 1,403,594 106,001 73,489 131,982 1,715,066 Income from equity instruments - - - - 44,341 55,588 229 3,649 44,570 59,237 Share of results of entities accounted for using the equity method ------3,269 1,874 3,269 1,874 Net fee and commission income 579,694 556,549 52,910 51,946 23,334 22,910 (113,909) (69,731) 542,029 561,674 Gains/(losses) on financial assets and liabilities and exchange differences 71,404 70,975 12,610 12,218 80,074 71,042 70,934 (2,968) 235,022 151,267 Other operating income/(expenses) (18,654) 4,287 (420) (318) (230) (282) 61,426 (14,107) 42,122 (10,420) Net fee and commission income 556,549 51,946 22,910 (69,731) 561,674 Gains/(losses) on financial assets and liabilities and exchange differences 70,975 12,218 71,042 (2,968) 151,267 Other operating income/(expenses) 4,287 (318) (282) (14,107) (10,420) Gross operating income 2,035,405 169,847 222,747 50,699 2,478,698 Expenses and depreciation and amortisation charge (843,317) (21,874) (42,032) (116,143) (1,023,366) Provisions - - - - (36,271) Asset impairment (276,883) (23,142) (2,623) 726 (301,922) Profit/loss from operations 915,205 124,831 178,092 (64,718) 1,117,139 Other net gains/losses - - - (35,852) (35,852) Profit/loss before tax 915,205 124,831 178,092 (100,570) 1,081,287 Income tax (256,257) (34,953) (49,866) 34,798 (306,278) Profit for the year from continuing 658,948 89,878 128,226 (65,772) 775,009 operations Profit/loss attributable to non- controlling interests - - - (4,835) (4,835) Profit attributable to the Group 658,948 89,878 128,226 (60,937) 779,844 Assets by segment-millions of euros 58,237 11,833 32,039 18,370 120,479 Liabilities by segment-millions of euros 36,719 1,772 33,222 48,766 120,479
Substantially all the total income for 2009, which includes interest and similar income, income from equity instruments, fee and commission income, net gains on financial assets and liabilities held for trading and other ordinary income, was obtained in Spain. It should be noted, however, that 0.7% of total income for 2009 was generated in the United States (2008: 1.6%).
94.7% of loans and advances to customers relate to borrowers resident in Spain (2008: 95.8%), 3.3% to borrowers resident in other EU countries (2008: 2.5%) and 0.8% to residents in other OECD countries (2008: 0.9%).
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
46. Related-party transactions
a) Transactions with companies in the Banco Español de Crédito Group and the Santander Group (Parent, subsidiaries and associates)
All significant inter-company balances at 2009 year-end and the effect of inter-company transactions during the year were eliminated on consolidation. The detail of the Group's most significant balances with associates and Santander Group companies (see Note 27) and of the effect on the income statements of transactions performed with them is as follows:
Thousands of Euros 2009 2008
Assets: Loans and advances to credit institutions 10,522,931 9,244,875 Loans and advances to customers 203,815 517,714
Liabilities: Deposits from credit institutions 2,856,940 3,067,146 Customer deposits 98,611 523,254
Income statement: Debit- Interest expense and similar charges (67,655) (95,037) Fee and commission expense (702) (329) General administrative expenses (75,054) (72,895)
Credit- Interest and similar income 173,978 227,645 Income from equity securities 3,175 560 Fee and commission income 74,104 70,091
Memorandum items: Contingent liabilities 243,483 245,279 Commitments 8,988 1,666,631
b) Transactions with Board members and executives (key executives of the Bank and its parent)
The information on the remuneration payable to the Bank's key executives is detailed in Note 5.
The balance of direct lending transactions to key executives of the Bank and of its parent amounted to EUR 4,216 thousand at 31 December 2009 and to EUR 4,485 thousand at 31 December 2008.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Additionally, the transactions currently performed by the Bank's key executives are those characteristic of a normal commercial relationship with a bank.
c) Transactions with other related parties
At 31 December 2009 and 2008, the positions with other related parties as defined in the applicable regulations were as follows:
1. Financing transactions (trade discount, credit, mortgage and other loans and other lending transactions): EUR 309 million and EUR 415 million, respectively.
2. Off-balance sheet risks (guarantees and documentary credits): EUR 265 million and EUR 225 million respectively.
3. Deposit taking transactions (customer deposits): EUR 25 million and EUR 3.6 million, respectively.
Provision of services transactions: EUR 4 million.
The transactions included in the aforementioned categories were performed in the normal course of the Bank's business with its customers (most of the balances relate to the Ferrovial Group) and on an arm's- length basis.
Notwithstanding the foregoing, certain individuals and legal entities that are defined as related parties ordinarily perform with the Banesto Group transactions which are characteristic of a normal commercial relationship with a financial institution, for amounts which are not material and under market or employee conditions, as appropriate.
47. Fair value of financial assets and financial liabilities not measured at fair value
As discussed above, the financial assets owned by the Bank -except for loans and receivables and held-to- maturity investments, equity instruments whose market value cannot be estimated reliably and derivatives that have these instruments as their underlyings and are settled by delivery thereof- are measured at fair value in the accompanying consolidated balance sheets.
Similarly, the Bank’s financial liabilities -except for financial liabilities held for trading, those measured at fair value and derivatives having as their underlyings equity instruments whose market value cannot be estimated reliably- are measured at amortised cost in the accompanying balance sheets.
A portion of the assets and liabilities recognised under "Loans and Receivables” and “Financial Liabilities at Amortised Cost” in the consolidated balance sheets at 2009 and 2008 are included in the fair values hedges managed by the Bank and, accordingly, are measured in the aforementioned consolidated balance sheet at their fair value in respect of the risk being hedged (interest rate risk - see Note 11).
Most of the other assets and certain liabilities earn or bear interest at a floating rate which is adjusted each year; therefore, their fair value resulting from the variations in market interest rates does not differ significantly from the amount at which they are recognised in the accompanying consolidated balance sheet.
The remaining assets and liabilities earn or bear interest at a fixed rate; and, since a significant portion of them mature within one year, their market value resulting from the variations in market interest rates does not
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
differ significantly from the amount at which they are recognised in the accompanying consolidated balance sheet.
Accordingly, the fair value of the fixed-rate, fixed-term assets and liabilities, with residual maturity of more than one year and not hedged against variations in market interest rates, does not differ materially from the amount recognised in the accompanying consolidated balance sheet.
The market value of the balance of “Held-to-Maturity Investments” in the consolidated balance sheet at 31 December 2009 amounted to EUR 2,102,459 thousand (see Note 7).
48. Risk and capital management
Banesto sees prudent risk and capital management not only as a general management principle but also as the key to having a competitive advantage in the current economic climate. The Bank has equipped itself with methodologies to identify and measure the risks to which it is exposed and with the necessary capabilities for the acceptance, management, monitoring (anticipation) and recovery of loans.
Risk management at Banesto is based on the following principles:
• Independence of the risk function vis-à-vis business decision making.
• Prudent loan acceptance, giving rise to predictable risk management and a low risk profile.
• Anticipation through monitoring by means of up-to-date customer assessment and information.
• Adaptation of policies and structures to the market situation, while maintaining the risk-price relationship.
• Active participation of senior management in loan acceptance and risk monitoring.
• Use of advanced management techniques based on specialised analysis, assessment and measurement methodologies: internal rating and scoring-based models, risk-adjusted return on capital (RAROC), value at risk (VaR), economic capital (consistent measure of the risk assumed), scenario analysis, etc.
• Support of the business, thus maintaining the healthy loan portfolio, risk-adjusted returns and quality customer service.
• Adaptation to the Basel Capital Accord (BASEL II), with the validation of the internal capital requirements model giving rise to regulatory capital savings under the Pillar 1 framework in line with expectations.
Banesto has risk intelligence units which incorporate modern analysis and management technologies, generally based on the use of quantitative benchmarks. These technologies are supplemented with units that analyse risk based on knowledge, experience and analytical capacity. The Bank’s structure is adapted to the various types of banking business.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The Bank’s preference for automation and centralisation, typical of the most advanced entities, is combined with the use of decentralisation structures in decision making, especially in cases where the direct relational factors are also a source of knowledge. Banesto has a decentralised system of powers for the approval of loans based on the expected loss of each customer.
The primary objective of risk management is to preserve the quality of the portfolio. To this end, Banesto aims to retain the lowest non-performing loans ratio in the system. Compliance with this objective should go hand- in-hand with a creative, anticipatory risk management that affords the Bank a competitive advantage to achieve its lending growth targets.
The risk function is performed by the Lending and Risk Area which is responsible for meeting the credit quality and growth targets assigned to it, both in the strategic plans and in the annual budgets. The Lending and Risk Area is made up of several functional units, each of which is dedicated to the integral credit risk management of different segments: Retail Banking, Business Banking, Corporate Banking, Real Estate and Consumer Banking.
All the Bank’s customer businesses that give rise to the assumption of credit risk or market risk are assigned an individual responsible for risk. The Risk Committee, created in accordance with Article 12 of the Board Regulations, makes risk policy proposals to the Executive Committee, which takes decisions pursuant to the powers delegated by the Board of Directors in Article 13 of the Board Regulations and to Article 24 of the bylaws. The Executive Committee has delegated certain of its powers to lower-ranking risk committees in accordance with the General Risk Responsibilities Map.
The Risk Committee is responsible for coordinating and centralising all the risks to which the Bank is exposed, ensuring that the actions of the Bank are consistent with the Committee’s risk tolerance limits, setting and reviewing, with the established frequency, global limits for the main risk exposures, and deciding upon all transactions that exceed the powers delegated to lower-ranking bodies.
The Lending and Risk Area is made up of the Lending and Risk Unit, which is responsible for proposing, managing, transmitting and implementing risk policies and ensuring their compliance, and the Global Risk Unit, which is responsible for global risk management and control and for ensuring that strategic risk management objectives are met.
The organisation, by type of risk, is as follows: the Lending and Risk Unit directly manages and controls credit risk and market risk, the Financial Area manages structural balance sheet risk, and the Resources Area manages operating risk.
I. Global risk management
The detail, by type of risk, of the Group's risk profile in 2009 and 2008, taking into account all its activities and measured in terms of use of economic capital, is shown in the table below:
Percentage Credit risk 83.9% 93% Market risk 9.1% 2% Operational risk 7.0% 5%
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
In 2009 this capital model was substantially revised to enhance its sensitivity to changes in the various elements that reflect the global risk profile: the quality of individual exposures, volatility, concentration/diversification, correlation, maturity, hedges, etc.
As illustrated, the greatest exposure is to credit risk and, accordingly, credit risk has been the focus of most of Banesto’s efforts from the standpoint of quantification as regards capital, expected losses and stress scenarios.
I.a Risk quantification: tools and metrics
Effective global risk management requires the development of methodologies and models that enable the quantification of the basic measurement parameters, i.e. expected and unexpected loss. It is also essential to have in place tools that enable the establishment of adequate risk protection measures, and systems to identify areas of business growth, always bearing in mind the Bank’s risk appetite.
Several years ago Banesto implemented quantitative models that estimate these parameters on the basis of four main components: the probability of default associated with each customer/contract (PD), the Bank’s exposure to this customer at the date of default (EAD), loss severity or loss given default (LGD) and asset correlation (AC).
These parameters are modelled in both a non-cyclical (Through-the-Cycle; TTC) and cyclical manner so that they reflect the current position in the macroeconomic cycle from a point-in-time (PiT) approach. The instability that characterised 2009 has made it essential to analyse and quantify the sensitivity of the risk components to certain macroeconomic scenarios and to changes in the characteristics of the Bank’s portfolios.
The different behaviour of the portfolios/customers in the light of the change in environment means that the models must have an increasingly high granularity in order to support a risk management tailored to each customer to avoid applying the same policies to different risk profiles.
Probability of default (PD)
All the rating/scoring models (corporate, banks, businesses, developers, SMEs, consumer loans, mortgages, cards and behaviour of loans to individuals) are calibrated on the basis of the probability of default.
This calibration is supported by a statistical process which, based on the internal default history of the various customers/transactions, assigns each risk category (rating/score) a probability of experiencing a more than 90-day default over a one-year time horizon. These probabilities of default provide a uniform measure for the comparison of customers from different segments and also act as an objective yardstick against which to compare the risk profile of different entities.
As is the case with modelling subject to the impact of macroeconomic effects, Banesto’s probabilities of default are adjusted by correction coefficients depending on the purpose they are used for (pricing, internal provisions, regulatory capital, economic capital, etc.) and the scenarios defined by senior management.
Exposure at default (EAD)
This concept measures the potential risk exposure by estimating the amount that will have been drawn down against a given contract at the date of default. EAD is calculated on the basis of committed lines of credit, such as credit accounts.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Loss given default (LGD)
After ascertaining the probability of default and the amount of exposure at default, loss given default makes it possible to measure the definitive loss to be incurred by the Bank following recovery. This process is performed on the basis of Banesto's historical experience of customer debt recovery management. As in the case of PD, LGD is affected by the position in the economic cycle, since non-performing loans, asset prices and other factors have a significant impact on recoveries of defaulted loans and, accordingly, on loss severity.
With a view to incorporating this cyclical effect, Banesto used the aforementioned factors to model the variables with the greatest impact on final loss severity such as recovery time, the probability of foreclosure, the distribution of recoveries in the event of administration by the court, etc. The fact that Banesto uses the same factors as for PD enables it to measure the correlation between PD and LGD and the combined effect on expected loss of specific stress scenarios of the two parameters.
Expected loss
Expected loss, which is obtained by combining the three concepts mentioned above, is the annual cost of the risk associated with the Bank's loan exposure and, since 2008, it is taken to the management income statement of the entire Entity.
As in the foregoing cases, the expected loss will depend on the management objective and on the scenario established for this purpose.
According to internal estimates, Banesto’s average point-in-time expected loss stands at 0.63% and its average through-the-cycle expected loss stands at 0.382%.
Asset correlation (AC) and diversification
The fourth factor to be taken into account is asset correlation, which measures the contribution of overall changes in financial assets to the distribution of credit risk losses.
It is a key factor in capital models and, therefore, safeguarding the entity’s solvency in the event of extreme events in an adverse cycle depends on proper measurement of asset correlation.
In the current climate the Bank’s diversified portfolio represents a very significant competitive edge and, accordingly, the Bank pays particular attention to the measurement and management of this parameter. To this end Banesto has a concentration manager who regularly analyses the composition of the portfolio, and controls individual and industry concentrations and establishes maximum concentration limits on the basis of the most widely used standard indicators (Herfindahl-Hirschman, Bank of Spain Industry Concentration Index, Gini).
Also, at Banesto both the prior estimates and the methodological approximations used in the correlation models are reviewed each year.
Economic capital (EC)
Although expected loss is a key component of credit risk management and of pricing, it is not sufficient if we consider that this loss is not constant over time. Therefore, a measure is required that will provide information on the variability of expected losses. This information is furnished by economic capital, which is intended to measure the potential impact on the Entity of the volatility of these losses in exceptional situations. Banesto
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
pursues two objectives in this area: firstly, it seeks to minimise this volatility, thus guaranteeing maximum returns for shareholders, and, secondly, it aims to maintain maximum solvency in such stress situations.
The Group's capital management is performed at both regulatory and economic level.
Regulatory capital management is based on the analysis of the capital base and the capital ratios (core capital, Tier 1, etc.) using Basel (“BIS”) and Bank of Spain criteria. The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, rating agencies and investors. Active capital management includes securitisations, sales of assets, and preferred and subordinated issues of equity and hybrid instruments.
From an economic standpoint, capital management seeks to optimise value creation at the Group and at its different business units. To this end, the economic capital, RORAC and value creation data for each business unit are generated, analysed and reported to the Management Committee on a quarterly basis.
In order to adequately manage the Group's capital, it is essential to estimate and analyse future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based on reference to the budgetary information (balance sheet, income statement, etc.) and to macroeconomic scenarios defined by the Research Service. The Group uses these estimates to plan the management measures (issues, securitisations, etc.) required to achieve its capital targets.
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 such as GDP, interest rates, the stock market, etc. that mirror historical crises that could happen again.
The Group’s capital management, as regards conceptual definitions, is in keeping with Bank of Spain Circular 3/2008. Accordingly, the Group considers eligible capital to be that specified in Rule Eight of Bank of Spain Circular 3/2008.
Tier 1 capital basically consists of share capital, reserves of the Parent and of the consolidated companies, non-controlling interests and net profit, from which treasury shares, projected dividends to be distributed and 50% of the carrying amount of the ownership interest in Santander Seguros must be deducted. Tier 2 capital consists of subordinated financing, 35% of the positive valuation adjustments of available-for-sale financial assets, the general provision of the assets which, under the standardised approach, account for up to 1.25% of risk-weighted assets, the positive amounts resulting from the comparison under the IRB approach between impairment losses plus provisions and expected losses, up to a maximum of 0.6% of risk-weighted assets, less 50% of the ownership interest in Santander Seguros, the expected losses of the equity exposures under the IRB approach, and the negative amounts resulting from the comparison under the IRB approach between impairment losses plus provisions and expected losses. The Group details all this information in a document called “Information of Prudential Relevance” regulated by the aforementioned Bank of Spain Circular 3/2008.
I.b Integration in risk management
Following the successful implementation of the regulations arising from BIS II, with the approval of the internal models by the Bank of Spain, Banesto has focussed all its efforts on reinforcing risk management, through the strengthening of the related parameters, and on making risk management an integral part of the Bank's strategy.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
A new management cycle
In 2009 -a year characterised by the instability and uncertainty arising from the global economic and financial crisis, in which risk models have proven to be one of the key factors, not only at Banesto but also at the other entities- the reinforcement of risk management acquired greater significance and there was a more evident need for the analysis and quantification of the sensitivity of the components of risk to certain macroeconomic scenarios and to changes in the characteristics of the Bank’s portfolios. More importance was also attached to the ongoing review of the metrics from a regulatory and management standpoint.
Additionally, such a dynamic climate demands the continuous review, analysis and, where appropriate, adjustment of the projections made.
This new management cycle has also led to a greater integration of risk metrics in the management of the Bank in two respects: from the standpoint of the day-to-day management of the Bank and in terms of planning and strategic definition.
The impact of this on day-to-day management is as follows:
· Modification of the loan acceptance policies: analysing the performance of the parameters of portfolios from different perspectives, not only the traditional ones, discloses behavioural changes that might give rise to a reconsideration of the loan acceptance policies.
· Development of new business strategies on the basis of the identification of new lending growth niches.
· More exhaustive monitoring of customers/transactions, guaranteeing the periodic review and analysis of assessments and the establishment of anticipatory measures.
The purpose of all of the foregoing is to ensure compliance with the risk profile established by the Bank. From the more global or strategic standpoint, this new management cycle provides knowledge of the likely performance of the risk profile of the various portfolios managed in a more proactive way which, together with a business forecast structure, makes it possible to project all matters relating to the risk profile and capital and to adjust strategies and day-to-day operating matters.
New risk metrics structure
This greater, more intense integration of the model in management has led to an adaptation of the regulatory metrics with the aim of providing increasingly granular measurements better adapted to the different requirements: business/risk, loan acceptance/monitoring, pricing/returns.
Accordingly, the metrics used in management are intended to be prospective overviews and, therefore, they are generally more cyclical, highly dynamic measures, since they must be adapted to the Bank’s business plans and to changes in the environment. The regulatory metrics, however, are mostly non-cyclical, static measures that are based more on historical observation.
In this adaptation of the management metrics, various projects have been developed with the aim of eliminating bias to prevent factors inherent to the models from being transferred to the business. One example of this was the analysis of the pro-cyclical nature of probability of default (PD), whereby the cause of the PD was analysed along with the alternatives to avoid overestimating or understating risk during this period of crisis.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The cyclical nature of the metrics, together with the current economic crisis, has further highlighted the need to quantify the sensitivity of risk to changes in macroeconomic scenarios.
The stress-testing project was developed against this backdrop, and it resulted in a credit risk management tool which makes it possible to interpret the sensitivity of the Bank’s portfolio to changes in the most significant risk factors (unemployment, inflation, GDP, housing prices, etc.).
Accordingly, the impact of a given macroeconomic scenario on each loan sub-portfolio under analysis can be quantified swiftly. In this connection, granularity is a key management factor, as is ensuring the convergence of the top-down and bottom-up approaches.
This model facilitates the use of the tool from different perspectives: on the one hand, adjusting the global risk quantification for the coming years; and, on the other hand, given the level of granularity obtained, supporting the anticipation of specific threats, identifying the investments that are most sensitive, in terms of increased defaults or losses, to macroeconomic changes. At the other extreme, it makes it possible to detect new opportunities or pockets of business by identifying the profiles that are less risk-sensitive in specific macroeconomic scenarios.
In view of the foregoing information, in an environment that is so dynamic both from the macroeconomic standpoint and in terms of the highly proactive anticipatory policies adopted, the forecasts of the risk components must be reviewed continuously. This is particularly necessary given the high penetration of the risk metrics in the management model, since they are included in the income statements of the branches, through Expected Loss, and in the planning that makes it possible to estimate the provisions and capital required for the coming years.
I.c Constructing a new risk architecture
The developments of the last two years show that events are occurring increasingly quickly and, therefore, it is essential to make decisions more swiftly, and it is impossible to analyse risks in an isolated manner, since they are connected and interdependent.
As a result of these requirements, in 2009 the Bank’s Global Risk Map was implemented, with the focus on strategic management by senior executives to swiftly improve the management and control environment at all levels.
The Risk Map is not intended to be an inventory or a quantitative balanced scorecard of all risks, but rather it goes one step further and analyses the causes and possible relationships of the risks and assesses the relevance and degree of control thereof, thus serving as a basis for prioritising the development of continuous improvement plans.
Accordingly, the objective is to establish a strategic and dynamic risk management model based on the relative importance and causes of risk. To this end, three levels of risk are considered:
a. Extreme risks, taken to be those that could affect business continuity or significantly damage the income statement. These risks are not quantified but rather they are inventoried and analysed so that measures can be established that either prevent them from arising or mitigate their impact if they were to arise.
b. Level I risks, taken to be the major types of risk (credit risk, market risk, operational risk, etc.). A series of metrics is established regarding these risks that is intended to quantify the exposure and the degree of control and management thereof.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
c. Risk factors, taken to be the various sub-categories of risk that influence the risks in the aforementioned category. As regards these types of risk, not only is a series of metrics established that evaluates risk exposure, but also the causes of risk are investigated, and their impact and probability of occurrence are analysed, together with the control measures to mitigate residual risk.
All of the foregoing enables Banesto to define improvement plans and serves as a tool for defining strategies.
II. Credit risk
Credit risk is the possibility of a credit institution incurring a loss stemming from the failure of counterparties to meet their contractual financial obligations.
The table below details the distribution, by segment, of the credit risk exposure to customers in terms of EAD at 31 December 2009 and 2008.
2009 2008 Millions of Euros EAD % EAD % Corporate banking 13,059 16% 16,786 20% Business banking 31,634 39% 31,073 36% SMEs, retail businesses and enterprises 5,775 7% 5,470 6% Independent professionals 2,206 3% 2,254 3% Individuals 25,638 32% 25,814 30% Banks, sovereign debtors and other 2,055 3% 4,327 5% Total 80,367 100% 85,724 100%
II.a Loan acceptance
Banesto’s loan acceptance process is structured on the basis of customer segmentation and the level of powers, while remaining in line with uniform criteria for each loan and sharing common objectives:
-To maintain a quality loan portfolio. -To enhance the customer response capability and efficiency. -To adapt the loan acceptance process to the customer’s risk profile.
To this end, Banesto has in place advanced systems that combine automatic acceptance models with teams of analysts who have a high level of experience in retail risk management, which represent the Bank’s greatest asset. Banesto has a Risk Analysis Centre (RAC) which is formed by highly specialised analysts, structured by business segment (individuals, SMEs and the agricultural sector), who ensure that the transactions meet the risk quality standards required by the Bank and who provide the branch network with individualised counselling on the processing of customer requests.
As regards individuals, the Bank has advanced automatic behaviour analysis tools (scores) that are incorporated in the systems and represent an effective risk assessment and monitoring instrument.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
In the case of the acceptance of loans to SMEs, the Bank has an Expected Loss model that has facilitated improvements in the management of loan transactions by the analysts and the possibility of adapting the collateral required to each customer profile.
With respect to companies and major corporate customers, the Bank uses the resources and tools required for the proper identification and assessment of risk: specific analysis systems for each type of customer, rating models for customers (individuals and economic groups) and classifications with operating risk limits that streamline the response capability and facilitate the contribution of the Risk Area to the achievement of the Bank’s commercial targets (risk-adjusted return on capital; RAROC):
• Each risk analyst has a portfolio of customers who he or she meets, analyses and reviews regularly on the basis of the monitoring requirements established in each case, thereby achieving a closer customer relationship and an improvement in anticipatory management.
• The analysis systems also serve as an effective risk management tool, and facilitate the assignment of the customer rating.
• The rating models used by type of customer (individuals and economic groups) make it possible to estimate the probability of default and the expected loss based on LGD estimates.
• The classification of customers with operating risk limits streamline the response capability and global risk management.
2009 was an extremely complex and difficult year from the economic standpoint and forecasts suggest that the difficulties will remain over the coming months.
Accordingly, the loan acceptance process based on collective decisions is in accordance with strict principles of prudence, which enable contributions to be made to growth through select new customers and facilitate the viability of business customers most sensitive to the difficulties of the economic climate.
II.b Risk monitoring
In addition to the involvement of the entire network in controlling the credit quality of the Bank’s portfolio, Banesto has in place a specific risk monitoring function.
In this regard, Banesto has sufficient technological and human resources to ensure, by means of tools, processes and systems, the early detection of incidents that might affect the development of its risk exposure to customers.
The continuous monitoring by means of ongoing observation is performed through monitoring and anticipation committees at all levels of the Bank, with the involvement of senior management.
For this purpose Banesto has data provided by information systems such as the Risk Anticipation System (SAR), which has 120 behaviour variables; information and monitoring of customers that are identified as causing more concern, through the firms under special surveillance system (FEVE); monitoring and continuous updating of the portfolio and customer ratings based on their performance; tools for the monitoring and prediction of the behaviour of individual customers, etc.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The objective of the monitoring process is to ensure a close, up-to-date and in-depth (continuous) knowledge of the customer and to assign a rating in line with its credit quality, thereby enabling the Bank to anticipate the future risk performance with a view to implementing the appropriate measures to mitigate any possible incidents that might arise in the future.
II.c Recovery
Banesto’s loan recovery activity, which includes the management and sale of foreclosed assets, has been adapted to the complex economic climate through the creation of instruments that provide a swift response to new demands, the development of loan recovery and asset sale policies, and the application of management specialised in serving the various customer segments, all of which is underpinned by cutting-edge technology and the boosting of the resources allocated to this activity.
The classification policy for cases exceeding a certain amount was further reinforced with an increase in the number of loan recovery managers -in view of the current economic situation- who are very goal-oriented, which also enables Banesto to focus its loan recovery strategy on the basis of the type of debt and to pay immediate attention to each occurrence of default as soon as it arises. Accordingly, there are managers specialised in Business Banking whose objective is to technically and efficiently manage the increasingly common cases of insolvency in this segment; specific loan recovery strategies focused on SMEs have been established and, through individual business plans, Banesto manages individuals, who are classified into portfolios, with a notably high recovery capacity in the mortgage segment supported by a differentiated management model.
Agreements below a given amount and consumer financing are handled with the support of an extensive network of external collection companies and managers, which are evaluated every six months on the basis of efficiency ratios and are encouraged to achieve success. These structures underpin the significant recovery levels of written-off loans to which Banesto has always paid more specialised attention than the rest of the industry, which demonstrates that such loans can be recovered and a contribution made to the income statement.
The now consolidated legal proceedings management model articulated in the Astrea tool and monitored by the Procedural Management Centre has afforded Banesto a clear advantage with respect to all its competitors as regards the management of loan recovery legal proceedings and places the Bank in a strong position to handle future challenges.
In 2009 further improvements were made to the new version of the Loan Recovery Management System, which contributed to an enhanced efficiency and swiftness of the recovery of loans.
II.d Concentration risk
Another component of credit risk is concentration risk. The Bank constantly monitors the degree of concentration, by geographical area, economic sector, product and customer group, of its credit risk portfolios and establishes the risk policies and exposure limits required to ensure adequate management of credit risk portfolio concentration.
Although Banesto has positions that are deemed to be “large exposures”, they are far below the maximum risk concentration limit set by Bank of Spain Circular 3/2008.
The distribution of the loan portfolio by customer segment is included in Note 48-b and the distribution by geographical area is included in Note 10.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
III.- Market risk
III.a Structural balance sheet risk
Interest rate risk is inherent to the Bank’s activity as a financial intermediary. This risk arises because the balance sheet comprises assets and liabilities that are sensitive to changes in interest rates and that reprice on different dates and in different sections of the yield curve, which, together with the fact that a large portion of the liabilities consists of current accounts, could cause unwanted fluctuations in the Bank’s net interest margin and in the economic value of its capital.
Management policy and strategy
The Bank’s main objective is to stabilise the net interest margin in the event of interest rate fluctuations and, at the same time, to maintain economic value. To this end, Banesto’s structural interest rate risk management is aimed at minimising the sensitivity of the net interest margin to changes in the yield curve.
The Asset-Liability Committee (ALCO) is responsible for approving lending strategies and for shaping the policies for the management, hedging, measurement and control of the risks associated with interest rate fluctuations. This does not include the Treasury Area positions which are managed and measured separately by the Markets Area using its own methodologies.
In the risk management context, the Bank arranges hedging transactions aimed at reducing interest rate risk, which may be performed with fixed-income instruments and with interest rate derivatives (swaps, collars and swaptions). The selection of one instrument or another is based on factors such as cost, the effectiveness of the instrument and the effects it might have on liquidity and capital. Additionally, in the case of derivative instruments, the requirements for hedge accounting established in Bank of Spain Circular 4/2004 and IAS 39 must be (and are being) met.
Management methodology
For the purpose of measuring structural balance sheet risk, Banesto has technological systems that provide all the salient structural risk information (dates, rates, accruals, etc.) for each contract on the balance sheet, all of which ties in with the Bank’s accounting records. Also, the Bank has followed a policy of investing in applications and systems that facilitate the development of models that provide considerable capacity for risk analysis.
The Bank assesses and manages interest rate risk by simulating a variety of scenarios and time horizons which are representative of its risk profile. Accordingly, the analysis of risk sensitivity involves comparing the behaviour of the net interest margin in scenarios of high interest rates and low interest rates in the event of parallel shifts in the implicit yield curve that is considered to be the basic scenario, and in scenarios of the flattening and steepening of the curve to reflect the yield curve risk. Additionally, in each of these scenarios, the margin is modelled under a considerable combination of factors including the reinvestment risk arising from pre-payments, new loans or budgeted balances, spreads, etc. that form a detailed simulation of the net interest margin.
In performing the sensitivity analysis, Banesto focuses mainly on the first year and, in greater detail, on the second year, since the second year shows the interest rate risk exposure more clearly once the Bank’s balance sheet as a whole has been repriced.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Since 96.3% of Banesto's balance sheet is expressed in euros, 2.7% in US dollars and the remaining 1.0% in other currencies (31 December 2008: 96.5%, 2.8% and 0.7%, respectively), interest rate risk management focuses on the positions in euros.
The following table shows the maturity and repricing gaps of assets, liabilities and off-balance-sheet transactions at 31 December 2009 and 2008:
Millions of Euros 31 December Less than 3 3 Months 1 to 2 2 to 5 More than 5 Not 2009 Months to 1 Year Years Years Years Sensitive Total
Assets Money market 7,800 4,265 56 1,571 53 - 13,745 Credit system 36,786 27,152 2,881 2,819 3,516 - 73,153 Securities portfolio 3,512 704 4,401 5,100 2,755 - 16,472 Other assets - - - - - 13,515 13,515 Total assets 48,098 32,120 7,388 9,489 6,324 13,515 116,884
Liabilities Money market 14,487 1,205 2,888 100 5 91 18,775 Deposit market 17,734 10,872 2,634 8,225 6,341 - 45,805 Issues 9,850 3,072 2,500 11,325 5,350 - 32,096 Other liabilities - - - - - 20,208 20,208 Total liabilities 42,070 15,149 8,022 19,649 11,696 20,299 116,884
Off-balance-sheet
transactions (7,736) (7,176) 4,645 7,551 2,717
Simple gap (1,708) 9,795 3,961 (2,609) (2,655) (6,784)
Cumulative gap (1,708) 8,088 12,049 9,440 6,784
Sensitivity ratios: Assets-liabilities/total
assets 5.16% 14.52% -0.59% -8.69% -4.60% -5.80% Simple gap/total assets -1.46% 8.38% 3.39% -2.23% -2.27% -5.80% Cumulative gap/total
assets -1.46% 6.92% 10.31% 8.08% 5.80% Coverage ratio: Sensitive assets/sensitive
liabilities 114.33% 212.04% 91.47% 48.29% 54.07%
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Millions of Euros 31 December Less than 3 3 Months 1 to 2 2 to 5 More than 5 Not 2008 Months to 1 Year Years Years Years Sensitive Total
Assets Money market 10,977 3,340 53 126 62 - 14,558 Credit system 42,417 26,058 2,534 2,894 2,633 - 76,536 Securities portfolio 1,466 3,227 2,490 789 2,923 - 10,895 Other assets - - - - - 10,958 10,958 Total assets 54,860 32,625 5,077 3,809 5,618 10,958 112,947
Liabilities Money market 10,905 6,204 2,287 318 3 - 19,717 Deposit market 18,088 15,257 2,567 5,456 5,272 - 46,640 Issues 10,842 2,263 1,682 5,873 8,775 - 29,435 Other liabilities - - - - - 17,155 17,155 Total liabilities 39,835 23,724 6,536 11,647 14,050 17,155 112,947
Off-balance-sheet
transactions (12,422) (3,766) 1,001 5,073 10,114 -
Simple gap 2,603 5,135 (458) (2,765) 1,682 (6,197)
Cumulative gap 2,603 7,738 7,280 4,515 6,197 -
Sensitivity ratios: Assets-liabilities/total
assets 13.30% 7.88% (1.29%) (6.94%) (7.47%) (5.49%) Simple gap/total assets 2.30% 4.55% (0.41%) (2.45%) 1.49% (5.49%) Cumulative gap/total
assets 2.30% 6.85% 6.45% 4.00% 5.49% - Coverage ratio: Sensitive assets/sensitive
liabilities 137.72% 137.52% 77.68% 32.70% 39.99% 63.88%
III.b. Liquidity risk
The aim of Banesto’s liquidity risk management is to ensure that the Bank’s payment obligations are met effectively and efficiently, paying particular attention to cost and focusing on the medium and long term. Also, the Bank increased its position in highly liquid assets, in line with the conservative policy on which its liquidity risk management is based.
In 2009 Banesto continued to improve its net monetary position due to the prudent and efficient management of wholesale financing and to the increase of the positions in liquid assets. Financing from the wholesale markets raised a total of EUR 6,000 million in 2009.
In a year of great volatility and uncertainty in the wholesale markets, Banesto succeeded in joining the small group of entities that was able to successfully have recourse to these markets repeatedly throughout the year
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
and take advantage of its good reputation among investors and its flexibility to adapt to investors’ needs, without having to resort to Treasury guarantees.
Together with the good functioning of traditional programmes such as the structured issues programme or the institutional domestic promissory notes programme and the consolidation of the Euro Commercial Paper (ECP) programme, mention should be made of the two mortgage-backed bond (cédula hipotecaria) issues (EUR 2,250 million) and the senior debt issue (EUR 1,000 million).
The following table shows the maturity gaps of assets and liabilities in millions of euros at 31 December 2009 and 2008, which can be used as a basis for the analysis of liquidity:
Millions of Euros 31 December Less than 3 3 Months 1 to 2 2 to 5 More than 5 Not 2009 Months to 1 Year Years Years Years Sensitive Total
Assets Money market 6,850 4,265 56 1,571 1,003 - 13,745 Credit system 8,787 15,033 9,291 16,262 23,779 - 73,153 Securities portfolio 2,729 764 4,401 5,109 3,469 - 16,472 Other assets - - - - - 13,515 13,515 Total assets 18,366 20,062 13,748 22,942 28,251 13,515 116,885
Liabilities Money market 14,487 1,207 2,889 106 20 91 18,800 Deposit market 9,149 11,457 3,772 11,529 9,859 14 45,781 Issues 4,575 3,288 3,093 14,392 6,748 - 32,096 Other liabilities - - - - - 20,208 20,208 Total liabilities 28,211 15,952 9,754 26,027 16,627 20,313 116,885
Simple gap (9,845) 4,110 3,993 (3,084) 11,624 (6,798)
Cumulative gap (9,845) (5,734) (1,741) (4,825) 6,798
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Millions of Euros 31 December Less than 3 3 Months 1 to 2 2 to 5 More than 5 Not 2008 Months to 1 Year Years Years Years Sensitive Total
Assets Money market 10,368 3,340 53 126 672 - 14,559 Credit system 13,051 16,019 9,229 15,339 22,896 - 76,534 Securities portfolio 527 3,232 2,549 834 3,754 - 10,896 Other assets - - - - - 10,958 10,958 Total assets 23,946 22,591 11,831 16,299 27,322 10,958 112,947
Liabilities Money market 10,905 6,204 2,287 318 3 - 19,717 Deposit market 9,468 15,993 6,529 8,614 6,022 14 46,640 Issues 2,480 5,067 3,281 8,002 10,605 - 29,435 Other liabilities - - - - 17,155 17,155 Total liabilities 22,853 27,264 12,097 16,934 16,630 17,169 112,947
Simple gap 1,093 (4,673) (266) (635) 10,692 (6,211)
Cumulative gap 1,093 (3,580) (3,846) (4,481) 6,211
These “gaps” reflect a typical commercial banking structure with a high percentage of demand deposit financing.
III.c Treasury operations risk
The measurement of treasury operations risk focuses mainly on credit risk and market risk. Banesto has a Market Operations Risk Unit dedicated to the monitoring and measurement of this type of risk. This Unit has two areas dedicated to the analysis of market risk and credit risk and a third area dedicated to market pricing and valuation, which are used in the valuation of positions. This structure makes it possible to group together the measurement of all the types of treasury risk with an integrated approach and integrated systems. 2009 required a close monitoring of treasury operations risk owing to the high volatility in the financial markets.
1. Credit risk
In treasury operations credit risk is measured as the positive value that any financial instrument could potentially acquire at a future time when it is possible that the counterparty to the financial instrument might fail to comply with its contractual obligations. This non-compliance would give rise to losses for Banesto, since the cost of re-placing an instrument with a positive value would represent a loss.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Treasury credit risk
In 2009 the Wholesale Banking business activity grew more slowly than in previous years. However, due to the considerable boost to the marketing of treasury products in previous years, the number of customer transactions involving derivative instruments is very high. The credit risk of treasury products is managed and controlled at the Market Operations Risk Unit (URAM). For this purpose the potential values of each financial instrument are estimated over the life of the instrument with a confidence level of 97.725%. Accordingly, in the event of customer default, Banesto’s loss would be lower than the estimated loss in 97.725% of cases.
The URAM calculates and controls the risk exposure to each customer over different time horizons. This analysis facilitates greater control and a more dynamic and efficient management of the limits established by the Loan Acceptance Units. The Loan Acceptance Units and the Wholesale Banking Area are furnished with very detailed information on the credit risk positions with each customer on a daily basis. Also, detailed information regarding Banesto’s exposure to its customers, by segment, product, rating, maturity and risk factor, is presented to senior management through the Risk Committee and the Executive Committee on a weekly basis. In 2009 the URAM improved the risk exposure estimate processes, with the application of more advanced simulation models.
At 2009 year-end, the risk exposure was EUR 13,388 million, and the Wholesale Banking segment (which groups together the Corporations and Institutions banking sector) represented the largest portion of this figure, with 95.1%, while the Business Banking, Real Estate and Retail Banking segments represented 4.4%, 0.2% and 0.3%, respectively.
2.- Market risk
The market risks affecting treasury operations (interest rates, exchange rates, equities, credit spreads, implicit volatilities, correlations, etc.) are managed and controlled by the Market Risk Unit using a standard historical simulation Value-at-Risk (VaR) methodology. VaR provides a standardised risk figure which represents the maximum expected loss as a result of adverse fluctuations in the market with a confidence level of 99%. At Banesto, VaR is calculated and reported to senior management every day and is controlled by a system of limits that affect the overall position and each of the portfolios that constitute the operations. Senior management is permanently informed of and involved in market risk management through fortnightly committee meetings under the auspices of the Risk Committee and through the ALCO.
In 2009 the levels of risk remained at all times within the approved limits, even at times of greater instability in the financial markets. The daily average VaR during the year was around EUR 5.2 million (2008: EUR 4.2 million), of which EUR 1.8 million reflect the level of market risk actually assumed and EUR 3.4 million relate to other technical market risks that are systematically covered by provisions pursuant to Banesto’s policy (2008: EUR 2.2 million and EUR 2.7 million, respectively).
The measurement of market risk using VaR is supplemented by an analysis of stress scenarios in which the impact of certain extreme events on the value of the portfolios is simulated. This enables historical and hypothetical scenarios with various degrees of severity and plausibility to be assessed, and the conclusions drawn are discussed with senior management on a regular basis through the aforementioned reporting cycles. Banesto regularly estimates the extreme losses that might occur if the VaR level were to be exceeded, by using the statistical conditional VaR, which is also reported to senior management on a daily basis and analysed in depth by the aforementioned committees. Throughout 2009 conditional VaR remained at around EUR 8.7 million (2008: EUR 7 million).
Banesto’s market risk measurement model has been submitted for approval by the Bank of Spain with a view to being used as an internal model for calculating minimum capital in this area. The pertinent audits of the model prior to its submission to the supervisor were conducted successfully in 2009, and the related
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
inspection is in progress. Banesto internally monitors and refines the quality of the model on an ongoing basis using back testing techniques which systematically compare the model’s predictions with the actual results of treasury activities. The results of the back testing were checked by the Group’s Internal Audit Department and by ratings agencies, and complied with the requirements recommended by international regulators.
III. d. Risks and results in 2009 a) Trading
The average VaR profile assumed in 2009 was EUR 5,200 thousand (2008: EUR 4,900 thousand). b) Balance sheet management
At 31 December 2009, the sensitivity of the net interest margin at one year to parallel falls of 100 b.p. was negative by EUR 23.9 million (1.89%) (31 December 2008: negative by EUR 60 million; 4%).
For the same timeframe the sensitivity of economic value to parallel increases of 100 b.p. in the curve was positive by EUR 76.4 million (0.94%) at 31 December 2009 (31 December 2008: negative by EUR 106 million; 1.2%).
IV. Operational risk
Banesto's operational risk management model was defined in accordance with the Basel II Accord, the EU directive on capital requirements for credit institutions and Bank of Spain Circular 3/2008 on solvency.
Banesto’s main operational risk management objectives are: – Identify and eliminate any clusters of operational risk before they give rise to losses (anticipation). – Reduce operational risk losses by establishing corrective plans based on the type of risk and the business in question (mitigation).
In 2009 the operational risk management model was consolidated, thus completing the view of this function as a transformational initiative, and new operational and information resources were incorporated, obtaining results in terms of both improvements in transactional and marketing processes and the reduction of events and losses.
Banesto is well positioned in the standardised approach within the regulatory framework, with ample coverage of its qualitative and quantitative requirements, which in turn represent a large portion of the requirements for the application of advanced models.
The operational risk management in Retail Banking has obtained noteworthy results through the NORMA project which covers five areas of operational risk in the commercial network: cash management, standardisation of operations and documentation, security, order and reputation and other operational risks. NORMA was extended to Business Banking in 2009 and in the future it will be applied in other business areas of the Bank.
Through NORMA, operational risk has been incorporated into the Bank’s executive and management structure, from branch and area level to the regional and central operational risk committees, which are furnished fortnightly with information on the focal points for the management thereof. The incorporation of the NORMA indicator in the network incentives model represents a significant landmark in the consolidation of this global operational risk management tool.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
In 2009 new risk identification mechanisms were included, which enabled the Bank to increase the coverage of its operational risk map. Incidents, new products, customer claims and any other unresolved matters that might give rise to losses are monitored from detection to resolution, and the related self-assessment questionnaires are completed.
The loss database was implemented five years ago and, as a result of its level of automation and detail in capturing data, all the Bank’s centres, in particular all the branches, are immediately aware of all operational risk events affecting them. This database also facilitates the preparation of reports on a comparative basis with other entities and, in particular, with the Spanish entities forming part of the international consortium known as the Operational Riskdata eXchange Association (ORX). The main purpose of this association is the anonymous exchange of operational risk loss data, which are used at each entity to model this risk and to validate data captured internally. ORX currently has more than 50 members at international level (Banesto has been a member since 2005) and it is a leading forum for research and the development of standards in operational risk management.
In 2009 the active management of events and the implementation of corrective measures gave rise to a significant reduction in the number of operational risk events, in particular in the risk types Errors in the Execution of Processes and Customer Practices. The line of business that presented the greatest reduction in losses was Retail Banking, as mentioned above with respect to the NORMA project.
Banesto’s Operational Risk Department is also responsible for the business continuity function, which defines the Bank’s critical processes and the requirements to continue operating in the event of a serious contingency. Banesto has a Continuity Management Committee which approves and defines general strategies and response mechanisms on the basis of the risks detected. Banesto is a member of the Spanish Business Continuity Consortium and participates in the working groups on definitions and coordination with critical industries and institutions.
V. Environmental risk
For several years Banesto has had in place an internal environmental risk assessment or environmental rating methodology that it applies to all its Corporate Banking customers. The environmental rating attaches weights to both the industry category and a series of variables that involve a greater or lesser degree of risk. Such variables range from compliance with the profuse specific environmental legislation for each industry to litigation and claims in progress, levels of waste emissions, discharges and production, the corrective measures adopted and the environmental quality certifications obtained.
The environmental assessment of a customer acts both as an opportunity, enabling the Bank to finance investment projects that aim to protect the environment, and as a threat, since it assesses the risk of a customer that ignores the environmental implications of its business. At present, all the Bank’s corporate customers have an environmental rating assigned to them to be taken into account in the analysis of the exposure to them.
VI. Reputational risk
Reputational risk can be defined as the possible impairment of the image, prestige or reputation of an entity resulting from the perception held by third parties of its actions.
Reputational risk management is present as an essential element in all areas of the organisation and features in the loan acceptance process at all decision levels. This risk is independent from the credit and/or economic risks inherent in the Bank's operations and from the legal risk that may arise in the performance and instrumentation thereof. It is therefore to be regarded as a risk that is additional to any other risk borne.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The Compliance Unit supervises the Bank’s reputational risk by monitoring the degree of compliance with the Code of Conduct in the Securities Market, the anti-money laundering manuals and procedures and all the governance standards established by the Executive Committee.
49. Explanation added for translation to English
These consolidated financial statements are presented on the basis of IFRSs as adopted by the European Union. Certain accounting practices applied by the Group that conform with IFRSs may not conform with other generally accepted accounting principles.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix I
Subsidiaries Composing the Banesto Group at 31 December 2009 and 2008
31 December 2009 Location/ Thousands of Euros Registered Percentage of Ownership Company Data Entity Office Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss) (*)
Agrícola Tabaibal, S.A. Gran Canaria Agriculture - 74.19 74.19 1,557 1,466 146 (55) Aktúa Soluciones Financieras, S.A. Madrid Finance 99.97 0.03 100.00 6,673 1,101 530 5,633 Alcaidesa Holding, S.A. Cadiz Real estate - 50.00 50.00 127,605 60,769 71,268 (4,432) Aljarafe Golf, S.A. Seville Real estate - 89.41 89.41 14,094 329 13,926 (161) Bajondillo, S.A. Madrid Real estate 99.99 0.01 100.00 384 359 26 (1) Banco Alicantino de Comercio, S.A. Madrid Banking 99.99 0.01 100.00 9,118 18 9,095 5 Banesto Banca Privada Gestión, S.A. S.G.I.I.C. Madrid Investment fund manager 99.99 0.01 100.00 3,537 876 2,414 247 Banesto Banco de Emisiones, S.A. Madrid Banking 99.99 0.01 100.00 7,113,484 7,011,502 101,062 920 Banesto Bolsa, S.A., Sdad. Valores y Bolsa Madrid Stock market 99.99 0.01 100.00 608,960 497,462 109,563 1,935 Banesto Financial Products, PLC. Ireland Finance 99.94 0.06 100.00 8,551,370 8,551,005 335 30 Banesto Holdings, Ltd Guernsey Securities investment 100.00 - 100.00 48,464 221 47,470 773 Banesto Preferentes, S.A. Madrid Finance 99.76 0.24 100.00 240 31 201 8 Banesto Renting, S.A. Madrid Finance 99.99 0.01 100.00 325,665 315,655 10,254 (244) Banesto Securities, Inc. New York Finance - 100.00 100.00 3,706 373 2,875 458 Beta Cero, S.A. Madrid Finance 74.00 14.00 88.00 15 1 26 (12) Caja de Emisiones y Anualidades Debidas por el Estado Madrid Finance 62.87 - 62.87 59 22 49 (12) Clínica Sear, S.A. Madrid Healthcare 50.58 - 50.58 15,574 11,155 4,686 (267) Club Zaudin Golf, S.A. Seville Services - 85.04 85.04 20,496 6,008 14,762 (274) Costa Canaria de Veneguera, S.A. Gran Canaria Real estate 37.09 37.10 74.19 16,037 2,667 13,531 (161)
(*) The companies' results at 31 December 2009 have not yet been approved by the shareholders at their respective Annual General Meetings. Note: The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial both for the Bank and for the companies themselves.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix I (cont.)
Subsidiaries Composing the Banesto Group at 31 December 2009 and 2008
31 December 2009 Location/ Thousands of Euros Registered Percentage of Ownership Company Data Entity Office Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss) (*)
Depósitos Portuarios, S.A. Madrid Services 99.95 0.05 100.00 1,121 567 336 218 Dudebasa, S.A. Madrid Finance 99.99 0.01 100.00 43,223 10,903 32,200 120 Efearvi, S.A. Madrid Real estate - 100.00 100.00 2,007 2,542 (516) (19) Elerco, S.A. Madrid Real estate 99.99 0.01 100.00 678,066 473,721 205,767 (1,422) Formación Integral, S.A. Madrid Training 99.99 0.01 100.00 1,751 445 1,296 10 Gescoban Soluciones, S.A. Madrid Finance 99.99 0.01 100.00 10,869 4,421 5,134 1,314 Hualle, S.A. Madrid Securities investment 99.99 0.01 100.00 85,662 11,342 73,445 875 Intursa, S.A. Seville Real estate - 100.00 100.00 962,374 1,070,651 (15,947) (92,330) Larix Chile Inversiones, Ltd. Chile Real estate - 100.00 100.00 348 294 249 (195) Merciver, S.L. Madrid Shipping 99.91 0.09 100.00 1,252,564 1,252,427 155 (18) Mesena Servicios de Gestión Inmobiliaria, S.A. Madrid Securities investment 99.99 0.01 100.00 114,334 246,128 (17,429) (114,365) Oil-Dor, S.A. Madrid Service stations 99.99 0.01 100.00 159,385 1,016 155,196 3,173 Programa Hogar Montigalá, S.A. Madrid Real estate 0.05 99.95 100.00 214,894 311,141 (21,043) (75,204) Promodomus Desarrollo de Activos, S.L. Madrid Real estate - 51.00 51.00 292,756 295,185 1,703 (4,132) Sodepro, S.A. Vitoria Finance 99.99 0.01 100.00 16,267 22 15,713 282 Wex Point España, S.L. Madrid Services 99.98 0.02 100.00 1,972 898 972 102
(*) The companies' results at 31 December 2009 have not yet been approved by the shareholders at their respective Annual General Meetings.
Note: The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial both for the Bank and for the companies themselves.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix I (cont.)
Subsidiaries Composing the Banesto Group at 31 December 2009 and 2008
31 December 2008 Location/ Thousands of Euros Registered Percentage of Ownership Company Data Entity Office Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss)
Agrícola Tabaibal, S.A. Gran Canaria Agriculture - 74.18 74.18 1,440 1,293 86 61 Alcaidesa Holding, S.A. Cadiz Real estate - 50.00 50.00 116,146 48,396 77,045 (9,295) Alhambra 2000, S.L. Madrid Vehicle wash - 100.00 100.00 3,347 2 3,149 196 Aljarafe Golf, S.A. Seville Real estate - 89.41 89.41 14,264 332 14,004 (72) Bajondillo, S.A. Madrid Real estate 74.00 26.00 100.00 384 359 26 (1) Banco Alicantino de Comercio, S.A. Madrid Banking 99.99 0.01 100.00 9,119 24 9,088 7 Banesto Banca Privada Gestión, S.A. S.G.I.I.C. Madrid Investment fund manager 99.99 0.01 100.00 2,999 569 2,414 16 Banesto Banco de Emisiones, S.A. Madrid Banking 99.99 0.01 100.00 9,865,798 9,764,737 100,142 919 Banesto Bolsa, S.A., Sdad. Valores y Bolsa Madrid Stock market 99.99 0.01 100.00 479,111 367,092 103,453 8,566 Banesto Factoring, S.A. Establecimiento Financiero de Crédito Madrid Factoring 99.97 0.03 100.00 2,283,946 2,158,712 115,639 9,595 Banesto Financial Products, PLC. Ireland Finance 99.94 0.06 100.00 7,510,201 7,509,811 314 76 Banesto Holdings, Ltd Guernsey Securities investment 100.00 - 100.00 47,733 218 47,430 85 Banesto Preferentes, S.A. Madrid Finance 99.76 0.24 100.00 131,724 131,523 159 42 Banesto Renting, S.A. Madrid Finance 99.99 0.01 100.00 379,204 366,790 10,381 2,033 Banesto Securities, Inc. New York Finance - 100.00 100.00 3,328 146 2,575 607 Banesto, S.A. Madrid Finance 74.00 26.00 100.00 49 1 50 (2) Beta Cero, S.A. Madrid Finance 74.00 14.00 88.00 26 1 37 (12) Caja de Emisiones y Anualidades Debidas por el Estado Madrid Finance 62.87 - 62.87 69 18 62 (11) Clínica Sear, S.A. Madrid Healthcare 50.58 - 50.58 15,047 10,295 5,185 (433) Club Zaudin Golf, S.A. Seville Services - 85.03 85.03 20,822 6,048 14,986 (122) Corpoban, S.A. Madrid Securities investment - 100.00 100.00 76,471 2 73,477 2,992 Costa Canaria de Veneguera, S.A. Gran Canaria Real estate 37.08 37.10 74.18 16,127 2,705 13,468 (46)
Note: The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial both for the Bank and for the companies themselves.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix I (cont.)
Subsidiaries Composing the Banesto Group at 31 December 2009 and 2008
31 December 2008 Location/ Thousands of Euros Registered Percentage of Ownership Company Data Entity Office Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss)
Depósitos Portuarios, S.A. Madrid Services 99.95 0.05 100.00 823 528 458 (163) Diseño e Integración de Soluciones, S.A. Madrid IT 99.99 0.01 100.00 2,982 310 2,601 71 Dudebasa, S.A. Madrid Finance 99.99 0.01 100.00 46,456 14,199 46,088 (13,831) Efearvi, S.A. Madrid Real estate - 100.00 100.00 2,010 2,525 (447) (68) Elerco, S.A. Madrid Real estate 53.38 46.62 100.00 818,562 557,009 284,810 (23,257) Formación Integral, S.A. Madrid Training 99.99 0.01 100.00 1,779 482 1,286 11 Gedinver e Inmuebles, S.A. Madrid Finance 99.99 0.01 100.00 6,633 345 6,153 135 Gescoban Soluciones, S.A. Madrid Finance 99.99 0.01 100.00 8,969 3,966 3,344 1,659 Grupo Inmobiliario La Corporación Banesto, S.A. Madrid Securities investment 99.99 0.01 100.00 50,952 43,059 11,706 (3,813) Hualle, S.A. Madrid Securities investment 99.99 0.01 100.00 84,149 2,549 46,618 34,982 Inversiones Turísticas, S.A. Seville Real estate - 100.00 100.00 945,717 925,506 4,910 15,301 Larix Chile Inversiones, Ltd. Chile Real estate - 100.00 100.00 94 189 32 (127) Larix Spain, S.L. Isle of Man Real estate - 100.00 100.00 1,249 75 1,323 (149) Mercado de Dinero, S.A. Madrid Securities investment 74.00 26.00 100.00 500 206 293 1 Merciver, S.L. Madrid Shipping 99.91 0.09 100.00 1,147,643 1,147,633 101 (91) Oil-Dor, S.A. Madrid Service stations 99.99 0.01 100.00 152,833 123 148,876 3,834 Programa Hogar Montigalá, S.A. Madrid Real estate 0.05 99.95 100.00 374,194 372,633 7,674 (6,113) Promodomus Desarrollo de Activos, S.L. Madrid Real estate - 51.00 51.00 589,189 587,977 2,000 (788) Sodepro, S.A. Vitoria Finance 99.99 0.01 100.00 15,659 1 15,067 591 Wex Point España, S.L. Madrid Services 99.98 0.02 100.00 2,092 1,086 1,177 (171)
Note: The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial both for the Bank and for the companies themselves.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix II
The Banesto Group’s Joint Ventures at 31 December 2009 and 2008
31 December 2009 Location/ Thousands of Euros Registered Percentage of Ownership Company Data Entity Office Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss) (*)
Espais Promocat, S.L. Barcelona Real estate - 50.00 50.00 26,941 27,373 606 (1,038) Inmobiliaria Sitio de Baldeazores, S.A. Madrid Real estate - 50.00 50.00 57 4,982 (4,700) (225) Kassadesing 2005, S.L. Madrid Real estate - 50.00 50.00 56,753 54,073 10,163 (7,483) Prodesur Mediterráneo, S.L. Alicante Real estate - 50.00 50.00 58,330 40,370 19,042 (1,082) Proinsur Mediterráneo, S.L. Alicante Real estate - 50.00 50.00 68,150 44,932 25,322 (2,104) Santander Asset Management, S.A., S.G.I.I.C. Madrid Investment fund manager 20.00 - 20.00 273,886 179,975 95,879 (1,968) Santander Pensiones E.G.F.P., S.A. Madrid Pension fund manager 20.00 - 20.00 94,064 38,089 44,808 11,167 Santander Seguros y Reaseguros, Cía. Aseguradora Madrid Insurance 39.00 - 39.00 15,335,462 14,757,802 479,235 98,425
31 December 2008 Location/ Thousands of Euros Registered Percentage of Ownership Company Data Entity Office Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss)
Espais Promocat, S.L. Barcelona Real estate - 50.00 50.00 27,636 26,574 1,375 (313) Habitat Elpi, S.L. Barcelona Real estate - 50.00 50.00 7,296 6,151 5,894 (4,749) Inmobiliaria Sitio de Baldeazores, S.A. Madrid Real estate - 50.00 50.00 4,300 8,981 2,264 (6,945) Kassadesing 2005, S.L. Madrid Real estate - 50.00 50.00 63,502 53,271 12,771 (2,540) Prodesur Mediterráneo, S.L. Alicante Real estate - 50.00 50.00 63,596 44,471 20,106 (981) Proinsur Mediterráneo, S.L. Alicante Real estate - 50.00 50.00 75,712 52,887 30,244 (7,419) Santander Asset Management, S.A., S.G.I.I.C. Madrid Investment fund manager 20.00 - 20.00 306,982 212,827 45,247 48,908 Santander Pensiones E.G.F.P., S.A. Madrid Pension fund manager 20.00 - 20.00 81,621 31,643 35,955 14,023 Santander Seguros y Reaseguros, Cía. Aseguradora Madrid Insurance 39.00 - 39.00 13,271,450 12,810,958 367,844 92,648
(*) The companies' results at 31 December 2009 have not yet been approved by the respective Annual General Meetings.
Note: The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial both for the Bank and for the companies themselves.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix III
Associates of the Banesto Group at 31 December 2009 and 2008
The major companies (representing 100% of direct investments in associates and 99% at Banesto Group level) are included in this list: 31 December 2009 Thousands of Euros Location/ Percentage of Ownership Company Data Entity Registered Office Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss) (*)
Agres, Agrupación Restauradores, S.L. Madrid Restaurants - 43.01 43.01 3,207 798 2,209 200 Aguas de Fuensanta, S.A. Asturias Food 36.78 5.43 42.21 32,517 22,762 9,692 63 Carnes Estellés, S.A. Valencia Food 21.41 - 21.41 28,818 19,255 9,563 - Cartera del Norte, S.A. Asturias Finance 36.10 - 36.10 1,062 12 1,048 2 Centro Desarrollo Invest. Apli. Nuevas Tecnologías Madrid Technology 49.00 - 49.00 1,308 173 1,067 68 Compañía Concesionaria del Túnel de Soller, S.A. Palma de Mallorca Construction 32.70 - 32.70 42,026 24,755 15,488 1,783 Dirgenfin, S.L. Castellón Real estate development - 40.00 40.00 56,451 56,392 59 - Grupo Alimentario de Exclusivas, S.A. Asturias Food 40.46 - 40.46 5,998 5,685 285 28 Promoreras Desarrollo de Activos, S.L. Madrid Real estate purchases/sales - 35.00 35.00 166,405 152,510 13,999 (104) Sistema 4B, S.A. Madrid Services 14.70 - 14.70 182,551 140,988 38,583 2,980
31 December 2008 Thousands of Euros Location/ Percentage of Ownership Company Data Entity Registered Office Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss)
Agres, Agrupación Restauradores, S.L. Madrid Restaurants - 43.01 43.01 3,669 1,255 2,050 364 Aguas de Fuensanta, S.A. Asturias Food 36.78 5.43 42.21 35,080 25,931 9,460 (311) Carnes Estellés, S.A. Valencia Food 21.41 - 21.41 35,633 26,313 9,049 271 Cartera del Norte, S.A. Asturias Finance 36.10 - 36.10 1,064 13 1,053 (2) Centro Desarrollo Invest. Apli. Nuevas Tecnologías Madrid Technology 49.00 - 49.00 1,124 109 1,012 3 Compañía Concesionaria del Túnel de Soller, S.A. Palma de Mallorca Construction 32.70 - 32.70 47,234 27,920 18,886 428 Grupo Alimentario de Exclusivas, S.A. Asturias Food 40.46 - 40.46 6,784 6,497 277 10 Sistemas 4B, S.A. Madrid Services 14.70 - 14.70 228,673 169,927 7,053 51,693
(*) The companies' results at 31 December 2009 have not yet been approved by the respective Annual General Meetings.
Note: The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial for the Bank.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix IV
Notifications of Acquisitions of Investees at 31 December 2009 and 2008
(Article 86 of the Consolidated Spanish Public Limited Liability Companies Law and Article 53 of Securities Market Law 24/1988):
Percentage of Net Ownership Date of Line of Acquired At Year- Notification Investee Business in the Year End to Investee
Acquisitions in 2009: Dirgefin, S.L. Real estate 40.00% 40.00% 30/12/09
Acquisitions in 2008: Promodomus Desarrollo de Activos, S.L. Real estate 100.00% 51.00% 06/06/08
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix V
List of agents to whom Bank of Spain Circular 5/1995 is applicable
Area Location/ Registered Office of Activity A.L.M. Finanzas y Créditos de La Mancha, S.L. Manzanares Castilla - La Mancha AAFF Rute S.L. Rute Andalusia Abel Floria Claveria Madrid – Pza. Cataluña Madrid Abu Road, S.L. Marbella Andalusia Agencia Financiera Ulloa, S.L. Culleredo Galicia Agentes Financieros Reunidos, S.L. Motril Andalusia AgilityFinancial S.L. Xirivella Valencia Alexis Sánchez Hernánez Las Palmas de Gran Canaria Canary Islands Alpasugui Agente Financiero, S.L. Roquetas Mar Andalusia Alto Quintana, S.L. El Barraco Castilla y León Alto Quintana S.L. Burgohondo Castilla y León Anagan Financiera, S XXI S.L. Sabiñánigo Aragon Anagan Gestión S XXI S.L. Agreda Castilla y León Ancuegar, S.L. Palencia Castilla y León Antonio Jesús Tomás Berlango Sant Boi de Llobregat Catalonia Arespa Gijón Asociados, S.L. Gijón Asturias Arión Financial Services, S.L. Madrid- Lagasca Madrid Asefisco Palma, S.L. Palma del Río Andalusia Asemar Financiera, S.L. Rojales Valencia Autonomous Community Aser Financieros, S.L. Galdácano Basque Country Asesores Financieros de Almendralejo, S.L. Almendralejo Extremadura Azorva Patrimonio e Inversión, S.L. Yecla Valencia Autonomous Community Balance Activo, S.L. Lliria Valencia Autonomous Community Bamarval 2008 Zaragoza- Urb. Las Fuentes Aragon Banest Blanes, S.L. Blanes Catalonia Banfortunia, S.L. Alcalá de Henares Madrid Bangencia Aranjuez S.L. Aranjuez Madrid Banking Solutions, S.L. Rivas Madrid BNT 2008 Agentes Financieros S.L. Almansa Castilla- La Mancha Bopecon Inversiones S.L. Sevilla- Isla de la Cartuja Andalusia Bosan Agente Financiero, S.L. Majadahonda Madrid Burma Agentes Financieros S.L. Nerva Andalusia Business and Personal Service, S.A. Pravia Asturias Business Rokers, S.L. Alhaurín de la Torre Andalusia Buzabrín, S.L. Madrid- Chamberí Madrid BW Capnorth Servicios Financieros y Banc Barbastro Aragon Carramigal, S.L. Madrid Madrid
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix V (cont.)
List of agents to whom Bank of Spain Circular 5/1995 is applicable
Area Location/ Registered Office of Activity Cetinve S.L. Dos Hermanas Andalusia Charuma, S.L. Seville Andalusia Consultores Financieros Leoneses, S.L. León Castilla y León Consultores Herpri, S.L. Murcia Murcia Credits Financial Murcia, S.L. Puente Tocinos Murcia De Two y Mas Investments Services, S.L. Madrid Madrid Diptos, S.L. Cornellá de Llobregat Catalonia Diserivan, S.L. Garlitos Extremadura División Servicios Financieros, S.L. Cáceres Extremadura Dos Torres Financiación S.C.A. Dos Torres Andalusia Drimty S.L. Mutxamel Valencia Autonomous Community Ema Villatorrada 2007 S.L. Sant Joan de Vilatorrada Catalonia Esteve Capital Gelida Catalonia Felipe Sánchez Solera Hontanaya Castilla - La Mancha Financeres Aro, S.L. Alcarras Catalonia Financiaciones Las Cabezas S.L. Las Cabezas de San Juan Andalucía Fínanlex, S.L. Llombai Valencia Autonomous Community Finansando, S.L. Algaba Andalusia Finanzas Boadilla, S.L. Boadilla del Monte Madrid Francisco Javier León Ruíz Cordoba Andalusia Francisco Muñoz Puerto Montefrío Andalusia Franquicies Bell-Lloch S.L. Bell Lloc D`Urgell Catalonia Franquicies Financeres Lleida, S.L. Lleida Catalonia G.S.G. Grupo Corporativo de Servicios, S.L. Madrid Madrid Gessinlex S.L. Elche Valencia Autonomous Community Gestión 5 Servicios Financieros, S.L. Malaga Andalusia Gestión Financiera Madrid Norte S.L. Alcobendas Madrid Gestión Financiera Malacitana 2007, S.L. Malaga Andalusia Gestión Invergara S.L. Terrasa Catalonia Gestiones e Inversiones Alper, S.L. Salceda de Caselas Galicia Gesvalor Financiación y Vida, S.L. Tarazona Aragon GMT Proyectos de Calidad Medioambiental, S.L. Orba Valencia Autonomous Community González y Naves, S.L. Oviedo Asturias Grup Arca Oliana, S.L. Oliana Catalonia Grup Bbr Gestio Privada, S.L. Mora d'Ebre Catalonia Hotrarescon S.L. S Antonio de Benageber Valencia Autonomous Community Interalde 2003, S.L. Valle de Trápaga Basque Country Inversiones Martuchi S.L. Ezequiel Solana- Madrid Madrid
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix V (cont.) List of agents to whom Bank of Spain Circular 5/1995 is applicable
Area Location/ Registered Office of Activity Inversiones y Finanzas Tres Cantos, S.L. Tres Cantos Madrid Inveya S.L. Alicante Alicante Isamer Financieros, S.L. San Pedro de Alcántara Andalusia J.M. Diversos Navarcles Catalonia Jesus Berzal Miguel Sacramenia Castilla y León Joluanca 2006, S.L. Bormujos Andalusia Joaquín Ferre Suñe San Carlos de la Rápita Catalonia Jose Berzal Miguel Turégano Castilla y León Jose Luis Torres Márquez Barcelona Catalonia José Manuel García Morante, S.L. Granada Andalusia Jose Perea Sierra Pilas Andalusia José Ramón Ramos Muriana Terrassa Catalonia José Sánchez Garzón Granada Andalusia Julia López García, S.L. Miguel Esteban Castilla - La Mancha Lagrebas S.L. Madrid- Av. Bruselas Madrid Lap Asturias, S.L. Nava Asturias Lastras Audismar, S.L. Pelayos de la Presa Madrid Marcos Antolín Asesores Financieros, S.L. Palencia- Asturias Castilla y León María de los Angeles Tejero Martínez Pinos Puente Andalusia Mariano Morell S.L.U. Sóller Balearic Islands Mario Moraleda Zuñiga Piedrabuena Castilla - La Mancha Marma Mallorca S.L. Calvia Balearic Islands Mateo Oliver Sanso Ciudadela Balearic Islands Meda Financiera, S.L. Arteixo Galicia Mercedes Sánchez Cuñado Viator Andalusia Monica Carranza S.L. Cumbres Mayores Andalusia Molina Cortés, Nicolás Plasencia Extremadura Nubarpol S.L. Gelves Andalusia Ofisfin, S.L. Torrejón de Ardoz Madrid Paduleta 55, S.L. Bilbao Basque Country Palmero e Hijos, S.L. La Laguna Canary Islands Pineban, S.L. Pineda de Mar Catalonia Plaza Servicios Financieros, S.L. Los Barrios Andalusia Premiun Corredor Henares S.L. Alcalá de Henares Madrid Proyecto Empresarial Intermediación y Mediación S.L. Seville Andalusia Ramón Fernández Espinosa Calzada de Calatrava Castilla - La Mancha Pujol Carrera, Ramón Bellver de Cerdanya Catalonia Rc 2007 Financieros, S.L. Benahavis Andalusia
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Appendix V (cont.) List of agents to whom Bank of Spain Circular 5/1995 is applicable
Area Location/ Registered Office of Activity Rodríguez Cals Financiera, S.L. Estepona Andalusia Rolarg Servicios Financieros, S.L. Bonares Andalusia Rosario Plaza Fernández Casas de Benítez Castilla - La Mancha Rusalea Finance, S.L. Madrid Madrid Serarols Associats, S.L. Berga Catalonia Sercon Asfico AAFF S.L. Oleiros Galicia Sersaf S.L. Seville Andalusia Serveis Financers de Banyoles S.L. Banyoles Andalusia Servicios Financieros Ceres S.L. Plasencia Extremadura Servicios Financieros Juarez Gomez S.L. Santomera Murcia Servicios Financieros Mantua S.L. Villamanta Madrid Servicios Integrales Nase, S.L. Náquera Valencia Autonomous Community Sismoint S.L. Esparraguera Catalonia Soluciones de Patrimonio e Inversión, S.L. Colmenar Madrid Soluciones Finan 2 S.L. Capellades Catalonia Tevar Marcilla S.L. Quintanar del Rey Castilla - La Mancha Tinto Santa Rosa S.L. Huelva Andalusia Tramygest Financiera, S.L. Guardamar Valencia Autonomous Community Trezavilla, S.L. Seville Andalusia Unión Gestora Extremeña, S.L. Badajoz Extremadura Vicente Demetrio Martínez Martínez Valencia Valencia Autonomous Community Vicente More Camps Gerona Catalonia Vicente Tacoronte González Arona Canary Islands Yvan 06 Inversiones S.L.U. Los Montesinos Valencia Autonomous Community Zisco Finanzas S.L. Alcorcón Madrid
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails.
Banco Español de Crédito Group
Directors’ Report for the year ended 31 December 2009
Business performance and situation of the Bank
2009 proved to be a difficult year for the financial system: the across-the-board decline in production led to slower growth in the banking business and, at the same time, default rates in the system continued to rise. Also, interest rates fell to all-time lows.
Against this backdrop, the Group obtained an excellent set of positive results due to its financial strength and to the implementation of a business model focussed on customer attraction and loyalty and on cost and risk management, and it strengthened its equity position with significant write-downs and provisions.
Banesto obtained profit before tax of EUR 779.3 million, down 27.9% on 2008. After deducting the income tax expense and non-controlling interests, profit for the year was EUR 559.8 million, down 28.2% year-on- year.
The changes in the income statement items were as follows:
Net interest income rose by 4.7% to EUR 1,796.4 million in 2009. This significant increase is the result of the business derived from attracting customers and building customer loyalty and from the Bank’s management of margins and the balance sheet. Net fees and commissions amounted to EUR 542.0 million, 3.5% less than in 2008. This decrease is a result of the decline in investment fund and pension fund fees owing to the fall in the volume of investment funds and pension funds under management throughout 2008 and to the increase in fees and commissions for services and insurance, which showed a significant increase of 5.0% with respect to 2008 to EUR 443.8 million, due largely to the greater loyalty and transactionality of Banesto’s customers. Gains on financial assets and liabilities and exchange differences amounted to EUR 235.0 million. Although the main source of this income continues to be the sale of cash products to customers, which supports the recurring nature of this income statement item, gains of EUR 78 million were also obtained in 2009 on the disposal of financial assets. Consequently, gross income amounted to EUR 2,663.5 million in 2009, 7.5% more than in 2008. The trend in personnel expenses and other general administrative expenses, which fell by 1.0%, and the depreciation and amortisation charge, which rose by 2.7%, resulted in an overall increase in operating costs of 0.2%, in keeping with the Group’s cost control policy.
Impairment losses amounted to EUR 517.3 million, of which EUR 451.6 million related to loans and receivables, 50.6% more than in 2008, as a consequence of the provisions made for the increase in non- performing loans which impacted the industry as a whole in 2009, albeit less severely in the case of Banesto. Lastly, the Group recognised provisions of EUR 229.2 million (2008: EUR 16.3 million), which reinforced its solid equity position. As a result of all the above, profit from operations amounted to EUR 891.6 million, down 20.2% on 2008.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Other operations generated a net loss of EUR 112.2 million, of which EUR 84.5 million related to non- current assets held for sale and EUR 26.2 million related to impairment losses on non-financial assets. As a result, profit before tax was EUR 779.3 million. After deducting income tax and non-controlling interests, profit for the year was EUR 559.8 million in 2009, down 28.2% on the previous year.
The most significant changes in the consolidated balance sheet were as follows:
- Total assets amounted to EUR 126,221 million at 31 December 2009, up 4.8% on 2008.
- Loans and advances to customers fell by 2.8% to EUR 75,633 million. Of the total balance of this item, loans and advances to the private sector amounted to EUR 70,406 million (down 2.5%).
- Customer deposits totalled EUR 56,718 million, representing a year-on-year decrease of (1.5%).
Research and development
In the field of technology, the Group continued to develop software enabling it to achieve cost savings and increase customer service quality whilst preparing it to meet new technological and functional renewal needs. Efforts were aimed mainly at continuing with the resource optimisation policy, leading to improved efficiency and enhanced process rationalisation.
In order to carry out the aforementioned R&D work and the ongoing adaptation of the microcomputer platform used by its personnel, in 2009 the Group incurred expenses and made investments in IT systems amounting to approximately EUR 114 million.
In view of the Group's responsibility to society, this innovation effort not only enables Banesto to capitalise on in-house resources, but it also places at the disposal of society our ability to respond to the new challenges posed by information technologies. In this respect, in 2009 the Group implemented agreements entered into with official agencies aimed at providing citizens and businesses with easy access to new technology. Particularly worthy of mention is the renewal of the contract for the management of court accounts, supported by a top-quality IT platform.
However, the commitment of the Group’s corporate management model to convert progress into improvements accessible to society makes us go a step further in this respect, as shown by the actions undertaken in 2009 by the Banesto Foundation for Society and Technology, which has consolidated its position as a benchmark in Spain for organisations of its kind.
The Group continued to train its workforce and to adapt it to the new business requirements and to the need for ongoing professional development. The implementation of a training development strategy focusing on continuous learning, professional development and the harnessing of the advantages of new technologies is proving highly satisfactory.
Treasury shares
In 2009, the Bank and two consolidable Group companies acquired and sold 13,028,206 and 13,509,310 Banco Español de Crédito, S.A. shares, respectively. The par value of the shares acquired was EUR 10,292,282.74 and that of the shares sold was EUR 10,672,354.90. The acquisition cost was EUR 102,350 thousand and the selling price was EUR 106,648 thousand.
At 31 December 2009, the Bank did not own any treasury shares. A Group company held 3,382,126 shares of Banco Español de Crédito, S.A. with a par value of EUR 2,672 thousand. The carrying amount of these shares at 31 December 2009 was EUR 29,527 thousand.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Outlook
The economic environment is forecast to continue to be difficult in 2010. Public and private agencies predict a decline in economic activity with a knock-on effect on employment, rising public-sector deficit and interest rates that are likely to remain very low for most of 2010.
Against this backdrop, Group's financial targets for 2010 are as follows:
- To improve on the 2009 efficiency ratio, focussing on the generation of income.
- A non-performing loan ratio below the average for the industry and that of the Group’s major peers, enabling Banesto to maintain its current competitive advantage.
- To achieve better results than the industry and our peers.
Events after the reporting period
In the period from 1 January 2010 to the date when these consolidated financial statements were authorised for issue, no events took place having a material effect on the consolidated financial statements, other than those described in the note to the consolidated financial statements on events after the reporting period.
Risk management at the Banesto Group
Note 48 to the consolidated financial statements includes a broad description of the Banesto Group's risk management.
Customer care service
As required by Article 17 of Ministry of Economy Order ECO/734/2004, of 11 March, on Customer Care Departments and Services and the Customer Ombudsmen of Financial Institutions, following is a summary of the Annual Report presented by the Head of the Service to the Board meeting held on 20 January 2010.
The activity of the Banesto Group’s Customer Care Service was carried out within the framework of the aforementioned Ministry of Economy Order ECO/734/2004 and in compliance with the competencies and procedures established in the Customer Ombudsman Regulations of Banco Español de Crédito, S.A. and of its Economic Group.
a) Statistical summary of the claims and complaints handled
4,452 claims and complaints were filed with the Customer Care Service in 2009, an increase of 58.6% compared with 2008, all of which were admitted for consideration (without prejudice to the existence of grounds for not admitting complaints for consideration in the Service's Regulations). 88% of the matters handled (3,900 complaints) were resolved and concluded within the year, whereas a total of 552 complaints had not yet been analysed at 31 December 2009.
The detail, by type, of the main complaints and claims handled is as follows:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Number Percentage Demand accounts 792 18% Mortgage loans 465 10% Hedges 410 9% Campaigns 357 8% Cards 313 7% Loans and credit facilities 233 5% Risks 230 5% Commercial paper discounting 145 3% Bills 147 3% Guarantees 115 3% Wills 103 2% Fraudulent use 88 2% Time deposits 86 2% Cheques 82 2% Investment funds 71 2% Transfers 72 2% POS terminals 66 1% Poor service 57 1% Securities 55 1% Structured deposits 50 1%
b) Summary of resolutions:
Number Percentage In favour of the complainant 1,709 44% In favour of the Bank 1,569 40% No pronouncement made 622 16% 3,900 100.00%
c) Detail of the complaints filed through the Bank of Spain and the Spanish National Securities Market Commission (CNMV)
Of the total number of complaints and claims handled by the Customer Care Service, 410 were filed through the Bank of Spain and 76 through the CNMV, the detail being as follows:
Bank of Spain
Number Percentage Claims resolved- 275 In favour of the customer 94 34% Claim accepted 84 30% In favour of the Bank 65 24% No pronouncement made 32 12% Claims unresolved 135 410
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
CNMV
Number Percentage Claims resolved- 18 In favour of the customer 1 6% Claim accepted 11 60% In favour of the Bank 1 6% No pronouncement made 5 28% Claims unresolved 58 76
d) General decision-making criteria
The criteria used as a basis for the resolution of the complaints handled by the Customer Care Service in 2009, as in previous years, were to ensure the correct application of current legislation, in particular with regard to transparency and customer protection, and of good banking practices and customs, all within the framework of the principle of equity and taking into consideration the criteria established in the reports issued by the respective claims services of the Bank of Spain, the CNMV and the Directorate-General of Insurance and Pension Funds. e) Recommendations or suggestions deriving from the Service's experience, with a view to better attaining the aims of its work
In 2009 the Service continued to implement the proposals aimed at complying with Bank of Spain Circular 8/1990 and ensuring that the Entity’s activities are in line with the regulators’ recommendations regarding good banking customs and practices.
Also, the autonomy and independence of the Service in the analysis of the claims filed by customers, as established in the Regulations governing its activity, have led to a series of initiatives and proposals to various internal departments and business units aimed at improving both the information furnished before, during and after the arrangement of any transactions (the principle of transparency) and the contractual and commercial documentation provided to the customer.
The recommendations and suggestions made by the Service to the Bank in 2009 related most notably to the following:
- Mortgage loans - Campaigns - Insurance - Cards - Interest rate hedges
Information required under Article 116 bis of the Securities Market Law:
In conformity with Article 116 bis of the Securities Market Law 24/1988, of 28 July, introduced by Law 6/2007, of 12 April, at its meeting on 20 January 2010, the Board of Directors of Banco Español de Crédito, S.A. resolved to make available to shareholders this Report explaining the matters that, in
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
conformity with Article 116 bis, were included in the 2009 Directors’ Report supplementing the 2009 financial statements. a) Structure of the share capital, including any securities not traded in a regulated EU market, indicating, where appropriate, the various classes of shares and, for each class, the rights and obligations conferred and the percentage of share capital represented As stipulated in Article 5 of the bylaws, the Bank's share capital consists of 687,386,798 fully subscribed and paid shares of EUR 0.79 par value each, of a single series, which confer the same rights and obligations. It is not necessary to hold a minimum number of shares in order to attend and vote at the General Meetings. No securities have been issued that are convertible into shares of Banco Español de Crédito, S.A. b) Any restriction on the transferability of securities There are no bylaw-stipulated restrictions on the transferability of the shares representing the share capital, without prejudice to the application of certain rules, which are set forth below.
The shares representing the share capital are freely transferable, without any restriction, unless the volume of shares acquired surpasses the threshold of a significant ownership interest, in which case Article 56 and related provisions of Law 26/1988, of 29 July, on Discipline and Intervention of Credit Institutions, in accordance with the new wording thereof as set forth in Law 5/2009, of 29 June, will apply. Under this Law, anyone intending to acquire an equity interest or voting power of at least 10% of the total capital or voting power must give prior notification to the Bank of Spain, which will have 60 working days in which to object to the proposed acquisition. The Bank of Spain may only object to the proposed acquisition if there is reasonable justification for doing so, in accordance with Article 58.1 of the aforementioned Law, or if the information furnished by the potential acquirer is incomplete. Prior notification must also be given to the Bank of Spain of any intention to increase an ownership interest, directly or indirectly, as a result of which the percentage of voting power or share capital held would be equal to or greater than 20%, 30% or 50%. Also, the Bank of Spain and the credit institution must be notified immediately of any acquisition of an ownership interest in a credit institution as a result of which the percentage of voting power or share capital held is 5% or more.
As Banesto is a listed company, the acquisition of certain significant ownership interests must be notified to the issuer and to the CNMV, pursuant to Article 53 of Securities Market Law 24/1988, Royal Decree 1362/2007, of 19 October, and CNMV Circular 2/2007, of 19 December, which establish as the first notification threshold 3% of the share capital or voting power (or, in accordance with current legislation, 1% if the notifying party is resident in a tax haven or in a tax-free country or territory or with which there is no effective exchange of tax information).
Lastly, also as a listed company, the acquisition of 30% or more of the share capital or voting power of the Entity entails the obligation to present a takeover bid under the terms established in Article 60 of Securities Market Law 24/1988.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
c) Significant direct or indirect ownership interests in the share capital
Name or Company Name of Number of Direct % of Total Voting Power Direct Holder of the Voting Rights Ownership Interest BANCO SANTANDER, S.A. 606,345,555 88.21%
CANTABRO CATALANA DE INVERSIONES, S.A. 1.069% (indirect ownership interest of 7,350,543 Banco Santander, S.A.)
d) Any restriction on voting power
The restrictions on the exercise of voting power are those common to any company, and the bylaws do not contain any specific restrictions on this power. e) Side agreements
There are no side agreements at Banco Español de Crédito, S.A. f) Rules governing the appointment and replacement of members of the managing body and the amendment of the Company's bylaws
1. Appointment and removal of members of the Board of Directors.
Articles 15, 16, 19 and 32 of the bylaws and Articles 15, 18, 19 and 20 of the Board of Directors Regulations govern the procedures for the appointment, re-election, evaluation and removal of directors, which can be summarised as follows:
a. Appointment, re-election and ratification.
- Competent body: the General Meeting, as provided for in the Consolidated Spanish Public Limited Liability Companies Law approved by Legislative Royal Decree 1564/1989, of 22 December, and in the bylaws. Nevertheless, in the event of a vacancy due to the resignation or death of one or several directors, the Board may designate, by virtue of the powers of co- optation attributed to it by law, one or several other directors, whose appointment must be confirmed at the earliest General Meeting. In this case, the appointment of these directors will be for the period of time remaining for their predecessors to complete the term of office for which they were appointed.
- Appointment requisites and restrictions: shareholder status is not a requisite for appointment as director, except in appointments by co-optation, in which case this status is required. Persons who are subject to any legally established prohibition or incompatibility that would bar them from holding office cannot be appointed as directors.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The Nomination and Remuneration Committee, at its meeting on 17 December 2003, expounded the requisites established in the Board Regulations for the proposal of candidates for the office of director and, accordingly, the persons designated as directors must be of renowned competence, experience and solvency and must have an honourable reputation gained by virtue of a personal history marked by observance of commercial and corporate laws and other regulations governing economic activity and the business world, and of good commercial, financial and banking practices. Another of the requisites established by the Committee is that a majority of the Board members must have discharged, for a period of not less than five years, senior administration, management, control or advisory functions for financial institutions, or functions of a similar degree of responsibility at other public or private-sector entities of a size at least similar to that of the Bank, in keeping with the requirements of the legislation governing credit institutions. Lastly, the Board Regulations set forth the circumstances under which designation as an independent director is prohibited; these circumstances are included in the recommendations of the Unified Code, in which independent directors are considered to be persons who, designated on the basis of their personal and professional conditions, are able to discharge their functions without being influenced by any relationships with the Bank, its main shareholders or its executives. Independent director status cannot be granted to directors who: a) Have been employees or executive directors of Group entities, unless three or five years, respectively, have elapsed since this relationship was terminated. b) Receive from the Bank or from its Group any amount or benefit other than remuneration as directors, unless this amount or benefit is not material. c) Are, or have been in the last three years, partners at the external auditors or the partners in charge of the auditors' report either of the listed company or that of any other entity in its group. d) Are executive directors or senior executives of another different entity in which one of the Bank's executive directors or senior executives is a non-executive director. e) Have, or have had during the last year, a significant business relationship with the Bank or with any entity in its Group, either in their own name or as a significant shareholder, director or senior executive of an entity that has or has had such a relationship. “Business relationship” shall be taken to be that of a supplier of goods or services, including financial, advisory or consulting services. f) Are significant shareholders, executive directors or senior executives of an entity that receives, or has received in the last three years, significant donations from the Bank or from its Group. This definition shall not include those persons who are merely trustees of a foundation that receives such donations. g) Are spouses, spousal equivalents, or relatives of up to the second degree of kinship, of an executive director or a senior executive of the Bank. h) Have not been proposed, for either appointment or renewal, by the Nomination and Remuneration Committee. i) Are currently, with respect to a significant shareholder or a shareholder represented on the Board, in one of the situations described under letters a), e), f) or g) above. In the case of the kinship referred to under letter g), the restriction shall apply with respect not only to the shareholder, but also to its proprietary directors at the investee.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
Any director who has a shareholding in the Bank may hold the position of independent director, provided they meet all the related conditions and, in addition, their ownership interest is not material. On taking office, the designated directors must formally agree to fulfil all the obligations and perform all the duties established by law, in the bylaws and in the Board Regulations. - Term of office: six years. However, outgoing directors can be re-elected one or several times. The term of office of directors appointed by co-optation and ratified at the earliest subsequent General Meeting shall be the same as that of the director whom they are replacing.
Article 17 of the bylaws provides for the annual renewal of one-fifth of the Board of Directors.
It was not considered necessary to establish an age limit for appointment as a director or for the discharge of duties as a director, or to limit the possibility of re-election of directors.
- Procedure: proposals for the appointment, re-election and ratification of directors submitted by the Board of Directors to the General Meeting and appointment decisions adopted by the Board itself by virtue of its co-optation powers must be preceded by the related proposal from the Nomination and Remuneration Committee.
If the Board objects to the Committee's proposal, it must give the reasons for its decision and place these reasons on record in the minutes to the related meeting.
The directors whose appointment, re-election or removal has been proposed shall refrain from attending and participating in the related deliberations and ballots of the Board and of its Committees.
Once an appointment has been made, it is made effective by the acceptance of the director and registration at the Bank of Spain's Registry of Senior Officers and at the Mercantile Registry. b. Vacation of office or removal Directors shall cease to hold office when the term for which they were appointed elapses, unless they are re-elected, or when the General Meeting so decides by virtue of the powers conferred upon it. Furthermore, directors must place their office at the disposal of the Board and give the related notice of resignation if the Board, after receiving the report of the Nomination and Remuneration Committee, should deem this appropriate, in those cases in which the directors might have an adverse effect on the functioning of the Board or on the Bank's credit and reputation and, in particular, when they are subject to any incompatibility or prohibition provided for by law that would bar them from holding office. Directors who stand down from the Board prior to the end of their mandate, due to resignation or any other cause, must submit a letter to all the members of the Board explaining their reasons for vacating their office. The Annual Corporate Governance Report will disclose the reasons that prompted directors to leave the Board. Proprietary directors shall resign when the shareholder they represent sells its entire ownership interest or when that shareholder reduces its ownership interest to a level that requires a reduction of the number of its proprietary directors, without prejudice to the possibility of their being re-elected as executive directors, independent directors or proprietary directors representing another shareholder. In the event of the removal, notice of resignation, disability or death of members of the Board or of its Committees, or of the removal or notice of resignation of the Chairman of the Board of Directors, of the Chief Executive Officer and of the other officers of these bodies, at the request of the Chairman of the Board or, in his absence, the highest-ranking Deputy Chairman, a meeting of
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
the Nomination and Remuneration Committee shall be convened in order to organise the succession or replacement process in an orderly fashion and to propose a replacement to the Board of Directors. This proposal shall be communicated to the Executive Committee and subsequently submitted to the Board of Directors at the next meeting planned in its annual schedule or at any extraordinary meeting that, if deemed necessary, might be called.
2. Amendment of bylaws The procedure for the amendment of the bylaws is regulated in Article 144 of the Spanish Public Limited Liability Companies Law, which, common to all companies, requires the approval by the shareholders at the Annual General Meeting, with the majorities stipulated in Article 103 of the aforementioned Law. As a credit institution, the amendment of the Bank's bylaws is subject to the procedures for authorisation by the Ministry of Economy and Finance contained in Royal Decree 1245/1995, of 14 July, on the creation of banks, cross-border activity and other matters relating to the legal regime of credit institutions, which provides (Article 8) that the amendment of the bylaws of banks is subject, with certain exceptions relating to minor changes, to the authorisation and registration procedure established in Article 1 of the aforementioned Royal Decree.
The powers of the Annual General Meeting contained in Article 32 of the bylaws and Article 3 of the Regulations of the Annual General Meeting expressly include that to amend the bylaws without being subject to any majorities other than those provided for by law. g) Powers of the members of the Board of Directors and, in particular, those relating to the possibility of issuing or repurchasing shares.
The Chairwoman and the Chief Executive Officer of Banco Español de Crédito, S.A. have been delegated all the powers of the Board of Directors, except for those which cannot be delegated by law, per the bylaws or per the Board Regulations, which establish (Article 3) the exclusive powers of the Board of Directors in a plenary session. Furthermore, the executive directors have the powers habitually conferred by the Bank on its senior executives.
The shareholders at the Annual General Meeting held on 26 February 2008 authorised the Board, with power of delegation, to increase share capital as provided for in Article 153.1.b) of the Spanish Public Limited Liability Companies Law. The Board of Directors meeting held immediately after this Annual General Meeting, availing itself of this power, resolved to delegate to the Executive Committee, in the broadest terms required by law, all powers that may be legally delegated so that, pursuant to Article 153.1.b) of the Spanish Public Limited Liability Companies Law, it may increase share capital on one or several occasions and at any time, within five years from the date of the aforementioned Annual General Meeting. The amount of the increase may be up to EUR 274,260,388.71 (par value), i.e. half the share capital of the Bank at the date of the aforementioned Annual General Meeting, and may be performed through the issuance of new shares, with or without share premium and with or without voting rights; the consideration for the new shares to be issued will be monetary contributions. The Executive Committee may set the terms and conditions of the capital increase and the characteristics of the shares and may offer freely the new unsubscribed shares within the pre-emptive rights period or periods. The delegated powers include being able to establish that, if the issue is undersubscribed, share capital is only increased by the amount of the shares subscribed, and to revise the wording of the article in the bylaws relating to share capital. The available limit at any given time of the aforementioned maximum capital increase amount shall be deemed to include the amount of any capital increases that may be made to cater for the conversion of debentures under Resolution Six of the Annual General Meeting of 26 February 2008. Also, the Executive Committee was empowered to disapply pre-emptive subscription rights, fully or partially, in accordance with Article 159.2 of the Spanish Public Limited Liability Companies Law.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
The Board of Directors also delegated to the Executive Committee the power to perform all the necessary tasks for the new shares issued in the capital increase or increases to be admitted to trading on the stock exchanges on which the Bank’s shares are listed in Spain and other countries, in accordance with the procedures laid down by each of these stock exchanges.
Neither the Board of Directors nor the Executive Committee has exercised the powers delegated to them.
Similarly, the shareholders at the Annual General Meeting held on 26 February 2008 authorised the Board of Directors, with power of delegation, to issue debentures convertible into or exchangeable for Bank shares. As with the case of the powers delegated to the Board to increase share capital, the Board of Directors Meeting held immediately after the aforementioned Annual General Meeting, availing itself of the powers delegated to it, resolved to delegate to the Executive Committee, in the broadest terms required by law, the power to execute and implement the resolutions adopted by the aforementioned Annual General Meeting.
Neither the Board of Directors nor the Executive Committee has exercised the powers delegated to them.
The shareholders at the Annual General Meeting held on 25 February 2009 authorised the Board of Directors to implement, in accordance with the current wording at that date of Article 75 and related provisions of the Spanish Public Limited Liability Companies Law, the derivative acquisition of shares of Banco Español de Crédito, S.A. The maximum number of shares to be acquired, when added to the number of shares already owned by the acquiring entity and its subsidiaries, shall not exceed the legally stipulated limit, set at 5% of share capital in the current wording at that date of Additional Provision One of the Spanish Public Limited Liability Companies Law, without prejudice to the application of any lower limits which, within the legal limit approved at the aforementioned Annual General Meeting, may be (or may have been) approved by the Board of Directors. The duration of this authorisation is 18 months from the date of the aforementioned Annual General Meeting. A similar resolution, subject to Article 75 and related provisions of the Spanish Public Limited Liability Companies Law, as worded by Law 3/2009, of 3 April, on structural modifications of companies formed under the Spanish Commercial Code, was proposed to the Annual General Meeting called for 24 February 2010. h) Significant agreements entered into by the Company which will come into force, be modified or terminate in the event of a change in control of the Company resulting from a takeover bid, and their effects, except when dissemination thereof may be seriously detrimental to the Company. This exception shall not apply when the Company is required by law to publish this information
The Company has not entered into any significant agreements that will come into force, be modified or terminate in the event of a change in control of the Company resulting from a takeover bid. i) Agreements between the Company and its directors, management personnel or employees which provide for termination benefits when the latter resign or are dismissed without justification or if the employment relationship ends as a result of a takeover bid
The legal and conventional effects that may result from the termination of the services relationship between Banesto personnel and the Bank are not uniform, but rather vary on the basis of the personnel in question, the office or job position held by the employee, the type of contract entered into with the Bank, the regulations governing the employment relationship, and various other factors. Nevertheless, the following cases can generally be distinguished:
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e
a) Employees: in the case of employees who have a common employment relationship with Banesto, which is the case of substantially all the personnel working for the Bank, the employment contracts between these employees and the Bank do not generally contain any clause providing for benefits in the event of the termination of the employment relationship. Therefore, employees shall be entitled to receive the benefits applicable under labour legislation in their particular case, depending on the cause of termination of their contract. In certain common employment relationships with the Bank, the employees' contracts entitle them to receive a benefit in the event that the relationship is terminated on appraised grounds (generally only in the event of unjustified dismissal). The amount of the termination benefit is normally determined on the basis of the gross annual fixed salary of the employee in force at the date on which the contract is terminated. b) Senior executives: among personnel who have special senior executive employment relationships with Banesto (special senior executive contracts), there are cases in which their contracts do not provide for any benefits in the event of termination of the employment relationship and, therefore, the executive in question shall be entitled, where appropriate, to the benefit provided for in the regulations governing special senior executive employment relationships. For these purposes, it should noted that Article 10.3 of Royal Decree 1382/1985, of 1 August, regulating the special senior executive employment relationship, provides that the senior executive may terminate the special employment contract with entitlement to the agreed-upon benefits or, in the absence thereof, those established in Royal Decree 1382/1985 in the event of termination due to withdrawal of the employer on the grounds, inter alia, of an important change in the ownership of the company, resulting in the renewal of its governing bodies, or in the content and rationale of its core business activity, provided that the termination takes place within the three months following the occurrence of these changes.
In addition to these, there are other executives whose contracts do entitle them to receive a benefit in the event of termination of the employment relationship on certain grounds. This benefit is normally determined individually for each senior executive on the basis of their professional circumstances and the importance and responsibility of the position they hold at the Bank.
c) Executive directors: the contracts regulating the discharge by executive directors of executive functions other than the supervisory and collective decision-making functions inherent to membership of the Board of Directors are indefinite-term contracts. Nevertheless, termination of the relationship due either to the executive directors’ failure to fulfil their obligations or to their own free will does not entitle them to any economic compensation. If the relationship is terminated for reasons attributable to the Bank or due to prevailing objective circumstances, such as those which, as the case may be, affect the executive directors' functional and organic statute, the director in question shall be entitled to receive the benefit envisaged in the respective contract, which will be determined not by general criteria but rather by the personal and professional circumstances of the director and by the date on which the contract was signed. The detail of these circumstances is contained in the notes to the consolidated financial statements and in the Report on Remuneration Policy that was made available to the shareholders at the Annual General Meeting on 24 February 2010.
WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 20-1-5_WHITE_DIGITAL 16/2/10 13:07 Página 251 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 20-4_CNMV 16/2/10 13:08 Página 252
252 Annual Report 09
CORPORATE GOVERNANCE REPORT ACCORDING TO THE CNMV MODEL
The Corporate Governance Report access on the web is:
http://www.banesto.es/igc WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 21_MAINFIGURES_1 16/2/10 13:10 Página 253
Banesto 253
MAIN FIGURES
Balance sheet million euros Change Change 31/12/2009 31/12/2008 Absolute %
Total assets 122,300.5 117,186.4 5,114.1 4.4% Shareholders’ equity 5,299.4 5,069.8 229.6 4.5% Lending 75,927.1 78,201.7 -2,274.7 -2.9% Total managed funds 67,996.3 67,924.9 71.4 0.1% Bad and doubtful loans 2,566.0 1,441.5 1,124.5 78.0% Non-performing loan (NPL) ratio (%) 2.94% 1.62% ------% coverage of NPLs 63.37% 105.37% ------BIS capital ratio 11.30% 10.66% ------Tier 1 8.72% 7.70% ------
Income statement million euros Change Change 31/12/2009 31/12/2008 Absolute %
Net interest income 1,730.7 1,578.4 152.2 9.6% Fees 607.6 619.1 -11.6 -1.9% Gross income 2,562.2 2,445.3 116.8 4.8% Operating costs 997.8 989.3 8.4 0.9% Net operating income 1,564.4 1,456.0 108.4 7.4% Cost-to-income (efficiency) ratio (%) 38.94 40.46 ------Ordinary profit before taxes 1,157.5 1,145.7 11.8 1.0% Ordinary attributable profit 823.9 821.8 2.1 0.3% Net attributable profit 559.8 779.8 -220.0 -28.2% ROA 0.49% 0.71% ------ROE 10.54% 16.56% ------
Data per share Year-end share price 8.56 8.08 0.48 5.9% Earnings per share in the year 0.81 1.13 -0.32 -27.9% Theoretical book value per share 7.71 7.38 0.33 4.5% PER 10.51 7.12 ------Price/theoretical book value 1.11 1.10 ------
Other information Employees 8,905 9,718 -813 -8.4% Branches 1,773 1,915 -142 -7.4% WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 22ANU_RegionalHeadquarters_1 16/2/10 13:11 Página 254
254 Annual Report 09
GENERAL INFORMATION AND REGIONAL HEADQUARTERS
General information Customer attention
Tels.: +34 91 338 31 00 Avda. Gran Vía de Hortaleza, 3 +34 91 338 15 00 28043 Madrid España Tel.: 902 303 630 Relations with shareholders e-mail: [email protected] Avda. Gran Vía de Hortaleza, 3 28043 Madrid España Relations with the media Tel.: 902 123 230 e-mail: Tel.: +34 91 338 24 08 [email protected] e-mail: [email protected] Relations with investors and analysis Press room Avda. Gran Vía de Hortaleza, 3 28043 Madrid España www.banesto.es/webcorporativa Tel.: +34 91 338 22 44 Fax. +34 91 338 25 58 Corporate website e-mail: [email protected] www.banesto.es/webcorporativa
BANCO ESPAÑOL DE CREDITO, S.A. Additional information on Banesto:
The bank was constituted on May 1, 1902 through a notarised • Commercial information deed in Madrid, inscribed in the Mercantile Registry of Madrid www.banesto.es on May 14,1902, number 1,595, folio 177, first inscription of www.ibanesto.com volume 36 of Companies. Its by-laws were brought into line with the Limited Companies Act through a notarised document • Annual report: on August 16, 1991, inscribed in the Mercantile Registry www.banesto.es/informe_anual volume 1,582, folio 1, page M- 28968, inscription 4,417 on • CSR Report October 8, 1991. It is inscribed in the special Registry of Banks www.banesto.es/rsc and Bankers with the number 0032, and the bank’s tax identification number is A-28000032. The bank is a member • Corporate Governance Report: of the Deposit Guarantee Fund. www.banesto.es/igc
Headquarters • Property portal: www.casaktua.com The corporate by-laws and other public information on Banesto can be consulted at the bank’s headquarters (Avda. Gran Vía • Banesto Foundation: de Hortaleza 3, Madrid). www.turismo-solidario.es www.emprendedorestv.com WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 22ANU_RegionalHeadquarters_1 16/2/10 13:11 Página 255
Banesto 255
RETAIL BANKING
6 1 Andalucia and Canary Islands 2 4 5 Director: Alberto Delgado Romero Avda. de la Palmera, 25 • 41013 • Sevilla 8 Telephone: 954.93.27.00 / Fax: 954.93.27.03 Canary Islands 3 7 Director: Virginia Martínez de Murguía
2 Basque Country, Navarre and La Rioja 1 Director: María Carmen Aracama Municha Postas, 22 • 01001 • Vitoria Gasteiz Telephone: 945.16.33.31 / Fax: 945.16.33.58
3 Castilla-La Mancha and Extremadura 6 Galicia and Asturias Director: Carmen González Moya Director: Vicente Pantoja Camacho Pza. de Zocodover, 4 • 45001 • Toledo Cantón Pequeño, 15-17 1º • 15003 • A Coruña Telephone: 925.28.02.53 / Fax: 925.28.01.33 Telephone: 981.21.67.90 / Fax: 981.21.79.62
4 Castilla-León and Cantabria 7 Levante Director: Matías Francisco Sánchez García Director: Félix Subies Montalar Constitución, 10 1˚ • 47001 • Valladolid Pintor Sorolla, 17 4˚ • 46002 • Valencia Telephone: 983.21.74.09 / Fax: 983.21.74.08 Telephone: 96.399.62.10 / Fax: 96.399.62.12
5 Catalonia and Balearics 8 Madrid Director: Eduard Miró Contijoch Director: José Luis Fernández Fernández Gran Vía Corts Catalanes, 583 • 08011 • Barcelona Villanueva, 2 • 28001 • Madrid Telephone: 93.214.45.91 / Fax: 93.214.46.90 Telephone: 91.338.15.55 / Fax: 91.338.13.50
COMPANY BANKING
1 Catalonia and Balearics Director: Pedro Alonso Juncar Gran Vía Corts Catalanes, 583 • 08011 • Barcelona Telephone: 93.214.45.44 / Fax: 93.214.46.96 6 4 Institutional relations head in Catalonia 1 Director: Pere Estruch Jane Gran Vía Corts Catalanes, 583 • 08011 • Barcelona Telephone: 93.214.45.41 / Fax: 93.214.46.96 3
2 Levante 2 Director: José Miguel Lorente Ayala 5 Pintor Sorolla, 17 3a planta • 46002 • Valencia Telephone: 96.399.62.11 / Fax: 96.399.61.31
3 Madrid 5 South Director: Octavio Ramírez Romero Princesa, 25 2˚ pta. • 28008 • Madrid Director: Juan Antonio Hernani Goldaracena Telephone: 91.758.60.01 / Fax: 91.758.60.33 Avda. de la Palmera, 25 • 41013 • Sevilla Telephone: 954.93.27.04 / Fax: 954.61.56.64 4 North (Aragon, Asturias, Cantabria, Castilla León and Galicia) 6 Basque Country, Navarre and La Rioja Director: José Antonio Portugal Alonso Director: José María Bilbao Urquijo Princesa, 25 2˚ pta. • 28008 • Madrid Navarra, 3 • 48001 • Bilbao Telephone: 91.758.60.10 / Fax: 91.758.60.03 Telephone: 944.23.18.14 / Fax: 944.23.97.80 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 22ANU_RegionalHeadquarters_1 16/2/10 13:11 Página 256
256 Annual Report 09
The 2009 Annual Report and the Corporate Social Responsibility Report are not printed. They are available in digital version. As a result of these measures, Banesto saved more than seven tonnes of paper. ® February 2010 Banesto
Design, creative concept and production: Printing: TF Artes Gráficas See the change / Álvaro Reyero Pita Translation: William Chislett Photos: Fernando Moreno Amador / Andrea Savini Legal deposit number: M-3083-2010 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 22ANU_RegionalHeadquarters_1 16/2/10 13:11 Página 257 WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e 23_BACK_DIGITAL09 16/2/10 13:11 Página 224
www.banesto.es
Global Compact FTSE4Good Euromoney EFQM GRI WorldReginfo - 929f2802-9e63-4c69-a4a5-4d25fbcace4e