SHARE REGISTRATION DOCUMENT ANNEX I OF COMMISSION REGULATION (EC) No. 809/2004 OF APRIL 29, 2004
BANCO SANTANDER, S.A.
October 2008 This Share Registration Document has been registered with the Official Registries of the National Securities Market Commission on October 29, 2008
REGISTRATION DOCUMENT TABLE OF CONTENTS RISK FACTORS CHAPTER 1: RESPONSIBLE PERSONS 1.1. PERSONS WHO ASSUME RESPONSIBILITY FOR THE CONTENTS OF THE REGISTRATION DOCUMENT 1.2. STATEMENT OF RESPONSIBILITY FOR THE REGISTRATION DOCUMENT CHAPTER 2: AUDITORS 2.1. AUDITORS’ NAMES AND ADDRESSES 2.2. RESIGNATION OF AUDITORS CHAPTER 3: FINANCIAL INFORMATION 3.1. SELECTED HISTORICAL INFORMATION 3.2. SELECTED INTERIM FINANCIAL INFORMATION CHAPTER 4: RISK FACTORS CHAPTER 5: INFORMATION ON THE ISSUER 5.1. HISTORY AND DEVELOPMENT OF THE ISSUER 5.1.1. Legal and trade name 5.1.2. Registration place and number 5.1.3. Date of incorporation and duration of business activity 5.1.4. Registered office, legal personality, applicable legislation, country of incorporation, address and telephone number of its registered office 5.1.5. Significant events in the Bank’s activities 5.2. INVESTMENTS 5.2.1. Principal investments of the issuer 5.2.2. Principal ongoing investments 5.2.3. Future investments regarding which firm commitments have currently been made CHAPTER 6: COMPANY DESCRIPTION 6.1. PRINCIPAL ACTIVITIES 6.1.1. Description of the Group’s principal activities 6.1.2. Significant new products and/or services 6.2. PRINCIPAL MARKETS 6.3. EXCEPTIONAL FACTORS AFFECTING THE PRINCIPAL ACTIVITY OR MARKET 6.4. DEPENDENCE ON PATENTS, LICENSES, AND RELATED AUTHORIZATIONS 6.5. SOURCE OF STATEMENTS MADE BY THE ISSUER REGARDING ITS COMPETITIVENESS
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CHAPTER 7: ORGANIZATIONAL STRUCTURE 7.1. DESCRIPTION OF THE GROUP AND ISSUER’S POSITION IN THE GROUP 7.2. MOST SIGNIFICANT COMPANIES OF THE GROUP CHAPTER 8: PROPERTY, PLANT AND EQUIPMENT 8.1. TANGIBLE ASSETS 8.2. ENVIRONMENTAL ISSUES CHAPTER 9: OPERATING AND FINANCIAL REVIEW AND PROSPECTS 9.1. FINANCIAL SITUATION. 9.1.1. Results of the Consolidated Group 9.2. OPERATING PROFIT 9.2.1. Information regarding significant factors 9.2.2. Significant changes in income 9.2.3. Information regarding governmental, tax, monetary and political actions CHAPTER 10: CAPITAL 10.1. ISSUER’S CAPITAL (LONG AND SHORT TERM) 10.2. ISSUER’S CASH FLOWS 10.3. ISSUER’S FINANCING STRUCTURE 10.4. RESTRICTIONS ON THE USE OF CAPITAL 10.5. FINANCING FOR PLANNED INVESTMENTS CHAPTER 11: RESEARCH AND DEVELOPMENT, PATENTS, AND LICENSES CHAPTER 12: TREND INFORMATION 12.1. SIGNIFICANT RECENT TRENDS 12.2. KNOWN TRENDS, UNCERTAINTIES, COMPLAINTS, COMMITMENTS OR EVENTS HAVING AN IMPACT ON PROSPECTS CHAPTER 13: EARNINGS FORECASTS OR ESTIMATES 13.1. STATEMENT OF THE PRINCIPAL ASSUMPTIONS ON WHICH THE FORECAST OR ESTIMATE WAS BASED 13.2. STATEMENT REGARDING AN INDEPENDENT REPORT ON THE PROFIT FORECAST 13.3. COMPARABILITY OF THE FORECAST WITH HISTORICAL FINANCIAL INFORMATION 13.4. STATEMENT REGARDING FORECASTS PUBLISHED IN THE PROSPECTUS AND THE FORECAST PROVIDED IN THIS DOCUMENT CHAPTER 14: BOARD, MANAGEMENT, AND SUPERVISORY BODIES; SENIOR EXECUTIVES 14.1. INFORMATION ABOUT THE MEMBERS OF THE BOARD OF DIRECTORS 14.1.1. Members of the board of directors 14.1.2. Directors and other persons responsible for the management of BANCO SANTANDER, S.A. at the highest level
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14.1.3. Committees of the Board of Directors 14.1.4. Limited partners, if the company is a limited partnership with stock capital 14.1.5. Founders, if the issuer has been established for a period of fewer than five years 14.1.6. Any senior executive who is relevant in order to establish that the issuer holds the appropriate qualifications and experience for handling the issuer’s activities 14.1.7. Relevant management training and experience of the members of the board of directors and of the senior executives; nature of all familial relationships among these individuals 14.1.7.1. Training and experience 14.1.7.2. Family relationships 14.1.8. Principal activities of the current board members and senior executives outside the Bank, when these activities are significant in relation to the Bank 14.1.9. Any convictions associated with offenses involving fraud within at least the preceding five years 14.1.10. Information regarding any bankruptcy, suspension of payments, or liquidation with which the members of the Bank’s management decision-making bodies or senior management were associated within the preceding five years 14.1.11 Details of any official public accusation and/or sanctions of this person by the statutory or regulatory authorities (including the designated professional organizations), and whether this person was ever disqualified by a court because of his or her actions as a member of an issuer’s administrative, management, or supervisory bodies, or because of his or her actions involving the management of an issuer’s affairs within the preceding five years 14.2. CONFLICTS OF INTEREST AFFECTING THE BOARD, MANAGEMENT, OR SUPERVISORY BODIES 14.2.1. Conflicts of interest 14.2.2. Agreements or understandings with major shareholders, customers, suppliers, or other parties, pursuant to which any person mentioned in Chapter 14.1 was appointed as a member of the Board of Directors or of Senior Management 14.2.3. Information about any restrictions agreed upon by the persons mentioned in Chapter 14.1 regarding the disposal of their interest in the issuer’s securities during a given period CHAPTER 15: COMPENSATION AND BENEFITS 15.1. BOARD OF DIRECTORS’ COMPENSATION 15.1.1. Bylaw-mandated compensation and attendance fees 15.1.2. Salaries 15.1.3 Advances, loans granted and guarantees outstanding provided by Grupo Santander in favor of directors 15.2. POST-EMPLOYMENT BENEFITS CHAPTER 16: MANAGEMENT PRACTICES 16.1. PERIOD AND DATE OF CONCLUSION OF CURRENT TERM 16.2. INFORMATION ON THE CONTRACTS OF MEMBERS OF THE BOARD, MANAGEMENT OR SUPERVISORY BODIES WITH THE BANK OR WITH GROUP COMPANIES 16.3. AUDIT COMMITTEE AND REMUNERATION COMMITTEE
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16.3.1. Audit and Compliance Committee 16.3.2. Appointments and Remuneration Committee 16.4 CORPORATE GOVERNANCE CHAPTER 17: EMPLOYEES 17.1. NUMBER OF EMPLOYEES 17.2. STOCK AND STOCK OPTIONS 17.3. DESCRIPTION OF RESOLUTIONS FOR EMPLOYEE PARTICIPATION IN CAPITAL CHAPTER 18 MAJOR SHAREHOLDERS 18.1. SIGNIFICANT OWNERSHIP INTERESTS IN THE COMPANY’S CAPITAL 18.2. VOTING RIGHTS OF THE MAJOR SHAREHOLDERS 18.3. STATEMENT REGARDING WHETHER THE ISSUER IS UNDER CONTROL 18.4. EXISTENCE OF CONTROL AGREEMENTS CHAPTER 19: RELATED-PARTY TRANSACTIONS CHAPTER 20: FINANCIAL INFORMATION RELATED TO THE ISSUER’S ASSETS AND LIABILITIES, FINANCIAL POSITION AND LOSSES AND PROFITS 20.1. HISTORICAL FINANCIAL INFORMATION 20.1.1. Basis of presentation and Accounting Principles 20.1.2. Accounting policies used and explanatory notes 20.2. PRO-FORMA FINANCIAL INFORMATION 20.3. FINANCIAL STATEMENTS 20.3.1. Consolidated Balance Sheet 20.3.2. Consolidated income statements 20.3.3. Consolidated statement of changes in shareholders’ equity 20.3.4. Cash flow statements 20.4. AUDIT OF HISTORICAL ANNUAL FINANCIAL INFORMATION 20.4.1. Audit opinion on the financial information 20.4.2. Other audited information 20.4.3. Unaudited financial data 20.5. AGE OF THE MOST RECENT FINANCIAL INFORMATION 20.6. INTERIM INFORMATION AND OTHER FINANCIAL INFORMATION 20.6.1. Financial Statements as of September 30, 2008 20.6.1.1. Results as of September 30, 2008 20.6.1.2. Main items in Grupo Santander’s balance sheet 20.6.1.3. Efficiency ratio 20.6.1.4. Non-performing loans
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20.6.1.5. Computable Capital - Shareholders’ Equity 20.6.1.6. Shares and dividends 20.7. DIVIDEND POLICY 20.7.1. Dividends per share 20.8. LEGAL PROCEEDINGS AND ARBITRATION 20.9. SIGNIFICANT CHANGES IN THE BUSINESS OR FINANCIAL POSITION OF THE ISSUER CHAPTER 21: ADDITIONAL INFORMATION 21.1. SHARE CAPITAL 21.1.1. Issued capital 21.1.1.1. Par value 21.1.1.2. Classes and series of shares 21.1.2. Shares not representing capital 21.1.3. Number, book value and par amount of shares held by the issuer or its affiliates 21.1.4. Convertible and/or exchangeable debentures 21.1.5. Rights and obligations with respect to authorized and un-issued capital or regarding decisions about capital increases 21.1.6. Information regarding the share capital of any Group member subject to an option 21.1.7. Share capital history 21.2. BYLAWS AND NOTARIAL INSTRUMENT OF INCORPORATION 21.2.1. Purposes and aims of the Bank 21.2.2. Description of bylaw provisions relating to the members of the management decision-making body 21.2.3. Description of the rights, preferences and restrictions relating to each class of shares 21.2.4. Description of the procedure for changes to the rights of shareholders 21.2.5. Description of the procedure to call general shareholders’ meetings 21.2.6. Description of bylaw provisions regarding control of the Bank 21.2.7. Description of bylaw provisions regarding the ownership threshold 21.2.8. Requirements established for changes in capital CHAPTER 22: SIGNIFICANT CONTRACTS CHAPTER 23: THIRD-PARTY INFORMATION, EXPERTS’ STATEMENTS, AND STATEMENTS OF INTEREST 23.1. DATA RELATING TO THE INDEPENDENT EXPERT’S REPORT 23.2. THIRD-PARTY INFORMATION CHAPTER 24: DOCUMENTS SUBMITTED CHAPTER 25: SHAREHOLDING INFORMATION
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RISK FACTORS Risks relating to the Group’s operations Since the Group’s loan portfolio is concentrated in Continental Europe, the United Kingdom and Latin America, any adverse changes affecting Continental Europe, the United Kingdom, or certain Latin American economies could adversely affect the Group’s financial condition. The Group’s loan portfolio is mainly concentrated in Continental Europe (in particular, Spain), the United Kingdom, and Latin America. At December 31, 2007, Continental Europe accounted for approximately 55% of the Group’s total loan portfolio (Spain accounted for 34% of the total loan portfolio), while the United Kingdom and Latin America accounted for 33% and 12%, respectively. Therefore, adverse changes affecting the economies of Continental Europe (in particular, Spain), the United Kingdom or the Latin American countries where the Group operates would likely have a significant adverse effect on the Group’s loan portfolio and, as a result, on its financial condition, cash flows and results of operations. Some of the Group’s business is cyclical, so income may decline when demand for certain products or services is in a down cycle. The level of income derived from certain of the Group’s products and services depends on the strength of the economies in the regions where the Group operates and certain market trends prevailing in those regions. Therefore, negative cycles may adversely affect the Group’s income in the future. Because the Group’s principal source of funding is short-term deposits, a sudden shortage of these funds could increase the Group’s cost of funding. Historically, the Group’s main funding source has been customer deposits (demand, time, and notice deposits). At December 31, 2007, 17.4% of customer deposits consisted of time deposits in amounts exceeding EUR 73,084 (USD 100,000, at an exchange rate of 0.7308). Time deposits represented 43.5%, 44.2% and 48.9% of total customer deposits at the end of 2005, 2006 and 2007, respectively. Time deposits for significant amounts may be a less stable source of financing than other kinds of deposits. The loss of liquidity in the markets, due to the deterioration in the US subprime market, continues to affect the supply and cost of funds and liquidity. This deterioration in the markets has affected the global economy, particularly securities in the institutional markets (mainly asset backed securities), as well as the availability of liquid resources via the interbank market. In this context, there can be no assurance that current levels of financing can be maintained without incurring higher financing costs or liquidating certain assets.
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Risks concerning borrower credit quality and general economic conditions are inherent in the Group’s business. Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of the Group’s operations. Adverse changes in the credit quality of the Group’s borrowers and counterparties or a general decline in economic conditions in Spain, the United Kingdom, Latin America or the world, or arising from systemic risks in the financial systems, could reduce recoverability and the value of the Group’s assets and require an increase in the level of provisions for credit losses. Deterioration in the economies in which the Group operates could lower the profit margins of its financial and banking services businesses. Increased exposure to the real estate market makes the Group more vulnerable to fluctuations in such market. The 2003-2006 period witnessed the lowest ever interest rates in the Eurozone. This led to increases in the demand for mortgage loans and significant increases in housing prices. In 2007 and 2008 there has been a major adjustment in the housing market, in terms of both demand and supply, which has also caused large interest rate increases in the Eurozone. As a result, the Group’s loan delinquency rate has risen 17 base points (from 0.78% to 0.95%) from the end of 2006 to the end of 2007. At September 30, 2008, the rate had jumped to 1.63%. Since mortgage loans comprise 50% of the Group’s loan portfolio at December 31, 2007, the Group is highly exposed to changes in the real estate market. Additional interest rate increases could have a significant negative impact on the mortgage loan delinquency rate which may, in turn, negatively affect the Group’s operations, as well as its financial position and operating income. The Group may generate less income from brokerage and other commission- and fee- based businesses. Market downturns are likely to lead to declines in the volume of transactions that the Group executes for its customers and, therefore, to declines in the Group’s non-interest revenues. In addition, because the fees that the Group charges for managing its customers’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of the portfolios of the Group’s customers or increases the amount of withdrawals would reduce the revenues that the Group receives from its asset management and private banking and securities custody businesses. Even in the absence of a market downturn, below-market performance by the Group’s mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenue the Group receives from its asset management business.
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Market risks associated with fluctuations in bond and equity prices and other market factors are inherent in the Group’s business. A protracted market decline could reduce market liquidity, making it harder to sell assets and leading to material losses. The performance of financial markets may cause changes in the value of the Group’s investment and trading portfolios. In some of the Group’s businesses, a prolonged market decline, especially a reduction in the price of assets, could reduce the level of activity or reduce market liquidity. These developments may lead to material losses if the Group cannot close out deteriorating positions in a timely way. This may especially be the case for assets of the Group for which there are not very liquid markets. Assets that are not traded on stock exchanges or other public trading markets, such as certain derivative contracts between banks, may be valued by the Group using models other than publicly quoted prices. Monitoring the deterioration of prices of assets of this type is complicated and could lead to losses that the Group did not anticipate. The increasing volatility of world equity markets due to the current credit crisis is having a particular impact on the financial sector. This may affect the value of the Group’s investments in entities in this sector and, depending on their fair value and future recovery expectations, could become a permanent impairment which, by application of applicable rules, would be subject to write-offs against the Group’s results. In particular, based on the ABN AMRO transaction and the expected final liquidation for the overall transaction, the Group holds an equity interest in Fortis classified as available-for-sale securities, for which reason changes in the stock price are recorded in the Group’s equity. Losses due to impairment of this portfolio would be set off by gains in other equity investments. Despite the Group’s risk management policies, procedures, and methods, it may be exposed to unidentified or unanticipated risks. The Group’s risk management techniques and strategies may not be fully effective in mitigating the Group’s risk exposure in all financial market environments or against all types of risk, including those that the Group is unable to identify or anticipate. Some of the qualitative tools and metrics that the Group uses to manage risk are based on the use of observed historical market behavior. The Group applies statistical and other tools to these observations to arrive at quantifications of its risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors that the Group did not anticipate or correctly evaluate in its statistical models. This would limit the Group’s ability to manage its risks. The Group’s losses could therefore be significantly greater than the historical measures indicate. In addition, the quantitative models used by the Group do not take into account all of the risks. The Group’s more qualitative approach to managing those risks could prove insufficient, exposing it to material unanticipated losses. If existing or potential customers believe the Group’s risk management is inadequate, they could take their business elsewhere, harming the Group’s reputation as well as its revenues and profits. The Group’s recent acquisitions and any future acquisition could be unsuccessful and could harm the Group’s business. Historically, the Group has acquired majority stakes in various companies. As regards recent acquisitions, that of Alliance & Leicester plc and of ABN AMRO assets are worthy of note. Additionally, the Group may consider other acquisitions. As of the date of this document, the Group is in the process of executing acquiring the U.S. entity, Sovereign Bancorp. It cannot be guaranteed that the Group will be successful in the management of these acquisitions.
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The Group cannot give assurances that its acquisitions will perform in accordance with expectations. When evaluating possible acquisitions, the Group must necessarily base its decisions on limited and potentially incorrect information and on a working hypothesis as regards operations, profitability and other matters that may be imprecise or incomplete. The Group cannot guarantee that its expectations in regard to integration and synergies will materialize. Proposals for the restructuring of the businesses acquired from ABN AMRO are complex and may not realize the anticipated benefits for the Group The restructuring plan in place for the separation and integration of ABN AMRO into the Group’s businesses and operations is complex and requires a substantial reorganization of the operations and legal structure of ABN AMRO. Additionally, there are activities that must take place simultaneously within different business lines and jurisdictions. The implementation of the reorganization and the realization of the forecast benefits within the planned timetable may prove challenging. Execution of the restructuring requires management resources previously devoted to the Group’s business and the retention of appropriately skilled ABN AMRO staff. The Group may not realize the benefits of the acquisition or be able to carry out the restructuring within the expected time period or to the extent projected. Increased competition in the countries where the Group operates may adversely affect growth prospects and operations. Most of the financial systems in which the Group operates are highly competitive. Recent financial sector reforms in the markets in which the Group operates have increased competition among both local and foreign financial institutions, and the Group believes that this trend will continue. In particular, price competition in Europe and Latin America has recently increased. The Group’s success in the European and Latin American markets will depend on the Group’s ability to compete effectively with other financial institutions. In addition, there is a trend towards consolidation in the banking industry, which has created larger and stronger banks with which the Group must now compete. The Group cannot assure that this increased competition will not adversely affect its growth prospects and, therefore, its operations. The Group also faces competition from non-bank competitors, such as brokerage companies, large department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies, and insurance companies. Volatility in interest rates may negatively affect the Group’s net interest income and increase its non-performing loan portfolio. Changes in interest rates may affect the interest income the Group receives from interest-earning assets differently than the interest paid by the Group on its interest- bearing liabilities. This difference could result in an increase in interest expense relative to interest income, leading to a reduction in the Group’s net interest income. Income from treasury operations is particularly vulnerable to interest rate volatility. Since the majority of the Group’s loan portfolio reprices in less than one year, rising interest rates may also bring about an increasing non-performing loan portfolio. Interest rates are highly sensitive to various factors that are beyond the Group’s control, including financial sector deregulation, monetary policies, domestic and international economic and political conditions, and other factors. As of December 31, 2007, the interest rate risk measured in daily Value at Risk (“VaRD”) terms amounted to EUR 75.4 million.
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Foreign exchange rate fluctuations may negatively affect the Group’s earnings and the value of its assets. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the price of our securities on the stock exchanges in which our shares and ADSs are traded. These fluctuations will also affect the conversion to U.S. dollars of dividends paid in euros on our ADSs. In the ordinary course of business, a percentage of the Group’s assets and liabilities is denominated in currencies other than the euro. Fluctuations in the value of the euro against other currencies may adversely affect the Group’s profitability. For example, appreciation of the euro against some Latin American currencies and the U.S. dollar may depress earnings from the Group’s Latin America operations, and the appreciation of the euro against the pound sterling will reduce the Group’s earnings from its U.K. operations. Additionally, while most of the countries in which the Group operates have not imposed prohibitions on the repatriation of dividends, capital investments or other distributions, no assurance can be given that these countries will not institute restrictive exchange control policies in the future. Moreover, fluctuations among the currencies in which our shares and ADSs trade could reduce the value of your investment. At December 31, 2007, the highest exposure in temporary positions (with a potential impact on the income statement) was concentrated in US dollars and pounds sterling, in that order. On this same date, the highest permanent exposure (with a potential impact on equity) was concentrated on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso, in that order. The Group permanently hedges a portion of these positions through exchange rate derivatives. The following table shows the estimated effect on the Group’s equity and its income statement as of December 31, 2007 of a 1% appreciation in the euro exchange rate with respect to each currency: Millions of euros Currency Effect on Equity Effect on Consolidated Results US dollar - 30.1 Chilean peso (13.7) - Pound sterling (4.3) 12.2 Mexican peso (16.3) - Brazilian real (68.5) -
Taking into account the interest rate hedge agreements mentioned above, the changes in the currencies in which Santander operates in 2007 have had a negative impact on shareholders’ equity of approximately EUR 455 million.
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Changes in the regulatory framework in the jurisdictions in which the Group operates could adversely affect its business. A number of banking regulations designed to maintain or strengthen liquidity, safety and solvency of banks and limit their exposure to risk apply in the different jurisdictions in which the Group operates. Changes in regulations, which are beyond the Group’s control, may have a material effect on the Group’s business and operations. Since some of the banking laws and regulations have recently been adopted, the manner in which they apply to the operations of financial institutions is still evolving. Moreover, no assurance can be given that laws or regulations will be passed, come into force or be interpreted in a manner that will not have an adverse effect on the Group’s business. Operational risks are inherent in the Group’s business. The Group’s business depends on the ability to process a large number of transactions efficiently and accurately. Losses can result from hiring inadequate personnel, applying inadequate or defective internal control processes and systems, or from external events that interrupt the Group’s normal business operations. We also face the risk that our controls and procedures are inadequately designed. The Group has suffered losses in the past from this risk, and there can be no assurance that it will not suffer material losses for this reason in the future. The Group is exposed to the risk of loss from legal and regulatory proceedings. Errors in the management of matters such as potential conflicts of interest, compliance with legal and regulatory requirements, ethical matters and the conduct of companies in which the Group holds strategic stakes or of its joint venture partners may increase the number of proceedings or the amount of damages claimed from the Group, or subject it to regulatory actions, fines or sanctions. Currently, the Bank and its subsidiaries are parties to a number of legal and regulatory proceedings. An adverse result in one or more of these proceedings could have a material adverse effect on results for any particular period. Credit, market and liquidity risks may have an adverse effect on the Group’s credit ratings and its cost of funds. Any downgrade in the Group’s ratings could increase the Group’s borrowing costs, limit access to capital markets, and adversely affect the sale or marketing of products, participation in business transactions (particularly longer-term and derivatives transactions) and affect the Group’s ability to retain its customers. This could reduce the Group’s liquidity and have an adverse effect on its operating results and financial condition.
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The Group’s ratings as of the date of registration are:
After announcing the acquisition of Alliance & Leicester, the deposits of Bradford & Bingley and all the capital of Sovereign, Fitch changed its view to “negative” until all the necessary approvals have been received and the scope of the risks of integration assimilated can be assessed.
The growth, asset quality and profitability of the Group’s Latin American subsidiaries may be adversely affected by political and macroeconomic conditions. The economies of the eight Latin American countries in which the Group operates have experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which the Group lends. Latin American banking activities (including retail banking, global wholesale banking, asset management and private banking) accounted for EUR 2,666 million of attributable net profit for the fiscal year ended December 31, 2007 (an increase of 17% over the previous year’s figure of EUR 2,287 million). Negative and fluctuating economic conditions, such as a changing interest rate environment, affect the Group’s profitability by causing lending margins to decrease and reducing demand for higher margin products and services. Negative and fluctuating economic conditions in certain Latin American countries may also give rise to breaches by some governments when satisfying the payment of their debts. This could affect the Group directly, by causing losses in its loan portfolio, and indirectly by causing instability in the banking system as a whole, since retail banks’ exposure to public administration debt is high in some of the Latin American countries in which the Group operates. In addition, the revenue of the Group’s subsidiaries in Latin America is subject to risks of losses due to a politically unfavorable situation, social instability, and changes in governmental policies, including expropriations, nationalizations, international legislation on ownership, interest rate caps and fiscal policies. The Group cannot guarantee that the growth of its Latin American subsidiaries, the quality of their assets and their profitability will not be affected by volatile macroeconomic and political conditions in the Latin American countries in which it operates. Recent events concerning the Group’s Venezuelan subsidiary. On August 1, Banco Santander disclosed its intention to sell Banco de Venezuela to a Venezuelan private investment group, to which end certain commitments were given although a final agreement was not reached.
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Subsequently, Banco Santander became aware of the interest of the Venezuelan Government in Banco de Venezuela, and conversations are currently ongoing. In 2007, attributable profit of EUR 179 million was obtained in Venezuela, which was 1.98% of the Group’s result in that fiscal year. Significant competition in some Latin American countries in which the Group is present could limit the Group’s ability to grow and increase market share. Because some of the Latin American countries in which the Group operates (i) only have limited regulatory barriers to market entry, (ii) generally do not distinguish between locally- and foreign-owned banks, (iii) have allowed consolidation of their banks, and (iv) do not restrict capital movements, the Group faces significant domestic and foreign competition in retail and investment banking. Latin American economies can be directly and negatively affected by adverse developments in other countries. The financial and securities markets in the Latin American countries in which the Group operates are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. Negative developments in the economy or securities markets in one country, particularly in an emerging market, may negatively affect the economies of other emerging markets. Such developments could be prejudicial for the business, the financial situation and the results of operations of the Group’s subsidiaries in Latin America.
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CHAPTER 1
1. RESPONSIBLE PERSONS 1.1. PERSONS WHO ASSUME RESPONSIBILITY FOR THE CONTENTS OF THE REGISTRATION DOCUMENT. Mr. Ignacio Benjumea Cabeza de Vaca, in the name and on behalf of BANCO SANTANDER S.A. (hereinafter, the “Bank”), in his capacity as Executive Vice President, General Secretary and Secretary of the Board of Directors, assumes responsibility for the entire contents of the Bank’s Share Registration Document (the “Registration Document”) which is in the form set forth in Annex-I to Commission Regulation (EC) No. 809/2004, dated April 29, 2004, and complies with the minimum information requirements established in section 7 of Directive 2003/171/EC. Mr. Ignacio Benjumea Cabeza de Vaca has sufficient powers to bind the Bank under the notarial instrument executed on February 3, 1999 before Mr. José María de Prada Díez, a resident of Santander and a Notary of the Association of Notaries Public of Burgos, which was recorded in his notarial protocol under number 327. 1.2. STATEMENT OF RESPONSIBILITY FOR THE REGISTRATION DOCUMENT. Mr. Ignacio Benjumea Cabeza de Vaca, acting in the name and on behalf of the Bank, having acted with reasonable diligence to ensure that such is the case, states that the information set forth in this Registration Document is, to the best of his knowledge, in accordance with the facts and contains no omission that might affect the contents hereof.
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CHAPTER 2
2. AUDITORS 2.1. AUDITORS’ NAMES AND ADDRESSES. The individual and consolidated annual financial statements and management reports of the Bank for fiscal years 2005, 2006 and 2007 have been audited by the independent auditors DELOITTE, S.L. (formerly DELOITTE & TOUCHE ESPAÑA, S.L.), whose registered office is located in Madrid at Plaza Pablo Ruiz Picasso, nº 1, and which is recorded in the Official Registry of Auditors under number S-0692.
2.2. RESIGNATION OF AUDITORS. The Bank’s auditors have not resigned or been removed from their duties during the period covered by the historical financial information.
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CHAPTER 3
3. FINANCIAL INFORMATION. Except where noted otherwise, all of the financial information contained in this report has been prepared in accordance with the BANK OF SPAIN’s Circular 4/2004 and the International Financial Reporting Standards as adopted by the European Union (EU-IFRS). Fiscal year 2005 was the first year in which accounts were prepared using the new accounting standards, which entailed changes in the presentation and structure of the business areas. The income statement for fiscal year 2006 included herein differs from the one approved at the Bank’s General Shareholders’ Meeting due to the Group’s divestment of the pension business in Latin America in 2007. The results arising from the consolidation of such companies (EUR 116 million) were reclassified, for comparison purposes and in accordance with the provisions of the accounting standard, from each of the headings under which they were recorded in the approved consolidated annual accounts for fiscal year 2006 to the “Profits from discontinued operations” heading in the income statement included herein. Similarly, for fiscal year 2005, the results arising from the consolidation of the companies sold in the pension business in Latin America (EUR 106 million), as well as the results corresponding to the equity stakes sold in 2006 (mainly Inmobiliaria Urbis, S.A. (Urbis) and the Abbey Insurance business) (EUR 238 million) were reclassified from each of the corresponding headings in the consolidated income statement to the “Profits from discontinued operations” heading in such income statement. The 2007 Report includes, for comparative purposes, information from fiscal years 2006 and 2005. In view of the prior adjustments, such information differs from the information contained in the corresponding annual statements for said fiscal years, which were approved at the respective General Shareholders’ Meetings. The information relating to fiscal years 2006 and 2005 included in the Report for 2007 has been reviewed by the Audit and Compliance Committee and by the Auditor.
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3.1. SELECTED HISTORICAL INFORMATION The information included in this Chapter should be read together with the consolidated financial statements included in Chapter 20 of this Registration Document and is entirely subject to the contents of such consolidated financial statements.
Basic Information Variation 2007 2006 Amount (%) 2005 Balance sheet (millions of euros) Total assets 912,915 833,873 79,042 9.5 809,107 Loans and advances to customers (net) 565,477 523,346 42,131 8.1 435,829 Customer funds under management 784,995 739,223 45,772 6.2 651,360 Shareholders’ equity 51,945 40,062 11,884 29.7 35,841 Total managed funds 1,063,892 1,000,996 62,896 6.3 961,953 Income statement (millions of euros)* Net interest income (w/o dividends) 14,882 12,076 2,806 23.2 10,324 Commercial revenue 24,096 20,184 3,912 19.4 17,541 Gross operating income 27,095 22,333 4,761 21.3 19,076 Net operating income 14,842 11,218 3,624 32.3 8,765 Profit from continuing operations 8,518 6,674 1,844 27.6 5,411 Profits attributed to the Group 9,060 7,596 1,464 19.3 6,220 EPS, profitability and efficiency (%)* Earnings per share (euro) 1.4287 1.2157 0.9967 Diluted earnings per share (euro) 1.4139 1.2091 0.9930 ROE 21.91 21.39 19.86 ROA 1.09 1.00 0.91 RORWA 1.95 1.83 1.78 Efficiency ratio 44.22 48.56 52.94 Capital and NPL ratios (%) BIS Ratio 12.66 12.49 12.94 Tier I 7.71 7.42 7.88 Non-performing loan ratio 0.95 0.78 0.89 NPL coverage 150.55 187.23 182.02 Market capitalization and shares Shares outstanding (millions) 6,254 6,254 6,254 Share price (euros) 14.79 14.14 11.15 Market capitalization (millions of euros) 92,501 88,436 69,735 Dividend per share (euro) 0.6508 0.5206 0.4165 Book value per share (euro) 8.31 6.41 5.73 Price/Book value per share (multiple) 1.78 2.21 1.95 Other data Number of shareholders 2,278,321 2,310,846 2,443,831 Number of employees 131,819 123,731 120,047 Continental Europe 47,838 44,216 43,612 United Kingdom (Abbey) 16,827 17,146 19,084 Latin America 65,628 60,871 55,889 Financial management and equity stakes 1,526 1,498 1,462 Number of branches 11,178 10,852 10,201 Continental Europe 5,976 5,772 5,389 United Kingdom (Abbey) 704 712 712 Latin America 4,498 4,368 4,100 Information based on ordinary profit (excl. net extraordinary capital gains and allowances) Profit attributed to the Group (excl. capital gains) 8,111 6,582 1,528 23.2 5,212 Attributed profit per share without capital gains (Euro) 1.2789 1.0534 0.8351 Diluted attributed profit per share without capital gains (Euro) 1.2657 1.0477 0.8320 ROE (w/o capital gains) 19.61 18.54 16.64 ROA (w/o capital gains) 0.98 0.88 0.78 RORWA (w/o capital gains) 1.76 1.60 1.51 P/E ratio (price/attributed profit per share w/o capital gains) (multiple) 11.56 13.42 13.35 (*)The presentation of the income statement from which the foregoing information was obtained differs from the presentation of the audited income statement. To facilitate the comparison with earlier periods, the income statement is presented without the net extraordinary capital gains and allowances, which are included only in aggregated form on the line preceding the profit attributed to the Group. Chapter 3 – Page 2
3.2. SELECTED INTERIM FINANCIAL INFORMATION The information included in this Chapter should be read together with the unaudited consolidated interim financial statements of the Bank as of September 30, 2008 included in Chapter 20.6 of this Registration Document and is entirely subject to the contents of such interim financial statements.
(1) In 9M ‘07 and December 2007 data without extraordinary capital gains and allowances. (2) December 2007 and 9M’08 calculations include in the denominator the number of shares needed to compulsorily convert the “Valores Santander.” Note: The financial information included herein is not audited, but it was approved by the Company’s Board of Directors at its meeting held on October 20, 2008, following a favorable report from the Audit and Compliance Committee on October 15, 2008. The Audit and Compliance Committee verified that the quarterly financial information was prepared in accordance with the same principles and practices as those used to draw up the annual financial statements.
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CHAPTER 4
4. RISK FACTORS See the risk factors described in the introduction to this Registration Document (see Introduction, pages 1, et seq.).
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CHAPTER 5
5. INFORMATION ON THE ISSUER 5.1. HISTORY AND DEVELOPMENT OF THE ISSUER 5.1.1. Legal and trade name The corporate name of the Bank is BANCO SANTANDER, S.A. and it does business under the Santander trade name. 5.1.2. Registration place and number The Bank is registered with the Commercial Registry of Cantabria and its Bylaws have been amended to conform to the current Business Corporations Law by a notarial instrument executed in Santander on June 8, 1992 before Notary Mr. José María de Prada Díez, under number 1,316 of his book of notarial records and recorded with the Cantabria Commercial Registry in volume 448 of the Archive, folio 1, page number 1,960, first Amendment entry. The current Bylaws, except for subsections 1 and 2 of Article 5 regarding share capital, were approved by the shareholders at the General Shareholders’ Meeting held on June 21, 2008; the respective notarial instrument was recorded with the Commercial Registry on August 11, 2008, in volume 926, folio 160, section 8, page S-1960, entry 1640. The current text of subsections 1 and 2 of Article 5 of the Bylaws is set forth in the notarial instrument recording a capital increase certified on October 10, 2008 to accommodate the exchange of shares for the acquisition of Alliance & Leicester, which document was recorded with the Commercial Registry in volume 926, folio 184, page S 1960, entry 1653. The Bank is likewise registered with the Special Banks and Banking Institutions Registry under code number 0049. 5.1.3. Date of incorporation and duration of business activity The Bank was established in the city of Santander by means of a notarial instrument executed on March 3, 1856 before the Notary Mr. José Dou Martínez, later ratified and partially amended by a second notarial instrument dated March 21, 1857, executed before the Santander Notary Mr. José María Olarán, and commenced operations on August 20, 1857. The Bank commenced operations upon incorporation and, pursuant to Article 4 of the Bylaws, its duration will be indefinite. Article 4 – Commencement of activities and duration:
“1. The Company commenced its activities on August 20, 1857.
2. The duration of the Company is indefinite.”
5.1.4. Registered office, legal personality, applicable legislation, country of incorporation, address and telephone number of its registered office. The Bank is domiciled in Spain, has the legal form of a corporation (sociedad anónima) and its activities are subject to the special Spanish legislation applicable
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to credit institutions in general and, specifically, to the supervision, control and regulations of the BANK OF SPAIN (BANCO DE ESPAÑA). BANCO SANTANDER, S.A. was incorporated in Spain, and has its registered office at Paseo de Pereda 9-12, Santander. The address of the main operational headquarters of the Bank is Ciudad Grupo Santander, Avda. de Cantabria s/n, 28660 Boadilla del Monte (Madrid). The telephone number of the Bank’s operational headquarters is +34 91 259 65 20. 5.1.5 Significant events in the Bank’s activities. The Bank was established in the city of Santander by means of a notarial instrument executed on March 3, 1856, later ratified and amended in part by a second notarial instrument dated March 21, 1857. The Bank commenced its activities on August 20, 1857. It was transformed into a credit corporation (sociedad anónima de crédito) by notarial instrument signed by the Santander Notary Mr. Ignacio Pérez on January 14, 1875, amended by subsequent notarial instruments, and was registered in the Commercial Registry Book of the Governmental Development Section in the Province of Santander. The Bank amended its Bylaws to conform to the current Business Corporations Law by means of a notarial instrument executed in Santander on June 8, 1992 before the Notary Mr. José María de Prada Diez and recorded under number 1,316 in his notarial protocol. The Bank commenced its activities upon incorporation. In 1999, BANCO SANTANDER S.A. and BANCO CENTRAL HISPANOAMERICANO, S.A. merged, with BANCO SANTANDER S.A. being the absorbing company. The Plan of Merger between BANCO SANTANDER, S.A. and BANCO CENTRAL HISPANOAMERICANO, S.A. was prepared by the Boards of Directors of both entities on January 15, 1999 and approved by the shareholders at their respective General Shareholders’ Meetings on March 6, 1999. The Bank adopted the corporate name BANCO SANTANDER CENTRAL HISPANO, S.A. within the framework of such merger process. On July 25, 2004, the Boards of Directors of the Bank and of Abbey approved the terms upon which Abbey’s Board of Directors recommended to its shareholders the tender offer made by the Bank for all the ordinary shares of Abbey under a Scheme of Arrangement governed by English Company Law. Following the holding of the respective General Shareholders’ Meetings of Abbey and the Bank in October 2004 and compliance with all other conditions for the transaction, the acquisition was completed on November 12, 2004 through the delivery of one new share of the Bank for every ordinary Abbey share. On July 20, 2007, the Bank, together with the Royal Bank of Scotland Group plc, Fortis N.V. and Fortis S.A./N.V., through RFS Holdings B.V., launched an offer for the entire share capital of ABN AMRO Holding N.V. (“ABN AMRO”).
On October 31, 2007 it completed the acquisition of ABN AMRO (for further information, see Chapter 5.2.1) and commenced a process for the spin-off of its businesses. The main business acquired by Santander is the Brazilian bank Banco Real. In fiscal year 2007, the Group organized a restricted and private bidding for the sale and subsequent leaseback of real estate for its own use located in Spain that
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includes its operational headquarters, Ciudad Financiera, 1,152 offices and ten individual properties (see Chapter 8).
5.2. INVESTMENTS 5.2.1. Principal investments of the issuer. I) Most significant events at Group companies during fiscal year 2007:
ABN AMRO Holding N.V. ("ABN AMRO") On July 20, 2007, having obtained the regulatory authorizations required to publish the documentation on the takeover bid for ABN AMRO, the Bank, together with the Royal Bank of Scotland Group plc, Fortis N.V. and Fortis S.A./N.V. (collectively, the “Banks”), formally launched, through RFS Holdings B.V., an offer for all the ordinary shares, ADSs and previously convertible preference shares of ABN AMRO. The initial acceptance period of such offer (the “Offer”) ended on October 5, 2007.
The Banks and RFS Holdings B.V., a company newly incorporated for the purpose of making the proposed offer, entered into an agreement dated May 28, 2007 (the “Consortium Agreement”) governing the modus operandi during the process of the offer, the way in which ABN AMRO is to be managed upon the successful conclusion thereof, the division of the ABN AMRO businesses among the Banks, and the sale of the non-core assets of ABN AMRO following the conclusion of the process. On October 10, the Banks declared the Offer to be unconditional. As of such date, the owners of 86% of the ordinary share capital of ABN AMRO had accepted the Offer (including certain shares that the Banks already owned and had undertaken to contribute to RFS Holdings B.V.).
On that same date, the commencement of an additional offer period was announced, during which the holders of ordinary shares and ADSs of ABN AMRO could sell them on the same terms and conditions as the Offer, until October 31, 2007.
Upon conclusion of the aforementioned additional offer period, 98.8% of the ordinary share capital of ABN AMRO (excluding its treasury shares) had definitively accepted the Offer.
At December 31, 2007, the investment made by the Bank amounted to EUR 20,615 million, and consisted of the Bank’s 27.9% ownership interest in the share capital of RFS Holdings B.V., the holding entity of the shares of ABN AMRO.
Following all these actions, the spin-off of the business lines of ABN AMRO commenced, with a view to their subsequent integration into each of the Banks. The following correspond to Santander: the “Latin America Business Unit” of ABN AMRO – basically, Banco ABN AMRO Real S.A. (“Banco Real”) in Brazil, Banca Antoniana Popolare Veneta Spa Banking Group (“Antonveneta”), the cash from the sale of the consumer banking unit of ABN AMRO in the Netherlands, Interbank and DMC Consumer Finance, plus 27.9% of the assets that were not
Chapter 5 – Page 3 allocated to any of the Banks of the consortium and which are intended to be disposed of. The spin-off process continued in 2008.
In this connection, on March 4, the Dutch Central Bank announced that it had no objections to the overall spin-off plan and in July 2008 it approved the individual spin-off plan of Banco Real and the businesses in Brazil. Subsequently, the Brazilian Central Bank approved Santander’s purchase, thereby rendering it effective.
As of the date of this document, the Group accounts for Banco Real by the equity method, and plans to account for it on a fully-consolidated basis during the fourth quarter of 2008.
The Group’s assets in Brazil will also comprise the assets corresponding to the asset management business of ABN AMRO in Brazil, which were initially allocated to Fortis in the process of spinning-off and integrating the assets of ABN AMRO, and which were acquired from it by the Bank in the first half of 2008 for EUR 209 million.
Also, on May 30, 2008, Banco Santander and Banca Monte dei Paschi di Siena announced the closing of the purchase and sale of Antonveneta (excluding Interbanca, its corporate banking subsidiary), for EUR 9,000 million, pursuant to the agreement announced on November 8, 2007 and which was only subject to the approval of the competent authorities. Until the consummation of the sale, the interest in Antonveneta was accounted for as a noncurrent asset for sale.
Following all these actions and the valuation of the interest pursuant to current legislation, the value of the Group’s equity interest in RFS Holding, B.V., corresponding basically to Banco Real, amounted to EUR 12,965 million at June 30, 2008.
Last, on June 2, 2008, Banco Santander announced that it entered into a definitive agreement with General Electric whereby GE Commercial Finance would acquire Interbanca and the Bank would acquire the units of GE Money in Germany, Finland and Austria, its card units in the United Kingdom and Ireland and its car finance units in the United Kingdom. The base price agreed for the two transactions is EUR 1,000 million each, subject to various adjustments. These transactions are expected to be closed in the fourth quarter of 2008 or the first quarter of 2009. The Interbanca business was part of RFS Holdings B.V. and, until the third quarter of 2008, it was accounted for by the equity method. Following such date, it is booked as a noncurrent asset for sale.
BANCO REAL
Banco Real is one of the largest banking institutions in Brazil by volume of loans, deposits and revenues. It boasts an extensive distribution network (1,900 offices and 8,700 ATMs) allowing it to operate as a full-service retail and wholesale bank nationwide, serving over 13 million clients. It also has institutions specializing in private banking and in car financing, the latter operating through over 15,000 dealers.
At December 31, 2007, Banco Real had assets worth BRL 159,547 million (equivalent to EUR 58,000 million), shareholders’ equity of BRL 12,142 million
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(equivalent to EUR 4,400 million) and net attributable profits of BRL 2,975 million (equivalent to EUR 1,160 million).
SANTANDER CONSUMER CHILE Santander Consumer Finance and the Bergé Group, through its Chilean subsidiary SKBergé, a company formed by Siglo Koopers and Bergé (SKB), entered into a strategic agreement to set up a finance company in Chile, whereby Santander Consumer will subscribe to between 51% and 90% of the share capital, and SKBergé will subscribe to between 10% and 49% of the share capital. The new company, which will operate under the name Santander Consumer Chile, will engage in consumer finance, focusing on both the automotive and other durable consumer goods industry, and on the credit card business. At December 31, 2007, Santander Consumer Finance had subscribed to 89% of the share capital of Santander Consumer Chile (with a disbursement of EUR 13 million), the remaining 11% being held by SK Bergé. ORÍGENES AFJP AND ORÍGENES SEGUROS DE RETIRO In fiscal year 2007, the Group entered into an agreement with ING Groep NV for the sale to the latter of the Group’s equity interest in the pension fund manager Orígenes AFJP and in Orígenes Seguros de Retiro in Argentina, for USD 166 million (EUR 112 million), giving rise to gross capital gains of EUR 84 million for the Group. PENSION FUND MANAGEMENT COMPANIES In fiscal year 2007, the Group completed the obligatory sale of its Pension Fund Management Companies (AFP) in Latin America to ING Groep NV for USD 1,314 million dollars (EUR 906 million), giving rise to a gross gain of EUR 747 million. The transaction includes the Pension Fund Management Companies in Mexico (Afore Santander), Chile (AFP Bansander), Colombia (AFP Cesantías Santander) and Uruguay (Afinidad AFAP). CB EXTROBANK In fiscal year 2007, the Group acquired all the shares of the Russian bank CB Extrobank for EUR 48 million, generating goodwill of EUR 37 million.
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SALE OF REAL ESTATE On November 14, 2007, Banco Santander announced that it had closed the sale of ten real estate properties to two companies belonging to Grupo Potegadea for EUR 458 million. In the same act, Banco Santander formalized an agreement to lease the above-mentioned properties for a total period of 40 years, with the Bank reserving an option to repurchase them. On November 23, 2007, Banco Santander concluded the sale of 1,152 pieces of real estate to the Pearl Group insurance company, the principal shareholder of which is Sun Capital. Banco Santander had simultaneously formalized an agreement to lease the above mentioned properties for a total period of between 45 and 47 years, reserving an option to repurchase them. The amount of the transaction was EUR 2,040 million. Both transactions gave rise to a capital gain of EUR 1,080 million for Grupo Santander. See Chapter 8 of this document for further information on these transactions. These transactions were made within the framework of the restricted and private bidding organized by Banco Santander for the sale and leaseback of a portfolio of real estate owned by it in Spain, which also includes the sale of Ciudad Financiera Santander. For further information on the latter transaction, see Chapters 5.2.2 and 8.1 of this document.
Other holdings
BANCO PORTUGUÉS DE INVESTIMENTO (BPI) In fiscal year 2007, the Group sold 35.5 million shares of BPI for a total of EUR 228 million, giving rise to a gain of EUR 107 million. Its interest at December 31, 2007 stands at 1.2%.
INTESA SANPAOLO
In fiscal year 2007, the Group sold the 1.79% interest it held in the Italian institution Intesa Sanpaolo for a total of EUR 1,206 million. The transaction generated a gain of EUR 566 million.
BOLSAS Y MERCADOS ESPAÑOLES On July 16, 2007, Santander Investment Bolsa, S.V., S.A. made a private placement for the account of Grupo Santander of a package of 2,842,929 shares of the company Bolsas y Mercados (“BME”), representing 3.4% of the share capital of the company, at a price of EUR 42.90 per share, which generated a gain of EUR 111 million for the Group. THE ROYAL BANK OF SCOTLAND GROUP, PLC (“RBS”) In 2007, the Group acquired a 2.3% interest in the share capital of RBS for EUR 1,368 million. At June 30, 2008, the Group’s interest in such institution is 2.3%.
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IBERDROLA, S.A. In fiscal year 2007, the Group acquired financial interests in Iberdrola, S.A. for EUR 1,503 million. At June 30, 2008, such interest stands at 1.86% of the share capital of such company. FORTIS, N.V. In fiscal year 2007, the Group acquired financial interests in Fortis, N.V. for EUR 892 million. At June 30, 2008, the Group’s interest in such company stands at 2.13%.
II) Most significant events at Group companies during fiscal year 2006: INTERBANCO, S.A. (“INTERBANCO”) In September 2005, the Group agreed to acquire 50.001% of the share capital owned by Millenium BCP in Interbanco. Interbanco ended 2004 with assets worth EUR 700 million. In January 2006, the Group paid EUR 118 million for 50.001% of the share capital of Interbanco, generating goodwill of EUR 90 million. At the beginning of 2007, the Group acquired an additional 9.999% of Interbanco through the integration into the latter of the branches of Santander Consumer E.F.C, S.A. and Santander Consumer Finance, S.A. in Portugal. As a result of this acquisition, Interbanco changed its name to Banco Santander Consumer Portugal, S.A. Following this transaction and by virtue of the initial purchase agreements, the Group acquired the remaining 40% of this entity for EUR 138 million. These transactions gave rise to goodwill of EUR 74 million. At December 31, 2007, the Group owned all the shares of Banco Santander Consumer Portugal S.A.
ISLAND FINANCE
In January 2006, Grupo Santander announced that its subsidiary in Puerto Rico, Santander BanCorp, and Wells Fargo & Company had entered into a definitive agreement for the acquisition from the latter of the assets and operations of Island Finance in Puerto Rico. At December 31, 2005, Island Finance’s loans in Puerto Rico amounted to approximately USD 627 million. The deal consisted of the acquisition by Grupo Santander of all the operations of Island Finance, except for its debt and remaining liabilities. The transaction was completed in the first quarter of 2006 for USD 742 million (EUR 625 million at the exchange rate on the acquisition date), generating goodwill of USD 114 million (EUR 96 million). In fiscal year 2007, following the valuation of the interest in Island Finance, the value of the goodwill was adjusted by EUR 14 million.
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ABBEY In June 2006, Abbey entered into an agreement with Resolution plc (“Resolution”) to sell its life insurance business to Resolution for EUR 5,340 million (GBP 3,600 million). The transaction did not give rise to any gains for the Group. The main insurance companies sold were Scottish Mutual Assurance plc, Scottish Provident Limited and Abbey National Life plc, as well as their subsidiaries Scottish Mutual International plc (Dublin) and Scottish Provident International Life Assurance Limited (Isle of Man), among others. SOVEREIGN BANCORP (“SOVEREIGN”) On May 31, 2006, Grupo Santander implemented the Investment Agreement announced in October 2005, whereby it acquired a 19.8% stake in the US bank Sovereign Bancorp, an entity based in Philadelphia (United States). Under the Agreement, the Group subscribed to a USD 1,931 million capital increase and purchased treasury shares amounting to approximately USD 464 million. In both cases, the price was USD 27 dollars per share, giving rise to a total investment of USD 2,395 million (approximately EUR 1,883 million) and goodwill amounting to USD 760 million. The funds raised by the capital increase were used by Sovereign to finance a portion of the purchase price of Independence Community Bank Corp. for USD 3,600 million. The Board of Directors of Sovereign appointed three representatives of Santander as members of its Board. Sovereign’s Chief Executive Officer as of such date was appointed as a Director of Santander. In 2007, Sovereign’s Board of Directors appointed a new Chief Executive Officer, following which the former Chief Executive Officer resigned from Santander’s Board of Directors. There is currently no Sovereign representative on Santander’s Board. Under this Agreement, the Group was entitled to increase its ownership interest to 24.99% through the purchase of shares in the market but, in the absence of express authorization from the shareholders of Sovereign acting at a general shareholders’ meeting, the shares purchased had to be deposited in a voting trust and the votes attaching thereto cast in the same proportion as the votes of Sovereign shareholders other than Santander and its shareholders. On May 3, 2007, the Sovereign shareholders approved an amendment to Sovereign’s Bylaws which, among other things, authorizes Santander to vote the shares held in the voting trust and any other Sovereign shares Santander may acquire in the future. Once the bylaw amendments had been approved by the shareholders acting at a general shareholders’ meeting, Santander and Sovereign terminated the voting trust, and the shares held therein were transferred to Santander. Since June 6, 2007, Santander is entitled to vote the 23,593,724 Sovereign shares held in the voting trust. The Investment Agreement provides that, except with the consent of Sovereign’s Board of Directors or through the procedures described below, Santander cannot increase its percentage interest to more than 24.99% until the end of the period established in the Investment Agreement (June 1, 2010, unless there is a tender offer by the Group or a third party before that date). The Investment Agreement gives Santander certain rights to acquire as many additional shares as it needs to maintain its interest at 24.99%.
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Since May 31, 2006, Sovereign has, in the ordinary course of its business and in order to accommodate the exercise of option plans of its employees, made several capital increases, which have had a dilutive effect on Santander’s interest. On certain occasions, Santander has purchased additional shares from Sovereign or on the open market in order to avoid or offset in part such dilutive effect. In this regard, in order to prevent the dilution of its interest, in May 2008 the Group invested USD 312 million (EUR 200 million) to participate in a capital increase made by Sovereign in the amount of USD 1,250 million. At December 31, 2007, the Group’s percentage interest in Sovereign stood at 24.43%. The acquisition cost of such percentage was EUR 2,300 million. In fiscal year 2007, following the valuation of the interest in Sovereign, the value of the interest was adjusted by EUR 1,053 million (see the section on impairment of interests in Chapter 20.3.1.) The Investment Agreement provides that until May 31, 2011, Santander will have the option to bid for all of Sovereign, subject to compliance with certain conditions and limitations agreed on by both parties. If Santander makes such an offer, the Board of Directors of Sovereign could resist it by means of a bidding process or competitive valuation procedure. Should it be determined through such procedures that there is no higher offer, the Board of Directors of Sovereign must accept such offer, taking into account the fact that, until May 31, 2009, any offer made by Santander must be made at a price of not less than $38 per share (the amount resulting from the adjustments to the figure of $40 per share established in the Investment Agreement to take account of the dilutive effect of a stock dividend paid by Sovereign). Even if the Board of Directors of Sovereign accepts the offer, Santander will not be permitted to complete the acquisition of Sovereign unless a majority of the shareholders, other than Santander itself, approve the acquisition by means of a vote at Sovereign’s general shareholders’ meeting. In addition, until May 31, 2011, Santander will have a pre-emptive right in any negotiation and may match any offer by third parties to acquire Sovereign. Lastly, with certain exceptions, Santander has agreed that it will not sell or otherwise dispose of the Sovereign shares until May 31, 2011. Santander has several options with respect to its investment in Sovereign. Such options allow it to: hold its investment indefinitely, elect to increase its interest in Sovereign to 100% or, subject to the conditions established in the Investment Agreement, sell or dispose of its interest. In June 2008, the Bank purchased Sovereign shares under a “Green Shoe” option for USD 43 million, bringing its interest at June 30 to 24.39%, with a value, pursuant to applicable laws and regulations and following the above-mentioned adjustment in value, of EUR 1,149 million. In October 2008, Santander reached an agreement with Sovereign for the acquisition of 100% of the said bank (see subsection 5.2.2. Principal ongoing investments. Acquisition of 75.65% of Sovereign Bancorp).
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UNIFIN S.P.A. (“UNIFIN”) In May 2006, the Group acquired 70% of the Italian consumer finance entity Unifin for EUR 44 million, generating goodwill of EUR 37 million. INMOBILIARIA URBIS, S.A. (“URBIS”) On July 27, 2006, Banesto and Construcciones Reyal, S.A.U. (“Reyal”) entered into an agreement whereby Reyal undertook to launch a tender offer for all the share capital of Urbis at a price of EUR 26 per share, contingent upon the acceptance of at least than 50.267% of the share capital of the entity, which was the percentage owned by Banesto and which it undertook to transfer to Reyal in its entirety. It further pledged not to accept competing offers. Upon completion of the terms stipulated in current regulations, on December 15, 2006, the National Securities Market Commission announced that the tender offer was valid, since it had been accepted by 96.40% of Urbis’ share capital. The transaction was definitively settled on December 21, 2006. The pre-tax gains for the Group amounted to EUR 1,218 million. DRIVE CONSUMER USA, INC. (“DRIVE”) (NOW SANTANDER CONSUMER USA, INC.) In September 2006, Santander Consumer reached an agreement to acquire 90% of Drive in the United States for USD 637 million in cash (approximately EUR 494 million), representing a multiple of 6.8 times estimated earnings for 2006. The transaction was completed in 2006, generating goodwill of USD 544 million (EUR 422 million). The agreement provides that the price paid by Santander could be increased by a maximum of USD 175 million (EUR 133 million at the exchange rate on December 31, 2006) if the company meets certain earnings targets in fiscal years 2007 and 2008. In July 2007, an agreement was reached to advance such payment in exchange for a reduction thereof from USD 175 million to USD 135 million (EUR 97 million) giving rise to additional goodwill equal to the amount paid (EUR 97 million). Drive is an automobile financing company whose business focuses on the “subprime” customer segment in the United States. It is based in Dallas (Texas) and has a presence in 35 states, with approximately 50% of its business concentrated in the states of Texas, California, Florida and Georgia. Drive has approximately 600 employees, and its products are distributed through more than 10,000 car dealers with which it has commercial agreements in place. Drive was formerly 64.5% owned by HBOS plc, the remaining 35.5% being owned by the management team. Following its acquisition by Santander, the theretofore Chairman and COO of Drive became the Chief Executive Officer, maintaining ownership of 9% of the company, upon which percentage there are certain put and call options which could enable Grupo Santander to acquire an additional 9% between 2009 and 2013 at prices linked to the company’s earning performance.
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COMPAÑÍA ESPAÑOLA DE PETRÓLEOS S.A. (“CEPSA”) Following the tender offer launched by the Bank in fiscal year 2003 for a maximum of 42,811,991 shares of Cepsa, such offer was accepted by 32,461,948 shares, representing an investment of EUR 909 million. Total, S.A. believed that the tender offer breached previously-executed shareholders’ agreements between it (or its subsidiary, Elf Aquitaine, S.A.- “Elf”) and the Bank in relation to Cepsa, and, accordingly, filed a request for arbitration with the Netherlands Court of Arbitration. On April 3, 2006, the parties were notified of the partial arbitration award rendered by the Arbitral Tribunal which, in the framework of the Netherlands Arbitration Institute, resolved the request for arbitration filed by Total, S.A. against the Bank. The Tribunal held that the shareholders’ agreements included in the agreements regarding Cepsa existing between the Bank and Total, S.A. (or its subsidiary, Elf) were rendered ineffective by application of the Third Interim Provision of Law 26/2003 of July 17. However, in the opinion of the Tribunal, the fact that the Bank launched the aforementioned tender offer without prior consultation with Total, S.A. caused an insurmountable disagreement between the two parties which, applying the portion of the agreements that was not rendered ineffective, entitled Total, S.A. to repurchase from the Bank 4.35% of Cepsa at the price specified in the agreements. The above-mentioned partial arbitration award also ordered the dissolution of Somaen-Dos, S.L. (Sociedad Unipersonal), whose sole corporate purpose was the holding of an interest in Cepsa, with a view to each shareholder recovering direct ownership of its respective Cepsa shares in accordance with the agreements between the Bank and Total S.A. (or its subsidiary, Elf). To such end, on August 2, 2006, Banco Santander, S.A. and Riyal, S.L. entered into two agreements with Elf Aquitaine, S.A. and Odival, S.A., on the one hand, and with Unión Fenosa, S.A., on the other, to enforce the partial award and separate the ownership interests that they each held in Cepsa through Somaen-Dos, S.L. On October 13, 2006, Elf received notice from the European Commission communicating the authorization of the concentration resulting from the acquisition by Elf of shares representing 4.35% of the share capital of CEPSA. Consequently, the Santander sold 11,650,893 CEPSA shares to Elf for EUR 53 million. Such sale gave rise to a loss of EUR 158 million, which was covered by a provision created for this purpose. BANCO SANTANDER CHILE In 2006, the Group placed 7.23% of the capital of Banco Santander Chile, in the amount of EUR 440 million, through a public offering registered with the US Securities and Exchange Commission, resulting in gross gains of EUR 270 million. MERGER At the Extraordinary General Shareholders’ Meeting of the Bank held on October 23, 2006, the shareholders approved the merger of Banco Santander S.A. (as the absorbing company) and Riyal S.L., Lodares Inversiones, S.A. Sociedad Unipersonal, Somaen-Dos, S.L. Sociedad Unipersonal, Gessinest Consulting, S.A. Sociedad Unipersonal and Carvasa Inversiones, S.A. Sociedad Unipersonal (as the merged companies) through the merger of the five latter companies into the
Chapter 5 – Page 11 former and the dissolution without liquidation of the five merged companies and the en bloc transfer of all of their assets to the Bank. Other holdings SAN PAOLO IMI, S.P.A In December 2006, the Group sold 89.9 million shares of San Paolo, representing 4.8% of its share capital, for EUR 1,585 million, generating a gain of EUR 705 million. For further information, see Intesa Sanpaolo in Chapter 5.2.1.I. of this document. ANTENA 3 TELEVISION On October 25, 2006, Santander published a material fact (hecho relevante) stating that Antena 3 de Televisión had announced a transaction whereby it would acquire a 10% interest held directly or indirectly by Grupo Santander. The transaction (for a price of EUR 400 million) generated a gain of EUR 294 million for the Group.
II) Most significant events at Group companies during fiscal year 2005: The following were the most significant events at Group companies in 2005: BANKIA BANK ASA (“BANKIA”) In March 2005, Santander Consumer Finance acquired 100% of the share capital of the Norwegian bank Bankia, at a cost of EUR 54 million, generating goodwill of EUR 45 million. Bankia and Elcon Finans AS (a company acquired in September 2004) were merged in 2005 to form Santander Consumer Bank AS. UNIÓN ELÉCTRICA FENOSA, S.A. (“UNIÓN FENOSA”) In September 2005, Grupo Santander agreed to sell to ACS Actividades de Construcción y Servicios, S.A. (ACS) shares of Unión Fenosa, S.A. representing 22.07% of its share capital, at a price of EUR 33 per share, totaling EUR 2,219 million. The sale resulted in gains of EUR 1,157 million.
Other holdings SHINSEI BANK, LTD. (“SHINSEI”) At the beginning of fiscal year 2005, the Group held a 7.4% stake in Shinsei. In the first quarter of 2005, the Group sold 2.7% of its stake for EUR 52 million, for a gain of EUR 49 million.
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THE ROYAL BANK OF SCOTLAND GROUP, PLC. (“RBS”) In fiscal year 2005, the Group sold its entire holding in RBS (2.57%) for EUR 2,007 million, with a consolidated gain of EUR 717 million. AUNA OPERADORES DE TELECOMUNICACIONES, S.A. (“AUNA”) In the first half of 2005, the Group increased its ownership interest in this company by 4.7% to 32.08%, at a cost of EUR 422 million. In November 2005, the Group sold part of its interest in Auna (27.07%) for EUR 2,141 million, producing gains of EUR 355 million. The Group’s holding in Auna as of December 31, 2005 stood at 5.01%. COMMERZBANK AG In fiscal year 2005, the Group progressively sold its holding in Commerzbank AG (3.38%) on the market. These transactions generated a EUR 24 million profit. Investment policies Grupo Santander will continue to respond to any business opportunities that may arise.
5.2.2. Principal ongoing investments. Since January 1, 2008, the following transactions are worthy of note.
CIUDAD FINANCIERA SANTANDER On September 12, 2008, Banco Santander formalized the sale of Ciudad Financiera Santander and the simultaneous leaseback thereof for a period of 40 years with the consortium headed by the British real estate investor Propinvest. The Bank also reserved a purchase option upon expiration of such period. The amount of the transaction is EUR 1,900 million, as originally provided for. Santander made a gain close to EUR 600 million from this sale, which is not included in third quarter earnings. With this transaction, Banco Santander concluded the process for the sale of the buildings used by it in Spain which began in 2007 within the framework of the acquisition of ABN AMRO. See Chapter 8.1. The total amount of the sales was EUR 4,434 million, with capital gains of approximately EUR 1,680 million. ASSET MANAGEMENT IN BRAZIL On March 12, 2008, Santander has purchased from Fortis, N.V. (“Fortis”) for EUR 209 million, the asset management activities of ABN AMRO in Brazil which had been acquired by Fortis as part of the purchase of ABN AMRO by the Consortium (RBS, Fortis and Santander), generating goodwill of EUR 184 million. This business was accounted for by the Group by the equity method until the third quarter of 2008; thereafter, it was fully consolidated by the Group.
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RBS’ CONSUMER FINANCE BUSINESS IN EUROPE In April 2008, Santander Consumer Finance reached a preliminary agreement to acquire the consumer finance business of the Royal Bank of Scotland (RBS) in continental Europe. The package includes its business in Germany, The Netherlands, Belgium and Austria. The acquisition will be made by Santander Consumer Holding GmbH and Santander Consumer Finance Germany GMBH.
The consumer finance unit of RBS in Europe (“RBS ECF”) has 861 employees serving 2.3 million customers in Germany, the Netherlands, Belgium and Austria. In 2007, its assets averaged EUR 2,200 million. RBS ECF provides installment sales directly and through its partners. It boasts a significant presence in the credit card business, in terms both of individual and corporate clients, and provides consumer finance through various distribution chains.
In the third quarter of 2008, the acquisition of the Royal Bank of Scotland (RBS) consumer finance business in Continental Europe was completed for EUR 336 million, and it is fully consolidated by the Group. The goodwill generated by the transaction has yet to be determined. The transaction has been financed with the liquidity generated by the Group in the ordinary course of its business.
GENERAL ELECTRIC MONEY AND INTERBANCA On March 27, 2008, Banco Santander and GE, through its units GE Money and GE Commercial Finance, reached a preliminary agreement on an exchange of assets valued at EUR 1,000 million between both companies. Such preliminary agreement provided for the purchase by Banco Santander of the GE Money units in Germany, Finland and Austria as well as of its credit card and car finance units in the United Kingdom. At the same time, GE Commercial Finance would purchase Interbanca, an Italian wholesale bank which Banco Santander received in the distribution of the assets of ABN AMRO agreed following the purchase of such institution together with Royal Bank of Scotland and Fortis. Banco Santander plans to merge such GE Money units, which have aggregate loans of EUR 9,000 million, into Santander Consumer Finance and Santander Cards. Interbanca would become part of GE Commercial Finance. On June 2, 2008, the Bank announced that it had reached a definitive agreement with GE. The agreed base price for both transactions is EUR 1,000 million each, subject to various adjustments. These transactions are expected to be closed in the fourth quarter of 2008 or in the first quarter of 2009.
RECOMMENDED ACQUISITION OF ALLIANCE & LEICESTER
On July 14, Banco Santander, S.A. and Alliance & Leicester reached an agreement on the terms and conditions of a recommended acquisition by Banco Santander of the entire issued and unissued share capital of Alliance & Leicester.
Pursuant to such terms, the shareholders of Alliance & Leicester have received one Banco Santander share for every three shares of Alliance & Leicester. Prior to the exchange date, Alliance & Leicester agreed to pay (and did pay) an interim cash dividend of 18 pence per share. In order to carry out the exchange, the
Chapter 5 – Page 14 shareholders at the Extraordinary General Shareholders’ Meeting of the Bank held on September 22, 2008 agreed to increase the Bank’s capital by a nominal amount of up to EUR 71,688,495, by means of the issuance and flotation of a maximum of 143,376,990 ordinary shares with a par value of EUR 0.50 each.
Basic features of the acquisition:
– At the time of the announcement, each Alliance & Leicester share was valued at 299 pence and the entire issued share capital was valued at approximately GBP 1,259 million (EUR 1,579 million), representing a premium of approximately 36.4% on the closing price of the shares on the London Stock Exchange on July 11, 2008. Taking into account the above-mentioned interim divided, such premium is approximately 44.6% above such closing price.
– It allows for the integration of the complementary business units of Alliance & Leicester and Abbey, strengthening the competitive positioning of the products and services offered by the Group, thus benefiting its customers. It is to be expected that the combined group will also reap the benefits of greater efficiency and that a reduction in the financing cost of Alliance & Leicester from its current high levels will be possible over time.
– It will increase the critical mass of the Group’s business in the British market as part of its vertical strategy.
– In-market cost synergies through its presence in the United Kingdom, estimated at over GBP 180 million per year (before taxes) by the end of 2011.
– Geographical complementation of both distribution networks (Alliance & Leicester has a large presence in the Midlands and Abbey in the London area).
– The expansion of Abbey in the SME and commercial market will be accelerated by 2-3 years.
– This transaction meets Grupo Santander financial requirements. It is expected to be accretive as from 2009 and a 19% ROI is expected by 2011. These estimates do not guarantee that Santander’s EPS will necessarily equal or exceed that of prior years.
The acquisition was implemented by means of a scheme of arrangement and was approved by the shareholders of Banco Santander, S.A. (as regards the capital increase) and Alliance & Leicester plc. In addition, the scheme of arrangement implementing the acquisition was sanctioned by the appropriate British Court, and the required authorizations of the Financial Services Authority and the Bank of Spain were secured.
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The acquisition was completed on October 10, 2008. On that date, 140,950,944 new shares of Banco Santander with a par value of 0.50 euro each were issued, at a premium of EUR 10.73 per share. The consideration for such capital increase consists of 422,852,832 Alliance & Leicester plc shares, with a par value of GBP 0.50 each, representing its entire issued ordinary share capital. The percentage of the increased share capital of the Bank represented by the new shares is approximately 2.2%. The new shares have traded on Spain’s Electronic Trading System (Continuous Market) since October 14, 2008.
The Group has not yet concluded the calculation of the goodwill that would be generated by the transaction.
Banco Santander, supporting the British Government’s plan to buttress the banking industry and in line with the estimates made by Banco Santander’s directors on the occasion of the purchase of A&L, has made a capital injection of GBP 1,000 million (approximately EUR 1,260 million) into Abbey to strengthen it. Such injection will improve capital ratios by approximately 1.25%. Santander does not intend to avail itself of the initiative providing for recapitalization with Government funds. The transaction was financed with the liquidity generated by the Group in the ordinary course of its business.
ACQUISITION OF THE DISTRIBUTION CHANNELS AND RETAIL DEPOSITS OF BRADFORD & BINGLEY
On September 29, 2008, following the announcement by the British Treasury of the transfer of Bradford & Bingley plc (B&B) to State ownership, the Group announced that the retail deposits, network of offices and the related employees will be acquired by Abbey National plc in accordance with the provisions of the Banking (Special Provisions) Act 2008.
According to the statements of the British Treasury, all customer receivables and treasury assets of B&B, including GBP 41,000 million in mortgage assets, are transferred to State ownership.
The following are transferred to Abbey:
• GBP 20,000 million of retail deposits, with 2.7 million customers;
• Direct distribution channels, including 197 commercial offices, 141 agencies (distribution points within third-party premises) and the related employees.
The acquisition price was GBP 612 million. The transaction is expected to be financed with the cash generated by the Group in the ordinary course of its business.
The transfer of retail customers and their deposits further strengthens Abbey’s customer deposit base and franchise. It will also allow Santander to reach a greater critical mass in the United Kingdom by increasing its distribution capacity.
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The combined business of Abbey, Alliance & Leicester (A&L) and B&B will have 1,286 offices with a good geographical distribution in the United Kingdom. It is also expected that, following completion of the transfer, Santander’s retail deposit market share will be approximately 10%.1 The customer base of the combined entity will total 24 million.
ACQUISITION OF 75.65% OF SOVEREIGN BANCORP
Banco Santander, S.A. and Sovereign Bancorp Inc., the parent company of Sovereign Bank, announced on October 13, 2008 that Banco Santander is to acquire Sovereign through a share swap. As of the date of the announcement, Santander held 24.35% of the outstanding ordinary shares of Sovereign. Sovereign’s Capital and Financing Committee, composed of independent directors, asked Santander to consider purchasing the 75.65% of the company it does not yet own. Such Committee evaluated the transaction and recommended it to the Board.
Under the terms of the definitive agreement for the transaction, which was unanimously approved by the directors of Sovereign who do not belong to Santander and by Santander’s Executive Committee, Sovereign shareholders will receive 0.2924 American Depository Shares (ADSs) of Banco Santander for every 3.42 shares of Sovereign (or 1 share of Banco Santander for every 3.42 shares of Sovereign). The transaction has an added value of approximately USD 1,900 million (EUR 1,400 million), or USD 3.81 per share, according to the closing price of Santander’s ADSs on Friday, October 10, 2008. The transaction complies with acquisition standards, both strategically by significantly enhancing the Group’s geographical diversification, and economically, with estimated net profits for Sovereign of USD 750 million in 2011.
The transaction is subject to the customary conditions for closing, such as the requisite regulatory banking approvals in the United States and Spain and the approval of the shareholders of both companies. Relational Investors, LLC has agreed to vote its 8.9% shareholding in Sovereign in favor of the transaction. In addition, all the directors who do not belong to Santander have agreed to vote their shares in favor of the transaction. Banco Santander will call an Extraordinary General Shareholders’ Meeting to approve the capital increase of approximately 147 million new shares or 2% of the capital of Santander. The transaction is expected close in the first quarter of 2009.
1 Deposit market share based on the combination of Abbey, A&L and B&B, subject to the transfer of B&B retail deposits. Chapter 5 – Page 17
SALE OF PORTERBROOK LEASING COMPANY Abbey National plc (“Abbey”) has reached an agreement to sell 100% of Porterbrook Leasing Company to a consortium of investors that includes Antin Intrastructure Partners (the infrastructure fund sponsored by BNP Paribas), Deutsche Bank and Lloyds TSB. The sale price has not been made public. The impact of the transaction on the Group is immaterial, given that it will simply permit a reduction in financing in the amount of approximately GBP 1,000 million. The transaction is subject to obtaining the appropriate regulatory authorizations and is expected to be completed before the end of the year.
5.2.3. Future investments regarding which firm commitments have been made. No material commitments have been acquired other than those described in Chapter 5.2.2.
Chapter 5 – Page 18
CHAPTER 6
6. COMPANY DESCRIPTION 6.1. PRINCIPAL ACTIVITIES. 6.1.1 Description of the Group’s principal activities.
In fiscal year 2007, Grupo Santander had an attributable profit of EUR 9,060 million, which was EUR 1,464 million and 19.3% higher than the EUR 7,596 million earned in 2006.
In both fiscal years, before net gains and extraordinary allowances (EUR 950 million in 2007 and EUR 1,014 million in 2006), the attributable profit increased 23.2% to EUR 8,111 million. This figure best reflects the Group’s profit generating ability and, accordingly, it is the figure that should be used as a baseline for future expectations.
The results for 2007 include a net impact from the incorporation of ABN in the amount of EUR 60 million, consisting of a positive impact of EUR 141 million due to Banco Real’s 2-month profits and financing costs (after taxes) of EUR 81 million (with costs amounting to EUR 13,000 million since the date of purchase), with no profits stemming from Antonveneta.
The gains obtained during fiscal year 2007 from the sale of the interest in Intesa Sanpaolo and the real properties in Spain (EUR 566 million and EUR 1,620 million), the amount yielded by the divestment of the pension business in Latin America (EUR 831 million) and by the sale of the stake in Banco Portugués do Investimento (EUR 107 million) were used to set up a provision for the stake in Sovereign (EUR 1,053 million), a provision for intangible assets (EUR 542 million), special allowances for pension and retirement plans (EUR 317 million) and other allowances and provisions (EUR 117 million). Accordingly, the gross gains obtained in 2007 (EUR 3,124 million), after the aforementioned allocations and after taxes and minority interests, contributed EUR 950 million to the profits attributed to the Group.
In addition, and in line with the accounting standards (IFRS), the results from businesses that were discontinued in 2007 (pension businesses in Latin America) and in 2006 (Abbey’s life insurance business, Urbis, Bolivia and pension businesses in Peru), which were fully consolidated, are now included as net amounts in the line for discontinued operations. This allows for improved monitoring of how well the Group’s recurring businesses are being managed.
In fiscal year 2007, Grupo Santander maintained the general standards applied in 2006, with two exceptions:
• The Global Customer Relationship Model increased its perimeter with the addition of 121 new customers, mostly from Latin America. This causes no change to geographic segments, but it does change the figures for Retail Banking (from which they are taken) and Global Wholesale Banking (to which they are added).
• Some adjustments have been made to the results of Retail Banking and Asset Management and Insurance, for two reasons:
Chapter 6 – Page 1
¾ At Abbey, the distribution of income between Retail Banking and Asset Management and Insurance has been modified in order to bring it into line with the Group’s corporate standards. This entails an increase at Retail Banking and a reduction at Asset Management and Insurance, but does not alter the total for Abbey.
¾ The business generated by the Group’s insurance brokerage is no longer reflected in Retail Banking and is now included within Insurance. This change in management is due to recent regulatory changes and to a search for efficiency in distribution.
Neither of these two changes is significant for the Group, and they do not alter either the Group’s figures or those of the principal (geographic) segments. The data for 2006 has been restated to reflect the changes in the affected areas.
Composition of the business:
The current structure of the operating business areas is discussed on two levels:
I. Principal (or geographic) level. The activities of the Group’s operating units are segmented by geographic areas. This coincides with the Group’s first level of management and reflects our positioning in the world’s three main currency areas. The following segments are reported:
• Continental Europe. This covers all retail banking business (including the specialized private banking company, Banif), wholesale banking, and asset management and insurance conducted in Europe, with the exception of Abbey. Given the importance of some of the units included here, financial information for the Santander Network, Banesto, Santander Consumer Finance (including Drive) and Portugal is also set out.
• United Kingdom (Abbey). This solely covers all of Abbey’s business, focused mainly on retail banking in the United Kingdom.
• Latin America. This embraces all the Group’s financial activities conducted via its banks and subsidiaries. It also includes the specialized units of Santander Private Banking, as an independent, globally managed unit, and the New York business. Because of their special importance, Brazil, Mexico, and Chile are presented separately.
II. Secondary (or business) level. This segments the activity of the operating units by type of business. The following segments are reported:
• Retail Banking. This covers all customer banking business (except Corporate Banking, which is managed through the Global Customer Relationship Model). Because of their relative importance, the main geographical areas (Continental Europe, UK-Abbey and Latin America) and the main countries are presented separately. The results of the hedging positions held in each country are also included, as taken from the assets and liabilities management committee in each country.
Chapter 6 – Page 2
• Global Wholesale Banking. This business reflects the revenues from the Global Corporate Banking business, investment banking and markets worldwide, including all treasuries managed globally, both for trading as well as distribution to customers (after the appropriate distribution to Retail Banking customers in each case), and the equities business.
• Asset Management and Insurance. This includes contributions to the Group for the design and management of investment funds and pension and insurance businesses of the various units. Accordingly, except for Latin American pension fund management companies, which have their own distribution networks, the Group uses and remunerates the distribution networks for the sale of these products through distribution agreements. This means that the result recorded in this business is net (i.e., deducting distribution costs represented by such remuneration from gross income).
In addition to these operating units, the sum of which would cover all activity both by geographic area and by business, the Group also maintains the area of Financial Management and Equity Stakes. This area includes the centralized activities relating to equity stakes in industrial and financial companies, financial management of the structural exchange rate position and of the parent Bank’s structural interest rate risk, as well as management of liquidity and of shareholders’ equity through issues and securitizations.
As the Group’s holding entity, it handles all of capital and reserves and allocations of capital and liquidity. It incorporates goodwill impairment and corporate and institutional expenses arising from the Group’s operations as provisions.
Financial statements for each operating segment are prepared based on an aggregation of the units that comprise the Group. The information that is the basis for these statements comes from both accounting data from the individual legal units that make up each segment and the information available from the management information systems. In each case, the financial statements are homogenized to conform to the Group’s accounting standards.
Description of the business Set forth below are the Balance Sheet and Income Statements for the two levels into which the business areas are organized, and the income statement net of extraordinary gains and allowances, for the principal level (geographic areas) to help better understand the business.
Chapter 6 – Page 3
Millions of Euros 2007 2006 2005 Financial Financial Management Financial Management Balance Sheet Continental and Continental Management and Continental Latin and (Summary) Europe Abbey Latin America Equity Stakes Total Europe Abbey Latin America Equity Stakes Total Europe Abbey America Equity Stakes Total
Loans and credits 310,618 184,086 68,854 1,919 565,477 271,687 190,512 60,172 975 523,346 210,299 171,796 52,919 815 435,829
Trading portfolio (excluding loans) 44,846 53,782 22,845 1,328 122,801 33,831 61,507 27,846 2,028 125,212 26,315 64,014 25,844 1,276 117,449
Available-for-sale financial assets 10,149 44 12,628 21,528 44,349 13,126 23 17,943 7,606 38,698 12,604 18 16,308 45,015 73,945
Due to credit institutions 53,205 19,810 11,146 25,429 109,590 67,061 18,185 20,311 22,956 128,513 69,621 13,070 24,436 15,718 122,845
Intangible assets and property and equipment 5,373 4,685 1,805 (202) 11,661 4,558 5,059 1,695 1,243 12,555 4,219 5,197 1,392 1,396 12,204
Other assets 25,876 9,458 24,707 170,154 230,195 18,583 8,691 16,842 126,028 170,144 15,709 47,420 17,194 94,342 174,665
Total Assets / Liabilities 450,067 271,865 141,985 220,156 1,084,073 408,846 283,977 144,809 160,836 998,468 338,767 301,515 138,093 158,562 936,937
Customer deposits 149,167 122,514 82,054 1,969 355,704 140,231 115,194 75,301 497 331,223 127,355 110,776 65,707 1,927 305,765
Marketable debt securities 70,344 76,055 5,039 82,196 233,634 47,633 72,858 5,258 78,320 204,069 27,011 62,462 6,213 53,154 148,840
Subordinated liabilities 2,379 7,876 2,540 22,875 35,670 2,362 9,430 2,383 16,248 30,423 2,241 11,428 1,130 13,964 28,763
Insurance liabilities 10,907 6 2,121 - 13,034 8,547 71 2,086 - 10,704 6,414 36,521 1,737 - 44,672
Due to credit institutions 66,027 38,688 19,017 47,834 171,566 89,016 51,020 32,403 8,935 181,374 90,341 40,761 42,208 38,385 211,695
Other liabilities 130,970 23,549 22,626 18,326 195,471 103,090 32,076 19,530 21,137 175,833 70,527 37,259 13,033 18,907 139,726
Shareholders’ equity 20,274 3,177 8,588 46,955 78,994 17,967 3,328 7,847 35,700 64,842 14,878 2,307 8,066 32,225 57,476
Off-balance-sheet funds 92,761 10,225 47,991 - 150,977 102,465 8,307 56,352 - 167,124 97,141 6,000 49,705 - 152,846
Total managed funds 542,829 282,090 189,976 220,155 1,235,050 511,311 292,284 201,160 160,837 1,165,592 435,908 307,514 187,799 158,562 1,089,783
Chapter 6 – Page 4
Millions of Euros 2007 2006 2005 Financial Financial Financial Management Management Management Income Statement Continental and Continental and Continental and (Summary) Europe Abbey Latin America Equity Stakes Total Europe Abbey Latin America Equity Stakes Total Europe Abbey Latin America Equity Stakes Total
NET INTEREST INCOME 7,894 2,335 6,654 (1,588) 15,295 6,206 2,108 5,272 (1,106) 12,480 5,366 2,083 3,950 (740) 10,659 Income from entities accounted for by equity method 9 2 4 427 442 63 7 411427 26 2 7 584 619 Net fees and commissions 4,137 1,007 2,866 30 8,040 3,653 1,025 2,357 (11) 7,024 3,291 947 1,842 (19) 6,061 Insurance activity 148 - 171 - 319 137 - 120 (4) 253 115 - 84 3 202 Gains on financial transactions and exchange differences 732 436 691 1,113 2,972 708 424 604 413 2,149 505 345 733 (48) 1,535 GROSS OPERATING INCOME 12,920 3,780 10,386 (18) 27,068 10,710 3,560 8,360 (297) 22,333 9,303 3,377 6,616 (220) 19,076 Income from non-financial services (net expenses) and other operating income 30 51 (141) 15 (45) 39 42 (118) (33) (70) 55 36 (89) (26) (24) General administrative expenses: Personnel (3,014) (1,037) (2,222) (236) (6,509) (2,684) (1,062) (1,975) (204) (5,925) (2,510) (1,119) (1,742) (183) (5,554) Other administrative expenses (1,513) (780) (1,867) (270) (4,430) (1,272) (815) (1,726) (160) (3,973) (1,154) (888) (1,507) (170) (3,719) Depreciation and amortization (559) (102) (348) (259) (1,268) (523) (105) (305) (214) (1,147) (489) (117) (334) (74) (1,014) NET OPERATING INCOME 7,864 1,912 5,808 (768) 14,816 6,270 1,620 4,236 (908) 11,218 5,205 1,289 2,944 (673) 8,765 Impairment losses on assets (1,580) (312) (1,660) (1,527) (5,079) (1,355) (387) (886) 77 (2,551) (977) (318) (433) (74) (1,802) Other income (expenses) 39 22 (368) 1,745 1,438 (245) - (230) 803 328 (18) 76 (213) 853 698 PROFIT BEFORE TAX 6,323 1,622 3,780 (550) 11,175 4,670 1,233 3,120 (28) 8,995 4,210 1,047 2,298 106 7,661 PROFIT FROM CONTINUING OPERATIONS 4,546 1,201 2,958 134 8,839 3,269 889 2,451 132 6,741 3,020 725 1,876 798 6,419 Net profit from discontinued operations - - 112 685 797 1,147 114 124 120 1,505 111 86 134 - 331 CONSOLIDATED PROFIT FOR THE YEAR 4,546 1,201 3,070 819 9,636 4,416 1,003 2,575 252 8,246 3,131 811 2,010 798 6,750 ATTRIBUTABLE PROFIT TO THE GROUP 4,439 1,201 2,666 754 9,060 4,144 1,003 2,287 162 7,596 2,980 811 1,779 650 6,220
Chapter 6 – Page 5
For the secondary level (or business level), the summarized balance sheet and income statement follow:
Millions of Euros 2007 2006 2005 Asset Financial Asset Financial Financial Retail Global Management Management Global Management Management Global Asset Managemen Income Statement Banking Wholesale and and Equity Retail Wholesale and and Equity Retail Wholesale Management t and Equity (Summary) Banking Insurance Stakes Total Banking Banking Insurance Stakes Total Banking Banking and Insurance Stakes Total
NET INTEREST INCOME 15,339 1,492 52(1,588) 15,295 12,310 1,241 35 (1,106) 12,480 10,640 724 35 (740) 10,659 Share of results of entities accounted for using the equity method 15 - - 427 442 16 - - 411 427 35 - - 584 619 Net fees and commissions 6,668 919 423 30 8,040 5,966 646 423 (11) 7,024 5,196 488 396 (19) 6,061 Insurance activity - - 319 - 319 - - 257 (4) 253 --1993 202 Gains on financial transactions and exchange differences 1,349 491 19 1,113 2,972 1,042 690 4 413 2,149 927 654 2 (48) 1,535 GROSS OPERATING INCOME 23,371 2,902 813 (18) 27,068 19,334 2,577 719 (297) 22,333 16,798 1,866 632 (220) 19,076 Income from non-financial services (net expenses) and other operating income (30) (29) (1)15 (45) (4) (33) - (33) (70) 25 (24) 1 (26) (24) General administrative expenses- Personnel (5,603) (542) (128) (236) (6,509) (5,165) (447) (109) (204) (5,925) (4,907) (350) (114) (183) (5,554) Other administrative expenses (3,737) (310) (113) (270) (4,430) (3,455) (252) (106) (160) (3,973) (3,219) (219) (111) (170) (3,719) Depreciation and amortization (899) (91) (19) (259) (1,268) (848) (68) (17) (214) (1,147) (868) (59) (13) (74) (1,014) NET OPERATING INCOME 13,102 1,930 552 (768) 14,816 9,862 1,777 487 (908) 11,218 7,829 1,214 395 (673) 8,765 Impairment losses on assets (3,488) (63) (1) (1,527) (5,079) (2,324) (304) - 77 (2,551) (1,659) (69) - (74) (1,802) Other income (expenses) (256) (35) (16) 1,745 1,438 (412) (48) (15) 803 328 (176) 12 9 853 698 PROFIT BEFORE TAX 9,358 1,832 535 (550) 11,175 7,126 1,425 472 (28) 8,995 5,994 1,157 404 106 7,661
Other aggregates: Total assets 678,867 166,979 18,071 220,156 1,084,073 668,960 153,005 15,667 160,836 998,468 624,040 145,163 9,172 158,562 936,937 Loans and credits 510,561 52,975 22 1,919 565,477 474,253 47,948 171 974 523,346 404,656 30,163 194 816 435,829 Customer deposits 308,652 45,082 1 1,969 355,704 288,533 42,194 - 496 331,223 268,225 35,592 21 1,927 305,765
Chapter 6 – Page 6
Income Statement Net of Capital Gains and Extraordinary Allowances, for the Main Level: Millions of Euros 2007 2006 2005 Financial Financial Financial United United United Continental Management Continental Management Continental Management TOTAL Kingdom Latin America TOTAL Kingdom Latin America TOTAL Kingdom Latin America Europe and Equity Europe and Equity Europe and Equity (Abbey) (Abbey) (Abbey) GEOGRAPHIC AREAS Stakes Stakes Stakes Income statement (Net of extraordinary income)
Net interest income 15,295 7,849 2,335 6,654 (1,588) 12,488 6,206 2,108 5,281 (1,106) 10,669 5,366 2,083 3,960 (739) Share of results from entities accounted for by the equity 441 9 2 4 427 427 6 3 7 411 619 26 2 7 584 method Net fees and commissions 8,040 4,137 1,007 2,866 30 7,223 3,653 1,026 2,556 (11) 6,256 3,291 947 2,037 (19) Insurance activity 319 148 0 171 - 298 137 0 165 (4) 227 115 0 109 2 Commercial revenue 24,096 12,188 3,345 9,694 (1,131) 20,436 10,002 3,137 8,008 (711) 17,772 8,798 3,033 6,113 (171) Gains (losses) on financial 2,998 655 436 691 1,217 2,180 708 423 634 414 1,562 505 345 759 (48) transactions Gross operating income 27,095 12,843 3,780 10,386 86 22,615 10,710 3,560 8,642 (297) 19,333 9,302 3,378 6,872 (219) Income from non-financial services (net) and other (45) 30 51 (141) 15 (71) 39 42 (120) (32) (24) 55 36 (90) (25) operating income Operating expenses (12,208) (5,087) (1,918) (4,437) (765) (11,176) (4,479) (1,983) (4,135) (579) (10,400) (4,153) (2,124) (3,694) (428) General administrative (10,940) (4,529) (1,816) (4,089) (506) (10,025) (3,957) (1,877) (3,826) (365) (9,382) (3,663) (2,007) (3,358) (354) expenses Personnel (6,510) (3,015) (1,037) (2,222) (236) (6,004) (2,685) (1,062) (2,052) (204) (5,619) (2,510) (1,119) (1,807) (183) Other administrative (4,430) (1,513) (780) (1,867) (270) (4,021) (1,272) (816) (1,774) (161) (3,763) (1,154) (888) (1,551) (171) expenses Depreciation and (1,268) (559) (102) (348) (259) (1,151) (522) (105) (309) (214) (1,017) (490) (117) (336) (74) amortization Net operating income 14,842 7,786 1,1913 5,808 (665) 11,369 6,270 1,620 4,387 (908) 8,909 5,204 1,290 3,088 (672) Net loan loss provisions (3,470) (1,524) (312) (1,619) (14) (2,467) (1,312) (387) (859) 91 (1,615) (950) (318) (295) (52) Other income (462) 40 22 (408) (116) (125) (31) (0) (253) 159 (457) (45) 76 (357) (131) Pretax profit (loss) 10,910 6,302 1,622 3,781 (759) 8,776 4,927 1,232 3,275 (658) 6,837 4,209 1,048 2,436 (855) (ordinary) Income tax (2,392) (1,773) (421) (822) 624 (1,986) (1,416) (343) (708) 481 (1,320) (1,189) (323) (454) 646 Profit from continuing 8,518 4,529 1,201 2,958 (171) 6,790 3,511 889 2,566 (177) 5,517 3,020 725 1,982 (210) operations Profit from discontinued 112 - - 112 0 354 143 114 9 89 225 110 86 28 — operations (net) Consolidated earnings for 8,631 4,529 1,201 3,071 (171) 7,144 3,654 1,003 2,575 (88) 5,742 3,130 811 2,010 (210) the fiscal year (ordinary) Profit attributed to minority 520 107 - 404 9 562 183 — 289 90 530 151 — 230 148 interests Profit attributed to the 8,111 4,423 1,201 2,666 (180) 6,582 3,471 1,003 2,287 (178) 5,212 2,979 811 1,779 (358) Group (ordinary) Net of extraordinary gains and 950 16 - - 934 1,014 674 — — 340 1,008 — — — 1,008 allowances Profits attributed to the 9,060 4,439 1,201 2,666 754 7,596 4,144 1,003 2,287 162 6,220 2,979 811 1,779 650 Group Chapter 6 – Page 7
Description of activities for the principal area and its principal units: I) CONTINENTAL EUROPE: This segment includes all of the activities performed in the retail banking, wholesale banking, and asset management and insurance businesses in this region.
In 2007, this segment earned EUR 4,439 million in attributable profit, including EUR 16 million of the net amount of gains and extraordinary allowances in Portugal (in 2006, gains amounting to EUR 674 million were included from the sale of Urbis). In recurring terms, i.e., before gains in any year, the attributable profit came to EUR 4,423 million in 2007 (53% of the operating areas), a 27.4% increase over 2006. Without considering Drive, which was included in the results of Santander Consumer Finance in 2007, the increase was 24.3%.
This increase was due to a rise in commercial revenues and a selective control of costs. As a result, the differential of revenue and cost growth rates was 6.3 p.p., and the efficiency ratio stood at 38.8%, a 2 p.p. improvement over 2006. All large units improved.
In addition, there was a diversified growth in profits. The four large commercial units posted two-digit increases, and the global areas as a whole also posted a remarkable growth rate, with Global Wholesale Banking being especially noteworthy among them.
Set forth below are the income statement, balance sheet and ratios for the principal units from this area:
Continental Europe. Principal units Millions of Euros Santander Branch Network Banesto 2007 2006 Var. (%) 2005 2007 2006 Var. (%) 2005 Income statement Net interest income 2,876 2,363 21.7 2,082 1,455 1,235 17.9 1,112 Share of results from entities accounted for — — — — 1 (0) — 1 by the equity method Net fees and commissions 1,654 1,591 3.9 1,547 626 587 6.7 547 Insurance activity — — — — 53 42 25.6 29 Commercial revenue 4,529 3,954 14.5 3,629 2,135 1,863 14.6 1,689 Gains (losses) on financial transactions 218 228 (4.4) 197 147 124 18.3 102 Gross operating income 4,747 4,182 13.5 3,826 2,282 1,987 14.8 1,791 Income from non-financial services (net) and 3 11 (69.2) 4 9 10 (13.0) 20 other operating income General administrative expenses (1,655) (1,531) 8.1 (1,493) (861) (820) 5.0 (797) Personnel (1,232) (1,155) 6.6 (1,134) (659) (621) 6.0 (591) Other administrative expenses (423) (376) 12.6 (359) (203) (199) 1.8 (206) Depreciation and amortization (232) (232) (0.1) (236) (117) (116) 0.2 (102) Net operating income 2,863 2,429 17.9 2,101 1,312 1,060 23.7 912 Net loan loss provisions (343) (337) 1.6 (305) (233) (190) 22.9 (151) Other income (expenses) (11) (8) 37.1 (11) 5 22 (79.5) 5 Profit before tax 2,509 2,083 20.4 1,785 1,083 893 21.3 766 Profit from continuing operations 1,806 1,506 20.0 1,285 754 608 24.2 523 Net profit from discontinued operations — — — — — 149 (100.0) — Consolidated profit for the year 1,806 1,506 20.0 1,285 754 757 (0.4) 647 Profits attributed to the Group 1,806 1505 19.9 1,285 668 585 14.2 498 Net of extraordinary gains and allowances — — — — — 674 (100.0) — Profits attributed to the Group 1,806 1,505 19.9 1,285 668 1,259 (46.9) 498
Chapter 6 – Page 8
Continental Europe. Principal units Millions of Euros Santander Consumer Finance Portugal 2007 2006 Var. (%) 2005 2007 2006 Var. (%) 2005 Income Statement Net interest income 2,085 1,379 51.2 1,179 718 660 8.8 641 Share of results from entities accounted for by the equity method 8 6 33.2 5 — — — — Net fees and commissions 538 393 37.0 342 364 366 (0.7) 303 Insurance activity — — — — 25 18 38.6 22 Commercial revenue 2,631 1,777 48.0 1,526 1,107 1,045 6.0 966 Gains (losses) on financial transactions 7 48 (84.7) 58 107 58 85.1 29 Gross operating income 2,638 1,825 44.5 1,584 1,214 1,103 10.1 995 Income from non-financial services (net) and other operating income 31 30 4.1 38 (8) (11) (23.1) (5) General administrative expenses (736) (592) 24.2 (518) (464) (458) 1.4 (433) Personnel (345) (271) 27.1 (243) (300) (294) 2.2 (278) Other administrative expenses (391) (321) 21.8 (275) (164) (164) 0.1 (155) Depreciation and amortization (67) (62) 7.3 (50) (70) (64) 9.2 (58) Net operating income 1,867 1,201 55.5 1,054 672 570 17.8 498 Net loan loss provisions (842) (397) 112.0 (371) (21) (41) (47.7) (53) Other income 26 6 347.4 (6) (21) (7) 184.6 (19) Profit before tax 1,051 810 29.9 676 630 522 20.6 427 Profit from continuing operations 737 575 28.3 468 512 424 20.8 347 Net profit from discontinued operations — — — — — — — — Consolidated profit for the year 737 575 28.3 468 512 424 20.8 347 Profits attributed to the Group 719 565 27.1 468 511 423 20.8 345 Net of extraordinary gains and allowances — — — — 16 — — — Profits attributed to the Group 719 565 27.1 468 527 423 24.6 345
(*).- Includes all of the figures from this item in the balance sheet.
Santander Branch Network Banesto
Balance sheet 2007 2006 Var. (%) 2005 2007 2006 Var. (%) 2005 Loans and credits* 116,798 105,476 10.7 88,659 74,034 61,069 21.2 47,851 Trading portfolio (excluding loans) — — — — 4,563 5,191 (12.1) 5,595 Available-for-sale financial assets 9 3 201.2 3 5,024 9,339 (46.2) 8,882 Due to credit institutions* 136 116 17.2 103 19,668 21,113 (6.8) 18,447 Intangible assets and property and equipment 2,191 2,191 0.0 1,675 1,342 999 34.3 1,568 Other assets 646 661 (2.1) 537 5,440 5,619 (3.2) 5,864 Total Assets / Liabilities and net worth 119,780 108,447 10.5 90,977 110,071 103,330 6.5 88,208 Customer deposits* 50,195 51,595 (2.7) 44,122 51,894 44,264 17.2 34,865 Marketable debt securities* — — — 2 28,568 23,882 19.6 17,860 Subordinated liabilities — — — — 1,470 1,414 4.0 1,620 Insurance liabilities — — — — — 1,230 (100.0) 1,832 Due to credit institutions* 259 86 201.6 29 15,483 19,947 (22.4) 20,539 Other liabilities 61,028 49,274 23.9 40,447 8,953 9,859 (9.2) 8,980 Shareholders’ equity 8,297 7,492 10.8 6,377 3,704 2,734 35.5 2,511 Other customer funds under management 51,288 55,650 (7.8) 53,724 14,103 16,866 (16.5) 16,211 Mutual funds 40,840 47,623 (14.2) 47,952 10,605 12,988 (18.3) 12,269 Pension funds 6,802 6,416 6.0 5,551 1,626 1,611 1.0 1,513 Managed portfolios — — — — 680 1,004 (32.3) 1,272 Deposit insurance 3,646 1,611 126.3 220 1,191 1,284 (7.2) 1,157 Customer funds under management 101,483 107,245 (5.4) 97,627 96,034 86,446 11.1 71,231 Total managed funds 171,068 164,097 (4.2) 144,701 124,174 120,216 3.3 104,419
Chapter 6 – Page 9
Santander Branch Network Banesto
Ratios (%) and Operating means 2007 2006 Var. (%) 2005 2007 2006 Var. (%) 2005 ROE 22.79 21.29 22.83 18.26 20.61 19.38 Efficiency ratio 38.72 40.95 44.01 41.20 45.27 48.23 Non-performing loan ratio 0.65 0.57 0.59 0.47 0.42 0.49 Coverage 248.11 295.80 289.26 332.92 396.13 371.55 Number of employees (direct + indirect) 19,392 19,027 1.92 19,092 10,776 10,545 2.19 10,577 Number of branches 2,887 2,832 1.94 2,669 1,946 1,844 5.53 1,703
Santander Consumer Finance Portugal
Balance sheet 2007 2006 Var. (%) 2005 2007 2006 Var. (%) 2005 Loans and credits* 45,731 39,461 15.9 29,535 30,119 28,366 6.2 25,861 Trading portfolio (excluding loans) 21 10 116.5 6 973 820 18.7 826 Available-for-sale financial assets 192 48 299.6 41 1,103 719 53.3 2,482 Due to credit institutions* 2,912 5,466 (46.7) 5,023 4,397 9,330 (52.9) 10,023 Intangible assets and property and equipment 839 643 30.5 376 484 437 10.9 447 Other assets 1,568 1,288 21.7 1,474 4,923 4,632 6.3 3,653 Total Assets / Liabilities and net worth 51,263 46,917 9.3 36,454 42,001 44,304 (5.2) 43,293 Customer deposits* 13,883 13,439 3.3 13,598 12,225 12,122 0.9 12,809 Marketable debt securities* 18,080 10,427 73.4 4,869 10,242 8,720 17.5 3,294 Subordinated liabilities 557 578 (3.7) 87 352 370 (4.9) 533 Insurance liabilities — — — — 4,077 3,759 8.5 2,795 Due to credit institutions* 14,493 19,526 (25.8) 15,053 11,813 16,028 (26.3) 20,866 Other liabilities 2,170 1,342 61.7 1,248 1,814 1,749 3.7 1,520 Shareholders’ equity 2,079 1,604 29.6 1,600 1,477 1,558 (5.2) 1,475 Off-balance-sheet funds 433 383 13.0 315 10,947 11,354 (3.6) 9,686 Mutual funds 360 323 11.3 273 5,698 6,040 (5.7) 5,858 Pension funds 73 60 22.5 43 1,488 1,448 2.8 1,011 Managed portfolios — — — — 288 376 (23.5) 312 Deposit insurance — — — — 3,473 3,490 (0.5) 2,505 Customer funds under management 32,953 24,827 32.7 18,868 33,766 32,833 3.7 26,613 Total managed funds 51,696 47,299 9.3 36,770 52,947 55,658 (4.9) 52,979 (*).- Includes all of the figures from this item in the balance sheet.
Santander Consumer Finance Portugal Ratios (%) and Operating means 2007 2006 Var. (%) 2005 2007 2006 Var. (%) 2005 ROE 34.12 35.60 44.25 28.55 24.07 20.79 Efficiency ratio 29.64 34.65 34.30 44.00 47.33 49.36 Non-performing loan ratio 2.84 2.57 2.40 1.25 0.53 0.78 Coverage 95.69 114.10 125.20 117.39 305.06 243.19 Number of employees (direct + indirect) 7,221 5,401 33.70 5,118 6,405 6,114 4.54 6,308 Number of branches 285 282 1.05 267 763 727 4.95 693
As regards the operations of the principal units that comprise the Continental Europe area:
Chapter 6 – Page 10
1. The Santander Branch Network.
In 2007, the Santander Branch Network maintained its profitable growth model, combining increased business, results, and investments in the retail network and customers. The Santander Branch Network thus closed fiscal year 2007 with an attributable profit of EUR 1,806 million, a 19.9% gain over 2006.
This increase resulted from recurring revenues (supported by a continuous rise in net interest income), cost control (whose increase is primarily due to the investments made in programs aimed at strengthening retail capacity) and a moderate rise in net loan-loss provisions, given the high quality of loans and receivables.
The retail activity centers on the “We Want to be your Bank” (“Queremos ser tu Banco”) strategy, which was extended to other groups at the beginning of 2007. Its main objectives are the acquisition and retention of customers and the improvement of service quality. Growth rates in acquisition and retention during this fiscal year surpassed the 2006 rates, and especially noteworthy is that the number of beneficiary customers already comes close to 4 million, practically one-half of the more than eight million customers comprised in the Santander Branch Network. In January 2006, when the strategy was launched, the number of beneficiaries was 2.4 million.
In October 2007, the Network placed among more than 125,000 customers the Bank’s issue of Valores Santander in the amount of EUR 7,000 million (See Chapters 10.1.a) and 21.1.5). The amount of such issue is not included in the liabilities of the Santander Branch Network, as it is in the nature of shareholders’ equity and is therefore reflected under Financial Management.
The results for fiscal year 2007 brought the efficiency ratio to 38.7%, compared to 41% in 2006. On the other hand, in an environment in which the non-performing loan ratio increased in the industry, credit risk quality remained under control, with the non- performing loan ratio standing at 0.65% —an increase of a mere 8 basis points during the year. Additionally, NPL coverage stands at 248%, compared to 296% in fiscal year 2006.
2. Banesto.
Attributable profit in 2007 was EUR 668 million. No extraordinary gains were posted during this fiscal year, unlike in fiscal year 2006, which included gains from the sale of Urbis (Banesto posted EUR 1,181 million before tax) and an extraordinary allowance for an early retirement plan (EUR 256 million). In homogeneous terms, i.e., without including the 2006 gains and extraordinary allowances, or the results obtained by Urbis in such fiscal year (recorded under discontinued operations), the results for continuing operations increased 24.2%. This growth was supported by a 14.8% rise in revenues and a 23.7% gain in net operating income.
Banesto is achieving strong growth in the segments it has identified as key: small and mid-sized companies, consumer spending, and cards and individuals. Specifically, in the SME business, Banesto achieved growth rates of 31% in loans to small companies and of 26% in loans to mid-sized companies.
During this fiscal year, Banesto completed the Network Expansion Plan commenced in 2006, which has further strengthened the entity’s retail capacity through the opening of 300 branches.
Chapter 6 – Page 11
Concerning income, gross operating income was EUR 2,282 million, a 14.8% increase over the last year. Such growth was boosted by: 1) a 17.9% growth in net interest income, due to the sustained growth and increased quality of the business, especially in SMEs and companies, together with price and spread management, and 2) the increase in net income from fees and commissions and the insurance business (reaching EUR 678 million, a 7.9% rise over the last year).
The Group’s cost-control discipline translated into an increase of only 4.4%, which entails the achievement of the efficiency goals underpinning the network expansion plan launched in 2006. This rise in costs, remarkably lower than the increase in revenues, marked a further improvement in the efficiency ratio, which at year-end 2007 fell to 41.2%, compared to 45.3% a year earlier.
Investment growth was accompanied by a strict control of risk quality, which enabled the Group to close the fiscal year with a non-performing loan portfolio rate of 0.47%, only 5 basis points above the figure at year-end 2006, and a NPL coverage rate of 333% (compared to 396% in December 2006).
The data for Banesto has been restated in accordance with the standards mentioned in Chapter 6.1.1 of this document so the data that appear here does not match the data published by Banesto.
3. Santander Consumer Finance.
Santander Consumer Finance is the Group’s consumer finance business. This business segment, which is supported by the global trend for individuals to finance a greater percentage of consumer spending, has the potential for strong growth and profitability.
Santander Consumer Finance’s strategy consists of establishing agreements with distributors (mainly auto dealerships) to facilitate the financing of automobiles and other consumer goods. In addition, it offers other products to its customers, such as personal loans, credit cards, insurance, and deposits. Starting in 2007, the results for Drive are included in this segment.
In 2007, Santander Consumer Finance’s attributable profit grew by 27.1% to EUR 719 million. The pillar for such growth was the combination of three variables:
• A moderate rise in income in its traditional European platforms, in a more complex environment for the consumer finance business.
• A successful integration of the U.S. unit (Drive), which posted excellent results, beyond the objectives originally set out, within the context of a slowing economy. The entry of Drive into the scope of consolidation in 2007 has had a major impact on the increase in output and income in this area.
• Expansion to new business platforms, in order to boost the future growth of the consumer business in the Group.
Santander Consumer Finance conducts its business in various platforms:
a) In Europe, in a hardly favorable market context (automobile sales stagnation, with registrations dropping by 9% in Germany due to the hike in VAT, and a growing pressure on margins due to interest rate increases combined with intensifying
Chapter 6 – Page 12 competition), Santander Consumer Finance saw an 8.2% rise in its attributable profit, to EUR 612 million. This was the result of a good relative performance of the business and a suitable management of revenues, costs and provisions.
In summary, gross operating income increased by 7.4% over 2006, boosted more strongly by fees from cross-sales (up 34.1%) than from net interest income (up 2.9%). The latter shows the net impact of growth in the managed portfolio (up 14%), a reduction in commercial revenue due to the rise in interest rates and, in an opposite direction, an improvement in the product mix toward more profitable lines.
Costs increased by 10.3% owing to the expansion to new markets, as without such expansion, mature platforms bring up costs to rates that near inflation. The revenues- costs relationship yielded an efficiency ratio of 35.8% and increased net operating income to EUR 1,269 million (up 5.7%). b) In the United States, in an environment characterized by an economic slowdown and tensions in financial markets, Drive exhibited its capacity to generate profitable growth. Thus, it managed volumes and margins in a manner such that it closed the fiscal year at a peak level of revenues: the figure for the fourth quarter surpasses the first one by 24%.
An efficient business model and activity-driven cost management made it possible to improve efficiency by 3 p.p. between the first and the fourth quarters, with the efficiency ratio standing at 11.9% in December 2007. This improvement leveraged growth in net operating income, such that the fourth quarter surpassed the first one by 28%. This increase absorbed higher provisions deriving from the business and the weakening environment, in line with the stringent internal risk models in place. Drive maintained a high credit quality level in its business segments, with a delinquency rate of 3.83% at December 2007 (lower than the 3.88% posted a year earlier).
Drive’s growth thus surpassed the objectives set out, with overall attributable profit reaching EUR 107 million in 2007. c) During 2007, Santander Consumer Finance made a big effort to expand its business to high-potential markets through the acquisition of small financial companies, joint ventures with domestic operators and/or the creation of start-ups.
An example of such start-ups was the launch of the businesses in an organic manner in Denmark, Finland and Slovakia; these added to the existing business in the United Kingdom, which, in its second full year, achieved its aims with a remarkable business growth (managed portfolio up 39%).
In Russia, the acquisition of Extrobank speeded up the implementation of our start-up. In Mexico, the acquisition of the financial company Alcanza allowed for the commencement of business in the automotive financing segment. Last, we formed joint ventures with domestic partners in Chile (Bergé) and in France (Banque Accord), where activities began during the first half of 2008.
Chapter 6 – Page 13
4. Portugal.
During 2007, Santander Totta continued to stand as one of the best banks in Portugal.2 Once again in 2007, Santander Totta achieved profitable growth, with profits increasing by more than 20%, efficiency improving by 3.3 percentage points, and ROE rising by 4.5 p.p. to 28.6%. Attributable profit came to EUR 527 million, up 24.6% from 2006. This profit includes extraordinary income from the sale of a stake in Banco BPI in the second quarter of 2007. A part of these gains was allocated to internal restructuring costs, long-term incentive plans, and the creation of a contingency fund, such that the net positive effect on profits was of EUR 16 million. Excluding this amount, recurring attributable profit stood at EUR 511 million, which entails a 20.8% increase. From the financial viewpoint, this fiscal year was marked by a highly competitive environment, characterized by regulatory changes (with a direct impact on banks’ profitability both in 2007, especially in the second quarter, and in future years) and by the shortage of liquidity in financial markets, which translated into sharp rises in interest rates. In this context, the Group continued to focus on a customer-driven business model, aimed at an increase in the number of customers, higher retention levels, and better cross-sales practices. Specifically, the beginning of 2007 was marked by a strong institutional campaign for the launch of the Santander Totta single brand known as O Meu Banco. Subsequently, the Group successfully launched other campaigns, with the Comissões Zero campaign being particularly noteworthy among them, and continued to invest in the expansion of the branch network. All of the foregoing led to a 9% increase in the number of current customers and an improvement in the products/customer ratio. Revenue and cost management, with a spread of 8 percentage points between revenue and cost growth rates, entailed a further improvement (down 3.3 percentage points) in the efficiency ratio, which stood at 44.0%, and yielded a 17.8% rise in net operating income. At the beginning of 2007, the criteria to record non-performing loans were modified, in line with the rest of the Group. If the same methodology had been applied to the last year, the non-performing loan ratio would have been 1.25%, exactly the same as that recorded a year earlier, and the NPL coverage rate would have been 117% (compared to 130% in 2006).
2 In 2007, the magazine Euromoney designated Santander Totta as the best bank in Portugal in terms of strategic vision, profitability, efficiency and achievement of market share.
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(II) UNITED KINGDOM (Abbey) Set forth below are the income statement, balance sheet, and main ratios:
United Kingdom (Abbey) Millions of Euros Variation 2007 2006 (%) 2005 Income statement Net interest income 2,335 2,108 10.8 2,083 Share of results from entities accounted for by the equity method 2 3 (32.4) 2 Net fees and commissions 1,007 1,026 (1.8) 947 Insurance activity 0 0 — 0 Commercial revenue 3,345 3,137 6.6 3,033 Gains (losses) on financial transactions 436 423 2.9 345 Gross operating income 3,780 3,560 6.2 3,378 Income from non-financial services (net) and other 20.6 operating income 51 42 36 General administrative expenses (1,816) (1,877) (3.2) (2,007) Personnel (1,037) (1,062) (2.4) (1,119) Other administrative expenses (780) (816) (4.4) (888) Depreciation and amortization (102) (105) (3.0) (117) Net operating income 1,913 1,620 18.1 1,290 Net loan loss provisions (312) (387) (19.3) (318) Other income (expenses) 22 (0) — 76 Profit before tax 1,622 1,232 31.7 1,048 Profit from continuing operations 1,201 889 35.1 725 Net profit from discontinued operations — 114 (100.0) 86 Consolidated profit for the year 1,201 1,003 19.8 811 Profits attributed to the Group 1,201 1,003 19.8 811
Balance sheet Loans and credits* 184,086 190,512 (3.4) 171,796 Trading portfolio (excluding loans) 53,782 61,507 (12.6) 64,014 Available-for-sale financial assets 44 23 87.9 18 Due to credit institutions* 19,810 18,185 8.9 13,070 Intangible assets and property and equipment 4,685 5,059 (7.4) 5,197 Other assets 9,458 8,691 8.8 47,420 Total Assets / Liabilities and net worth 271,865 283,977 (4.3) 301,515 Customer deposits* 122,514 115,194 6.4 110,776 Marketable debt securities* 76,056 72,857 4.4 62,462 Subordinated liabilities 7,876 9,430 (16.5) 11,428 Insurance liabilities 6 71 (91.6) 36,521 Due to credit institutions* 38,688 51,020 (24.2) 40,761 Other liabilities 23,549 32,076 (26.6) 37,259 Shareholders’ equity 3,177 3,328 (4.6) 2,307 Other customer funds under management 10,225 8,307 23.1 17,263 Mutual funds 10,225 8,307 23.1 5,999 Pension funds — — — — Managed portfolios — — — — Deposit insurance — — — 11,264 Customer funds under management 216,672 205,860 5.3 227,188 Total managed funds 292,284 324,777
Ratios (%) and Operating means ROE 32.26 32.79 35.66 Efficiency ratio 50.08 55.10 62.21 Non-performing loan ratio 0.60 0.60 0.67 Coverage 65.84 85.88 77.72 Number of employees (direct + indirect) 16,827 17,146 (1.9) 19,084 Number of branches 704 712 (1.1) 712 (*).- Includes all of the figures from this item in the balance sheet.
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In 2007, Abbey continued to make headway toward its objective of becoming a retail bank prepared to offer all kinds of services. In this regard, it improved the customer’s vision through the implementation of the Partenón platform, expanded the product range, and engaged in closer collaboration with the Group’s global areas.
Like the other segments, Abbey’s financial statements for 2005, 2006 and 2007 have been restated in accordance with the standards set forth in Chapter 6.1.1 of this document. This means that the figures given above do not coincide with those published by the company itself. This report includes all the results of the discontinued business of life insurance in a separate line for 2005 and 2006.
From the financial viewpoint, the objectives set for the fiscal year in terms of revenues, expenses and profits were accomplished. Attributed profit came to EUR 1,201 million, up 19.8% from 2006 (+20.2% in pounds sterling). As regards income, especially noteworthy was the growth in revenues in an industry environment that was worse than expected. The increase in profits was primarily due to a strong 10.8% growth (+11.1% in pounds sterling) in net interest income. This rise in income reflects the expansion in volumes in pounds sterling, and above all, a very active management of margins, a matter that received focus attention during the fiscal year. Such management concerned both loans, where the margin drop in mortgages was softened, with a strong increase in personal loans, and customer deposits and investment products, where the rise was remarkable.
Operating costs continued to exhibit the excellent performance of prior fiscal years, such that the synergies contemplated at the time of the acquisition were exceeded in the third year. In 2007, they dropped by 3.2% (2.9% in pounds sterling), largely due to the savings stemming from the payroll reduction carried out in 2006.
Lower costs and greater revenues gave rise to a strong improvement in the efficiency ratio, which stood at 50.1%, compared to 55.1% in 2006. The efficiency ratio has been reduced by 20 percentage points from the region of 70% where it was at the time of the acquisition of Abbey by Santander.
Provisions for credit losses decreased by 19.3% (19.1% in pounds sterling) compared to 2006, which reflects the good quality of the mortgage portfolio and the lower exposure vis-à-vis 2006 in unsecured personal loans (UPLs), particularly those granted via the Internet.
The non-performing loan ratio remained at 0.60%, with no changes during fiscal year 2007, while the coverage rate was 66%, compared to 86% in 2006. This drop was mainly driven by a change in the mix of non-performing loans (as the strategy for a reduction of business in personal loans, which are given greater coverage, led to a decrease in their relative weight), and on the other hand, by the increased weight of mortgage loans, which are given lower coverage because they are backed by stronger collateral.
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III. LATIN AMERICA Set forth below are the income statement, balance sheet, and main ratios of the principal units that comprise the Latin America area. These figures do not include Banco Real, the total assets, net worth and attributed profit of which at December 31, 2007 were EUR 58,000 million, EUR 4,400 million and EUR 1,160 million, respectively.
Latin America. Principal units Brazil* Mexico Millions of Euros 2007 2006 Var.(%) 2005 2007 2006 Var.(%) 2005 Income statement Net interest income 2,439 1,861 31.1 1,381 1,893 1,554 21.9 1,022 Share of results from entities accounted for by the equity method 1 1 (22.0) 1 — — — 0 Net fees and commissions 1,249 1,002 24.6 717 588 473 24.3 380 Insurance activity 72 57 25.9 43 38 23 63.5 17 Commercial revenue 3,761 2,922 28.7 2,142 2,519 2,050 22.9 1,419 Gains (losses) on financial transactions 624 438 42.7 555 (32) (9) 273.0 49 Gross operating income 4,385 3,359 30.5 2,697 2,488 2,041 21.8 1,473 Income from non-financial services (net) and other operating income (33) (6) 422.1 1 (37) (74) (50.3) (63) General administrative expenses (1,680) (1,511) 11.2 (1,314) (865) (832) 3.9 (754) Personnel (878) (785) 11.9 (703) (440) (395) 11.5 (355) Other administrative expenses (802) (726) 10.4 (611) (425) (438) (2.9) (399) Depreciation and amortization (139) (115) 20.3 (158) (80) (70) 14.8 (65) Net operating income 2,533 1,727 46.7 1,226 1,506 1,066 41.3 585 Net loan loss provisions (792) (440) 80.0 (165) (459) (207) 122.2 (49) Other income (expenses) (349) (213) 64.1 (198) (16) 1 — (57) Profit before tax 1,393 1,074 29.6 862 1,030 860 19.9 480 Profit from continuing operations 919 762 20.7 603 868 669 29.8 462 Net profit from discontinued operations — — — — 7 25 (71.6) 54 Consolidated profit for the year 919 762 20.7 603 875 694 26.1 516 Profits attributed to the Group 905 751 20.5 591 654 528 23.8 376 (*).- All of the data for Brazil excludes Banco Real.
Latin America. Principal units Chile Millions of Euros 2007 2006 Var.(%) 2005 Income statement Net interest income 1,112 910 22.1 782 Share of results from entities accounted for by the equity method (3) 1 — 1 Net fees and commissions 317 292 8.6 233 Insurance activity 49 37 34.0 23 Commercial revenue 1,475 1,240 18.9 1,040 Gains (losses) on financial transactions 31 95 (67.7) 11 Gross operating income 1,506 1,335 12.8 1,051 Income from non-financial services (net) and other operating income (21) (11) 83.6 (4) General administrative expenses (536) (505) 6.3 (428) Personnel (327) (317) 3.1 (259) Other administrative expenses (209) (187) 11.6 (169) Depreciation and amortization (54) (50) 8.8 (48) Net operating income 894 769 16.3 570 Net loan loss provisions (203) (109) 86.1 (103) Other income (expenses) 55 (6) — (19) Profit before tax 746 653 14.2 448 Profit from continuing operations 645 544 18.6 375 Net profit from discontinued operations 36 31 18.2 22 Consolidated profit for the year 682 575 18.6 397 Profits attributed to the Group 543 489 11.0 338
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Brazil Mexico Millions of Euros 2007 2006 Var.(%) 2005 2007 2006 Var.(%) 2005 Balance sheet Loans and credits* 19,998 13,990 42.9 10,667 14,124 15,647 (9.7) 13,238 Trading portfolio (excluding loans) 5,903 8,933 (33.9) 5,048 10,779 15,084 (28.5) 18,089 Available-for-sale financial assets 3,685 6,356 (42.0) 5,942 3,929 6,686 (41.2) 4,750 Due to credit institutions* 2,062 2,619 (21.3) 6,932 5,684 7,844 (27.5) 7,442 Intangible assets and property and equipment 628 650 (3.3) 364 455 368 23.3 338 Other assets 14,045 7,273 93.1 8,560 4,525 4,401 2.8 4,168 Total Assets / Liabilities and net worth 46,321 39,821 16.3 37,513 39,495 50,032 (21.1) 48,025 Customer deposits* 21,484 17,282 24.3 11,041 21,830 23,416 (6.8) 23,310 Marketable debt securities* 1,079 817 32.2 688 1,301 2,215 (41.3) 2,657 Subordinated liabilities 1,622 1,430 13.4 420 51 57 (10.3) 64 Insurance liabilities 1,930 1,407 37.2 1,124 98 88 11.8 67 Due to credit institutions* 7,849 8,542 (8.1) 16,036 8,292 15,505 (46.5) 16,585 Other liabilities 9,556 7,915 20.7 6,062 5,354 6,507 (17.7) 3,270 Shareholders’ equity 2,801 2,428 15.4 2,142 2,569 2,244 14.5 2,071 Other customer funds under management 21,588 14,674 47.1 11,728 9,259 11,689 (20.8) 10,088 Mutual funds 20,618 13,988 47.4 11,151 9,259 8,395 10.3 6,708 Pension funds — — — — — 3,295 (100.0) 3,381 Managed portfolios 917 686 33.7 577 — — — — Deposit insurance 53 — — — — — Customer funds under management 45,772 35,610 33.8 25,001 32,441 37,465 (13.2) 36,187 Total managed funds 67,909 54,496 24.6 49,241 48,754 61,721 (21.0) 58,113
(*).- Includes all of the figures from this item in the balance sheet.
Chile Millions of Euros 2007 2006 Var.(%) 2005 Balance sheet Loans and credits* 17,103 15,107 13.2 14,967 Trading portfolio (excluding loans) 2,189 1,507 45.2 1,087 Available-for-sale financial assets 1,353 772 75.3 1,169 Due to credit institutions* 1,727 3,151 (45.2) 3,370 Intangible assets and property and equipment 338 319 5.8 352 Other assets 2,222 2,139 3.9 2,353 Total Assets / Liabilities and net worth 24,931 22,995 8.4 23,298 Customer deposits* 14,566 13,216 10.2 13,186 Marketable debt securities* 2,242 1,536 45.9 1,701 Subordinated liabilities 680 705 (3.4) 647 Insurance liabilities 77 58 33.3 46 Due to credit institutions* 4,365 4,158 5.0 4,838 Other liabilities 1,926 2,019 (4.6) 1,355 Shareholders’ equity 1,075 1,304 (17.5) 1,525 Other customer funds under management 4,257 11,732 (63.7) 10,038 Mutual funds 4,252 3,584 18.6 2,684 Pension funds — 8,148 (100.0) 7,354 Managed portfolios — — — — Deposit insurance 5 — — — Customer funds under management 21,744 27,246 (20.0) 25,618 Total managed funds 29,188 34,727 (15.9) 33,335
Chapter 6 – Page 18
Brazil Mexico Ratios (%) and Operating means 2007 2006 Var.(%) 2005 2007 2006 Var.(%) 2005
ROE 28.45 28.42 23.07 26.48 23.08 20.42 Efficiency ratio 39.58 46.42 52.48 37.71 44.02 55.61 Non-performing loan ratio 2.74 2.38 2.88 1.20 0.64 0.89 Coverage 101.46 102.78 138.52 192.25 279.19 273.43 Number of employees (direct + indirect) 21,923 21,681 1.1 20,600 13,743 12,993 5.8 12,247 Number of branches 2,104 2,026 3.8 1,897 1,088 1,039 4.7 1,005
Chile Ratios (%) and Operating means 2007 2006 Var.(%) 2005
ROE 43.81 32.15 25.03 Efficiency ratio 39.22 41.53 45.32 Non-performing loan ratio 2.11 1.59 2.31 Coverage 118.45 152.62 165.57 Number of employees (direct + indirect) 13,025 11,537 12.9 10,535 Number of branches 494 397 24.4 401
Grupo Santander generated attributable profit in Latin America of EUR 2,666 million in 2007, an increase of 16.6% (up 22.1% excluding the exchange rate impact). This percentage is affected by the changes in the scope of consolidation both in 2006 (sale of the pension fund management company in Peru and of the bank in Bolivia, and placement in the market of 7.23% of Banco Santander Chile) and in 2007 (sale of the pension fund management companies in Chile, Argentina, Colombia, Mexico and Uruguay, which yielded gains of EUR 622 million, recorded in Financial Management and Equity Stakes). Excluding this, income from continuing operations rose by 20.7% (up 26.7% without the exchange rate impact).
These results were achieved in an economic environment that was once again highly favorable in 2007, in spite of the deceleration of the US economy and the turmoil in the markets on a global scale.
The Group’s strategy in Latin America in 2007 continued to focus on the development of the financial franchise, and particularly on growing the business and increasing recurring income in the segments of individuals and SMEs. The development and retention of the customer base, the growth of anchor products, the boost to the global businesses of individuals and, finally, the development of credit were the main drivers of growth in Retail Banking.
The most important aspects of the Group’s activity in 2007 were:
• As regards income, net interest income, supported by a strong expansion of the retail business (and, more specifically, by loans to individuals and SMEs), grew 26.2% (31.9% without the exchange rate impact).
• The focus on the generation of recurring revenues and, specifically, the emphasis on the development of bank products and services subject to a fee or commission
Chapter 6 – Page 19
(credit cards, cash management, foreign trade, investment funds, and insurance) translated into a 21.6% growth (26.2% without the exchange rate impact) in fees and commissions. Of note is the growth (without the exchange rate impact) of 39.6% in cards and 34.6% in insurance, as well as the 36.8% rise in fees and commissions in investment banking transactions.
• Gross operating income increased 24.2% (29.2% without the exchange rate impact), compared to a 10.8% rise (15.0% without the exchange rate impact) in costs (with an average inflation rate of 5%). The latter include the investments and expenses (increase in installed capacity, technology, implementation of the Santander single brand, promotion, etc.) incurred in the specific retail expansion programs.
• Net loan-loss provisions rose 93.5% owing to an increase in the volume of loans and receivables and, above all, to the greater focus on segments offering a higher return but at the same time requiring a higher risk premium. The non-performing loan ratio in 2007 was 1.87% (compared to 1.38% in 2006), while the coverage rate was 134%, compared to 167% at the close of the prior fiscal year.
Noteworthy activities of the principal units:
1. Brazil.
After the achievement of brand unification, technological integration, and the corporate merger in 2006, the focus in 2007 continued to be placed on the expansion of the retail businesses: capturing, gaining the commitment of and retaining individual customers; growth in distribution businesses (automotive financing, payroll-related loans, credit cards); development of the business with SMEs and companies, and consolidation of a dominant position in global wholesale banking, leveraged by the Group’s global capabilities.
Santander Brazil is one of the principal financial franchises in Brazil. The Group has 2,104 branches (a net increase of 78 branches during the year) and 8.3 million customers (800,000 more than the previous year).
With regard to income, and always in local currency, attributable profit rose by 17.6% (20.5% in euros), to EUR 905 million. By segments, Retail Banking, which accounts for 57% of the total, increased its pre-tax income by 84.7% (in local currency), Asset Management and Insurance grew 6.6% (in local currency), while Global Wholesale Banking saw a 13.6% decrease (in local currency).
Commercial revenue rose 25.6%, driven by the expansion of business volumes (and, especially, of the various types of retail loans) and by the increase in fees and commissions and income from the insurance business (up 21.7%). In contrast, spreads declined, in a context of lower interest rates.
Growth in costs was controlled (up 9.1%), and the increase above the inflation rate (4.5%) was due to the expense incurred in plans for business development and expansion of installed capacity. As a result of revenue and cost performance, there was a 43.1% increase in net operating income. The efficiency ratio improved 6.8 points as compared to fiscal year 2006, standing at 39.6%.
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Net loan-loss provisions rose 75.6%, due to an increase in loan volumes and, especially, to the focus on products and segments with a higher risk profile but offering a higher return. The non-performing loan ratio stood at 2.74%, and the coverage rate was 101%.
2. Mexico.
Santander is one of the principal financial groups in Mexico in terms of business volume. The Group has 1,088 branches (a net increase of 49 branches during the year) and 8.5 million customers (an increase of 474,000 over 2006).
In 2007, the Group’s strategic focus continued to be the development and retention of its customer base and the profitable growth of the retail businesses, through a multi- channel, highly-segmented model.
Credit cards and payroll deposits were the two pillars of growth in the customer base. Consumer loans (“Crédito Efectivo,” “Crédito Nómina,” “Crédito Restitución,” etc.) are used in addition to the credit card itself in order to enhance customer retention.
As regards income (with variations being considered always in local currency), commercial revenue rose by 34.5%. Within such revenue, net interest income grew 33.4%, driven by the strong expansion of credit (especially to individuals) and the increased spread of the lending portfolio, the result of appropriate price management and a higher share of more profitable loans in the overall loan structure.
Income from fees and commissions and insurance rose 38.1%, with a remarkable growth in insurance, cards and investment funds. Income from financial transactions remained negative, as was the case in 2006.
Costs increased 14.7% (inflation rate of 3.8%) due to the expansion of installed capacity and retail business development programs. As a consequence of a greater increase in revenues than in costs, net operating income grew 54.7%. The efficiency ratio thus gained 6.3 points, to stand at 37.7% in 2007.
Net loan-loss provisions increased 143.3%, as a result of a strong growth in lending, a shift of focus toward products with a higher spread but also greater risk, and the deterioration in the risk premium for credit cards; the non-performance loan ratio was, however, lower than that of its competitors. Attributable profit thus rose by 35.6% (up 23.8% in euros), to EUR 654 million. The NPL ratio (1.20%) and the coverage rate (192%) remained solid.
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3. Chile.
Santander Chile is one of the leading financial groups in Chile (in terms of customers, distribution network and net profit). It has a 21.2% share in loans and a 21.5% share in bank savings. The group has 494 branches and 2.8 million customers.
Santander Chile continued to focus its strategy on expanding the customer base and enhancing retention, as well as on growing the business with individuals and SMEs and the development of the global businesses (wholesale banking, asset management, means of payment and insurance). The denser distribution network (net increase of 97 offices during the year) and the improvements in service quality helped expand the customer base by 345,000 during the year, to 2.8 million, and to achieve a 16% rise in the number of retained customers.
With regard to income (always considering variations in local currency), attributable profit grew by 19.3% (up 11.0% in euros), to EUR 543 million. Net profit (before minority interests, which were on the rise due to the placement in the market of 7.23% of Banco Santander Chile in the last quarter of 2006) rose 27.5%.
Gross operating income increased by 21.3%. Net interest income rose by 31.3%, pushed by the growth in volumes and the improvement in spreads in the business, while fees and commissions (including the insurance business) rose 19.8%.
Costs increased 14.5% (with an inflation rate of 7.8%), thus reflecting the development of the retail infrastructure. Net operating income consequently rose by 25.0%. The efficiency ratio improved by 2.3 points, to 39.2%.
Net loan-loss provisions doubled in 2007 because of the different movements in generic provisions, as charges were reversed in 2006 and provisions were made in 2007. The non-performing loan ratio was 2.11% and coverage was 118%.
IV. Financial Management and Equity Stakes Financial Management and Equity Stakes is responsible for a series of centralized activities and acts as the Group’s holding entity, managing all capital and reserves and assigning capital and liquidity to the other businesses on the basis of the standards set forth in Chapter 6.1.1 of this document. The cost of liquidity, via the transfer of funds to various businesses, is calculated at the short-term market rate: 4.06% in 2007 (compared to 2.96% in 2006).
Chapter 6 – Page 22
Set forth below are the Income Statement and Balance Sheet for the Financial Management and Equity Stakes area: Financial Management and Equity Stakes
Millions of Euros 2007 2006 Var. (%) 2005 Income statement Interest income (w/o dividends) (1,771) (1,269) 46.5 (866) Income from equity interests 183 162 27.5 127 Net interest income (1,588) (1,106) 49.8 (739) Share of results from entities accounted for by the equity method 427 411 (29.7) 584 Net fees and commissions 30 (11) (39.7) (19) Insurance activity — (4) — 2 Commercial revenue (1,131) (711) 315.0 (171) Gains (losses) on financial transactions 1,217 414 — (48) Gross operating income 86 (297) 35.5 (219) Income from non-financial services (net) and other operating income 15 (32) 28.8 (25) General administrative expenses (506) (365) 3.0 (354) Personnel (236) (204) 11.3 (183) Other administrative expenses (270) (161) (5.9) (171) Depreciation and amortization (259) (214) 188.5 (74) Net operating income (665) (908) 35.0 (672) Net loan loss provisions (14) 91 — (52) Other income (expenses) (116) 159 — (131) Profit (loss) before taxes (ordinary) (795) (658) (23.1) (855) Profit from continuing operations (171) (177) (15.5) (210) Net profit from discontinued operations (0) 89 — Net consolidated profit for the fiscal year (ordinary) (171) (88) (57.9) (210) Attributable profit to the Group [ordinary] (180) (178) (50.3) (358) Net of extraordinary gains and allowances 934 340 (66.3) 1,008 Profits attributed to the Group 754 162 (75.1) 650 Balance sheet Trading portfolio (excluding loans) 1,328 2,029 59.0 1,276 Available-for-sale financial assets 21,528 7,605 (83.1) 45,014 Investments 15,604 4,897 74.2 2,811 Goodwill 13,827 14,508 3.6 14,006 Liquidity lent to the Group 80,450 67,138 69.9 39,508 Capital assigned to Group areas 32,039 29,120 15.3 25,250 Other assets 55,381 35,539 15.8 30,697 Total Assets / Liabilities and net worth 220,156 160,836 1.4 158,562 Customer deposits* 1,969 496 (74.3) 1,927 Marketable debt securities* 82,196 78,321 47.3 53,154 Subordinated liabilities 22,874 16,247 16.3 13,965 Preferred securities — — — — Other liabilities 66,161 30,073 (47.5) 57,291 Group capital and reserves 46,955 35,699 10.8 32,225 Other customer funds under management — — — — Mutual funds — — — — Pension funds — — — — Managed portfolios — — — — Deposit insurance — — — — Customer funds under management 107,040 95,064 37.7 69,046 Total managed funds 220,156 160,863 36.9 158,562
Operating means Number of employees (direct + indirect) 1,526 1,498 1.9 1,462
(*).- Includes all of the figures from this item in the balance sheet.
Chapter 6 – Page 23
In 2007, this area posted a profit amounting to EUR 754 million, which includes EUR 60 million from the net contribution of ABN and net gains and extraordinary allowances net of taxes coming to EUR 934 million.
The gross gains obtained in fiscal year 2007, stemming from the sale of the stake in Intesa Sanpaolo and of real properties in Spain (EUR 566 and EUR 1,620 million, respectively) and from the divestment of the pension fund business in Latin America (EUR 831 million), were allocated to the allowance of the stake in Sovereign (EUR 1,053 million), the provision of intangible assets (EUR 542 million), special provisions for pension and retirement plans (EUR 317 millions) and writedowns (EUR 30 million). Accordingly, the gross gains generated in 2007 (EUR 3,124 million), after the aforementioned allocations and net of taxes and minority interests, contributed EUR 934 million to the Group’s attributable profit.
The inclusion of ABN in the Group’s financial statements had the following effects on this segment: revenues amounting to EUR 141 million, accounted for in income under the equity method, and financing costs of EUR 121 million (EUR 81 million after taxes), recorded in the net interest income.
Excluding gains and the net contribution of ABN, ordinary earnings registered, as is usual in this segment, a loss of EUR 239 million, compared to a loss of EUR 178 million in 2006. The comments below do not take into account either of these effects.
This segment had positive gross operating income of EUR 65 million in 2007, compared to a loss of EUR 297 million in 2006, a variation due to the net impact of various positive and negative factors.
The principal positive effect came from ROFs, which rose by EUR 803 million, from EUR 414 million in 2006 to EUR 1,217 million in 2007. This increase was primarily due to the larger positive impact of the euro/dollar and euro/sterling exchange rate (offsetting the negative impact on income of the depreciation of each currency in Latin America and the United Kingdom), and the larger contribution from interest rate hedging portfolios, which registered losses due to provisions in 2006 and made a slightly positive contribution in 2007.
The negative effects were the impact on net interest income that the rise in interest rates had on the cost of financing, the higher cost from the larger volume of securitizations, and lower profits by the equity method of accounting because of the lower figure recorded in this line for Cepsa (part of this decrease is offset by minority interests).
Costs were EUR 187 million higher (up 32.3%) than in 2006. This increase is due to two main factors: on the one hand, the larger expenses incurred in the development of the single brand and those associated with sponsorship and marking the Bank’s 150th anniversary, and on the other hand, the increase in amortizations (up EUR 45 million) of intangibles.
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This area is comprised of the following subsegments:
Equity stakes: The highlights in the area of equity stakes were: the sale of 4.8% of San Paolo IMI at the end of 2006 and the sale of 1.79% of Intesa Sanpaolo in the second quarter of 2007 (as set forth in Chapter 5.2 above, this latter transaction generated gains of EUR 566 million).
At year-end 2007, unrealized gains on listed financial and industrial stakes were on the order of EUR 4,000 million.
Financial management: This area carries out the global functions of managing the structural exchange rate position, the structural interest rate risk of the parent bank and the liquidity risk. It manages the latter through issues and securitizations. It also manages shareholders’ equity.
This sub-segment includes the cost of hedging the Group’s non-euro denominated investments. The current hedging policy is aimed at protecting the capital invested and at an active hedging of the results for the fiscal year through various instruments that are deemed to be most appropriate for their management. In 2006 and 2007, the main units with exchange risk continued to be hedged.
Shareholders’ equity, the allocation of capital to each unit, and the financing cost of the investments made are also managed in this subsegment. As a result, it usually contributes negatively to earnings.
6.1.2. Significant new products and/or services. Global New Products Committee (GNPC) All new products or services that any entity of Grupo Santander seeks to market must be submitted to this Committee for approval. In 2007, 14 Committee sessions were held (two of them in writing and without a meeting), in which 186 products or product families were analyzed. A Local New Products Committee is created in each country where an entity of Grupo Santander is located. Once a new product or service undergoes the established procedure, this Committee must seek the approval of the Global New Products Committee. In Spain, the functions of the Local New Products Committee are vested in the Global New Products Committee itself. The Areas that participate in the Global New Products Committee, chaired by the General Secretary, are: Tax Advice, Legal Advice, Customer Service, Internal Audit, Retail Banking, Global Corporate Banking, Risk Internal Control and Comprehensive Assessment, Compliance, Financial Accounting and Management Control, Financial Transactions and Markets, Transactions and Services, Risks (Methodology, Processes and Infrastructure), Global Wholesale Banking Risks, Corporate Risks and IFIs, Market Risks, Solvency Risk, Technological and Operating Risk, Santander Private Banking, Technology, Global Treasury, Universities and, finally, the unit proposing the new product or a representative of the Local New Products Committee. Prior to the launch of a new product or service, the aforementioned Areas, as well as, where applicable, other independent experts considered necessary for the proper assessment of the risks incurred (for instance, Anti-Money Laundering), perform an Chapter 6 – Page 25 exhaustive analysis of the aspects that may have an impact on the process and state their opinion regarding the marketing of the product or service in question. Having examined the documents received, and after verifying that all the requirements are satisfied for the approval of a new product or service and taking into account the risk guidelines established by the Risk Committee of Grupo Santander, the Global New Products Committee then approves, rejects or establishes conditions for the new product or service proposed. The Global New Products Committee particularly focuses on the suitability of the new product or service to the framework within which it will be marketed. For such purpose, it pays special attention to the following: - That each product or service is sold by the person that knows how to sell it. - That customers know what they are investing in and the risk entailed by the product or service in which they invest and that this is supported by documentary evidence. - That the product or service suits the customer’s risk profile. - That each product or service is sold where it can be sold, not only for legal or tax reasons, i.e., from the viewpoint of its consistency with the legal and tax system of each country, but also by taking into consideration the financial culture prevailing therein. - That when a product or service is approved, maximum limits are established regarding its placement.
Manual of Procedures for the Marketing of Financial Products This Manual, which has been used at Banco Santander since 2004 in the retail marketing of financial products in Spain, was subject to a thorough review in 2007, as a consequence of the entry into force on November 1 of Directive 2004/39 on Markets in Financial Instruments (“MiFID”), which lays down new requirements for the sale of financial products. The purpose of the Manual is to ensure: (i) the appropriate assessment of financial products prior to their commercial use; (ii) the appropriate conduct of commercial activities in accordance with the characteristics of the service, the product and the customer; and (iii) compliance with the regulations governing the processes for marketing financial products, including MiFID. Services consisting of the investment in financial products are subject to this Manual, which includes: securities or other fixed or variable income financial instruments, money market instruments, stakes in mutual funds, deposit and investment insurance, traded derivatives and OTC transactions, and atypical financial contracts. However, the Global New Products Committee may bring other products within the scope of the Manual of Procedures. The Manual uses customer and product segmentation as a starting point, and provides for various commercial treatment regimes primarily in terms of the type of service rendered. The combination of these elements (type of customer, type of product and commercial treatment) results in a matrix that determines what kind of mechanism should be applied (appropriateness test, suitability test) in order to evaluate the customer-product match, as well as what kind of warnings must be issued to the customer. Customer and product segmentation results from cross-matching the internal classification already applied by Santander before MiFID to the classification
Chapter 6 – Page 26 established by MiFID, which yields a protection level that is greater than the minimum required by MiFID. The different types of commercial treatment, graded in terms of greater to lesser Bank involvement, are: (i) advised sale, which includes portfolio advice and management; and (ii) non-advised sale, which comprises marketing and mere execution. During fiscal year 2007, 120 products subject to the Manual were submitted for approval. Although the large majority of the products submitted were investment funds, the marketing of other types of products was also approved, such as warrants, hedging products, preferred interests, and public offers for sale and/or initial public offerings of securities. Of these 120 products, 68 were new products submitted to the Global New Products Committee, and 52 were non-new products submitted to the Office for the Manual (a specific body created to ensure the implementation of the Manual, reporting to the Compliance Area). These 120 products were categorized as follows: 36 were classified as green products (30%), 49 as yellow products (41%) and 32 as red products (27%). There are three products to which no color was assigned: two of them are generic, and therefore, a color will be assigned to each issue sought to be marketed, and the other one is a product whose approval has been made conditional upon a subsequent review. The color red, yellow or green is assigned by taking into account not only the risk of loss posed by the product but also the degree of difficulty the public may have in understanding its features. Of the 28 products approved as from November 1, 19 were classified as complex products under MiFID and 9 as non-complex products.
6.2. PRINCIPAL MARKETS. See Chapter 6.1. Chapter 6.1.1 contains the figures for 2007, 2006 and 2005 for the principal units, segmented into two levels: (i) principal (or geographic) level and (ii) secondary (or business) level. 6.3. EXCEPTIONAL FACTORS AFFECTING THE PRINCIPAL ACTIVITY OR MARKET. As described in Chapter 5.2.1., in 2007 Banco Santander, forming a consortium with Royal Bank of Scotland Group and Fortis, successfully completed the tender offer for the Dutch bank ABN AMRO. As a result of such transaction, Grupo Santander strengthened its presence in the Brazilian market, through the acquisition of Banco Real. 6.4. DEPENDENCE ON PATENTS, LICENSES, AND RELATED AUTHORIZATIONS. Given their nature, the Bank’s activities do not depend on, nor are they significantly influenced by, the existence of patents, licenses, trademarks, technical assistance, exclusivity agreements, or price regulation (for more information on research and development, patents and licenses, see Chapter 11 of this Registration Document).
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6.5. SOURCE OF STATEMENTS MADE BY THE ISSUER REGARDING ITS COMPETITIVENESS. Not applicable.
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CHAPTER 7
7. ORGANIZATIONAL STRUCTURE 7.1. DESCRIPTION OF THE GROUP AND ISSUER’S POSITION IN THE GROUP BANCO SANTANDER, S.A. is the controlling entity of Grupo Santander. As of December 31, 2007, the Group was comprised of 636 companies that were fully consolidated. In addition, another 120 companies are entities affiliated within the group, jointly-controlled entities or listed companies in which the group holds an interest greater than 3%. 7.2. MOST SIGNIFICANT COMPANIES OF THE GROUP Below is a list of the principal fully consolidated subsidiaries that make up Grupo Santander, together with their corporate name, registered office, business and the direct or indirect percentage interest held in each.
Data At December 31, 2007 % Ownership by Bank % Voting Company Registered Office Direct Indirect Rights (f) Line of Business Abbey Covered Bonds LLP United Kingdom - (a) - Finance Abbey National Alpha Investments (c) United Kingdom 0.00% 100.00% 100.00% Finance Abbey National American Investments Limited United Kingdom 0.00% 100.00% 100.00% Finance Abbey National Baker Street Investments United Kingdom 0.00% 100.00% 100.00% Finance Abbey National Beta Investments Limited United Kingdom 0.00% 100.00% 100.00% Finance Abbey National Financial Investments 4 B.V. The Netherlands 0.00% 100.00% 100.00% Finance Abbey National General Insurance Services Limited United Kingdom 0.00% 100.00% 100.00% Advisory services Abbey National Homes Limited United Kingdom 0.00% 100.00% 100.00% Finance Abbey National International Limited Jersey 0.00% 100.00% 100.00% Banking Abbey National Investments United Kingdom 0.00% 100.00% 100.00% Finance Abbey National June Leasing (5) Limited United Kingdom 100.00% 0.00% 100.00% Leasing Abbey National March Leasing (4) Limited United Kingdom 0.00% 100.00% 100.00% Leasing Abbey National PEP & ISA Managers Limited United Kingdom 0.00% 100.00% 100.00% Fund and portfolio management Abbey National plc United Kingdom 100.00% 0.00% 100.00% Banking Abbey National Property Investments United Kingdom 0.00% 100.00% 100.00% Finance Abbey National Securities Inc. United States 0.00% 100.00% 100.00% Securities company Abbey National Treasury International (IOM) Limited Isle of Man 0.00% 100.00% 100.00% Banking Abbey National Treasury Investments United Kingdom 0.00% 100.00% 100.00% Finance Abbey National Treasury Services Investments Limited United Kingdom 0.00% 100.00% 100.00% Finance Abbey National Treasury Services Overseas Holdings United Kingdom 0.00% 100.00% 100.00% Holding company Abbey National Treasury Services plc United Kingdom 0.00% 100.00% 100.00% Banking Abbey National UK Investments United Kingdom 0.00% 100.00% 100.00% Finance Agencia de Seguros Santander, Ltda. Colombia 0.00% 100.00% 100.00% Insurance Alcaidesa Holding, S.A. (consolidated) Spain 0.00% 44.60% 50.01% Real estate América Latina Tecnología de México, S.A. De C.V. Mexico 100.00% 0.00% 100.00% IT services Andaluza de Inversiones, S.A. Spain 0.00% 100.00% 100.00% Holding company Aviación Regional Cántabra, A.I.E. Spain 73.58% 0.00% 73.58% Leasing Banco Alicantino de Comercio, S.A. Spain 0.00% 89.19% 100.00% Banking Banco Banif, S.A. Spain 100.00% 0.00% 100.00% Banking Banco de Albacete, S.A. Spain 100.00% 0.00% 100.00% Banking Banco de Asunción, S.A. Paraguay 0.00% 99.33% 99.33% Banking Banco de Venezuela, S.A., Banco Universal Venezuela 96.78% 1.64% 98.42% Banking Banco Español de Crédito, S.A. Spain 88.12% 1.07% 89.19% Banking Banco Madesant - Sociedade Unipessoal, S.A. Portugal 0.00% 100.00% 100.00% Banking Banco Santander (Panamá), S.A. Panama 0.00% 100.00% 100.00% Banking Banco Santander (Suisse) SA Switzerland 0.00% 100.00% 100.00% Banking
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Data At December 31, 2007 % Ownership by Bank % Voting Company Registered Office Direct Indirect Rights (f) Line of Business Banco Santander Bahamas International Limited Bahamas 0.00% 100.00% 100.00% Banking Banco Santander Chile Chile 0.00% 76.73% 76.91% Banking Banco Santander Colombia, S.A. Colombia 0.00% 97.64% 97.64% Banking Banco Santander Consumer Portugal S.A. Portugal 0.00% 100.00% 100.00% Banking Banco Santander International United States 95.89% 4.11% 100.00% Banking Banco Santander Perú S.A. Peru 99.00% 1.00% 100.00% Banking Banco Santander Puerto Rico Puerto Rico 0.00% 90.59% 100.00% Banking Banco Santander Río S.A. Argentina 8.23% 91.07% 99.30% Banking Banco Santander, S.A. Brazil 0.00% 98.08% 98.08% Banking Banco Santander Totta, S.A. Portugal 0.00% 99.72% 99.86% Banking Banco Santander, S.A. Uruguay 90.93% 9.07% 100.00% Banking Banco Santander, S.A., Institución de Banca Múltiple Grupo Financiero Santander Mexico 0.00% 74.95% 99.99% Banking Banco Totta de Angola, SARL Angola 0.00% 99.70% 99.99% Banking Banesto Banco de Emisiones, S.A. Spain 0.00% 89.19% 100.00% Banking Banesto Bolsa, S.A., Sdad. Valores y Bolsa Spain 0.00% 89.19% 100.00% Securities company Banesto Factoring, S.A. Establecimiento Financiero de Crédito Spain 0.00% 89.19% 100.00% Factoring Banif Gestión, S.A., S.G.I.I.C. Spain 0.00% 97.84% 100.00% Fund manager Bansalease, S.A., E.F.C. Spain 100.00% 0.00% 100.00% Leasing BRS Investment S.A. Argentina 0.00% 100.00% 100.00% Holding company Banco Santander de Negocios Portugal, S.A. Portugal 0.00% 99.86% 100.00% Banking BST International Bank, Inc. Puerto Rico 0.00% 99.72% 100.00% Banking CA Premier Banking Limited United Kingdom 0.00% 100.00% 100.00% Banking Cántabra de Inversiones, S.A. Spain 100.00% 0.00% 100.00% Holding company Cántabro Catalana de Inversiones, S.A. Spain 100.00% 0.00% 100.00% Holding company Capital Riesgo Global, SCR de Régimen Simplificado, S.A. Spain 87.09% 12.91% 100.00% Venture capital company Carfax (Guernsey) Limited Guernsey 0.00% 100.00% 100.00% Insurance company Cartera Mobiliaria, S.A., SICAV Spain 0.00% 74.49% 89.63% Securities investment Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander Mexico 0.00% 74.93% 99.97% Securities company Cater Allen International Limited United Kingdom 0.00% 100.00% 100.00% Securities company Cater Allen Limited United Kingdom 0.00% 100.00% 100.00% Banking CB Extrobank Russia 0.00% 100.00% 100.00% Banking Central Inmobiliaria de Santiago, S.A. de C.V. Mexico 100.00% 0.00% 100.00% Real estate management Centro de Equipamientos Zona Oeste, S.A. Spain 93.62% 6.38% 100.00% Real estate Corpoban, S.A. Spain 0.00% 89.19% 100.00% Securities investment Crefisa, Inc. Puerto Rico 100.00% 0.00% 100.00% Finance Drive ABS LP United States 0.00% 90.00% 100.00% None Drive Consumer LP United States 0.00% 90.00% 100.00% None Drive VFC GP LLC United States 0.00% 90.00% 100.00% None Dudebasa, S.A. Spain 0.00% 89.19% 100.00% Finance Efectividad en Medios de Pago, S.A. de C.V. Mexico 98.61% 1.39% 100.00% Securities company Elerco, S.A. Spain 0.00% 89.19% 100.00% Lease Fideicomiso 100740 SLPT Mexico 0.00% 74.95% 100.00% Finance Fideicomiso GFSSLPT Banca Serfín, S.A. Mexico 0.00% 74.95% 100.00% Finance Gestión de Actividades Tecnológicas, S.A. Spain 99.98% 0.02% 100.00% Securities investment Gestión Industrial Hispamer, S.A. Spain 100.00% 0.01% 100.00% Securities investment Gestión Santander, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión, Grupo Financiero Santander Mexico 0.00% 74.96% 100.00% Finance Hipotebansa EFC, S.A. Spain 100.00% 0.00% 100.00% Mortgage loan company Holmes Financing (No.10) plc United Kingdom - (a) - Finance Holmes Funding Limited United Kingdom - (a) - Finance Hualle, S.A. Spain 0.00% 89.19% 100.00% Securities investment Chapter 7 – Page 2
Data At December 31, 2007 % Ownership by Bank % Voting Company Registered Office Direct Indirect Rights (f) Line of Business Ingeniería de Software Bancario, S.L. Spain 100.00% 0.00% 100.00% IT services Inmobiliaria Lerma y Amazonas, S.A. De C.V. Mexico 0.00% 74.93% 100.00% Real estate management Internacional Compañía Seguros de Vida, S.A. Argentina 0.00% 59.20% 59.20% Insurance Inversiones Turísticas, S.A. Spain 0.00% 89.19% 100.00% Hotel management Island Insurance Corporation Puerto Rico 0.00% 90.59% 100.00% Insurance La Unión Resinera Española, S.A. (consolidated) Spain 74.87% 21.28% 96.23% Chemicals Laboratorios Indas, S.A. (d) Spain 0.00% 73.41% 100.00% Pharmaceutical Laparanza, S.A. (b) Spain 61.59% 0.00% 61.59% Farming operations Luresa Inmobiliaria, S.A. Spain 0.00% 96.14% 100.00% Real estate Luri 1, S.A. Spain 0.00% 5.58% 100.00% Real estate Luri 2, S.A. Spain 0.00% 4.81% 100.00% Real estate N&P (B.E.S.) Loans Limited United Kingdom 0.00% 100.00% 100.00% Leasing Naviera Trans Gas, A.I.E. Spain 99.99% 0.01% 100.00% Shipping Norbest A.S. Norway 7.94% 92.06% 100.00% Securities investment Oil-Dor, S.A. Spain 0.00% 89.19% 100.00% Finance Open Bank Santander Consumer, S.A. Spain 0.00% 100.00% 100.00% Banking Optimal Investment Services SA Switzerland 0.00% 99.99% 99.99% Fund manager Pan American Bank Limited Bahamas 0.00% 100.00% 100.00% Banking Patagon Euro, S.L. Spain 100.00% 0.00% 100.00% Holding company Porterbrook Leasing Company Limited United Kingdom 0.00% 100.00% 100.00% Leasing Porterbrook Maintenance Limited United Kingdom 0.00% 100.00% 100.00% Maintenance services Riobank International (Uruguay) SAIFE Uruguay 0.00% 100.00% 100.00% Banking Rue Villot 26, S.L. Spain 0.00% 80.00% 80.00% Real estate Santander AM Holding, S.L. Spain 100.00% 0.00% 100.00% Holding company Santander Asset Management - Sociedade Gestora de Fundos de Investimento Mobiliário, S.A. Portugal 0.00% 99.86% 100.00% Fund manager Santander Asset Management Distribuidora de Títulos e Valores Mobiliários Ltda. Brazil 0.00% 98.08% 100.00% Manager Santander Asset Management S.A. Administradora General de Fondos Chile 0.00% 76.74% 100.00% Fund manager Santander Asset Management UK Holdings Limited United Kingdom 0.00% 100.00% 100.00% Holding company Santander Asset Management, S.A., S.G.I.I.C. Spain 28.30% 69.54% 100.00% Fund manager Santander Bank & Trust Ltd. Bahamas 0.00% 100.00% 100.00% Banking Santander Benelux, S.A., N.V. Belgium 100.00% 0.00% 100.00% Banking Santander Brasil Arrendamento Mercantil, S.A. Brazil 0.00% 98.08% 100.00% Leasing Santander Brasil S.A. Corretora de Títulos e Valores Mobiliários Brazil 0.00% 98.08% 100.00% Securities company Santander Brasil Seguros S.A. Brazil 0.00% 99.38% 100.00% Insurance Santander Capitalizaçao, S.A. Brazil 0.00% 99.38% 100.00% Finance Santander Cards Limited United Kingdom 100.00% 0.00% 100.00% Financial services Santander Carteras, S.G.C., S.A. Spain 0.00% 100.00% 100.00% Fund manager Santander Consumer (UK) plc United Kingdom 0.00% 100.00% 100.00% Advisory services Santander Consumer Bank AS Norway 0.00% 100.00% 100.00% Finance Santander Consumer Bank AG Germany 0.00% 100.00% 100.00% Banking Santander Consumer Bank S.p.A. Italy 0.00% 100.00% 100.00% Finance Santander Consumer Finance a.s. Czech Republic 0.00% 100.00% 100.00% Leasing Santander Consumer Finance B.V. The Netherlands 0.00% 100.00% 100.00% Finance Santander Consumer Finance, S.A. Spain 63.19% 36.81% 100.00% Banking Santander Consumer Holding GmbH Germany 0.00% 100.00% 100.00% Holding company Santander Consumer Iber-Rent, S.L. Spain 0.00% 60.00% 60.00% Renting Santander Consumer Spain Auto 07-1 Spain - (a) - Securitization Santander Consumer Spain Auto 07-2 Spain - (a) - Securitization Santander Consumer Spólka Akcyjna Poland 0.00% 100.00% 100.00% Banking Santander Consumer USA, Inc. United States 90.00% 0.00% 90.00% Finance
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Data At December 31, 2007 % Ownership by Bank % Voting Company Registered Office Direct Indirect Rights (f) Line of Business Santander Consumer, EFC, S.A. Spain 0.00% 100.00% 100.00% Finance Santander Corredora de Seguros Limitada Chile 0.00% 76.73% 100.00% Insurance company Santander de Leasing, S.A., E.F.C. Spain 70.00% 30.00% 100.00% Leasing Santander de Renting, S.A. Spain 99.99% 0.01% 100.00% Renting Santander Factoring y Confirming, S.A., E.F.C. Spain 100.00% 0.00% 100.00% Factoring Santander Factoring, S.A. Chile 0.00% 99.51% 100.00% Factoring Santander Financial Products, Ltd. Ireland 0.00% 100.00% 100.00% Finance Santander Financial Services, Inc. Puerto Rico 0.00% 90.59% 100.00% Loan company Santander Global Property, S.L. Spain 94.44% 5.56% 100.00% Securities investment Santander International Bank of Puerto Rico, Inc. Puerto Rico 0.00% 90.59% 100.00% Banking Santander Investimentos em Participações S.A. Brazil 0.00% 98.08% 100.00% Collections and payments Santander Investment Bank Limited Bahamas 0.00% 100.00% 100.00% Banking Santander Investment Bolsa, S.V., S.A. Spain 0.00% 100.00% 100.00% Securities company Santander Investment Chile, Limitada Chile 0.00% 100.00% 100.00% Finance Santander Investment Limited Bahamas 0.00% 100.00% 100.00% Securities company Santander Investment Securities Inc. United States 0.00% 100.00% 100.00% Securities company Santander Investment, S.A. Spain 100.00% 0.00% 100.00% Banking Santander Investment, S.A., Corredores de Bolsa Chile 0.00% 88.13% 100.00% Securities company Santiago Leasing, S.A. Chile 0.00% 76.85% 100.00% Leasing Santander Merchant Bank Limited Bahamas 0.00% 100.00% 100.00% Banking Santander Mortgage Corp. Puerto Rico 0.00% 90.59% 100.00% Mortgage loan company Santander Overseas Bank, Inc. g) Puerto Rico 0.00% 100.00% 100.00% Banking Santander PB UK (Holdings) Limited United Kingdom 100.00% 0.00% 100.00% Finance Santander Pensiones, S.A., E.G.F.P. Spain 21.20% 76.64% 100.00% Pension fund manager Santander Portfolio Management UK Limited United Kingdom 0.00% 100.00% 100.00% Finance Santander Private Banking s.p.a. Italy 0.00% 100.00% 100.00% Banking Santander Private Banking UK Limited United Kingdom 0.00% 100.00% 100.00% Real estate Santander Real Estate, S.G.I.I.C., S.A. Spain 0.00% 99.14% 100.00% Fund manager Santander Río Seguros S.A. Argentina 0.00% 100.00% 100.00% Insurance Santander S.A. - Corretora de Câmbio e Títulos Brazil 0.00% 98.08% 100.00% Securities company Santander S.A. Agente de Valores Chile 0.00% 76.95% 100.00% Securities company Santander Securities Corporation Puerto Rico 0.00% 90.59% 100.00% Securities company Santander Seguros de Vida, S.A. Chile 0.00% 100.00% 100.00% Insurance Santander Seguros Generales S.A. Chile 99.50% 0.50% 100.00% Insurance Santander Seguros, S.A. Brazil 0.00% 99.38% 99.38% Insurance Santander Seguros, S.A. Uruguay 0.00% 100.00% 100.00% Insurance Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. Spain 0.00% 95.78% 100.00% Insurance Santander Totta Seguros, Companhia de Seguros de Vida, S.A. Portugal 0.00% 99.86% 100.00% Insurance Santander Unit Trust Managers UK Limited United Kingdom 0.00% 100.00% 100.00% Fund and portfolio management Scottish Mutual Pensions Limited United Kingdom 0.00% 100.00% 100.00% Insurance Seguros Santander, S.A., Grupo Financiero Santander Mexico 0.00% 74.96% 100.00% Insurance Serfin International Bank and Trust, Ltd. Cayman Islands 0.00% 99.72% 100.00% Banking Sheppards Moneybrokers Limited United Kingdom 0.00% 100.00% 100.00% Advisory services Sinvest Inversiones y Asesorías Limitada Chile 0.00% 100.00% 100.00% Finance Sistema 4B, S.A. Spain 52.17% 13.11% 66.87% Cards Solarlaser Limited United Kingdom 0.00% 100.00% 100.00% Real estate Totta & Açores Inc. Newark United States 0.00% 99.72% 100.00% Banking Totta (Ireland), PLC Ireland 0.00% 99.72% 100.00% Finance Totta Crédito Especializado, Instituiçao Financeira de Crédito, S.A. (IFIC) Portugal 0.00% 99.83% 100.00% Leasing Totta Urbe - Empresa de Administraçâo e Construçôes, S.A. Portugal 0.00% 99.72% 100.00% Real estate UNIFIN S.p.A. Italy 0.00% 70.00% 70.00% Finance Chapter 7 – Page 4
Data At December 31, 2007 % Ownership by Bank % Voting Company Registered Office Direct Indirect Rights (f) Line of Business Vista Desarrollo, S.A. SCR Spain 100.00% 0.00% 100.00% Venture capital company W.N.P.H. Gestao e Investimentos Sociedade Unipessoal, S.A. Portugal 0.00% 100.00% 100.00% Securities investment Wallcesa, S.A. Spain 100.00% 0.00% 100.00% Securities investment
(a) Companies over which effective control is exercised. (b) Data as of December 31, 2006, last financial statements approved. (c) Data as of March 31, 2007, last financial statements approved. (d) Data as of June 30, 2007, last financial statements approved. (e) Data homogenized as of calendar fiscal year 2007. (f) Pursuant to Section 3 of Royal Decree 1815/1991, of December 20, approving the rules for the preparation of the consolidated annual financial statements, in order to determine voting rights, the voting rights held by subsidiaries or by other parties acting in their own name but on behalf of Group companies were added to the voting rights directly held by the Parent. Accordingly, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies. (g) Data as of November 30, 2007, last financial statements approved.
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CHAPTER 8
8. PROPERTY, PLANT AND EQUIPMENT 8.1. TANGIBLE ASSETS. The following table shows the number of premises(*) where the Bank carries out its activities as of December 31, 2007 (**).
Country Owned Leased Other Total GERMANY 1 101 8 110 ARGENTINA 146 107 1 254 BRAZIL 185 1,402 0 1,587 CHILE 183 323 9 515 COLOMBIA 39 37 0 76 MEXICO 209 859 77 1,145 PARAGUAY 0 0 0 0 PERU 0 1 0 1 PORTUGAL 259 411 1 671 PUERTO RICO 9 55 1 65 URUGUAY 3 19 - 22 VENEZUELA 165 113 2 280 SPAIN 24 2,861 0 2,885 UNITED KINGDOM (ABBEY) 3 776 0 779 TOTAL 1,224 7,037 129 8,390
(*) Where several offices are located on the same premises, we consider such premises as a single piece of real property. (**) Excluding foreclosed assets given that they are non-current assets for sale.
As of December 31, 2007, there were no significant liens or encumbrances on the balances of tangible assets of the Group. On November 14, 2007, the Group formalized the sale of ten items of real estate to two companies of the Pontegadea group for EUR 458 million, which yielded net gains in the amount of EUR 216 million. Concurrently therewith, an operating lease agreement on the aforementioned properties was executed with such companies (with maintenance, insurance and taxes being borne by the Group) for a mandatory compliance period of 12 to 15 years, during which rent (currently established at EUR 1.722 million a month) will be adjusted annually on each anniversary date of the lease agreements in accordance with the percentage variation in the Consumer Price Index (CPI) in Spain over the prior twelve months, except in the fifth year (effective as from the sixth year), in which rent for nine of the ten properties will be adjusted in accordance with the CPI increased by three percentage points. In nine of the ten lease agreements, the contract may be extended for another 5 five-year periods, plus a final three-year extension up to a total of 40 years. In one of the ten lease agreements, the contract may be extended for another 5 five-year periods up to a total of 40 years. In nine of the ten lease agreements, provision is made for an adjustment of rent to market values upon each extension. In one of the ten lease agreements, it is provided that the adjustment to market values will be made in 2017, with the following adjustments to market values to be made every five years as from 2017. In addition, the lease agreements provide for a purchase option exercisable by the Group at the final expiration thereof (in 2047), except for one of the leases, which provides for the possibility of exercising the option during March 2023, March 2028, March 2033, March 2038, March 2043 and March 2047. Under all of the lease agreements, the
Chapter 8 – Page 1 value of the properties in the event that the purchase option is exercised shall be the market value of the properties on the relevant dates, which value shall be determined, if applicable, by independent experts. Moreover, on November 23, 2007, the Group formalized the sale of 1,152 offices of the Group to the Pearl group for EUR 2,040 million, which resulted in net gains of EUR 860 million. Concurrently therewith, an operating lease agreement on such offices was executed with the Pearl group (with maintenance, insurance and taxes being borne by the Group), for mandatory compliance periods of 24, 25 or 26 years (depending on the property), during which rent (currently established at EUR 8.417 million a month, payable on a quarterly basis) will be adjusted annually on each anniversary date of the lease agreements: (i) during the first 10 years under the contract, in accordance with the percentage variation in the CPI in Spain over the prior twelve months plus 215 basis points; and (ii) as from the eleventh year, in accordance with the variations in the CPI. The agreements may be extended for a maximum of another 3 seven-year periods each, up to a total of 45, 46 or 47 years (depending on the property), with rent to be adjusted to market values at the expiration of the mandatory compliance period and at the expiration of each extension, and provide for a purchase option exercisable by the Group at the final expiration of the lease (45, 46 and 47 years, depending on the property) at the market value of the properties on such date, which value shall be determined, if applicable, by independent experts. Among the other terms and conditions agreed, all of which are customary arm’s length terms and conditions in operating lease agreements, especially noteworthy is, inter alia, that none of the aforementioned lease agreements provides for the transfer of title to the properties to the Group at the expiration of the agreements, the Group being entitled not to extend the lease beyond the minimum mandatory compliance period. In addition, the Group has not given the purchasers any warranty in connection with any losses that might stem from early termination of the agreements, or in connection with any possible fluctuations in the residual value of the properties. In conducting the above-described transactions, the Group obtained advice from independent experts, who estimated the economic useful life of the properties conveyed as of the date of the transaction, which life was in all cases greater than 60 years. Such independent experts also analyzed both the sales price of the aforementioned properties and the subsequent rent amounts agreed, and concluded that they had been set at fair market values as of such date. The lease expenses recognized by the Group in fiscal year 2007 in connection with the above-mentioned agreements came to EUR 10 million, which amount consists entirely of minimum payments under contract. The present value of the minimum future payments that the Group will incur during the mandatory compliance period (assuming that neither the right to an extension nor the existing purchase options will be exercised) comes to EUR 122 million over a one-year period, EUR 443 million between one and five years (EUR 117 million in 2009, EUR 113 million in 2010, EUR 109 million in 2011 and EUR 105 million in 2012), and to EUR 1,253 million beyond five years. On September 12, 2008, Banco Santander formalized the sale of Ciudad Financiera Santander to the consortium led by the British real estate investor Propinvest and simultaneously leased it back for a 40-year period; the Bank also reserved a purchase option right exercisable at the expiration of such period.
Chapter 8 – Page 2
The amount of the transaction came to EUR 1,900 million, as originally envisaged. Santander realized gains from this sale in an amount close to EUR 600 million, which are not included in third quarter earnings. With this transaction, Banco Santander culminated the process of sale of the buildings used by it in Spain, which began in 2007 within the framework of the transaction for the acquisition of ABN AMRO. Sales totaled EUR 4,434 million, with gains amounting approximately to EUR 1,680 million.
8.2. ENVIRONMENTAL ISSUES. There are no environmental issues that might affect the Bank’s use of its tangible fixed assets.
Chapter 8 – Page 3
CHAPTER 9
9. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 9.1. FINANCIAL SITUATION. 9.1.1. Results of the Consolidated Group. The main aspects of the Group’s financial development in 2007 were as follows: • Santander Group obtained an attributable profit of EUR 9,060 million, 19.3% more than in 2006. In recurring terms, i.e., without including extraordinary gains and allowances (EUR 950 million in 2007 and EUR 1,014 million in 2006), the attributed profit was EUR 8,111 million, an increase of 23.2%, which figure includes EUR 60 million for the net contribution of the businesses acquired from ABN AMRO.
• Strong growth in earnings per share: EPS amounted to EUR 1.43, or EUR 1.28 excluding capital gains, which represents growth of 17.5% and 21.4%, respectively. The EPS for 2007 includes the total number of shares into which the “Valores Santander” must be converted, weighted by the period in which the latter have been issued.
• In line with these results, the dividend per share charged to income for the fiscal year 2007, approved at the General Shareholders’ Meeting held on June 21, 2008 following the proposal of the Board of Directors, was EUR 0.650781. This represents a 25% increase for the third consecutive year, maintaining the payout at around 50% of the profit before extraordinary capital gains and allowances, and represents a 4.7% return on the average share price in 2007.
• Improvements in returns (excluding gains) compared to 2006, both on equity (ROE: 19.6%; up 1.1%) and on risk assets (RORWA: 1.76%; up 16 basis points).
• Risk quality: the loan delinquency ratio was 0.95%, having increased slightly in most recent quarters, and coverage increased to 151%, favored by the general allowance of EUR 6,027.
• Capital ratios: the BIS ratio was 12.66% and core capital was 6.25%. This high level of solvency is due to three factors: the capacity to generate ordinary profits, the active management of the Group’s businesses and the continued optimization of the balance sheet.
• Group Rating: the rating agencies Standard & Poor’s and Fitch Ratings both improved the Group’s rating in 2006. In March 2007, Standard & Poor’s improved the long-term rating from A+ to AA and in April 2007 Moody’s improved it from AA to Aa1, while maintaining the financial strength rating. As of June 2008, these ratings had not been modified. After announcing the acquisition of Alliance & Leicester, the deposits of Bradford & Bingley and all the capital of Sovereign, Fitch has changed its view to “negative” until all the necessary approvals have been received and the scope of the risks of integration assimilated can be assessed.
Chapter 9 – Page 1
Set forth below is a summary income statement for the last three fiscal years (the statutory income statement is included in Chapter 20.3.2 of this document):
Variation Millions of Euros 2007 2006 Amount (%) 2005
Interest income (w/o dividends) 14,882 12,075 2,806 23.2 10,324 Income from equity interests 413 404 9 2.3 336 Net interest income 15,295 12,479 2,815 22.6 10,659 Share of results from entities accounted for by the equity method 441 427 15 3.4 619 Net fees and commissions 8,040 7,024 1,016 14.5 6,061 Insurance activity 319 253 66 26.2 201 Commercial revenue 24,096 20,184.0 3,912 19.4 17,541 Gains (losses) on financial transactions 2,972 2,149 824 38.3 1,534 Gross operating income 27,068 22,333 4,736 21.2 19,075 Income from non-financial services 152 119 33 27.9 156 Other operating income (119) (119) 0 0.0 (89) Operating expenses (12,286) (11,115) (1,171) 10.5 (10,379) General administrative expenses (10,940) (9,899) (1,041) 10.5 (9,274) Personnel (6,551) (5,968) (583) 9.8 (5,611) Other administrative expenses (4,467) (4,001) (466) 11.6 (3,753) Amortization (1,268) (1,147) (121) 10.6 (1,014) Net operating income 14,816 11,217 3,598 32.1 8,764 Impairment losses on assets (5,079) (2,551) (2,528) 99.1 (1,802) Loans (3,499) (2,467) (1,032) 41.8 (1,615) Goodwill (600) (13) (587) 4,583.4 0 Other assets (979) (70) (909) 1,290.0 (187) Other income (expenses) 1,438 328 1,110 338.1 698 Profit before tax 11,175 8,995 2,180 24.2 7,660 Income tax (2,336) (2,255) (81) 3.6 (1,242) Net profit from ordinary activity 8,840 6,740 2,099 31.1 6,418 Profit from discontinued operations (net) 797 1,505 (708) (47.1) 331 Consolidated profit for the year 9,636 8,245 1,391 16.9 6,749 Profit attributed to minority interests (576) (650) 74 (11.4) (530) Profits attributed to the Group 9,060 7,595 1,465 19.3 6,219 Memorandum item: Net of extraordinary gains and allowances 950 1,014 (64) (6.3) 1,008 Profit attributed to the group (ordinary) 8,110 6,581 1,529 23.2 5,211 Memorandum item:
Average total assets 877,682 814,235 63,447 7.8 740,225 Average shareholders’ equity 41,352 35,505 5,847 16.5 31,326
Chapter 9 – Page 2
Grupo Santander operated against a backdrop of strong world economic growth (up 5.2%), although the fiscal year ended on a more uncertain note. The instability of the financial markets in the last part of 2007, combined with high energy prices and a U.S. business cycle that had reached maturity, led to a moderation of global economic growth in the last quarter of 2007. However, the strength of the emerging economies made it possible to sustain growth above 4%, thus counteracting the weak performance of the most developed economies, particularly the United States.
The United States ended the fourth quarter of 2007 with GDP growth of 0.6%, which fell to 2.2% for the year as a whole. The unfavorable financial and real estate environment and high energy prices at the end of 2007 suggest that the downturn will continue. To counteract this trend, the U.S. Federal Reserve significantly reduced the official interest rate in the second half of 2007 (4.25% at year end compared to 5.25% in 2006) and in 2008 (3.0% in February). In addition, the U.S. Government announced a package of tax incentives. Despite the high inflation rate, current economic trends give the Federal Reserve room to make further interest rate cuts.
Latin America has remained untouched by the crisis in the markets thanks to its sound financial and foreign trade positions, high raw material prices, its links to the Asian economies, and the vitality of its domestic demand. As a result, the region’s GDP grew by more than 5%. The increase in inflation, which left less room to maneuver as regards monetary policies, together with the slowdown of the developed economies, slightly dampened growth in the region in 2008, although it remained solid (above 4%).
Activity in the region’s three major economies grew strongly. Only Mexico witnessed slower growth to 3% due to the influence of the U.S., which was offset by solid and growing domestic demand. The strong growth of Brazil and Chile of over 5% created inflationary pressure, especially in Chile, which led its central bank to raise the official interest rate to 6%. Consequently, exchange rates have remained steady.
The Eurozone experienced notable growth in 2007 (2.7%) although this fell slightly in the last part of the year (2.3% in the fourth quarter). The greater financial strength of its private sector made it more resilient to turbulence in the financial markets than in the U.S. Inflation rose to 3.1%, exceeding the target level of 2%. This limited the leeway of the European Central Bank, which has maintained the official interest rate at 4% since the mid-2007. Against this backdrop, the euro remained strong (EUR 1 = USD 1.47).
In Spain, GDP continued to show strong growth of 3.8%, although growth slackened somewhat during the last quarter (3.5%). Solid domestic demand continued to be the mainstay within the general slowdown, which is somewhat more pronounced in the construction industry, while foreign trade mitigates growth to a lesser extent. Inflation rose at the end of the year to over 4%.
In the United Kingdom, GDP grew by 3.1%, exceeding its potential, despite more moderate growth in the last quarter (2.9%). The Bank of England’s reductions in the official interest rate in December 2007 and January 2008 to 5.25% sought to counteract this tendency. However, inflation above the 2% target might limit the room for maneuver of monetary policy. Against this backdrop, the pound lost value, depreciating 8% against the euro (to EUR 1 = GDP 0.73).
Chapter 9 – Page 3
The performance of the U.S. dollar, the pound sterling and the other currencies in which Santander operates had a slightly negative impact on the Group’s income and expenses (approximately 2-3%). The impact on the balance sheet was negative, at around 5%.
Earnings performance in 2007 once again shows the strength of the Group’s business model, which was adapted to the different markets in order to achieve solid growth in income, margins, and profit at a local level and, by extension, at a global level. The focus on customers and on the retail network, the potential of Santander’s business portfolio and the continued effort to improve commercial and operational efficiency are some of the factors explaining this trend.
In sum, the tendency of the Group and of the business areas in 2007 shows how the Santander Group was capable of maintaining its profit growth path in a complicated market for banking and financial services. An analysis of the Group’s business plan shows the effort made to increase income and improve efficiency in all areas, strengthening activity with customers in all geographic and business areas in which it is present, while also strengthening the solvency of the Group’s balance sheet and improving the profitability of assets and equity.
This focus on growth and generating present profit combined with the Group’s proactive approach to make possible increased future profits, reflected in the following actions: investments have continued in retail networks (on a like-for-like basis, the Group opened 500 offices and more than 1,500 ATMs) and in customer attraction and loyalty; steps were taken to make Abbey more of a retail bank; the globalization of the Group has been enhanced; and, lastly, ABN AMRO’s assets were acquired, which increases growth potential.
9.2. OPERATING PROFIT The accompanying income statements for the fiscal years 2006 and 2005 differ from those originally approved at the General Shareholders’ Meeting in that, as a result of the divestment carried out by the Group in 2007 of the pension business in Latin America, the results arising from the consolidation of these companies (EUR 116 million in 2006 and EUR 106 million in 2005) were reclassified for comparative purposes, in accordance with accounting standards, from each of the headings under which they were recorded in the approved consolidated financial statements for 2006 and 2005, to “Profit from discontinued operations” in the accompanying income statement. The gains arising in 2007 on the sale of the investment in Intesa Sanpaolo and of the properties in Spain (EUR 566 million and EUR 1,620 million, respectively, recognized under “Other Gains”), the proceeds from the divestment of the Latin American pension business (EUR 831 million, recognized under “Discontinued operations”) and the sale of the investment in Banco Portugués do Investimento (EUR 107 million, recognized under “Gain/losses on financial assets and liabilities”) were used to assign allowances to the investment in Sovereign3 (EUR 1,053 million), to provision intangible assets (EUR 542 million), to recognize special provisions for retirement and pension plans (EUR 317 million) and to recognize other provisions and write-downs (EUR 117 million euros). As a result, the gross gains realized in 2007 (EUR 3,124 million) contributed EUR 950 million, after the aforementioned uses and net of tax and minority interests, to “Profit attributed to the Group.”
3 Of this amount, the corresponding goodwill implicit in Sovereign amounts to EUR 586 million, and the amount corresponding to exchange differences is EUR 104 million, recorded under “Gain/losses on financial assets.” Chapter 9 – Page 4
The gains generated in 2006 through the sale of the investments in Banco Santander Chile, San Paolo IMI, S.p.A. (San Paolo) and Antena 3 TV (EUR 270 million, 705 million and 294 million, respectively, recorded under “Other gains/losses”) and the gain generated by the divestment of Urbis (EUR 1,218 million, recognized under “Discontinued operations”) were used to fund a significant portion of the retirement plans (EUR 716 million), to re-estimate the impact of the reduction in the standard tax rate for the Corporate Income Tax (Impuesto sobre Sociedades) in Spain (EUR 491 million), and to recognize the expense of delivering 100 Bank shares to each employee in the Group (EUR 179 million). Accordingly, the gains realized in the fiscal year (EUR 2,487 million, before tax), after the aforementioned uses and net of tax and minority interests, contributed EUR 1,014 million to profit attributed to the Group. In 2005, the gains on the disposal of the investments in Unión Fenosa, S.A., Royal Bank of Scotland Group Plc and Auna Operadores de Telecomunicaciones, S.A. (EUR 1,157 million, EUR 717 million and EUR 355 million, respectively, which are recognized under “Other gains/losses”) were partially used to fund early retirement plans and to amortize early restructuring costs. Therefore, the realized gains (EUR 2,229 million before tax) contributed, after the aforementioned uses and net of tax, EUR 1,008 million to the profit attributed to the Group for 2005. Below is a breakdown of changes in the Group’s consolidated income statement for 2007 compared to 2006.
I) NET INTEREST INCOME:
Variation 2007 2006 2005 2007/2006 Mill. euros Mill. euros (%) Mill. euros
+ Interest and similar income 45,803.4 36,832.8 24.4 33,088.6 + Income from equity instruments 413.2 404.0 2.3 335.6 - Interest expense and similar charges (30,921.5) (24,757.0) 24.9 (22,764.8)
Net interest income 15,295.1 12,479.8 22.6 10,659.4
The Group’s net interest income was EUR 15,295 million, 22.6% more than in 2006. Growth was particularly notable at the Santander Network, Banesto, Brazil, Mexico and Chile. Abbey has also had a good year, increasing net interest income by 11%. Furthermore, this growth has proven to be sound and sustained since, excluding dividends and the cost of financing ABN AMRO in the last quarter of 2007 (the income of which is not reflected here because it is accounted for using the equity method), consecutive increases have been reported each quarter for the last three years.
Chapter 9 – Page 5
II) COMMERCIAL REVENUE:
Variation 2007 2006 2006/2005 2005 Mill. euros Mill. euros (%) Mill. euros Net interest income 15,295.1 12,479.8 22.6 10,659.4 + Fee and commission income 9,480.0 8,288.6 14.4 7,153.9 - Fee and commission expense (1,439.8) (1,264.4) 13.9 (1,092.8 ) + Share of results of entities accounted for using the equity method 441.4 426.9 3.4 619.2 + Insurance activity income 319.4 253.1 26.2 201.5 Commercial revenue 24,096.1 20,184.0 19.4 17,541.2
The changes in net interest income, fees and commissions and insurance activities drove commercial revenues to EUR 24,096.1 million, 19.4% more than in 2006. The increase for 2006 compared to 2005 was 15.1%. The following changes are worthy of note: a) Net fees and insurance activity
Net fees and commissions Variation Millions of euros 2007 2006 (%) 2005 Commissions for services 3,736.5 3,276.3 14.1 2,855.1 Credit and debit cards 853.1 663.7 28.5 620.0 Insurance 1,431.9 1,184.7 20.9 924.1 Account management 571.4 554.9 3.0 544.6 Bill discounting 225.1 231.6 (2.8) 218.4 Contingent liabilities 349.9 302.0 15.8 252.9 Other transactions 1,737.0 1,524.1 14.0 1,219.2 Mutual and pension funds 1,891.4 1,785.5 5.4 1,645.0 Securities services 980.4 777.7 26.1 637.0 Net fees and commissions 8,040.2 7,024.2 14.5 6,061.2 Insurance activity 319.4 253.1 26.2 201.5 Net fees and insurance activity 8,359.3 7,277.3 14.9 6,262.7
Net fees and commissions income totaled EUR 8,040 million, representing an increase of 14.5% with respect to the previous year, including most notably the 21.6% growth achieved in Latin America. More modest performance occurred in Continental Europe (up 13.3%), highly conditioned by the impact on the Santander Network of the extension to other customer groups of the We Want to Be Your Bank (Queremos ser tu Banco) campaign and by the launch in Portugal of the Zero Fees (Comissões Zero) strategy, the aim of which is to attract new customers and retain existing customers. The highest levels of growth were experienced by Santander Consumer Finance, Global Wholesale Banking and Banif. For its part, the figures for Abbey fell slightly (down 1.8%), due to the drop in income from commissions on current accounts (caused by regulatory matters that are affecting the entire British financial system), which was almost completely offset by a wider range of products and improvements in cross-selling.
In terms of products, the greatest growth was experienced in fees and commissions from cards (up 28.5%), securities (up 26.1%) and insurance (up 20.9%), while guarantees and other contingent liabilities also performed well.
Chapter 9 – Page 6
In addition to the insurance fees and commissions mentioned above, insurance activity contributed income of EUR 319 million, representing a year-on-year increase of 26.2%. Latin America was particularly strong, increasing by 42.6%.
b) Share of results of entities accounted for using the equity method The share of results of entities accounted for using the equity method contributed EUR 441 million, a year-on-year increase of 3.4%. Disregarding the results contributed by ABN, this figure would be EUR 300 million, a 29.7% fall, due to the lower contribution from the investment in CEPSA. Part of this fall is because of the accounting change due to the shareholding restructuring in the stake carried out in 2006, which is offset by lower minority interests. Also included in this line is profit of EUR 43 million from the stake in Sovereign Bancorp.
III) GROSS OPERATING INCOME:
Variation 2007 2006 2007/2006 2005 Mill. euros Mill. euros (%) Commercial revenue 24,096.1 20,184.0 19.4 17,541.2 + Gains/losses on financial assets and liabilities 2,321.6 2,052.5 13.1 1,457.8 + Exchange differences 650.7 96.6 573.4 76.5 Gross income 27,068.5 22,333.2 21.2 19,075.5
Gross operating income reached EUR 27,068.5 million in 2007, 21.2% more than the figure obtained in 2006. In turn, gross operating income for 2006 was 17.1% higher than that achieved in 2005. Gain/losses on financial assets and liabilities and exchange differences Net gains on financial assets and liabilities amounted to EUR 2,972 million, a year-on-year increase of 38.3%, growth largely helped by the strong results in 2007 in EUR/USD and EUR/GBP exchange rate positions, and by the adverse impact in 2006 of the write-down of structural interest rate risk hedging portfolios.
In the available-for-sale portfolios, of note are the profits obtained during the fiscal year 2007 through the sale of Bolsas y Mercados Españoles (EUR 111 million), BPI (EUR 107 million) and Telefónica, S.A. (EUR 138 million).
Chapter 9 – Page 7
IV) NET OPERATING INCOME: Net operating income was EUR 14,815.7 million, an increase of 32.1% compared to 2006, which in turn rose by 28.0% compared to 2005.
Variation
2007/2006 Millions of Euros 2007 2006 (%) 2005 Gross income 27,068.5 22,333.2 21.2 19,075.6 Net income from non-financial services 152.1 118.9 27.9 156.2 Other operating income 351.1 323.9 8.4 256.1 Operating costs: (12,286.2) (11,115.7) 10.5 (10,378.3) Personnel expenses (6,551.2) (5,967.9) 9.8 (5,611.3) Other administrative expenses (4,467.1) (4,001.3) 11.6 (3,753.1) Depreciation and amortization (1,267.9) (1,146.5) 10.6 (1,013.9) Other operating expenses (469.7) (442.5) 6.1 (344.8) Net operating income 14,815.7 11,217.7 32.1 8,764.7 Efficiency ratio % 44.22 48.56 52.94 Average number of employees 129,132 123,208 120,081 Personnel expenses per employee (thousands of 50.7 48.4 46.7 Euros) (**) % of personnel expenses/operating costs(***) 53.3 53.7 54.1 Number of branches 11,178 10,852 10,201 Employees per branch 11.6 11.4 11.8 ATA per branch (millions of Euros) 78.5 75.0 72.6 Net operating income per branch (millions of Euros) 2.4 2.1 1.9
ATA. = Average Total Assets.
Operating expenses The aggregate amount of Operating expenses includes general administrative expenses (personnel and other administrative expenses) and depreciation and amortization of tangible and intangible assets. Total expenses increased by 10.5%, reaching EUR 12,286.1 million, with a strong performance from retail areas and an above-average increase in global business due to expansion projects in progress.
The following table gives a breakdown of operating expenses:
Chapter 9 – Page 8
Operating expenses Variation Millions of euros 2007 2006 (%) 2005
Personnel expenses 6,551.2 5,967.9 9.8 5,611.3 Non-financial general expenses 37.2 28.6 30.1 34.1 Financial general expenses: 4,429.9 3,972.8 11.5 3,719.0 Information technology 487.0 416.8 16.9 417.7 Communications 416.6 346.2 20.3 390.0 Advertising 560.7 471.6 18.9 387.1 Building and premises 845.8 844.7 0.1 757.6 Printing and office supplies 138.1 122.2 13.0 116.8 Taxes 276.9 226.3 22.4 178.2 Other 1,704.8 1,545.0 10.3 1,471.6 Amortization of assets 1,267.8 1,146.5 10.6 1,013.9 Tangible assets 621.3 628.5 (1.46) 618.1 Intangible assets 646.6 518.0 24.8 395.8 Operating expenses 12,286.1 11,115.8 10.5 10,378.3
V) IMPAIRMENT LOSSES, PROVISIONS AND OTHERS: a) Impairment losses Impairment losses were EUR 5,078.5 million, 99.1% more than the previous year. Most of this amount (EUR 3,499.1 million) related to net impairment charges for loans, which were 41.8% higher than in 2006. This increase was basically due on to the net effect of, on the one hand, higher impairment charges in Latin America (EUR 760 million) and the inclusion of Drive in the scope of consolidation Drive (EUR 407 million) and, on the other, the lower general credit loss provisions recognized in the year as compared to 2006 (down EUR 434 million), mostly in Global Wholesale Banking. Below is a breakdown of net provisions for credit losses: Variation Provisions for credit losses and country risk 2007/2006 Millions of Euros 2007 2006 (%) 2005 Non-performing loans (4,216.3) (3,123.2) 35.0 (2,013.1) Country risk 93.0 103.4 (10.05) (88.2) Recovery of written-off assets 624.2 552.7 13.0 486.3 Net provision for credit losses (3,499.1) (2,467.1) 41.8 (1,615.0)
Net losses for impairment of goodwill increased by EUR 587.2 million euros with respect to 2006, reaching EUR 600 million. This increase was due to the allowances for goodwill generated in the acquisition of the Group’s stake in Sovereign (EUR 586 million). In addition, “other impairment losses” amounted to EUR 979.4 million, an increase of EUR 909.0 million compared to 2006. The main provisions were related to the impairment of EUR 542.2 million in intangibles and EUR 363.7 million for impairment, other than that of goodwill, of the Group’s stake in Sovereign.
Chapter 9 – Page 9
b) Other Gains/Losses: “Other gains/losses” increased by EUR 1,109.8 million compared to 2006, reaching a figure of EUR 1,438.1 million. The following table gives a breakdown of Other Gains and Other Losses: Variation 2007/2006 Millions of Euros 2007 2006 (%) 2005
On the disposal of tangible assets 1,804.1 88.9 1,929.5 80.6 Of which, for the sale of real estate 1,620.1 - -
On the disposal of investments 16.4 272.0 (94.0) 1,298.9 Of which: Unión Fenosa - - 1,156.6 Sale of ADRs (Chile) - 269.8 -
Other 322.8 1,044.9 (69.1) 1,133.8 Of which: gains obtained on the disposal of: - Antena 3 - 294.3 - - San Paolo 566.1 704.9 (19.7) - - Royal Bank of Scotland Group, plc - - 717.4 - Auna - - 354.8
Of which for extraordinary retirement plans (316.9) - -
Net financial gain from non-financial activities 1.4 1.8 (21.8) (7.9) Net provision for credit losses (706.6) (1,079.3) (34.5) (1,807.4) Net gains 1,438.1 328.2 338.1 698.2
VI) PROFIT ATTRIBUTED TO THE GROUP: The following table provides a breakdown of profits obtained during the fiscal years 2007, 2006 and 2005: Variation 2007/2006 Millions of Euros 2007 2006 (%) 2005 Profit before tax 11,175.2 8,995.4 24.2 7,660.9 Income tax (2,335.7) (2,254.6) 3.6 (1,241.8) Profit from continuing operations 8,839.6 6,740.8 31.1 6,419.1 Profit from discontinued operations (net) 796.6 1,505.0 (47.1) 330.7 Consolidated profit for the year 9,636.2 8,245.6 16.9 6,749.8 Profit attributed to minority interests (575.9) (649.8) (11.4) (529.7) Profits attributed to the Group 9,060.3 7,595.9 19.3 6,220.1 Memorandum item: Net of extraordinary gains and allowances 949.7 1,013.6 (6.3) 1,008.3 Profit attributed to the group (ordinary) 8,110.5 6,582.3 23.2 5,211.8
“Profit before tax” was EUR 11,175.2 million, a 24.2% increase over 2006. Beneath “Profit from continuing operations,” which amounted to EUR 8,839.6 million in 2007, “Profit from discontinued operations” amounted to EUR 796.6 million in 2007 (EUR 1,505.0 million in 2006). This includes the net profit generated by operations discontinued in both fiscal years (in 2007, the sale of the pension fund management
Chapter 9 – Page 10 businesses in Latin America and, in 2006, the sale of Abbey’s insurance business, the investment in Urbis, Banco de Santa Cruz in Bolivia and AFP Unión Vida in Peru). Consolidated profit for the year was EUR 9,636.2 million. Of that amount, EUR 575.9 million was for minority interests, which fell 11.4%.
After deducting minority interests, the profit attributed to the Group in 2007 increased 19.3% to a figure of EUR 9,060.3 million.
Excluding capital gains and extraordinary allowances, “ordinary” attributed profit was EUR 8,110.3 million (a 23.2% increase over 2006). In 2006, the figure for ordinary attributed profit reached EUR 6,581.4 million, 26.3% more than in 2005.
9.2.1. Information regarding significant factors. See Chapter 9.1.1. 9.2.2. Significant changes in income See Chapter 9.1.1. 9.2.3. Information regarding governmental, tax, monetary and political actions Law 35/2006, of November 28, on Personal Income Tax and Partially Amending the Corporate Income Tax, Non-Resident Income Tax and Wealth Tax Laws, establishes, inter alia, a reduction over two years of the standard corporate income tax rate in Spain which, at December 31, 2006, was 35%. The rate cut will be as follows:
Tax periods Tax Commencing on rate
January 1, 2007 32.5% January 1, 2008 30.0%
For this reason, in 2006 the Group re-estimated the amount of deferred tax assets and liabilities and tax carryforwards recognized in the consolidated balance sheet, taking into account the fiscal year in which the restated reversal will foreseeably take place. As a result, a net charge was booked under “Income tax” in the consolidated income statement for 2006 in the amount of EUR 491 million.
Chapter 9 – Page 11
CHAPTER 10
10. CAPITAL 10.1 ISSUER’S CAPITAL (LONG AND SHORT TERM) This Chapter presents Grupo Santander’s issued capital and shareholders’ equity. The following table discloses the shareholders’ equity and preferred securities of Grupo Santander at December 31, 2007, 2006 and 2005:
Millions of euros Sept. 30, ‘08 2007 2006 Var. (%) 2005 Capital stock 3,127 3,127 3,127 - 3,127 Additional paid-in surplus 20,370 20,370 20,370 - 20,370 Reserves 28,069 23,458 12,352 89.9 8,781 Treasury stock (77) 0 (127) (99.8) (53) Subtotal I 51,490 46,955 35,722 31.4 32,225 Attributable profit 6,935 9,060 7,596 19.3 6,220 Interim dividend distributed (846) (1,538) (1,337) 15.0 (1,163) Subtotal II 57,579 54,478 41,981 29.8 37,283 Interim dividend not distributed (2,532) (1,919) 32.0 (1,442) Shareholders’ equity (*) 57,579 51,945 40,062 29.7 35,841 Valuation adjustments (3,779) 722 2,871 (74.8) 3,077 Minority interests 2,527 2,358 2,221 6.2 2,848 Preferred securities 498 523 668 (21.8) 1,309 Preferred interests in subordinated debt 7,151 7,261 6,837 6.2 6,773 Shareholders’ equity and minority interests 63,976 62,810 52,658 19.3 49,848
(*) Obtained by deducting dividends that have been announced but not distributed from shareholders’ equity on the Balance Sheet included in Chapter 20.
Chapter 10 – Page 1
To understand the changes in the components of shareholders’ equity, set forth below is a breakdown of changes in shareholders’ equity for fiscal years 2005, 2006 and 2007: Thousands of Euros Reserves accounted Profits Dividends Additional for using the Other Treasury attributable and paid-in Accumulated equity equity stock and to the compens- Capital surplus Reserves method instruments securities Group ation Total
Balances at January 1, 2005 3,127,148 20,370,128 6,256,632 621,195 93,567 (126,500) 3,605,870 (1,310,662) 32,637,378 Consolidated profit for the period ------6,220,104 - 6,220,104 Allocation of profits - - 3,279,608 326,262 - - (3,605,870) - - Dividends / Compensation - - (1,721,691) (115,582) - - - (433,537) (2,270,810) Issuances (reductions) - - (2,531) - - - - - (2,531) Purchase and sale of own securities - - 26,421 - - 73,432 - - 99,853 Payments with equity securities - - - - 19,167 - - - 19,167 Transfers - - 267,052 (243,462) (23,590) - - - - Other - - (5,351) 15,236 (11,666) - - - (1,781) Balances at December 31, 2005 3,127,148 20,370,128 8,100,140 603,649 77,478 (53,068) 6,220,104 (1,744,199) 36,701,380 Consolidated profit for the period ------7,595,947 - 7,595,947 Allocation of profits - - 5,828,922 391,182 - - (6,220,104) - - Dividends / Compensation - - (2,495,742) (109,173) - - - 406,981 (2,197,934) Issuances (reductions) - - (4,163) - - - - - (4,163) Purchase and sale of own securities - - 9,627 - - (73,733) - - (64,106) Payments with equity securities - - - - 19,167 - - - 19,167 Transfers - - 79,346 (44,369) (34,977) - - - - Other - - (26,460) (43,479) 450 - - - (69,489) Balances at December 31, 2006 3,127,148 20,370,128 11,491,670 797,810 62,118 (126,801) 7,595,947 (1,337,218) 41,980,802 Consolidated profit for the period ------9,060,258 - 9,060,258 Allocation of profits - - 7,169,330 426,617 - - (7,595,947) - - Dividends / Compensation - - (3,117,057) (139,086) - - - (200,589) (3,456,732) Issuances (reductions) - - (1,704) - 7,000,000 - - - 6,998,296 Purchase and sale of own securities - - 4,575 - - 126,609 - - 131,184 Payments with equity securities - - - - 48,548 - - - 48,548 Transfers - - 207,364 (195,246) (12,118) - - - - Other - - (278,185) 5,342 (11,667) - - - (284,510) Balances at December 31, 2007 3,127,148 20,370,128 15,475,993 895,437 7,086,881 (192) 9,060,258 (1,537,807) 54,477,846 Parent 3,127,148 20,370,128 7,696,864 - 7,078,622 - 4,070,247 (1,537,807) 40,805,202 Subsidiaries - - 7,687,422 - 8,259 (192) 4,501,609 - 12,197,098 Jointly-controlled entities - - 91,707 - - - 46,945 - 138,652 Associates - - - 895,437 - - 441,457 - 1,336,894
The following breakdown is included to facilitate an understanding of the composition of capital resources: a) Reserves – Other equity instruments: During fiscal year 2007, in order to partially finance the tender offer for ABN AMRO (see Chapter 5.2.1.I.), Santander Emisora 150, S.A.U. issued EUR 7,000 million in securities mandatorily convertible into newly-issued ordinary shares of the Bank (“Valores Santander”). Such securities may voluntarily be exchanged for shares of the Bank on October 4, 2008, 2009, 2010 and 2011, and must be exchanged on October 4, 2012.
The reference price of the Bank’s shares for purposes of the conversion was set at EUR 16.04 per share, with the conversion ratio for the bonds (i.e., the number of shares of the Bank that correspond to each Valor Santander for purposes of the conversion) being 311.76 shares for each Valor Santander. The nominal interest rate thereof is 7.30% through October 4, 2008, and Euribor plus 2.75% thereafter until the exchange thereof for shares.
Other than the issuance of the Valores Santander, at December 31, 2007, there were no other issuances convertible into shares of the Bank or that grant privileges or rights that might, due to any contingency, become convertible into shares. Abbey has a GBP
Chapter 10 – Page 2
200 million subordinated debt issue which is convertible, at Abbey’s option, into preference shares of Abbey, at a price of GBP 1 per share. Banco Santander, S.A. Institución de Banca Múltiple has two USD 150 million issues of unsecured subordinated preference debentures that are voluntarily convertible into ordinary shares of Banco Santander, S.A. Institución de Banca Múltiple, Grupo Financiero Santander for the amount of USD 150 million each. b) Valuation adjustments:
Thousands of euros Valuation adjustments 2007 2006 2005 Available-for-sale financial assets 1,418,966 2,283,323 1,941,690 Cash flow hedges (58,655) 49,252 70,406 Hedges of net investments in foreign operations 638,474 (173,503) (384,606) Exchange differences (1,276,749) 711,685 1,449,606 Total valuation adjustments 722,036 2,870,757 3,077,096
The balances of “Valuation adjustments” include the amounts, net of the related tax effect, of adjustments to the assets and liabilities recognized temporarily in equity through the statement of changes in shareholders’ equity until they are extinguished or realized, when they are recognized 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. “Exchange differences” was affected in 2007 by the change in the EUR/USD and EUR/GBP exchange rate as compared to the previous year. c) Minority interests: The breakdown, by Group company, of “Shareholders’ equity - minority interests” is presented below: Thousands of euros 2007 2006 2005
Grupo Financiero Santander Serfin, S.A. de C.V. 649,291 657,013 609,728 Banesto 476,152 303,889 767,833 Banco Santander Chile 241,726 234,726 146,192 Grupo Brasil 56,062 45,161 44,275 Santander BanCorp 30,701 31,311 29,539 Other companies 328,445 298,837 720,990 1,782,377 1,570,937 2,318,557 Profit for the year attributed to minority interests 575,892 649,806 529,666 Of which: Grupo Banesto 81,467 260,591 149,143 Grupo Financiero Santander Serfin, S.A. de C.V. 281,186 166,103 139,885 Banco Santander Chile 138,781 84,640 58,153 Somaen-Dos, S.L. - 77,177 138,919 Grupo Brasil 7,005 10,568 11,559 Santander BanCorp 1,626 3,053 6,680
2,358,269 2,220,743 2,848,223
This includes the net shareholders’ equity of subsidiaries attributable to equity instruments that are not directly or indirectly owned by the Bank, including the portion attributed to them of profit for the year.
Chapter 10 – Page 3
The changes in “Minority interests” for 2007, 2006 and 2005 were:
Millions of euros 2007 2006 2005
Balance at beginning of year 2,221 2,848 2,085 (Net) Inclusion of companies in the Group and changes in scope of (9) (1,050) 34 consolidation Change in proportion of ownership interest (117) 72 (1) Valuation adjustments (57) 15 49 Dividends paid to minority interests (360) (160) (137) Changes in share capital 220 (29) (25) Exchange differences and other items (116) (125) 313 Profit for the year attributed to minority interests 576 650 530 Balance at end of year 2,358 2,221 2,848 c) Preferred securities: At December 31, 2007, the issuer and most significant terms of the issuances were:
Millions 2007 2006 2005 Annual Repayment Issuer and Equivalent Foreign Equivalent Foreign Equivalent Foreign Interest option Currency of Issue in euros currency in euros currency in euros Currency Rate (1)
Banesto Holdings Ltd. US dollars 53 77 59 77 66 77 10.50% June 30, 2012 Totta & Açores Financing, Limited (USD) - - - - 127 150 - - Pinto Totta International Finance, Limited (USD) - - 95 125 212 250 - - Abbey (USD) - - - - 381 450 - - 8.63% to Abbey (Pounds Sterling) 443 325 484 325 474 325 10.38% No option Valuation adjustments 27 - 30 - 49 - - - Balance at end of year 523 668 1,309
(1) From these dates, the issuer can redeem the shares, subject to prior authorization by the national supervisor.
Equity having the substance of a financial liability (preferred shares) includes the amount of financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity. These shares do not carry any voting rights and are non-cumulative. They were subscribed by non-Group third parties and, except for the shares of Abbey amounting to GBP 325 million, are redeemable at the discretion of the issuer, based on the terms and conditions of each issue.
Chapter 10 – Page 4
The changes in “preferred securities” were as follows: Thousands of Euros 2007 2006 2005
Balance at beginning of year 668,328 1,308,847 2,124,222 Redemptions (94,912) (472,925) (944,968) Of which: Totta & Acores Financing , Limited - (118,483) - Abbey National plc - (354,442) - BSCH Finance, Ltd. - - (754,774) BCH Capital, Ltd. - - (190,194) Pinto Totta Internacional Finance, Limited (94,912) - -
Exchange differences and other items (50,858) (167,594) 129,593 Balance at end of year 522,558 668,328 1,308,847
In 2007, the Group redeemed in advance an issue of preference shares in the amount of EUR 94.9 million. In 2006, the Group redeemed in advance two issues of preference shares in the amount of EUR 472.9 million. In 2005, the Group redeemed in advance four issues of preference shares (equity having the substance of a financial liability) guaranteed by the Bank in the aggregate amount of EUR 945.0 million. e) Subordinated debt: Subordinated debt by currency of issue and interest rate type breaks down as follows: Thousands of euros December 31, 2007 Outstanding amount in currency % Annual Currency of Issue 2007 2006 2005 (Millions) Interest Rate
Euros 19,224,529 16,309,049 14,706,164 19,224 5.15 US dollar 7,358,576 6,898,455 7,843,846 10,832 7.11 Pound sterling 6,918,511 5,631,867 5,761,408 5,073 7.10 Other currencies 2,168,563 1,583,450 452,038 - - Balance at end of year 35,670,179 30,422,821 28,763,456
Preference shares and other subordinated debt: For the purposes of payment priority, preference shares are junior to all general creditors and to subordinated liabilities/deposits. The payment of dividends on these shares, which have no voting rights, is conditional upon obtaining sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.
The other issues are subordinated and, therefore, rank junior to all general creditors of the issuers. The issues launched by Santander Central Hispano Issuances, Limited, Santander Central Hispano Financial Services, Limited, Santander Issuances, S.A. Unipesonal, Santander Perpetual, S.A. Unipersonal, Santander Finance Capital S.A. Unipersonal and Santander Finance Preferred S.A. Unipersonal are guaranteed by the Bank or by restricted deposits arranged by the Bank for this purpose.
Chapter 10 – Page 5
Subordinated debt by issuing entity, maturity and other characteristics breaks down as follows:
Remaining Thousands amount in of euros currency Annual interest rate Maturity date Issuer 2007 Currency (Millions)
Banco Santander, S.A.
May 1991 288,440 Euros - Floating (1) May 2011
June 1995 60,101 Euros - 12.70% December 2010
December 1995 73,516 Euros - 10.75% December 2010
March 1997 60,101 Euros - 7.38% December 2012
June 1997 59,295 Euros - 7.65% December 2015
Santander Central Hispano Issuances, Ltd. :
April 1994 28,121 Euros - Floating April 2009
June 1998 151,162 Euros - 5.00% June 2008
July 1999 490,510 Euros - 5.00% July 2009
March 2000 434,840 Euros - 6.00% July 2010
March 2001 500,000 Euros - Floating March 2011
March 2001 453,542 Euros - 6.00% March 2011
November 1995 135,860 US Dollars 200 7.00% November 2015
February 1996 203,791 US Dollars 300 6.00% February 2011
November 1999 424,564 US Dollars 625 8.00% March 2009
September 2000 679,302 US Dollars 1.000 7.00% September 2010
Singapore June 2000 70,883 150 5.00% June 2010 Dollars
November 2000 272,721 Pounds Sterling 200 6.00% November 2010
Santander Consumer Bank
Aktiengelsellschaft
August 2006 - Sundry issues 54,577 Euros - From 5.84% to 8.25% January 2016
Banco Santander Chile (merged with Banco
Santiago)
January 1992 - October 1999 40,162 Chilean Pesos 30.908 7.63% - 7.75% October 2016
May 1996 23,520 Chilean Pesos 17.682 7.12% December 2015
September 1996 18,536 Chilean Pesos 13.706 6.88% March 2016
September 1996 23,358 Chilean Pesos 17.196 6.93% March 2011
August 2006 133,846 Chilean Pesos 91.726 4.40%-4.50% September 2026
January 2003 150,727 US Dollars 222 8.64% July 2012
December 2004 203,721 US Dollars 300 5.67% December 2014
November 2007 53,802 Chilean pesos 2.000 4.40% November 2032
December 2007 19,669 Chilean pesos 2.000 4.40% December 2032
Atta-Credia Especializado, IFIC. S.A.
(formerly McLeasing Sdad. Loc.Fin):
Banco Santander Banespa, S.A.:
September 2005 341,114 US Dollars 500 9.00% Perpetual
Chapter 10 – Page 6
Remaining Thousands amount in of euros currency Annual interest rate Maturity date Issuer 2007 Currency (Millions)
July 2016 - September 2006 1,077,092 Brazilian Real 2.797 Floating 2016
Banco Santander Totta, S.A.:
November 1997 27,353 Euros - Floating Perpetual
December 1997 8,886 Euros - Floating Perpetual
December 2002 15,050 Euros - Floating December 2008
December 2005 300,000 Euros - 5.20% December 2015
Banesto Group:
September 2003 500,000 Euros - Floating September 2013
March 2004 500,000 Euros - From fixed to floating (2) March 2016
Santander Central Hispano Financial
Services, Ltd.:
June 2001 272,721 Pounds Sterling 200 From fixed to floating (3) Perpetual
Santander Issuances, S.A.:
September 2004 500,000 Euros - From fixed to floating (4) September 2019
September 2004 500,000 Euros - Floating (5) September 2014
March 2016 - July March 2006 - July 2006 1,550,000 Euros - Floating 2017
May 2006 500,000 Euros - 4.25% (6) May 2018
May 2006 272,721 Pounds Sterling 200 5.38% (7) May 2016
July 2006 409,082 Pounds Sterling 300 5.38% (8) July 2017
June 2006 543,442 US Dollars 800 5.80% - 5.90% June 2016
June 2006 339,651 US Dollars 500 Floating June 2016
January 2007 409,082 Pounds Sterling 300 Floating January 2018
February 2007 200,000 Euros - Floating February 2019
March 2007 235,000 Euros - Floating February 2019
March 2007 1,500,000 Euros - Floating February 2017
February 2019 – May May 2007 650,000 Euros - Floating 2019
July 2007 139,000 Euros - Floating July 2022
July 2007 102,000 Euros - Floating July 2028
October 2007 1,489,708 Euros - Floating October 2017
October 2007 1,090,884 Pounds Sterling 800 Floating October 2017
Mexican New October 2007 290,967 4.677 Floating October 2017 Pesos
Banco Santander S.A., Institución de Banca
Múltiple.,Grupo Financiero Santander
January 2014 - November 2004 25,443 US Dollars 150 Floating (9) November 2018
February 2005 25,399 US Dollars 150 Floating March 2015
Santander Perpetua, S.A., Unipersonal-
From fixed to floating December 2004 750,000 Euros - Perpetual (10)
October 2007 1,018,953 US Dollars 1.500 6.67% Perpetual
Chapter 10 – Page 7
Remaining Thousands amount in of euros currency Annual interest rate Maturity date Issuer 2007 Currency (Millions)
Abbey Group
December 1991 202,308 Pounds Sterling 150 11.50% April 2017
February 1993 204,541 Pounds Sterling 150 10.13% April 2023
October 1999 204,541 Pounds Sterling 150 6.50% October 2030
September 2000 443,172 Pounds Sterling 325 7.50% Perpetual
September 2000 579,532 Pounds Sterling 425 7.50% Perpetual
September 2000 238,631 Pounds Sterling 175 7.38% Perpetual
September 2000 374,991 Pounds Sterling 275 7.13% Perpetual
October 1995 272,721 Pounds Sterling 200 10.06% Perpetual
From fixed to floating April 2005 272,721 Pounds Sterling 200 April 2015 (11)
September 1994 91,122 Yen 15.000 5.56% Perpetual
February 1995 30,374 Yen 5.000 5.50% Perpetual
From fixed to floating December 1996 30,374 Yen 5.000 Perpetual (12)
June 1998 340,128 US Dollars 500 6.70% Perpetual
October 1999 680,255 US Dollars 1.000 7.95% October 2029
April 2005 458,501 Euros - Floating (13) April 2015
December 1998 511,973 Euros - 5.00% January 2009
February 1999 500,666 Euros - 4.63% February 2011
From fixed to floating September 2000 400,533 Euros - Perpetual (14)
Santander Consumer Finance, S.A.
September 2006 499,540 Euros - Floating September 2016
Santander Factoring y Confirming, S.A.,
E.F.C.
June 2011 - December June 1999 – December 2005 50,040 Euros - Floating (15) 2015
Santander BanCorp
October 2004 – October 2005 84,913 US Dollars 254 From 5.00% to 6.00% June 2032
BS Venezuela
January 2007 15,963 Bolivar 700 Floating February 2008
Total valuation adjustments 1,229,042
Subtotal subordinated debt 28,408,797
PREFERENCE SHARES
Banesto Group:
Banesto Preferentes S.A. December 2003 131,144 Euros - Floating Perpetual
Banesto S.A. November 2004 200,000 Euros - 5.50% Perpetual
From fixed to floating Banesto S.A. October 2004 125,000 Euros - Perpetual (16)
Chapter 10 – Page 8
Remaining Thousands amount in of euros currency Annual interest rate Maturity date Issuer 2007 Currency (Millions)
Santander Finance Capital, S.A.-
October 2003 450,000 Euros - Floating Perpetual
February 2004 400,000 Euros - Floating Perpetual
July 2004 750,000 Euros - Floating Perpetual
September 2004 680,000 Euros - Floating Perpetual
From fixed to floating April 2005 1,000,000 Euros - Perpetual (17)
Santander Finance Preferred S.A.
Unipersonal:
March 2004 129,067 US Dollars - 6.40% Perpetual
November 2006 339,651 US Dollars 500 6.80% Perpetual
September 2004 300,000 Euros - Floating Perpetual
October 2004 200,000 Euros - 5.70% Perpetual
January 2007 407,581 US Dollars 600 6.70% Perpetual
March 2007 237,756 US Dollars 350 5.60% Perpetual
July 2007 340,901 Pounds Sterling 250 7.00% Perpetual
Abbey Group
February 2000 679,302 US Dollars 1.000 9.00% Perpetual
February 2001 409,082 Pounds Sterling 300 7.04% Perpetual
August 2002 238,631 Pounds Sterling 175 6.98% Perpetual
Santander PR Capital Trust I:
February 2006 84,913 Euros - 6.75% July 2036
Total valuation adjustments 158,354 - - - -
Subtotal subordinated debt 7,261,382
TOTAL SUBORDINATED DEBT 35,670,179
(1) Interest on the May 1991 issue of the Bank is revised annually, being tied to EURIBOR less two percentage points, with a maximum of 14% per annum and a minimum of 10%. These securities are redeemable at par in 2011, but the holders can redeem them earlier at 6, 12 and 18 years from the issue date.
(2) This issue has a fixed interest rate of 4% for the first seven years, and from March 2011, the interest rate is Euribor 3M plus 0.95%.
(3) This issue has a fixed interest rate of 7.25% until December 2011, and from this date the interest rate is Libor 3M plus 285 b.p.
(4) This issue has a fixed interest rate of 4.5% until September 2014, and from this date, the interest rate is Euribor 3M plus 0.86%.
(5) This issue has a floating interest rate of Euribor 3M plus 0.25% for the first five years, and from this date, the interest rate is Euribor 3M plus 0.75%.
(6) This issue has a fixed interest rate of 4.25% until May 2013. From this date, the interest rate is Euribor 3M plus 0.82%.
(7) This issue has a fixed interest rate of 5.375% until May 2011. From this date, the interest rate is Euribor 3M plus 0.69%.
(8) This issue has a fixed interest rate of 5.375% for the first five years, and from June 2011, the interest rate is Libor 3M Euribor 3M plus 0.86%.
(9) This issue has a floating interest rate of Libor 6M plus 1.1% for the first five years, and from this date, the interest rate is Libor a.m. plus 2.2%.
(10) This issue has a fixed interest rate of 4.375% for the first ten years, and from December 2014, the interest rate is Euribor 3M plus 1.6%.
(11) This issue has a fixed interest rate of 5.25% until the call date (April 2010). From this date the interest rate is Euribor 3M plus 0.75%.
(12) This issue has a fixed interest rate of 4% until December 2016, and from this date, the interest rate is Libor 3M plus 1.5%.
Chapter 10 – Page 9
(13) The interest rate of this issue is Libor 3M plus 0.25% until April 2010 (call date). From that date, the interest rate is Libor 3M plus 0.75%.
(14) This issue has a fixed interest rate of 7.125% until September 2010, and from this date, the interest rate is Euribor 3M plus 2.3%.
(15) In previous years, issuances between Santander Factoring & Confirming and Santander’s Group were net, so the result of them was zero.
(16) This issuance had a fixed interest rate of 6% until October 2005. Now the interest rate is Euribor CMS 10 plus 0.125%.
(17) This issue has a fixed interest rate of 3% until April 2006. From this date, the interest rate is Euribor 3M plus 0.10%.
At June 30, 2008, total subordinated debt was EUR 33,965 million, of which EUR 6,901 million are preference shares. The breakdown of subordinated liabilities by maturity date and amount is as follows: Maturity dates
December 31, 2007 Millions of Euros
Up to 1 – 3 3 - 12 1 - 3 3 - 5 More than On demand 1 month months months years years 5 years Total Subordinated liabilities 88 8 61 569 4,065 2,357 28,522 35,670 Changes in the balance of subordinated liabilities were as follows: Millions of Euros 2007 2006 2005
Balance at beginning of year 30,423 28,763 27,470 Net inclusion of entities in the Group - (459) - Of which: Scottish Pensions Limited - (292) -
Issues 8,330 5,881 2,507 Of which: Santander Consumer Finance, S.A. Banco do Estado de Sao Paulo, S.A. (Banespa) - 995 420 Abbey - - 793 Santander Central Hispano Issuances, Limited 5,908 3,484 - Santander Finance Capital, S.A.Unipersonal - - 1,000 Santander Perpetual, S.A. Unipersonal 1,019 - - Santander Finance Preferred, S.A.Unipersonal 1,072 - -
Redemptions (2,340) (2,265) (2,410) Of which: Abbey (944) (763) (551) Santander Central Hispano Issuances, Limited (1,188) (1,369) (1,189)
Exchange differences (1,353) (1,093) 659 Other changes 610 (404) 537 Balance at end of year 35,670 30,423 28,763
During the first six months of 2008, the Group has not issued either subordinated debt or preferred shares.
Chapter 10 – Page 10
During fiscal year 2007, the Group issued subordinated debt in the amount of EUR 7,258 million (excluding intragroup transactions). Additionally, preferred shares in the amount of EUR 1,072 were issued. Furthermore, the Group redeemed an aggregate amount of EUR 2,340 million of other subordinated liabilities, of which EUR 1,188 million were guaranteed by the Bank. During fiscal year 2006, the Group issued preferred shares in the amount of EUR 380 million, guaranteed by the Bank. Additionally, it issued other subordinated debt in the amount of EUR 5,501 million, of which EUR 3,782 million corresponded to five issuances guaranteed by the Bank. Furthermore, the Group redeemed an aggregate amount of EUR 2,265 million of other subordinated liabilities, of which EUR 1,369 million were guaranteed by the Bank. In fiscal year 2005, the Group issued preferred shares (subordinated liabilities) guaranteed by the Bank in the amount of EUR 1,000.0 million. In addition, the Group issued other subordinated liabilities in the amount of EUR 1,512.5 million and repaid other subordinated liabilities in the amount of EUR 2,410.3 million. Set forth below are the capital adequacy ratios according to the BIS and the Bank of Spain regulations: I) Breakdown of Shareholders’ Equity applying standards of the Bank for International Settlements (BIS):
Millions of Euros 2007 2006 Change (%) 2005
Basic computable capital (Tier 1) 39,725 35,539 11.8 32,532
Supplemental computable capital 25,500 24,237 5.2 20,894 Computable capital (BIS regulations) 65,225 59,776 9.1 53,426 Risk-weighted assets (BIS regulations) 515,050 478,733 7.6 412,734 BIS Ratio 12.66% 12.49% 12.94% Tier 1 7.71% 7.42% 7.88% Core Capital 6.25% 5.91% 6.05% Surplus shareholders’ equity (BIS ratio) 24,021 21,478 11.8 20,407
Applying the standards of the Bank for International Settlements (BIS), Grupo Santander’s shareholders’ equity was EUR 65,225 million at December 31, 2007, an increase of EUR 5,448 million (approximately 9%) for the fiscal year, with a surplus over the required minimum of EUR 24,021 million. The BIS ratio was 12.66%, the Tier I ratio was 7.71% and the core capital ratio was 6.25%. In Chapter 20.6.1.5, the subchapter “Computable Capital - Shareholders’ Equity” includes the related updated data at June 30, 2008.
II) Capital adequacy and other minimum capital requirements according to Bank of Spain regulations: The following table summarizes the information related to the capital ratio and the minimum capital requirements of Bank of Spain’s Circular 5/1993, of May 26, which further developed Law 13/1992, of June 1, on shareholders’ equity and consolidated supervision of financial institutions4.
4 Circular 5/1993 has been annulled by Circular 3/2008 of May 22 which entered into force on June 11, 2008.
Chapter 10 – Page 11
Capital adequacy ratio according to Bank of Spain’s Circular 5/1993 Millions of euros 2007 2006 2005 1. Total weighted risks 467,768.9 423,541.8 354,700,0 2. Required capital adequacy ratio (%) 8% 8% 8% 3. Minimum capital by credit and counterparty risk 37,421.5 33,883.3 28,376,0 4. Minimum capital by exchange rate risk 947.8 764.0 611.0 5. Minimum capital by trading portfolio risk 2,971.6 3,875.6 3,846.1 6. MINIMUM CAPITAL REQUIRED 41,340.9 38,522.9 32,833.1 7. Basic capital 35,316.6 30,273.6 29,476.6 (+) Share capital and share equivalents 3,127.1 3,127.1 3,127.1 (+) Effective and express reserves and reserves in consolidated companies 41,049.7 38,266.4 34,192.5 (+) Minority interests 3,306.2 3,782.0 2,881.8 (+) Funds allocated to the bank’s risks 0.0 0.0 0.0 (+) Preference shares – Section 7.1 of Law 13/85 12,691.1 4,760.1 6,305.9 (-) Intangible assets, treasury stock and other deductions 24,857.6 19,662.0 17,030.7 8. Computable Capital (recursos propios de segunda categoría) 26,450.1 21,878.8 19,767.6 (+) Asset revaluation reserves 854.8 1,156.5 0.0 (+) Funds for charitable purposes 0.0 (+) Share capital belonging to non-voting shares 0.0 (+) Perpetual and subordinated debt (b) 20,487.7 15,514.7 19,768.3 (+) Generic allowance of insolvency risk (b) 5,108.4 5,208.4 (-) Deductions 0.8 0.8 0.7 9. Limitations to complementary capital (recursos propios de segunda categoría) 0.0 10. Other Deductions from Capital -5,908.4 -2,457.6 -6,026.7 11. TOTAL COMPUTABLE CAPITAL 55,858.3 49,694.9 43,217.5 Solvency ratio of the entity (c) 10.81% 10.32% 10.53% 12. CAPITAL SURPLUS (OR DEFICIT) 14.517.4 11.172.0 10,384.4 % of surplus (deficit) on minimum capital required 35.12% 29.00% 31.63% MEMORANDUM ITEM: Mixed Group’s consolidated capital surplus (f) 14.886,9 11.459.5 10,384.4
(a) Includes subordinated issues with a maturity date and perpetual. Issues with a maturity date are subject to the 50% limit on basic capital. If that limit is exceeded, the excess is deducted in point 9 “Limitations to complementary capital”.
(b) In 2006, generic allowance of insolvency risk was included in Computable Capital pursuant to the requirements of the amendment to Bank of Spain’s Circular 5/1993.
(c) Total computable capital / (minimum capital required X 12.5) (%).
(d) Mixed Group: Group of credit institutions taken into account for consolidation purposes, adjusted by the additional requirements applicable to insurance companies included in the Group.
10.2 ISSUER’S CASH FLOWS The statement of cash flows for fiscal year 2007 (see financial statement in Chapter 20.3.4) discloses the Group’s activity during the year. Structural liquidity management Liquidity risk is associated with the Group’s capacity to finance its commitments, at reasonable market prices, as well as to carry out its business plans with stable sources of funding. The Group permanently monitors maximum gap profiles. The measures used to control liquidity risk as part of balance sheet management are the liquidity gap, liquidity ratio, stress scenarios and contingency plans.
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a) Liquidity gap The liquidity gap provides information on contractual and expected cash inflows and outflows for a certain period of time, for each of the currencies in which the Group operates. The gap measures the net cash requirements or surpluses at a given date, and reflects the level of liquidity maintained under normal market conditions. Two types of liquidity gap analyses are performed, depending on the balance sheet item: 1.- Contractual liquidity gap: All cash-flow generating on-and off-balance sheet items are analyzed and placed at the point of contractual maturity. For those assets and liabilities without a contractual maturity, an internal analysis model is used, based on statistical research of the historical series of products, and which determines what is referred to as the stable or instable balance for liquidity purposes. 2.- Operational liquidity gap: This is a scenario for normal liquidity profile conditions, since the cash flows of the on-balance-sheet items are placed at the point of probable liquidity rather than at the point of contractual maturity. In this analysis, the performance scenario (renewal of liabilities, discounts in sales of portfolios, renewal of assets, etc.) is the fundamental point. b) Liquidity ratios The liquidity ratio compares liquid assets available for sale or transfer (after applying the relevant discounts and adjustments) to total liabilities to be settled (including contingencies). This ratio shows, by currencies that cannot be consolidated, the level of immediate response of the entity to firm commitments. Cumulative net illiquidity ratio is defined as the 30-day cumulative gap obtained from the modified liquidity gap. The modified contractual liquidity gap is calculated on the basis of the contractual liquidity gap, placing liquid assets at the point of settlement or transfer and not at the point of maturity. c) Scenario analysis / Contingency Plan Grupo Santander’s liquidity management focuses on taking all measures necessary to prevent a crisis. The causes of a liquidity crisis cannot always be predicted. Consequently, the contingency plans focus on creating models of potential crises by analyzing various scenarios, identifying crisis types, internal and external communications, and individual responsibilities. The contingency plan covers the activity of a local unit and of central headquarters. It specifies clear lines of communication at the first sign of a crisis and suggests a wide range of responses to the different levels of crises. As a crisis can occur locally or globally, each local unit must prepare a contingency financing plan, indicating the amount it would potentially require as aid or financing from headquarters during a crisis. Each unit must inform headquarters (Madrid) of its plan at least every six months so that it can be reviewed and updated. These plans, however, must be updated more frequently if market circumstances make it advisable.
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10.3. ISSUER’S FINANCING STRUCTURE To understand the Group’s financing structure, the following table shows a breakdown, by maturity date, of the balance of certain items included in the balance sheet at December 31, 2007:
December 31, 2007 Millions of euros
Up to 1 - 3 3 - 12 1- 3 3 - 5 More than Average On demand 1 month months months years years 5 years Total Interest Rate
Assets: Cash and balances with central banks 14,102 10,278 5 10 1,265 4,295 1,108 31,063 5.93% Available-for-sale financial assets-
Debt instruments 31 953 1,070 2,060 5,837 6,450 17,786 34,187 5.11% Loans receivables: Loans and advances to credit institutions 4,865 9,785 6,333 4,113 884 759 5,021 31,760 4.53% Loans and advances to customers 9,848 29,446 28,607 65,696 58,124 62,048 279,982 533,751 6.75% Debt instruments 1 4 - 5 634 65 959 1,668 4.55% Other financial assets 7,165 2,393 99 282 372 766 1,274 12,351 -
36,012 52,859 36,114 72,166 67,116 74,383 306,130 644,780 6.51% Liabilities: Financial liabilities at amortized cost: Deposits from central banks 3,534 21,322 3,691 201 - - - 28,748 4.45% Deposits from credit institutions 5,704 22,412 6,504 6,197 3,002 3,111 1,756 48,686 4.55% Customer deposits 178,538 55,381 27,839 28,959 13,141 11,145 2,040 317,043 4.12% Marketable debt securities 868 13,310 17,600 24,198 35,294 26,745 88,250 206,265 4.61% Subordinated liabilities 88 8 61 569 4,065 2,357 28,522 35,670 5.69% Other financial liabilities 11,251 931 1,343 1,034 79 1,780 123 16,540 -
199,983 113,364 57,038 61,158 55,581 45,138 120,691 652,952 4.41% Difference of assets less liabilities (163,970) (60,505) (20,924) 11,008 11,535 29,245 185,439 (8,172)
10.4. RESTRICTIONS ON THE USE OF CAPITAL The Bank of Spain’s Circular 5/1993, of March 26, which implements Law 13/1992, of June 1, on capital adequacy and consolidated supervision of financial institutions, provides that consolidated groups of financial institutions must at all times maintain a capital adequacy ratio of at least 8% of the weighted credit risk of balance sheet items, commitments and other memorandum accounts, as well as exchange rate risk and net global position in foreign currency, and the weighted positions in the trading portfolio and derivative instruments. Circular 5/1993 was annulled by Circular 3/2008, of May 22, on capital adequacy and individual and consolidated supervision of financial institutions, which entered into force on June 11, 2008. This regulation provides that consolidated groups of financial institutions (or, in certain case, individual entities) must at all times maintain a capital adequacy ratio of 8% of the weighted credit risk of balance sheet items, commitments and other memorandum accounts, as well as exchange rate risk and net global position in foreign currency, and the weighted positions in the trading portfolio and derivative instruments and operational risk.
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The Bank of Spain, in its supervisory function, may also require a capital adequacy ratio above 8%. Finally, qualitative and quantitative requirements are established with respect to the public disclosure of information on capital resources. Grupo Santander complies with the restrictions on the use of capital resources in accordance with applicable regulations (see Chapter 10.1). 10.5. FINANCING FOR PLANNED INVESTMENTS The capacity of the Group to finance planned investments is described in Chapter 5.2. above.
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CHAPTER 11
11. RESEARCH AND DEVELOPMENT, PATENTS, AND LICENSES Human resources training and development is a key tool for the creation of value in relations with shareholders, customers, and society as a whole. In response to various objectives, the corporate training model is basically structured around three centers: – Corporate schools of knowledge. These contribute to technical excellence in business and functions with a global reach. They develop advanced technical programs for executive-level higher education, curriculum-based programs supporting different stages of an employee’s career, and programs on best practices and support for business goals. – Corporate integration center. This organizes the corporate integration program aimed at new professionals joining the Group. The program is implemented consistently in all the countries in which Santander is present, and supplements local programs. It combines various planned activities during the first three / six months of hiring, such as the corporate integration course, meetings, tutorials, job-specific training, etc. – Executive development center. This sets a benchmark for the professional development of all executives through the implementation of training and development programs and talent development programs within the framework of the corporate executive management policy. This corporate model is supplemented by El Solaruco, the Group’s corporate training and development center. Located at Ciudad Grupo Santander in Boadilla del Monte (Madrid, Spain), the center has become a benchmark institution for the professionals of Santander. In 2007, El Solaruco received Corporate Learning Improvement Process (CLIP) accreditation from the European Foundation for Management Development. During 2007, investment in training at the Group reached EUR 75.5 million, which involved more than 5.4 million hours, and reached 90% of the workforce. The corporate training and development facilities have welcomed 74,921 people from throughout the Group, of whom 24,781 have participated in training programs and more than 50,140 attended professional gatherings, forums and conventions. Also in 2007, the Technology and Operations division played a key role in rolling out Santander’s strategy, making significant progress in implementing the global management model. During 2007, investment in technology was approximately EUR 685 million. In this area, the Group has had five major lines of action: – First, the technology has maintained its focus on the implementation of corporate strategies as the first step in technological convergence at the Group. Corporate technology allows the Group to harness the advantages of being global through Partenón in Europe and Altair in Latin America, contributing the proper tools to each local market with Alhambra. Partenón facilitates a sustained reduction in operating costs, a comprehensive knowledge of customers, and swifter and more agile product launches. It is already fully functional at Banesto, the Santander Network and Banif. The rest of the European units continue at the expected pace. Worthy of note is its implementation at Abbey, where, although it will be fully operational during 2008, numerous benefits are already being obtained due to its capacity to:
Chapter 11 –Page 1
• Boost the retail function by strengthening the Group’s vision of the customer and automating commercial processes. • Improve the quality of service, reducing incidents and the time required to open accounts and attend to customers. • Reduce technology costs by more than 20%. • Improve financial control and reduce operational risk. • Promote new businesses and products. Specifically, a corporate technology solution has been implemented through Parthenon for debit cards that has reduced fraud in this product, while allowing for the creation of a new credit card business in record time and at a minimal cost. In Latin America, the Altair platform continued to evolve through the development of new card, deposit and consumer credit cards. Parallel to these advances, Alhambra has been successfully implemented in the Santander Network in Spain, which is allowing its employees to work more productively and effectively. Alhambra is a key component in Santander’s corporate strategy, as it will allow for technological convergence between Partenón in Europe and Altair in Latin America. There have also been advances in the standardization and homogenization of the technical infrastructures, in line with corporate policies, leading to increased quality of service and improved efficiency in the main areas of data processing centers, communications, and terminals. - Second, technology has contributed to fostering the Group’s global businesses with the implementation of global solutions and the consolidation of platforms. A good example is the Corinto corporate solution for the wholesale businesses, which has continued deployment in 2007 with a special focus on Brazil and Abbey, facilitating the development of new products as well as the introduction of the corporate factory operations model. - Third, and in parallel with the technological developments, work has continued on the expansion of the global operations model, designed to help improve the efficiency and productivity of the Group. This has already been established at the Santander Network, Banesto and Banif, and is being implemented at Abbey, Totta and Openbank (in line with the start-up of Partenón). Work has also started in Latin America and at Santander Consumer Finance. - Fourth, there has been a strengthening in the development of specialist corporate factories, a key element of the global model: Isban and Altec for the development and maintenance of software; Produban for IT production and the management of data processing centers, and Geoban for the management of operating services. The factories continued to work on the expansion of their service and customer portfolios, enhancement of the quality of service and efficiency, and a reduction in operational and technological risks. - Finally, also in 2007 there has been a continuation of the implementation of a global integral cost management model, which involves the creation of management units for each type of expense, the centralization of purchasing and payment functions, and greater discipline in the approval and management of expenses. This model allows for a reduction in costs, it improves cost control, and offers better service by the expenses and purchasing areas.
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CHAPTER 12
12. TREND INFORMATION 12.1. SIGNIFICANT RECENT TRENDS The evolution of the world economy is framed within a process of deceleration that is greater than was anticipated, and which is expected to continue in 2009. This panorama is the result of the confluence of two shocks that greatly weighed down growth: on the one hand, an increase in the price of raw materials, which began to abate in part after reaching maximums in July; and on the other hand, the financial turbulence that reached a maximum in September.
The expansion of the financial turbulence to both sides of the Atlantic has increased liquidity tensions in the markets, showing the weakness of certain financial institutions that have been taken control of and/or absorbed. The plans designed in the U.S. and Europe to rescue and support the financial industry in order to improve its access to liquidity and to recapitalize should help to stabilize the markets, contributing to a slow and progressive recovery of the economies. As regards the U.S., its economy points to GDP growth for the rest of the year and the beginning of 2009 that will be well below that of the first half (which exceeded 2%). The 0.5% reduction in the official rate (to 1.5%) in October carried out in concert with the main central banks of the world should support the recovery.
Latin America has one of the best profiles in the current environment, with notable growth of 4%, although lower than in recent years due to the global slowdown and the hardening of monetary policies. This trend compensates for the still-elevated inflationary pressures, diminishing the probabilities of new interest rate increases, with the exception of Brazil. Exchange rates are strengthening their trend towards moderate depreciation due to the fall in prices for raw materials, the future loosening of monetary policy, and a lower surplus in the balance of payments.
The Eurozone showed strong deceleration (2Q: down 0.7% quarterly annualized vs. up 3.2% in 1Q) that is expected to last through 2009. This trend, together with more stable prices for raw materials, is expected to place inflation at 2% by the middle of 2009. This has allowed the ECB to commence lowering interest rates (from 4.25% to 3.75%) in October, which is expected to continue. In the meantime, the euro reached more moderate levels against the dollar (EUR 1 = USD 1.43), while maintaining stable with the pound (EUR 1 = GBP 0.79).
In Spain, the adjustment in the real estate market and the adverse international environment have intensified the slowdown (up 0.6% quarterly annualized in 2Q vs. 1.4% in 1Q) more than anticipated. Inflation, after hitting a maximum (5.3% in July) points to lower levels of 4% by the end of the year in a trend that is expected to continue in 2009.
Within the coordinated strategy in the European Union, the Spanish Government has approved a set of measures intended to recover the effectiveness of the financial sector. Noteworthy is the increase in deposit guarantees (up to EUR 100,000 per depositor and entity), a line of financing of up to EUR 50,000 million through the purchase of high quality assets in the sector, and the establishment of guarantees of up to EUR 100,000 million on new issuances of debt by the institutions.
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Business activity has also loss intensity in the United Kingdom (2Q: up 0.2% quarterly annualized; 1Q: 1.1%), which is expected to continue during the coming quarters. During such period, inflation, which is coming down, will remain quite above the objective (above 4% at the end of the year). In October, the official rate was reduced by 0.5%, with the current rate at 4.5%.
12.2 KNOWN TRENDS, UNCERTAINTIES, COMPLAINTS, COMMITMENTS OR EVENTS HAVING AN IMPACT ON PROSPECTS Set forth below is a description of certain factors that, should they materialize, could have a material adverse impact on the Bank or could make the published financial information not indicative of the Group’s operating results or of its financial position in the future. ▪ The European financial services sector is likely to remain highly competitive. Although an increasing number of financial services providers and alternative distribution channels can be expected, further, consolidation in this sector (through mergers, acquisitions or alliances) is likely to continue as other competitor banks look to increase their market share or combine with complementary businesses. Regulatory changes can be expected in the future that will lower barriers in the markets of the European Union. ▪ A prolonged drop in the Spanish and UK real estate market and consequent increase in mortgage delinquency rates. ▪ Uncertainty regarding interest rates in the U.S. and in other countries. ▪ The effect of recent bank regulations designed to maintain or strengthen the liquidity, safety and solvency of banks and to limit their exposure to the risk applicable in the various jurisdictions in which the Group operates. ▪ Uncertainties relating to expected economic growth expectations and economic cycles, particularly in the United States, Spain, the United Kingdom, other European countries and Latin America, and the impact they may have on interest and exchange rates. ▪ The effect that an economic slowdown may have on Latin America and on interest and exchange rates in the region. ▪ Other changes in the macroeconomic environment that might impair the quality of our customers’ credit. ▪ An increase in the cost of our funds might negatively affect net interest income as a result of the difference in the revaluation of our assets and liabilities. ▪ Continued downward trend in the capital markets. ▪ A drop in the value of the euro relative to the US dollar, the pound Sterling or Latin American currencies. ▪ Greater inflationary pressures in benchmark economies because of the effect they may have in connection with interest rate increases and slower growth. ▪ Increased consolidation in the European financial services market, which would further reduce margins. ▪ Although it is foreseeable that barriers to entry in local European markets will be lowered, the Bank’s possible plans of expansion into other markets
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could be affected by regulatory requirements imposed by national authorities in those countries. ▪ Acquisitions or restructurings of businesses, the returns on which may not meet the expectations of the Group. ▪ Possible liquidity squeezes and alterations in credit spreads as a result of the recent crisis in financial markets relating to subprime mortgages in the U.S., which may affect both our costs of funding and the value of our portfolios and of managed portfolios. Without prejudice to the foregoing, we do not expect the Group or the third-party funds managed by it to experience any significant loss as a result of the non-payment of subprime mortgage assets or of assets within the same category derived from the business of Drive, our automotive financing company in the U.S.
With respect to the bankruptcy petition filed in September 2008 by the U.S. investment bank Lehman Brothers, it is noted that the Group’s exposure to such institution, both as regards loans and derivatives transactions, is not material for the Group as a whole.
Banif, Banco Santander’s private banking subsidiary in Spain, has in recent years sold various structured products, with or without guaranteed capital, that were based on a bond issued by an issuing company belonging to Lehman. Currently, Banif is considering various alternatives to offer its customers a solution that covers them exclusively for the issuance risk in which they incurred in investing in the bond issued by Lehman. The cost of this solution, which is still being analyzed, and which in any event will not be material for the Group, will be borne by Banif, which will absorb it in its income statement. Banif’s decision to cover this issuance risk does not signify any acknowledgment that the sale of the products was defective, but rather is a one-time solution configured for purely commercial reasons to support customers in the fact of an extraordinary situation.
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CHAPTER 13
13. EARNINGS FORECASTS OR ESTIMATES The Bank has chosen not to include any earnings forecasts or estimates. 13.1. STATEMENT OF PRINCIPAL ASSUMPTIONS ON WHICH THE FORECAST OR ESTIMATE WAS BASED Not applicable. 13.2. STATEMENT REGARDING AN INDEPENDENT REPORT ON THE PROFIT FORECAST Not applicable. 13.3. COMPARABILITY OF THE FORECAST WITH HISTORICAL FINANCIAL INFORMATION Not applicable. 13.4 STATEMENT REGARDING FORECASTS PUBLISHED IN THE PROSPECTUS AND THE FORECAST PROVIDED IN THIS DOCUMENT Not applicable.
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CHAPTER 14
14. BOARD, MANAGEMENT, AND SUPERVISORY BODIES, AND SENIOR EXECUTIVES 14.1. INFORMATION ABOUT THE MEMBERS OF THE BOARD OF DIRECTORS 14.1.1. Members of the board of directors The current Bylaws of the Bank (Article 41) provide for a maximum of 22 directors and a minimum of 14. The Bank’s Board currently consists of 19 Directors. Article 41- Quantitative composition of the board: “1. The board of directors shall be composed of not less than fourteen and not more than twenty-two members, appointed by the shareholders acting at a general shareholders’ meeting.
2. It falls upon the shareholders at a general shareholders’ meeting to set the number of members of the board within the aforementioned range. Such number may be set indirectly by the resolutions adopted by the shareholders at a general shareholders’ meeting whereby directors are appointed or their appointment is revoked.” The following chart contains information about the composition, duties, and structure of the Board and its committees. In particular, it should be noted that for the purposes of this Registration Document, the professional address of the individuals named in the following chart is: Ciudad Grupo Santander, Avda. de Cantabria s/n, 28660 Boadilla del Monte (Madrid).
Chapter 14 – Page 1
Board of Directors neration Committee Executive Committee Committee Executive Committee Risk Committee Compliance and Audit Appointments and Remu Committee International Technology, ProductivityQuality and Committee Executive External
Chairman C C C Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos
First Vice Chairman V C I Mr. Fernando de Asúa Álvarez
Second Vice Chairman and CEO
Mr. Alfredo Sáenz Abad
Third Vice Chairman C Mr. Matías Rodríguez Inciarte
Fourth Vice Chairman I Mr. Manuel Soto Serrano
Members
Assicurazioni Generali S.p.A. (represented by P Mr. Antoine Bernheim)
Mr. Antonio Basagoiti García-Tuñón I Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea Mr. Javier Botín-Sanz de Sautuola y O’Shea(1) P Lord Burns (Terence) E Mr. Guillermo de la Dehesa Romero I Mr. Rodrigo Echenique Gordillo E Mr. Antonio Escámez Torres I Mr. Francisco Luzón López Mr. Abel Matutes Juan I Mr. Juan Rodríguez Inciarte (2) Mr. Luis Ángel Rojo Duque C I Mr. Luis Alberto Salazar-Simpson Bos I Ms. Isabel Tocino Biscarolasaga I
General Secretary and Secretary of the Board
Mr. Ignacio Benjumea Cabeza de Vaca
Vice General Secretary and Vice Secretary of the Board
Mr. Juan Guitard Marín (3)
C: Chairman of the Committee V: Vice Chairman of the Committee P: Proprietary I: Independent E: Neither proprietary nor independent (1) External proprietary director who provides representation on the Board of the shareholdings of the Marcelino Botín Foundation, of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, of Mr. Emilio Botín-Sanz de Sautuola y O’Shea, of Mr. Jaime Botín-Sanz de Sautuola y García de los Ríos, of Ms. Paloma O’Shea Artiñano, and his own shareholding interest. (2) Mr. Juan Rodríguez Inciarte was designated director by co-option at the meeting of the Board of Directors held on January 28, 2008 and his appointment was ratified at the General Shareholders’ Meeting held on June 21, 2008. (3) Non-Directors.
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14.1.2. Directors and other persons responsible for the management of BANCO SANTANDER, S.A. at the highest level BANCO SANTANDER, S.A. is managed, at the highest level, by the members of its Senior Management under the Chairman and CEO of the Bank. The Chairman, CEO, and the people mentioned below make up the Bank’s Senior Management, without prejudice to the positions that some of them hold within the Board of Directors:
Abbey Mr. Antonio Horta Osorio
Mr. Francisco Luzón López
Americas Mr. Marcial Portela Álvarez
Mr. Jesús María Zabalza Lotina
Internal Audit Mr. David Arce Torres
Mr. Adolfo Lagos Espinosa
Global Wholesale Banking Mr. Jorge Maortua Ruiz-López
Mr. Gonzalo de las Heras Milla
Global Private Banking Mr. Javier Marín Romano
Banesto Ms. Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea
Communication, Corporate Marketing and Mr. Juan Manuel Cendoya Méndez de Vigo Research Strategy Mr. Juan Rodríguez Inciarte
Asset Management Mr. Joan David Grimà Terré
Financial Management and Relations with Mr. José Antonio Álvarez Álvarez Investors Financial Accounting and Management Control Mr. José Manuel Tejón Borrajo
Human Resources Mr. José Luis Gómez Alciturri
Santander Branch Network - Spain Mr. Enrique García Candelas
Mr. Matías Rodríguez Inciarte
Risk Mr. Javier Peralta de las Heras
Mr. José María Espí Martínez
Santander Consumer Finance Ms. Magda Salarich Fernández de Valderrama
Santander Totta Mr. Nuno Manuel Da Silva Amado Mr. Ignacio Benjumea Cabeza de Vaca General Secretariat Mr. Juan Guitard Marín Mr. César Ortega Gómez Insurance Mr. Jorge Morán Sánchez Technology and Operations Mr. José María Fuster Van Bendegem
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14.1.3. Committees of the Board of Directors In accordance with the Rules and Regulations of the Board, the Bank’s Board of Directors has created, as decision-making committees, an Executive Committee, with general decision-making powers, and a Risk Committee, with powers delegated by the Board of Directors specifically in the area of risks, with decision- making authority in this area. The table below summarizes the basic composition information at December 31, 2007 and the meetings of these Committees during fiscal year 2007:
NO. OF NO. OF DECISION-MAKING MEMBERS EXECUTIVE EXTERNAL MEETINGS HOURS (1) COMMITTEES
1 Executive Committee 10 5 5 55 275 2 Risk Committee (2) 5 1 4 98 250
(1) Average estimated hours dedicated by each Director. (2) On March 24, 2008, Mr. Rodrigo Echenique Gordillo stepped down from the Risk Committee and was replaced by Mr. Juan Rodríguez Inciarte. As a result of this change, as of the date of this document there are two executive directors and three external directors within the Risk Committee. Executive Committee The Executive Committee is the basic instrument for the Bank’s and the Group’s corporate governance. The Board considers the composition of the Executive Committee to be balanced, as the committee is made up of 10 directors, 5 executive and 5 external. Of the latter, 4 are independent and 1 is neither proprietary nor independent. The Executive Committee proposes to the Board those decisions for which it is exclusively responsible. In addition, the Committee reports to the Board on the affairs discussed and the decisions made and makes a copy of the minutes of its meetings available to the directors (Article 13 of the Rules and Regulations of the Board). The Executive Committee holds all of the powers delegated by the Board of Directors, except for those that cannot legally be delegated and the following: a) Approval of the Company’s policies and general strategies, including, in particular: (i) Strategic plans, management goals, and the annual budget; (ii) Dividend and treasury stock policy; (iii) General risk policy; (iv) Corporate governance policy; (v) Corporate social responsibility policy. b) Approval of policies regarding information policies and communications to shareholders, the markets and the public. The Board is responsible for providing prompt, accurate and reliable information to the markets, particularly with regard to shareholding structure, material changes in the rules for corporate governance, and significant related-party or treasury transactions. c) Control of management activities and the evaluation of executives; and d) The powers pertaining specifically to the Board with regard to its composition and operation; the remuneration and duties of the directors; the hiring of technical
Chapter 14 – Page 4 assistance for them; and relations between the Board and the shareholders, the markets, and the auditor. Article 3 of the Rules and Regulations of the Board provides that the following powers of the Board may, on an emergency basis, be exercised by the Executive Committee, with a subsequent report thereof to the Board at the first meeting thereafter held by it: a) Approval of the financial information that the Company must make public on a periodic basis. b) Approval of transactions entailing the acquisition and disposition of substantial assets of the Company and major corporate transactions, unless such approval must be given by the shareholders at a General Shareholders’ Meeting, pursuant to the provisions of the Bylaws. c) Approval, within the framework of the provisions of the Bylaws, of the compensation to which each director is entitled. d) Approval of the contracts governing the provision by directors of duties other than those of a mere director and the compensation to which they are entitled for the performance of executive duties. e) The appointment, compensation and, if applicable, removal of the members of the Senior Management, as well as the definition of the basic terms of their contracts. f) Authorization for the creation or acquisition of shareholdings in special purpose entities or entities domiciled in countries or territories that are considered to be tax havens. Risk Committee The Risk Committee has the delegated powers specifically set forth in the resolution on delegation, and assumes the following responsibilities generally: a) To propose to the Board the Group’s risk policy, which must particularly identify: (i) The various types of risk (operational, technological, financial, legal and reputational, among others) that the Group faces, including, contingent and other off-balance sheet losses among the financial or economic risks; (ii) The internal informational and control systems that will be used to control and manage such risks; (iii) The setting of the risk level that the Group deems acceptable; (iv) The planned measures to mitigate the impact of identified risks, in the event that they materialize; b) To systematically review exposure to principal customers, economic sectors of activity, geographic areas, and risk types. c) To be aware of and to authorize, if appropriate, management tools, enhancement initiatives, evolution of projects, and any other relevant activity relating to the control of risks, specifically including the nature and behavior of the internal risk models as well as the results of internal validation thereof. d) To assess and monitor the statements made by the supervisory authorities in the exercise of their duties. e) To ensure that the activities of the Group are consistent with the previously decided risk tolerance level and to delegate to lower-level Committees or executives the powers to assume risks. Chapter 14 – Page 5 f) To decide about transactions that go beyond the powers delegated to lower decision-making bodies, as well as the global limits of pre-classification in favor of economic groups or with respect to exposures by classes of risks. The Committee deals with all types of risks: credit, market, operating, liquidity, etc. The Risk Committee, as the body responsible for overall risk management, also evaluates reputational risk within the scope of its area of activity and decision-making power. It consists of five directors, two of which are executive and three external independent.
14.1.4. Limited partners, if the company is a limited partnership with stock capital Not applicable. 14.1.5. Founders, if the issuer has been established for a period of less than five years Not included, because BANCO SANTANDER, S.A. has been established for more than five years. 14.1.6. Any senior executive who is relevant in order to establish that the issuer holds the appropriate qualifications and experience for handling the issuer’s activities See Chapter 14.1.2 above. 14.1.7. Relevant management training and experience of the members of the board of directors and of the senior managers; nature of all family relationships among these individuals 14.1.7.1. Training and experience The relevant training and professional experience of the current members of the Bank’s Board of Directors and Senior Management are described briefly below, in relation to their business activities both within and outside the Bank. Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos (chairman of the Board of Directors and of the Executive Committee) Born in 1934. He joined the Bank in 1958, and was appointed chairman of the Board in 1986. At present he is also a non-executive director of Shinsei Bank Limited. Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos holds degrees in economics and in law. Mr. Fernando de Asúa Álvarez (first vice chairman of the Board of Directors, and chairman of the Appointments and Remuneration Committee) Born in 1932. He served as vice chairman of BANCO CENTRAL HISPANOAMERICANO, S.A. from 1991 to 1999. He was appointed as a director of the Bank in April 1999. He has been chairman of IBM España, where he is now Honorary Chairman. He is also a non-executive director of Compañía Española de Petróleos (CEPSA) and non-executive vice chairman of Técnicas Reunidas, S.A.
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Mr. Fernando de Asúa Álvarez holds degrees in economics and computer science, and graduate degrees in business administration and mathematics. Mr. Alfredo Sáenz Abad (second vice chairman of the Board of Directors and Chief Executive Officer) Born in 1942. He served as vice chairman and chief executive officer of Banco Bilbao Vizcaya. In 1994 he was appointed as chairman of Banesto, and in February of 2002 he was appointed as second vice chairman and chief executive officer of the Bank. At present, he is also non-executive vice chairman of Compañía Española de Petróleos (CEPSA) and non-executive director of France Telecom España. Mr. Alfredo Sáenz Abad holds degrees in economics and in law. Mr. Matías Rodríguez Inciarte (third vice chairman of the Board of Directors, and chairman of the Risk Committee) Born in 1948. He joined the Bank in 1984, and was appointed executive vice president and financial manager in 1986. He was appointed director in 1988. He is also an external director of Banesto. Mr. Matías Rodríguez Inciarte holds degrees in economics and business technology, and is a state economist. He served in the Spanish Government as Minister of the Presidency (1981–1982). At present he is also a non-executive director of Financiera Ponferrada and chairman of Fundación Príncipe de Asturias. Mr. Manuel Soto Serrano (fourth vice chairman of the Board of Directors) Born in 1940. He was appointed as a director in April of 1999. He was the chairman of the ARTHUR ANDERSEN’s Global Board, and served as managing partner for Europe, the Middle East, Africa, and India. At present, he is also non-executive vice chairman of Indra Sistemas and non-executive director of Corporación Financiera Alba. Mr. Manuel Soto Serrano holds degrees in economics and business administration. ASSICURAZIONI GENERALI S.P.A. (“Assicurazioni”) (director) Assicurazioni is an Italian insurance company represented on the Bank’s Board by its chairman, Mr. Antoine Bernheim, who was born in 1924. Assicurazioni was a director of BANCO CENTRAL HISPANOAMERICANO, S.A. from 1994 to 1999, and was appointed as a member of the Bank’s Board of Directors in April of 1999. Mr. Antoine Bernheim joined the Board of Directors of Assicurazioni Generali in 1973. He was appointed vice chairman in 1990 and served as chairman of the Board from 1995 to 1999. He has served as chairman of Assicurazioni Generali since 2002. He is vice chairman of the Supervisory Board of Intesa Sanpaolo, S.p.A., vice chairman of the subsidiary of the Assicurazioni group Alleanza Assicurazioni S.p.A., a member of the Board of Mediobanca, and vice chairman of LVMH and of Bolloré Investissement. Mr. Bernheim is also a director of Generali France, AMB Generali Holding AG, Generali España Holding Entidades de Seguros S.A., BSI, Generali Holding Vienna and Chistian Dior S.A. Finally, he is a member of the Supervisory Board of Eurazeo. Mr. Antonio Basagoiti García-Tuñón (director) Chapter 14 – Page 7
Born in 1942. He was the executive vice president of BANCO CENTRAL HISPANOAMERICANO, S.A. He was appointed as a director of the Bank in July of 1999. At present, he is also non-executive vice chairman of Faes Farma and non- executive director of Pescanova and member of the External Advisory Board of A.T. Kearney. He has been Chairman of Unión Fenosa. Mr. Antonio Basagoiti holds a law degree. Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (director) Born in 1960. She was the executive vice president of BANCO SANTANDER, S.A. and chief executive officer of Banco Santander de Negocios from 1994 to 1999. She was appointed chairwoman of Banesto in February of 2002. At present, she is also non-executive director of Assicurazioni Generali S.p.A. and member of the International Advisory Board of the New York Stock Exchange, and of Insead and Georgetown University. Ms. Ana Patricia Botín holds a degree in economics. Mr. Javier Botín-Sanz de Sautuola y O’Shea (director) Born in 1973. He was appointed as a director of the Bank in July of 2004. Mr. Javier Botín began his career in 1998 as a lawyer in the International Legal Department of Banco Santander, where he had previously worked in the areas of Asset Management, Risks and Retail Network. In 2000 he founded M&B Capital Advisers, S.A., where he holds the positions of director and managing partner, and also oversees business development and the investment area. He also participates in other business initiatives associated with the venture capital sector, and in not-for-profit activities through the Marcelino Botín Foundation, where he is a member of its board of trustees. Mr. Javier Botín holds a law degree. Lord Burns (Terence) (director) Born in 1944. He was appointed as a director of the Bank in December of 2004. He is the chairman of Abbey National plc. Lord Burns is also the non-executive chairman of MARKS AND SPENCER GROUP PLC. He is also the non-executive chairman of GLAS CYMRU LTD (Welsh Water) and non-executive director of PEARSON GROUP PLC. He has served as Permanent Secretary of the British Treasury; chairman of the Financial Services and Markets Bill Joint Committee in the British Parliament; and as an external director of BRITISH LAND PLC and of LEGAL & GENERAL GROUP PLC. Lord Burns holds a degree in economics. Mr. Guillermo de la Dehesa Romero (director) Born in 1941. He is an International Advisor at Goldman Sachs. He has served as Secretary of State for Economics and as Secretary General of Commerce in the Spanish Government, and as CEO of Banco Pastor. He was appointed as a director of the Bank in June of 2002. At present, he is also an international advisor to Goldman Sachs, non-executive director of Campofrío Alimentación, Chairman of CEPR (Centre for Economic
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Policy Research) of London, member of the Group of Thirty, of Washington, and chairman of the Governing Board of Instituto de Empresa. Mr. Guillermo de la Dehesa is a state economist and Bank of Spain office manager (on leave). Mr. Rodrigo Echenique Gordillo (director) Born in 1946. Appointed as a director in 1988. He served as the chief executive officer of the Bank from then until 1994. At present, he is also chairman of the Economic and Social Council of the Carlos III University of Madrid and external director of Inversiones Inmobiliarias Lar, S.A. Mr. Rodrigo Echenique holds a law degree and is also a government attorney. Mr. Antonio Escámez Torres (director) Born in 1951. He was a director and the executive vice president of BANCO CENTRAL HISPANOAMERICANO, S.A. from 1988 to 1999, and was appointed as a member of the Bank’s Board of Directors in April of 1999. At present, he is also chairman of Fundación Banco Santander, non-executive chairman of Santander Consumer Finance, non-executive chairman of Open Bank Santander Consumer, non-executive vice chairman of Attijariwafa Bank and non- executive chairman of Arena Media Communications. Mr. Antonio Escámez holds a law degree. Mr. Francisco Luzón López (director) Born in 1948. He joined the Bank in 1996 as executive vice president, adjunct to the chairman. He was appointed as a director in March of 1997. He served as chairman of Banco Exterior de España (from 1988 to 1996), Caja Postal (from 1991 to 1996), Corporación Bancaria de España (from 1991 to 1996) and Argentaria (1996). At present, he is also external director of Industria de Diseño Textil (Inditex), global vice chairman of Universia and chairman of the Social Council of the Castilla-La Mancha University. Mr. Francisco Luzón holds degrees in business administration and economics. Mr. Abel Matutes Juan (director) Born in 1941. He is the chairman of Grupo de Empresas Matutes. He served as the Minister of Foreign Affairs in the Spanish Government, and as a Commissioner of the European Union (from 1989 to 1993) for various portfolios. He was appointed as a director of the Bank in June of 2002. Mr. Abel Matutes holds degrees in law and economics. Mr. Juan Rodríguez Inciarte (director) Born in 1952. He was appointed as a director by co-option at the meeting held by the Board of Directors on January 28, 2008 and his appointment was ratified at the General Shareholders’ Meeting held on June 21, 2008. He joined the Bank in 1985 as a director and executive vice president of Banco Santander de Negocios. In 1989 he was appointed as executive vice president of
Chapter 14 – Page 9 the Bank. Between 1991 and 1999 he served as a director of BANCO SANTANDER, S.A. At present, he is also vice chairman of Abbey National plc and a director of Santander Consumer Finance, S.A., Compañía Española de Petróleos, S.A. (CEPSA), RFS Holdings and member of the Supervisory Board of ABN AMRO Holding NV and of ABN AMRO Bank N.V. He holds a degree in economics. Mr. Luis Ángel Rojo Duque (director and chairman of the Audit and Compliance Committee) Born in 1934. He was the governor of the BANK OF SPAIN from 1992 to 2000. He was appointed as a director of the Bank in April of 2005. Mr. Luis Ángel Rojo Duque holds a degree in law and a doctorate in economics, and is also a state economist. He is also doctor honoris causa of the universities of Alcalá and Alicante, a member of the Wise Men Group appointed by the ECOFIN Council for the study of integration of European financial markets, and a member of the Royal Academy of Moral and Political Sciences and of the Royal Academy of the Spanish Language. Mr. Luis Alberto Salazar-Simpson Bos (director) Born in 1940. He was appointed as a director of the Bank in April of 1999. Between 1977 and 1979 he was the civil governor of Biscay, and was subsequently appointed as the Director of National Security. He has been a member of the Inter-Ministry Commission on Collective Bargaining Agreements, the Board of the Spanish Emigration Institute, the National Council of Chambers of Commerce, Industry, and Navigation, and the Board of the Nuclear Energy Council. He is currently the chairman of FRANCE TELECOM ESPAÑA, S.A. and a director of MUTUA MADRILEÑA AUTOMOVILISTA, SOCIEDAD DE SEGUROS A PRIMA FIJA. He is also chairman of CONSTRUCTORA INMOBILIARIA URBANIZADORA VASCO-ARAGONESA, S.A and a director of MUTUACTIVOS PENSIONES, S.A. Mr. Luis Alberto Salazar-Simpson holds a law degree with a specialization in public finance and tax law. Ms. Isabel Tocino Biscarolasaga (director) Born in 1949. She was designated a director by co-option at the meeting of the Board of Directors held on March 26, 2007, which appointment was ratified at the General Shareholders’ Meeting held on June 23, 2007. She is a full-time professor at the Complutense University of Madrid. She has served as Minister of the Environment; chairwoman of the committees on European Affairs and Foreign Affairs in the Spanish Congress; and chairwoman for Spain and Portugal and vice chairwoman for Europe at Siebel Systems. She is currently an elective member of the Spanish State Council, an external director of Climate Change Capital, vice chairwoman of the International Association of Women Jurists and of the Federal Council for the European Movement and a member of the Royal Academy of Doctors. Ms. Isabel Tocino holds a doctorate degree in law. She has undertaken graduate studies in executive business administration at IESE and at Harvard Business School. Mr. José Antonio Álvarez Álvarez (executive vice president)
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Born in 1960. He was the head of financial management at BBVA from 1999 to 2002. He joined the Bank in 2002, and was appointed executive vice President, Financial Management and Relations with Investors, in 2004. He holds degrees in economics and business administration. Mr. Nuno Manuel Da Silva Amado (executive vice president) Born in 1959. He joined the Bank as a member of the Executive Committee of BCI/Banco Santander Portugal in 1997. He was appointed as a director and vice chairman of the Executive Committee of Santander Totta in December of 2004. He was appointed as executive vice president of the Bank in July of 2006. In 2006 he was also appointed chief executive officer of Santander Totta. He holds a degree in business organization and management, and has done the Advanced Management Program at INSEAD. Mr. David Arce Torres (executive vice president) Born in 1943. He joined the Bank in 1964. He was appointed as executive vice president, Internal Audit, in 1994. He is also a director of Banesto. Mr. Ignacio Benjumea Cabeza de Vaca (executive vice president) Born in 1952. He joined the Group in 1987 as general secretary and secretary of the board of Banco Santander de Negocios. He was appointed as general secretary and secretary of the board of Banco Santander S.A. in 1994. Mr. Ignacio Benjumea Cabeza de Vaca holds a law degree from the University of Deusto, ICADE-E3, and a government attorney. Mr. Juan Manuel Cendoya Méndez de Vigo (executive vice president) Born in 1967. Served as head of the legal and tax advisory office of BANKINTER, S.A. from 1999 to 2001. He joined the Bank on July 23, 2001 as executive vice president, Communications, Corporate Marketing and Research. Mr. Juan Manuel Cendoya holds a law degree and is also a government attorney.
Mr. José María Espí Martínez (executive vice president) Born in 1944. He joined the Bank in 1985, and was appointed executive vice president, Human Resources, in 1988. He was appointed executive vice president, Risk, in 1999. He is a state economist and holds degrees in business management and marketing. Mr. José María Fuster Van Bendegem (executive vice president) Born in 1958. He joined the Group in 1988. He was appointed chief information officer of Grupo Santander in 2004. That year he was also appointed as member of the Board of Abbey National plc and of the Board of Advisors of IBM Corporation. In 2006 he was appointed executive director of Banesto, and in 2007 executive vice president for Technology and Operations at Banco Santander. At present, he also serves as director of Ingeniería de Software Bancario, S.L. (ISBAN).
Mr. José María Fuster Van Bendegem is a Senior Aeronautical Engineer and holds an MBA from the Instituto de Empresa. Mr. Enrique García Candelas (executive vice president)
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Born in 1953. He joined the Bank in 1975, and was appointed senior vice president in 1993. He was appointed executive vice president, Santander Branch Network, in January of 1999. He holds a degree in business administration from INSEAD. Mr. José Luis Gómez Alciturri (executive vice president) Born in 1949. He joined the Bank in 1966. Since November of 2003, he has served as executive vice president, Human Resources, and was appointed adjunct executive vice president in 2005 and executive vice president in 2007.
Mr. Gómez Alciturri pursued business studies in Cantabria. Mr. Joan-David Grimà Terré (executive vice president) Born in 1953. He joined BANCO CENTRAL HISPANOAMERICANO, S.A. in 1993. He was appointed head of the Industrial Portfolio division in June of 2001. He was appointed executive vice president, Asset Management, in December of 2005. Mr. Joan David Grimà Terré holds a degree in business administration. Mr. Juan Guitard Marín (executive vice president) Born in 1960. He served as general secretary and secretary of the Board of Banco Santander de Negocios (from 1994 to 1999) and as head of the Investment Department (from 1999 to 2000). He rejoined the Bank in 2002, when he was appointed as executive vice president and vice general secretary and vice secretary of the Board. He holds a law degree and is also a government attorney. Mr. Gonzalo de las Heras Milla (executive vice president) Born in 1940. He joined the Bank in 1990. He was appointed as executive vice president, Global Wholesale Banking, in 1991, and supervises the North American business of the Group. Mr. Gonzalo de las Heras holds a law degree and a postgraduate degree in business administration and economics. Mr. Antonio Horta Osorio (executive vice president) Born in 1964. He joined the Bank in 1993 and was appointed executive vice president, Portugal, in June of 2000. In 2006, he was appointed as chief executive officer of Abbey. He holds a degree in business administration and an MBA from INSEAD.
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Mr. Adolfo Lagos Espinosa (executive vice president) Born in 1948. He served as chief executive officer of Grupo Financiero Serfin from 1996 to 2002. He was appointed executive vice president, Americas, in October of 2002 and executive vice president, Global Wholesale Banking, in April of 2003. He holds a Bachelor of Science degree in Industrial Management and a Master of Science degree in Operations Research. He has also completed an Advanced Management Program. Mr. Jorge Maortua Ruiz-López (executive vice president) Born in 1961. He served as executive vice president of Banesto from 2001 to 2003. He joined the Bank in 2003 as the head of Treasury. Mr. Jorge Maortua holds degrees in economics and business administration (ICADE). Mr. Javier Marín Romano (executive vice president) Born in 1966. He joined the Bank in 1991. After serving in various positions in the Group, he was appointed executive vice president, Global Private Banking, in 2007, which position he still holds. Mr. Marín holds a degree in law, as well as a degree in business administration from Universidad Pontificia de Comillas. Mr. Jorge Morán Sánchez (executive vice president) Born in 1964. He joined the Bank in 2002. Between 1990 and 1992, he worked as head of marketing for Banco Natwest. Between 1992 and 2000 he served as executive vice president of AB Asesores Morgan Stanley DW, and was appointed vice chairman and CEO of Morgan Stanley for Spain and Portugal in 2000. He was appointed executive vice president, Asset Management and Insurance, in 2004; as a director and chief operating officer of Abbey in 2005; and as executive vice president, Global Insurance division, in 2006. Mr. Jorge Morán Sánchez holds degrees in economics and business administration. Mr. César Ortega Gómez (executive vice president) Born in Madrid in 1954. He joined Banco Santander in 2000, and was appointed executive vice president, General Secretariat, in 2006. He holds degrees in economics and business administration. Mr. Javier Peralta de las Heras (executive vice president) Born in 1950. He joined the Bank in 1989, and was appointed as executive vice president, Risk, in 1993. He holds a law degree. Mr. Marcial Portela Álvarez (executive vice president) Born in 1945. He joined the Bank in 1998 as executive vice president. He was appointed executive vice president, Americas, in 1999. Mr. Marcial Portela holds degrees in political science and in sociology. Ms. Magda Salarich Fernández de Valderrama (executive vice president)
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Born in 1956. She joined the Bank in 2008 as executive vice president in charge of the Santander Consumer Finance division. Before that, she held various positions in the automotive industry, such as director and executive vice president of Citroën España and manager of business and marketing in Europe at Automóviles Citroën. She is an engineer from ICAI. She pursued the General Management program at IESE and did the master’s course in Business Management and Marketing at Instituto de Empresa. Mr. José Manuel Tejón Borrajo (executive vice president) Born in 1951. He joined the Bank in 1989. In 2002, he was appointed executive vice president, Financial Accounting and Management Control. He holds a degree in economics. Mr. Jesús Maria Zabalza Lotina (executive vice president) Born in 1958. He was executive vice president of La Caixa (from 1996 to 2002). He joined the Bank in 2002 as executive vice president, Americas. He is a Senior Industrial Engineer. 14.1.7.2. Family relationships Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea and Mr. Javier Botín-Sanz de Sautuola y O’Shea are the children of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos. Mr. Matías and Mr. Juan Rodríguez Inciarte are brothers. 14.1.8. Principal activities of the current board members and senior managers outside the Bank, when these activities are significant in relation to the Bank The current directors and senior managers of the Bank discharge the following duties at other companies as of the date of this document:
Business Name Position Mr. Emilio Botín-Sanz de Sautuola y SHINSEI BANK, LIMITED Director García de los Ríos Mr. Fernando de Asúa Álvarez IBM ESPAÑA, S.A. Honorary Chairman COMPAÑÍA ESPAÑOLA DE PETRÓLEOS, S.A. (CEPSA) Director TÉCNICAS REUNIDAS, S.A. Vice Chairman CONSTRUCTORA INMOBILIARIA URBANIZADORA VASCO- Director ARAGONESA, S.A. Director
Mr. Alfredo Sáenz Abad COMPAÑÍA ESPAÑOLA DE PETRÓLEOS, S.A. (CEPSA) Vice Chairman FRANCE TELECOM ESPAÑA, S.A. Director
Mr. Matías Rodríguez Inciarte BANCO ESPAÑOL DE CRÉDITO, S.A. Director FINANCIERA PONFERRADA, S.A. Director GRUPO CORPORATIVO ONO, S.A. Second Vice Chairman OPERADOR DEL MERCADO IBÉRICO DE ENERGÍA POLO ESPAÑOL, Director S.A. UCI, S.A. Chairman
Mr. Manuel Soto Serrano INDRA SISTEMAS, S.A. Vice Chairman CORPORACIÓN FINANCIERA ALBA, S.A. Director Mercapital, S.L. Chairman of the Advisory Board INVERSIONES INMOBILIARIAS LAR, S.A. Director CARTERA INDUSTRIAL REA, SA Director
Mr. Antonio Basagoiti García-Tuñón FAES FARMA, S.A. Vice Chairman PESCANOVA, S.A. Director A.T. KEARNEY Director (member of the External Advisory Board) Chapter 14 – Page 14
Business Name Position Mr. Antoine Bernheim (1) ASSICURAZIONI GENERALI, S.P.A. Chairman INTESA SAN PAOLO S.P.A. Vice Chairman - Supervisory Board ALLEANZA ASSICURAZIONI, S.P.A. Vice Chairman MEDIOBANCA-BANCA DI CREDITO FINANZIARIO S.P.A. Member – Supervisory Board LVMH Vice Chairman BOLLORÉ INVESTISSEMENT Vice Chairman GENERALI FRANCE Director AMB GENERALI HOLDING, AG Director GENERALI ESPAÑA HOLDING DE SEGUROS, S.A. Director BSI Director GENERALI HOLDING VIENNA Director CHRISTIAN DIOR, S.A. Director EURAZEO Member – Supervisory Board Ms. Ana Patricia Botín-Sanz de BANCO ESPAÑOL DE CRÉDITO, S.A. Executive Chairwoman Sautuola y O’Shea ASSICURAZIONI GENERALI, S.P.A. Director
Mr. Javier Botín-Sanz de Sautuola y M&B CAPITAL ADVISERS, SOCIEDAD DE VALORES, S.A. Executive Director O’Shea M&B CAPITAL MARKETS, S.V., S.A. Chairman and CEO FUNDACIÓN MARCELINO BOTÍN Trustee
Lord Burns (Terence) ABBEY NATIONAL PLC Chairman GLAS CYMRU (WELSH WATER) Chairman PEARSON GROUP PLC Director MARKS AND SPENCER GROUP PLC Chairman
Mr. Guillermo de la Dehesa Romero AVIVA VIDA Y PENSIONES, S.A. DE SEGUROS Y REASEGUROS Chairman CAMPOFRÍO ALIMENTACIÓN, S.A. Director GOLDMAN SACHS EUROPE LTD. Director AVIVA PLC Director
Mr. Rodrigo Echenique Gordillo INVERSIONES INMOBILIARIAS LAR, S.A. Director
Mr. Antonio Escámez Torres SANTANDER CONSUMER FINANCE, S.A. Chairman OPEN BANK SANTANDER CONSUMER, S.A. Chairman ARENA MEDIA COMMUNICATIONS ESPAÑA, S.A. Chairman ATTIJARIWAFA BANK SOCIÉTÉ ANONYME Vice Chairman GRUPO KONECTANET, S.L. Representative (2)
Mr. Francisco Luzón López Industria de Diseño Textil, S.A. (Inditex) Director
Mr. Abel Matutes Juan FIESTA HOTELS & RESORTS, S.L. Chairman FCC CONSTRUCCIÓN, S.A. Director EURIZON FINANCIAL GROUP Director TUI AG Member – Supervisory Board
Mr. Juan Rodríguez Inciarte COMPAÑÍA ESPAÑOLA DE PETROLEOS, S.A. (CEPSA) Director RFS HOLDINGS Director SANTANDER CONSUMER FINANCE, S.A. Director JCF SERVICES, CO LLC Advisor SAAREMA INVERSIONES, S.A. Chairman and CEO ABN AMRO HOLDING NV Member – Supervisory Board ABN AMRO BANK NV Member – Supervisory Board BANCO BANIF, S.A. Director Mr. Luis Alberto Salazar-Simpson Bos FRANCE TELECOM ESPAÑA, S.A. Chairman CONSTRUCTORA INMOBILIARIA URBANIZADORA VASCO- Chairman ARAGONESA, S.A. MUTUA MADRILEÑA AUTOMOVILISTA, SOCIEDAD DE SEGUROS A Director PRIMA FIJA MUTUACTIVOS PENSIONES, S.A. Director
Ms. Isabel Tocino Biscarolasaga CLIMATE CHANGE CAPITAL Director
Mr. José Antonio Álvarez Álvarez BOLSAS Y MERCADOS ESPAÑOLES, SOCIEDAD HOLDING DE Director MERCADOS Y SISTEMAS FINANCIEROS, S.A.
Mr. David Arce Torres BANCO ESPAÑOL DE CRÉDITO, S.A. Director
Mr. Ignacio Benjumea Cabeza de Vaca SOCIEDAD RECTORA DE LA BOLSA DE VALORES DE MADRID, Director S.A. Director BOLSAS Y MERCADOS ESPAÑOLES SOCIEDAD HOLDING DE MERCADOS Y SISTEMAS FINANCIEROS, S.A. Director LA UNIÓN RESINERA ESPAÑOLA, S.A.
Mr. José María Fuster Van Bendegem SISTEMA 4B, S.A. Director
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Business Name Position Mr. Enrique García Candelas CORPORACIÓN EMPRESARIAL EXTREMADURA, S.A. Director
Mr. Joan David Grimà Terré TEKA INDUSTRIAL, S.A. Director ACS ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A. Director
Mr. Gonzalo de las Heras SOVEREIGN BANCORP Director
Mr. César Ortega Gómez(5) FOMENTO DE CONSTRUCCIONES Y CONTRATAS, S.A. Director
Mr. Marcial Portela Álvarez BEST GLOBAL, S.A. Director
Mr. José María Espí Martínez UNION DE CREDITOS INMOBILIARIOS. S.A., E.F.C. Chairman and Director UCI, S.A. Director
(1) Representative of the Director ASSICURAZIONI GENERALI, S.P.A. (2)Mr. Antonio Escámez Torres is an individual representative of Santander Consumer Finance, S.A. on the Board and at the office of the vice chairman of GRUPO KONECTANET, S.L.
14.1.9. Any convictions associated with offenses involving fraud within at least the preceding five years It is hereby stated for the record that none of the members of the Bank’s Board of Directors (including legal entities) or of its Senior Management has been convicted of fraud-related offenses within the five years preceding the registration date of this Registration Document. 14.1.10. Information regarding any bankruptcy, suspension of payments, or liquidation with which the members of the Bank’s management decision-making bodies or senior management were associated within the preceding five years It is hereby stated for the record that none of the members of the Bank’s Board of Directors or of its Senior Management has been associated, in his or her capacity as a member of the Bank’s Board of Directors or of its Senior Management, with any bankruptcy, suspension of payments, or liquidation of a commercial company within the five years preceding the registration date of this Registration Document. 14.1.11. Details of any official public accusation and/or sanctions of this person by the statutory or regulatory authorities (including the designated professional organizations), and whether this person was ever disqualified by a court because of his or her actions as a member of an issuer’s administrative, management, or supervisory bodies, or because of his or her actions involving the management of an issuer’s affairs within the preceding five years It is hereby stated for the record that none of the members of the Bank’s Board of Directors or of its Senior Management has ever been criminally convicted or administratively sanctioned by statutory or regulatory authorities, or disqualified by any court because of his or her actions as a member of an issuer’s administrative, management, or supervisory bodies, or because of his or her actions involving the management of an issuer’s affairs within the five years preceding the registration date of this Registration Document.
Chapter 14 – Page 16
14.2. CONFLICTS OF INTEREST AFFECTING THE BOARD, MANAGEMENT, OR SUPERVISORY BODIES 14.2.1 Conflicts of interest During 2007 there were 50 instances in which the directors, including those who are members of Senior Management, abstained from participating or voting in deliberations of the Board of Directors or of its committees. These 50 cases can be characterized in the following way: on 22 occasions, they were due to proposed appointments and re-elections, the delegation of powers or the revocation of delegated powers, including, on one occasion, the appointment to a committee of the Board; on 11 occasions, the discussion revolved around the approval of the compensation terms applicable to some directors; on 5 occasions, the discussion concerned the annual verification of the condition of the directors that the Appointments and Remuneration Committee carried out at its meeting of March 19, 2007 pursuant to Article 5.5 of the Rules and Regulations of the Board; and on 12 occasions, the discussions revolved around proposals for the purchase or sale of shareholdings or for the provision of financing to companies related to various directors, including 9 in which Mr. Rodrigo Echenique Gordillo abstained because the discussion concerned transactions with companies related to him, another one from which Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea absented herself because Banesto had submitted a financing offer that competed with the one under discussion, and finally, 2 other discussions concerning the preclassification for risk purposes of a company in which Mr. Fernando de Asúa Álvarez was a director and another one in which Mr. Antonio Basagoiti García- Tuñón was a director. None of the aforementioned 50 cases concerns the representatives on the Board of Banco de Assicurazioni General, S.p.A. and of Mutua Madrileña Automovilista.
14.2.2. Agreements or understandings with major shareholders, customers, suppliers, or other parties, pursuant to which any person mentioned in Chapter 14.1 was appointed as a member of the Board of Directors or of Senior Management Apart from the external proprietary Directors listed in Chapter 14.1.1 above, there are no such agreements or understandings. 14.2.3. Information about any restrictions agreed upon by the persons mentioned in Chapter 14.1 regarding the disposal of their interest in the issuer’s securities during a given period A) During fiscal year 2003, the Group’s codes of conduct were adjusted to comply with the requirements of Law No. 44/2002, of November 22, governing Measures for the Reform of the Financial System. Accordingly, on July 28, 2003, the Bank’s Board of Directors approved the new Code of Conduct in the Securities Markets and the new General Code of Conduct for Grupo Santander, which took effect on August 1 and replaced the codes that had been in force since March of 2000. Pursuant to the provisions of the above-mentioned Code of Conduct in the Securities Market, subject persons cannot: (i) engage in transactions to the opposite of the Group’s securities within 30 days following each purchase or sale of said securities, or (ii) engage in transactions involving the Group’s securities, from one month prior to the announcement of the
Chapter 14 – Page 17
corresponding quarterly, half-yearly, or annual earnings until those earnings are published. For the purposes of the provisions of the foregoing paragraph, the term “subject person” shall have the following meaning: Apart from exceptions established by the Compliance Committee for legal reasons or other justified reasons, Subject Persons consist of: 1.- The Bank’s directors and the directors of its subsidiaries, provided that the latter persons are directly associated with the securities markets. 2.- Members of the Senior Management of the Bank and of its subsidiaries who are directly associated with the securities market. 3.- All persons who provide their services in the areas of the Bank or of its subsidiaries that are directly associated with the securities markets. 4.- Representatives or agents of the Bank or of its subsidiaries who engage in activities that are directly associated with the securities markets. 5.- Those other person who, because of the nature of their activities, are obligated – in the opinion of the Compliance Office – to be governed, either temporarily or permanently, by the controls specified in the Code of Conduct in the Securities Markets. This definition excludes those persons who are governed by the Banesto Code of Conduct, unless they also hold a position within the Bank that entails a condition rendering the person in question a subject person. The Compliance Office prepares and updates a list of subject persons, and, for persons governed by multiple codes, may determine which of the obligations having similar contents are applicable to those persons. B) In addition, in February of 2006, three directors, acting in their capacity as shareholders of the Bank, entered into a shareholders’ agreement that was communicated to the Bank and also to the National Securities Market Commission. The document in which the above-mentioned agreement appeared was filed with the Registry of such supervisory entity and with the Commercial Registry of Cantabria. The agreement was signed by Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, Mr. Emilio Botín-Sanz de Sautuola y O'Shea, Mr. Francisco Javier Botín-Sanz de Sautuola y O’Shea, Simancas, S.A., Puente San Miguel, S.A., Puentepumar, S.L., Latimer Inversiones, S.L., and Cronje, S.L. Unipersonal, and contemplates the syndication of the Bank’s shares held by the signers or for which the signers had been granted voting rights. Pursuant to the syndication agreement and through the establishment of restrictions on the free transferability of the shares and the regulation of the exercise of the voting rights inherent therein, the intention was that the representation and actions of the members of the syndicate as shareholders of the Bank would take place in a concerted manner at all times, for the purpose of implementing a stable and long- lasting shared policy and an effective and unified presence and representation within the Bank’s decision-making bodies. As of the date the agreement was signed, the syndication involved a total of 44,396,513 shares of the Bank (0.694 % of its current capital). Furthermore, and in compliance with the contents of clause one of the shareholders’ agreement, the syndication extends, solely with regard to the exercise of the voting rights, to other shares in the Bank that subsequently come under direct or indirect ownership by the
Chapter 14 – Page 18 signatories, or for which voting rights are granted to the signatories, such that, as of the date of registration of this Share Registration Document, another 13,596,636 shares (0.213 % of the Bank’s current share capital) are also included in the syndicate. The chairmanship of the syndicate is held by the individual who at the time is the chairman of the Marcelino Botín Foundation, who is currently Mr. Emilio Botín- Sanz de Sautuola y García de los Ríos. The members of the syndicate are obligated to syndicate and group the voting rights and other political rights inherent in the syndicated shares, such that the exercise of these rights and, in general, the actions of the members of the syndicate with regard to the Bank take place in a concerted manner and in compliance with the instructions and indications, and with the necessarily unified criteria and voting sense, issued by the syndicate, for this purpose granting the representation of these shares to the chairman of the syndicate as the sole common representative of the members of the syndicate. Except for transfers made to other members of the syndicate or to the Marcelino Botín Foundation, prior permission must be obtained from the syndicate assembly, which may freely authorize or deny the intended transfer.
Chapter 14 – Page 19
CHAPTER 15
15. COMPENSATION AND BENEFITS 15.1 BOARD OF DIRECTORS’ COMPENSATION 15.1.1 Bylaw-mandated compensation and attendance fees Article 58 of the Bank’s current Bylaws describes the directors’ compensation system. Section 1 thereof provides that the directors shall be entitled to receive compensation, and section 2 provides that such compensation shall be paid as a share in profits and by-law mandated compensation, and shall have two components: (a) an annual amount and (b) attendance fees. Section 2 further lays down that the specific amount payable for the above mentioned items to each of the directors shall be determined by the Board of Directors, taking into consideration the positions held by each director on the Board and their membership in and attendance at the meetings of the various committees, and that the aggregate amount of the compensation mentioned above shall be equal to one percent of the profit of the Company for the fiscal year, provided, however, that the Board may resolve that such percentage be reduced in those years in which it so deems justified. The Board, acting under the powers granted to it, set the amount of the share in the profits of the Bank for fiscal year 2007 at 0.126% (0.143% in 2006 and 0.152% in 2005). As of the date hereof, the amount of such item for fiscal year 2008 has not yet been set. The Board of Directors, also acting under the powers conferred upon it, resolved to allocate the above-mentioned amount as follows, with such amount being allocated proportionately to any directors who did not sit on the Board for the whole year: each Board member received a gross emolument of EUR 118,100 (EUR 107,400 in 2006 and EUR 89,500 in 2005) and, additionally, each member of the Board Committees listed below received the following gross amounts, respectively: Executive Committee, EUR 236,900 (EUR 215,400 in 2006 and 179,500 in 2005); Audit and Compliance Committee, EUR 55,000 (EUR 50,000 in 2006 and 2005); Appointments and Remuneration Committee, EUR 33,000 (EUR 30,000 in 2006 and 2005); in addition, the First Vice-Chairman and the Fourth Vice-Chairman receive gross amounts of EUR 39,600 each (EUR 36,000 in 2006 and 2005).
In 2007, the Directors also received fees for attending the meetings of the Board of Directors and the Committees thereof (excluding the Executive Committee).
The gross amounts for attending Board of Directors meetings were set by the Board at its meeting of December 15, 2004 and are as follows: EUR 2,310 for resident directors and EUR 1,870 for non-resident directors (EUR 2,310 and EUR 1,870, respectively, in both 2006 and 2005).
The Board, at its meeting of December 18, 2006, approved the proposal of the Appointments and Remuneration Committee made at its meeting of December 13, 2006 to modify the amount of the fees for attending meetings of the Risk Committee and the Audit and Compliance Committee, setting them at EUR 1,500 effective January 1, 2007, leaving the amounts received by the members of the Board of Directors and of other committees –the Appointments and Remuneration Committee, the International Committee and the Technology, Productivity and
Chapter 15 – Page 1
Quality Committee- unchanged at their current levels, excluding the Executive Committee, since no fees are paid for attending the meetings of such committee. The gross amounts established are as follows:
- Risk Committee and Audit and Compliance Committee: EUR 1,500 for resident directors and EUR 1,212 for non-resident directors. - Other Committees: EUR 1,155 for resident directors and EUR 935 for non- resident directors. The amounts received by the Directors for attending the meetings of the committees of the Board were EUR 1,155 and EUR 935 respectively for resident and non-resident directors, both in 2006 and in 2005. The Board of Directors, at its meeting of December 17, 2007, and at the proposal of the Appointments and Remuneration Committee, approved the new amounts of the attendance fees applicable as from January 1, 2008 for attendance at the meetings of the Board of Directors and the committees thereof –excluding the Executive Committee, since no fees are paid for attending the meetings of such committee-. The gross amounts approved are the following: - Board of Directors: EUR 2,540 for resident directors and EUR 2,057 for non- resident directors. - Risk Committee and Audit and Compliance Committee: EUR 1,650 for resident directors and EUR 1,335 for non-resident directors - Other Committees: EUR 1,270 for resident directors and EUR 1,028 for non- resident directors.
15.1.2 Salaries The salaries received by the Bank’s executive directors, who, at December 31, 2007, 2006 y 2005 were Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Mr. Alfredo Sáenz Abad, Mr. Matías Rodríguez Inciarte, Ms. Ana Patricia Botín- Sanz de Sautuola y O’Shea and Mr. Francisco Luzón López, are as follows
Thousands of euros 2007 2006 2005 Total salaries 24,315 20,970 18,494 Of which variable compensation 16,088 13,666 11,412
The detail, by Director, of the compensation earned by the Bank’s Directors in fiscal year 2007 is as follows:
Chapter 15 – Page 2
Thousands of Euros 2007 2006 2005 Salary compensation of By-law mandated compensation Per Diems executive Directors (1) Nomin- ating and Audit and Compensa- Executive Compliance tion Other Variable Other Directors Board Committee Committee Board Per Diems Fixed (a) Total Compensation Total Total Total
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos 118 237 - - 25 5 1,187 2,337 3,524 1 3,910 3,459 3,035 Mr. Fernando de Asúa Álvarez 158 237 55 33 25 169 - - - - 677 590 519 Mr. Alfredo Sáenz Abad 118 237 - - 25 5 3,126 5,582 8,708 511 9,604 8,099 7,161 Mr. Matías Rodríguez Inciarte 118 237 - - 25 141 1,510 2,945 4,455 178 5,154 4,501 3,970 Mr. Manuel Soto Serrano 158 - 55 33 25 35 - - - - 306 271 246 Assicurazioni Generali. Spa. 137 - - - 6 - - - - - 143 136 110 Mr. Antonio Basagoiti García-Tuñón 118 237 - - 25 133 - - - 10 523 3,477 (4) 414 Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea 118 237 - - 25 2 1,133 1,985 3,118 17 3,517 3,084 2,733 Mr. Francisco Javier Botín-Sanz de Sautuola y O’Shea (2) 118 - - - 25 - - - - - 143 128 106 Lord Terence Burns (***) 118 - - - 17 - - - - - 135 122 105 Mr. Guillermo de la Dehesa Romero 118 237 - 33 25 14 - - - - 427 381 326 Mr. Rodrigo Echenique Gordillo 118 237 - 33 25 119 - - - 30 562 1,388 1,329 Mr. Antonio Escámez Torres 118 237 - - 25 128 - - - 42 550 1,329 1,337 Mr. Francisco Luzón López 118 237 - - 25 2 1,271 3,239 4,510 728 5,620 4,601 4,003 Mr. Luis Ángel Rojo Duque (****) 118 - 55 33 14 29 - - - - 249 232 113 Mr. Abel Matutes Juan 118 - 55 - 25 15 - - - - 213 189 172 Mutua Madrileña Automovilista (3) 137 - - - 16 - - - - - 153 148 122 Mr. Luis Alberto Salazar-Simpson Bos 118 - 55 - 25 16 - - - - 214 192 173 Mr. Jay S. Sidhu (b) ------58 - Mr. Emilio Botín-Sanz de Sautuola y O’Shea (**) ------98 Mr. Elías Masaveu Alonso del Campo (**) ------47 Ms. Isabel Tocino Biscarolasaga (*) 82 - - - 21 - - - - - 103 - - Total fiscal year 2007 2,324 2,370 275 165 424 813 8,227 16,088 24,315 1,517 32,203 - - Total fiscal year 2006 2,092 2,150 250 150 386 630 7,304 13,666 20,970 5,757 - 32,385 - Total fiscal year 2005 1,795 1,800 256 148 315 607 7,082 11,412 18,494 2,704 - - 26,119
(*) Appointed Director by co-option to fill a vacancy by the Board at its meeting of March 26, 2007, took office at the meeting of April 23, 2007. Her appointment was ratified by the shareholders acting at the Annual General Shareholders’ Meeting held on June 23, 2007. (**) Directors who were Board members for some months in 2005 but ceased to be Directors prior to December 31, 2005. (***) Appointed at the Bank’s Board of Directors of December 20, 2004 and subsequently ratified by the shareholders acting at the General Shareholders’ Meeting of June 18, 2008 (****) Appointed as a member of the Bank’s Board of Directors on April 25, 2005 and subsequently ratified by the shareholders acting at the General Shareholders’ Meeting of June 18, 2008. (a) Accrued in 2007. (b) Appointed by the shareholders acting at the General Shareholders’ Meeting of June 17, 2006 and ceased to hold office on December 31, 2006. (1) Recorded under “Personnel expenses” of the Bank, except in the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, whose salary is recorded at Banco Español de Crédito, S.A. (2) Amounts refunded to Fundación Marcelino Botín. (3) Ceased to be a Director on December 19, 2007. (4) Includes compensation received for the work done on the Board of Unión Fenosa during the time he was a member thereof at the proposal of the Bank in the amount of three million euros, which was approved by the Bank’s Board of Directors at its meeting of February 6, 2006 at the proposal of the Appointments and Remuneration Committee. The amounts recorded under the caption Other compensation in the foregoing table include, among other items, the life insurance and medical insurance costs payable by the Group.
Chapter 15 – Page 3
15.1.2.1. Compensation of Board members as representatives of the Bank and of Senior Management Representation By resolution of the Executive Committee, all compensation received by the Bank’s directors who represent the Bank on the Board of Directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. The compensation received in 2007, 2006 and 2005 in respect of representation duties of this kind, relating to appointments agreed upon before March 18, 2002, was as follows: Thousands of Euros Company 2007 2006 2005 Mr. Emilio Botín-Sanz de Shinsei Bank, Ltd. 50.1 59.9 58.7 Sautuola y García de los Ríos Mr. Fernando de Asúa Álvarez Cepsa 97.2 95.6 89.9 Mr. Antonio Escámez Torres Attijariwafa Société Anonyme 9.9 5.0 5.1 157.2 160.5 153.7 In addition, in 2007 Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos received options for the acquisition of 10,000 shares of Shinsei Bank, Ltd. (Shinsei) at a price of JPY 555 each. Previously in 2006 and 2005, Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos had received, in each of those years, 25,000 shares of Shinsei at a price of JPY 825 each for those received in 2006 and JPY 601 each for those received in 2005. At December 31, 2007, the listing price of Shinsei shares was JPY 408 so that –regardless of the exercise periods established – no profit would have been made on the options granted in 2007, 2006 and 2005 had they been exercised.
In addition, other Bank directors earned a total of EUR 750,000 in 2007 as members of the Board of Directors of Group companies (EUR 732,000 and EUR 739,000 in 2006 and 2005), which break down as follows: Lord Burns received EUR 682,000 at Abbey; Mr. Rodrigo Echenique received EUR 36,000 at Banco Banif S.A. and Mr. Matías Rodríguez Inciarte received EUR 32,000 at U.C.I., S.A. Chapter 17.2. of this Registration Document provides information relating to the holding of shares of the issuer and of any option on such shares by the members of the Board of Directors. 15.1.2.2. Senior Management The following is a detail of all remuneration received by the Bank’s Executive Vice Presidents (*) in 2005, 2006 and 2007: Thousands of Euros Salary Compensation Other Fiscal Year Number (1) Fixed Variable Total remuneration (**) Total
2005 24 16,450 27,010 43,460 2,708 46,168 2006 26 19,119 34,594 53,713 11,054 64,767 2007 26 19,504 42,768 62,272 10,092 72,364
(*) The compensation of executive Directors, already listed above, has been excluded. (**) Includes compensation for withdrawal and payment for retirement or death of general managers. (1) Held the position of Executive Vice President at some point during the year. The amounts show annual compensation, regardless of the number of months during which they were members of senior management. Furthermore, no member of Senior Management (who is not a Director) received any additional amounts from other Group companies in 2007 for representing the Bank on their boards of directors or any amounts for other items.
Chapter 15 – Page 4
The 912,000 options on shares granted to the Bank’s Executive Vice Presidents (excluding executive Directors) (Executives Plan 2000) (Plan Directivos 2000), whose exercise price was EUR 10,545 per share, were exercised in 2005, at an average listing price of EUR 11.06 per share. Furthermore, at December 31, 2007, the Bank’s Executive Vice Presidents (excluding executive Directors) held 7,235,988 options on Bank shares stemming from Plan I06. As of the end of 2007, the Bank’s Executive Vice Presidents (excluding executive Directors) had the right to receive a maximum number of shares under Plan I09 and Plan I10 of 889,109 and 1,333,465 shares, respectively. In addition, and with regard to the Matched Deferred Bonus Plan, the amount invested by the Executive Vice Presidents totaled EUR 3.5 million. In addition, compensation in kind provided to the Executive Vice Presidents of the Bank (excluding executive Directors), primarily in the form of life insurance, totaled EUR 1,094 thousand in 2007 (EUR 909 thousand and 777 thousand in 2006 and 2005, respectively.) 15.1.3. Advances, loans granted and guarantees outstanding provided by Grupo Santander in favor of directors The following table sets out the Group’s direct risks with directors of the Bank and the guarantees provided to them. The terms and conditions of such transactions are equivalent to those of transactions made on an arm’s length basis, or else the respective compensation in kind has been allocated:
Thousands of Euros 2007 2006 2005 Loans and Guaran- Total Loans and Guaran- Total Loans and Guaran- Total Credits tees Credits tees Credits tees Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos - -- -- 2 -2 Mr. Fernando de Asúa Álvarez - - - - - 4 - 4 Mr. Alfredo Sáenz Abad 6 - 6 21 - 21 16 - 16 Mr. Matías Rodríguez Inciarte 18 10 28 - - 8 10 18 Mr. Manuel Soto Serrano 4 4 4 - 4 3 - 3 Mr. Antonio Basagoiti García-Tuñón 94 1 95 125 1 126 145 1146 Ms. Ana Patricia Botín-Sanz de Sautuola y O´Shea --- 2-2 - -- Mr. Francisco Javier Botín-Sanz de Sautuola y O´Shea - - - - - 60 - 60 Mr. Rodrigo Echenique Gordillo 7 - 7 33 - 33 5 - 5 Mr. Antonio Escámez Torres 309 - 309 289 - 289 295 - 295 Mr. Francisco Luzón López 722 - 722 875 - 875 1,026 - 1,026 Mútua Madrileña Automovilista - - - 140 63 203 5 47 52 1,160 11 1,171 1,489 64 1,553 1,569 581,627 The compensation in kind allocated to directors in 2007 for loans outstanding in such fiscal year totaled EUR 40,000. Such amount is included in the “Other Compensation” column of the second table of Chapter 15.1.2. The Group’s direct risks to other members of Senior Management who are not directors as of December 31, 2007 totaled EUR 14 million for loans and credits and EUR 2 million for guarantees (credits and loans for EUR 10 million and guarantees for EUR 2 million as of December 31, 2006).
Chapter 15 – Page 5
15.2. POST-EMPLOYMENT BENEFITS The total amount of the supplemental pension obligations to all its personnel, both in service and retired, assumed by the Group over the years, which amounted to EUR 11,820 (covered mostly by in-house provisions) at December 31, 2007 includes obligations to those who have been directors of the Bank during the year and who discharge (or have discharged) executive duties. The total pension obligations to these directors, together with the total sum insured under life and other insurance policies amounted to EUR 264 million at December 31, 2007 (EUR 234 million as of December 31, 2006 and EUR 182 million at December 31, 2005). The following table provides information on: (i) the pension obligations undertaken and covered by the Group, and (ii) other insurance –the premiums of which are paid by the Group, the related cost being included in the “Other Compensation” column of the table in Chapter 15.1.2 above-, in both cases with respect to the Bank’s executive Directors.:
2007 2006 2005 Accrued Other Accrued Other Accrued Other Thousands of Euros Pensions Insurance Pensions Insurance Pensions Insurance
Mr. Emilio Botín-Sanz de Sautuola y 22,926 - 21,068 - 11,785 - García de los Ríos Mr. Alfredo Sáenz Abad 68,070 9,378 55,537 8,155 45,444 7,917 Mr. Matías Rodríguez Inciarte 44,226 4,529 39,390 4,117 28,953 3,997 Ms. Ana Patricia Botín-Sanz de Sautuola y 17,975 1,403 15,045 1,402 12,232 1,373 O’Shea Mr. Francisco Luzón López 45,468 7,264 39,187 6,571 39,188 6,380
Total 198,665 22,934 170,227 20,245 137,602 19,667
The amounts of the “Accrued Pensions” column in the foregoing table set forth the present actuarial value of the accrued future annual payments to be made by the Group, were obtained by means of actuarial calculations, and cover the obligations to pay the respective pension supplements calculated, for Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Mr. Alfredo Sáenz Abad, Mr. Matías Rodríguez Inciarte and Ms. Ana Patricia Botín-Sanz de Sautuola y O´Shea, as 100% of the fixed annual salary earned at the time of actual retirement plus 30% of the arithmetical mean of the last three variable salary payments received. In addition, in the case of Mr. Francisco Luzón López, the amounts calculated will be added to the amounts received by him in the year before retirement or early retirement in his capacity as a member of the Board of Directors or the Committees of the Bank or of other consolidated Group companies. By resolutions dated December 17, 2007 and March 24, 2008, the Board of Directors of the Bank authorized a change in the contracts of executive Directors and of the other members of the Bank’s Senior Management –the “Senior Managers”- granting senior managers the right, on the date of retirement –or pre- retirement, as appropriate- to elect to receive the accrued pensions –or amounts similar thereto- in the form of income or of capital –i.e. in a single payment- in full but not in part. In order to maintain the financial neutrality for the Group, the amount to be received by the beneficiary of the commitment in the form of capital upon retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy implementing such commitments to Senior Managers. The Senior Managers who are still in service on reaching retirement age –or who, as of the date of the contract entered into, have passed the age of retirement- must state whether they wish to opt for this Chapter 15 – Page 6 form of benefit. Should the Senior Manager subsequently die whilst still in service and prior to retirement, his heirs will be entitled to receive the capital of his pension. Pension charges recognized and reversed in 2007 amounted to EUR 21,615 thousand and EUR 580 thousand respectively (EUR 44,819 thousand and EUR 629 thousand, respectively, in 2006; and EUR 4,414 thousand and 4,449 thousand respectively in 2005). Additionally, other directors have life insurance policies, the cost of which is borne by the Group, the related insured sum being EUR 3 million at December 31, 2007 (EUR 3 million in 2006 and 2005). Payments made in 2007 to members of the Board entitled to receive post-employment benefits amounted to EUR 2.6 million. The actuarial liabilities resulting from post-employment compensation accrued by other members of Senior Management who are not directors at December 31, 2007 amounted to EUR 202 million (EUR 186 million and EUR 150 million at December 31, 2006 and 2005, respectively). The charge to income for this item in 2007 amounted to EUR 24 million (EUR 46 million and EUR 24 million in 2006 and 2005, respectively). In addition, the sums insured under life and accident policies for this group at December 31, 2007 totaled EUR 56 million (EUR 52 million and EUR 43 million at December 31, 2006 and 2005, respectively). At its meeting of July 21, 2008, the Board of Directors approved the new terms and conditions for the contractual relationship of executive directors and executive vice presidents with the Bank, to bring them into line with the new Bylaws (Articles 49.2 and 58.4) and with the new pension system. Such terms and conditions include, among others, the terms further developing and implementing the above-mentioned resolutions of December 17, 2007 and March 24, 2008 regarding the granting to executive directors and other Senior Managers of the option to collect their pensions or similar amounts in a single payment.
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CHAPTER 16
16. MANAGEMENT PRACTICES 16.1 PERIOD AND DATE OF CONCLUSION OF CURRENT TERM. The following table shows the date on which each of the members of the Bank’s Board of Directors was first appointed and the date of expiration of his/her term of office. Name Date first appointed Date of expiration (1) Mr. Emilio Botín Sanz de Sautuola y García de los Ríos July 4, 1960 First half of 2013 Mr. Fernando de Asúa Álvarez...... April 17, 1999 First half of 2011 Mr. Alfredo Sáenz Abad...... July 11, 1994 First half of 2011 Mr. Matías Rodríguez Inciarte ...... October 7, 1988 First half of 2010 Mr. Manuel Soto Serrano ...... April 17, 1999 First half of 2010 ASSICURAZIONI GENERALI. S.P.A...... April 17, 1999 First half of 2012 Mr. Antonio Basagoiti García-Tuñón ...... July 26, 1999 First half of 2012 Dª. Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea .. February 4, 1989 First half of 2011 Mr. Javier Botín-Sanz de Sautuola y O’Shea...... July 25, 2004 First half of 2010 Lord Burns (Terence) ...... December 20, 2004 First half of 2011 Mr. Guillermo de la Dehesa Romero...... June 24, 2002 First half of 2010 Mr. Rodrigo Echenique Gordillo...... October 7, 1988 First half of 2011 Mr. Antonio Escámez Torres...... April 17, 1999 First half of 2012 Mr. Francisco Luzón López...... March 22, 1997 First half of 2012 Mr. Abel Matutes Juan...... June 24, 2002 First half of 2010 Mr. Luis Ángel Rojo Duque ...... April 25, 2005 First half of 2013 Mr. Luis Alberto Salazar-Simpson Bos ...... April 17, 1999 First half of 2013 Ms. Isabel Tocino Biscarolasaga ...... March 26, 2007 First half of 2011 D. Juan Rodríguez Inciarte ………………………… January 28, 2008 First half of 2013 (1) However, pursuant to the provisions of Article 55 of the current Bylaws, one-fifth of the positions shall renew annually, with turnover determined by seniority based on the date and order of the respective appointment.
16.2 INFORMATION ON THE CONTRACTS OF MEMBERS OF THE BOARD, MANAGEMENT OR SUPERVISORY BODIES WITH THE BANK OR WITH GROUP COMPANIES The essential terms and conditions of contracts with the executive directors are described in this Chapter. (i) Exclusivity and non-competition Executive directors may not enter into contracts for services with other companies or entities without the express authorization of the Board of Directors; in any event, a non-compete obligation shall be established as regards companies and businesses similar to those of the Bank and its consolidated Group. (ii) Code of Conduct Contained therein is an obligation to strictly comply with the provisions of Grupo Santander’s General Code of Conduct and with those of the Code of Conduct in the Securities Market, specifically with respect to rules of confidentiality, professional ethics and conflicts of interest.
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(iii) Remuneration The remuneration received for discharging executive duties is compatible with the collection of the remuneration mandated by the Bylaws (share in profits) and per diems that they may be entitled to receive as members of the Board of Directors, as expressly provided in the Bank’s Bylaws and the Rules and Regulations of the Board of Directors. Remuneration packages for the performance of executive tasks incorporate the following basic elements: a. Fixed remuneration Market standards are taken into account for setting the amount. It should not normally represent more than 50% of the aggregate annual fixed and variable (or bonus) compensation. In 2005, 2006 and 2007, such percentages were, on the average, 38.3%, 34.8% and 33.8%, respectively. b. Annual variable remuneration (or bonus) The bonus for executive directors is basically tied to the achievement of pre-tax profit objectives, with market standards taken into account in setting the bonus. For executive directors discharging general management functions within the Group, such remuneration will be primarily determined by the achievement of the pre-tax profit targets of the Group as a whole, whereas for executive directors with management functions focusing more on a specific business division, the attainment of the pre-tax profit targets of such division will have greater weight. Based on such standards, a range of variable remuneration of executive directors is estimated at the beginning of the year. c. Pension rights In addition, executive directors have the right to collect a pension supplement in the event of early retirement or retirement, which may be externally funded by the Bank. The Bank may request early retirement of executive directors who have reached 50 years of age and have at least 10 years of service with the Bank and/or other Group companies. Executive directors may also take early retirement, at their own request, if they are over 55 and have at least 10 years of service with the Bank and/or other Group companies. Notice of the decision to retire or take early retirement must in any event be given 60 days prior to the intended retirement date. Pension rights are also recognized in the event of incapacity and in favor of the spouse (widow/widower) and children (orphans) in the case of death of the executive director. Generally, the amount of pension supplements consists of the amount necessary to reach an annual gross amount equal to 100% of the fixed salary received by the director at the time of actual retirement, plus 30% of the average of the last three variable remuneration amounts received. In certain cases, if the early retirement is by decision of the director, the sum resulting from the application of the method described above would be reduced by between 20% and 4%, depending on the director’s age at the time of early retirement. Pursuant to resolutions of the Bank’s Board of Directors dated December 17, 2007 and March 24, 2008, amendments to the employment contracts of the executive directors and the other members of the Bank’s Senior Management (the “Senior Executives”) were approved giving the Senior Executive the right, on the
Chapter 16 – Page 2 date of retirement (or early retirement, if applicable) to choose to receive accrued pensions (or similar amounts) in the form of income or of capital, in a single payment, i.e. in whole but not in part. In order to preserve financial neutrality for the Group, the amount to be received by the beneficiary of the commitment in the form of capital at the time of retirement must be the proportional part of the market value of the assets covered by the mathematical provisions of the policy that implements these commitments to the Senior Executives. Senior Executives that remain active upon reaching retirement age (or who have exceeded such age on the date of signing the employment contract) must state whether or not they desire to choose this type of benefit. Should the Senior Manager subsequently die whilst still in service and prior to retirement, his heirs will be entitled to receive the capital of his pension. Receipt of pension supplements is incompatible with the rendering of services to competitors of the Bank or of its Group, except with the Bank’s express authorization. d) Remuneration linked to shares of the Company Finally, remuneration schemes consisting of the delivery of shares, options on shares, or amounts linked to changes in the share price of Santander’s shares are also expected to be implemented. The decision to grant remuneration linked to shares of the Bank corresponds by Law and the Bylaws to the shareholders acting at a General Meeting, upon a proposal of the Board of Directors prepared after a report from the Appointments and Remuneration Committee. Article 28.3 of the Rules and Regulations of the Board provides that only executive Directors may be beneficiaries of remuneration systems consisting of the delivery of shares or of rights thereto. (iv) Termination The contracts are of an indefinite duration. However, executive directors whose contracts are terminated owing to failure to perform their obligations or by their own decision 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 or organic duties, the director will be entitled, upon termination of the employment relationship with the Bank, to the following: 1. In the case of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, retirement with pension supplement. At December 31, 2007 and 2006, this supplement would be EUR 1,706,000 and 1,529,000 annually. If termination due to reasons attributable to the Bank or due to objective circumstances occurs as of the date of registration of this document, the estimate of the supplement, based on current salary conditions, would be EUR 1,878,000 annually.
2. In the cases of Mr. Matías Rodríguez Inciarte and of Mr. Francisco Luzón López, early retirement with pension supplement. As of December 31, 2007, this supplement would be EUR 2,146,000 annually for Mr. Matías Rodríguez Inciarte and EUR 2,293,000 for Mr. Francisco Luzón López (EUR 1,916,000 and 1,972,000, respectively, in fiscal year 2006; and EUR 1,801,000 and 1,938,000, respectively, in fiscal year 2005). If termination due to reasons attributable to the Bank or due to objective circumstances occurs as of the date of registration of this document, the estimate of the supplement, based
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on current salary conditions, would be EUR 2,416,000 and 2,648,000 in the cases of Mr. Matías Rodríguez Inciarte and Mr. Francisco Luzón López, respectively.
3. In the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O'Shea, compensation benefit of up to five times the annual fixed salary, as provided in the contract, depending on the date of termination. At December 31, 2007, the amount would be EUR 3,399,000 (EUR 4,120,000 at December 31, 2006 and EUR 4,000,000 at December 31, 2005). Receipt of this compensation is incompatible with receiving a pension supplement. If termination due to reasons attributable to the Bank or due to objective circumstances occurs as of the date of registration of this document, the estimate of such compensation, based on current salary conditions, would be EUR 3,807,000.
4. In the case of Mr. Alfredo Sáenz Abad, retirement or alternatively receipt of remuneration equal to 40% of his annual fixed salary multiplied by the number of years of service to the Bank, up to a maximum of ten times his annual fixed salary. At December 31, 2007, the amount under the first alternative would be EUR 4,257,000 per year, while that relating to the second alternative would be EUR 31.3 million. The two terms of the alternative are mutually exclusive, for which reason, if Mr. Alfredo Sáenz Abad chooses to receive the compensation, he will not receive any pension supplement (EUR 3,657,000 annually and EUR 27.2 million, at December 31, 2006; and EUR 3,421,000 annually and EUR 26.4 million, at December 31, 2005, respectively). If termination due to reasons attributable to the Bank or due to objective circumstances occurs as of the date of registration of this document, the estimates of the supplement and the compensation, based on current salary conditions, would be EUR 4,973,000 annually and EUR 35.9 million, respectively.
5. In the case of Mr. Juan Rodríguez Inciarte, passing to a situation of special early retirement, early retirement, or retirement, accruing a pension supplement. At December 31, 2007, this supplement would be EUR 930,000 annually. If termination due to reasons attributable to the Bank or due to objective circumstances occurs as of the date of registration of this document, the estimate of the supplement, based on current salary conditions, would be EUR 958 million annually.
(v) Insurance The Group provides life insurance to its executive directors (included under “Other Insurance” in the table of Chapter 15.2 above), whose coverage varies in each case on the basis of the policy adopted by the Bank for its senior executives, as well as reimbursement-based medical insurance. (vi) Confidentiality and return of documents There is a strict duty of confidentiality during the term of the employment relationship and following termination thereof. Following termination, they must return to the Bank all documents and objects relating to their activity which the executive director may have in his/her possession.
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(vii) Other conditions
Advance notice period Date of current By decision of By decision of contract the Bank the Director (months) (months)
Mr. Emilio Botín-Sanz de Sautuola y García Jan. 2, 2007 (*) (*) de los Ríos Dec. 9, 1997 and Mr. Alfredo Sáenz Abad Feb. 13, 2002 4 4 Mr. Matías Rodríguez Inciarte Oct. 7, 2002 4 4 Ms. Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea Feb. 13, 2002 4 4 Mr. Francisco Luzón López Jan. 12, 2004 6 4 Mr. Juan Rodríguez Inciarte Nov. 14, 2002 4 4 (*) There is no contractual provision in this respect.
16.3. AUDIT COMMITTEE AND REMUNERATION COMMITTEE. 16.3.1. Audit and Compliance Committee The Board’s Audit and Compliance Committee was set up primarily to evaluate accounting information and control systems, safeguard the independence of the auditor and review the internal control and compliance systems of the Bank and its Group. It is to be made up of not less than three nor more than seven directors, all of whom must be external or non-executive directors, with a majority of the Committee being independent directors. Members of the Audit and Compliance Committee shall be appointed by the Board of Directors bearing in mind the directors’ accounting, audit or risk management knowledge, qualifications and experience. The Audit and Compliance Committee shall in any event be chaired by an independent director with accounting, audit or risk management knowledge and experience. Its current chairman is Mr. Luis Ángel Rojo Duque. Currently, all members of this Committee are external independent directors. The current composition of the Audit and Compliance Committee is as follows: ▪ Mr. Luis Ángel Rojo Duque, Chairman. ▪ Mr. Fernando de Asúa Álvarez, member. ▪ Mr. Abel Matutes Juan, member. ▪ Mr. Luis Alberto Salazar-Simpson Bos, member. ▪ Mr. Manuel Soto Serrano, member ▪ Mr. Ignacio Benjumea Cabeza de Vaca, Secretary (not a member). This Committee has issued a report, which is distributed together with Grupo Santander’s Annual Report and which is available on Grupo Santander’s corporate website (www.santander.com), providing details on the following: i) Regulation, duties, composition and attendance of its members at meetings in 2007 and operation of the Committee. ii) Activities conducted in 2007, broken down into the various basic functions of the Committee: ▪ Financial information ▪ Auditor ▪ The Group’s internal control systems
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▪ Internal Auditing ▪ Compliance ▪ Corporate Governance ▪ Reports to the Board and the General Shareholders’ Meeting and assessment of the effectiveness of and compliance with the Company’s governance rules and procedures. iii) Assessment by the Committee of its performance in 2007. The following are the functions of the Audit and Compliance Committee: a) To report, through its Chairman and/or its Secretary, to the shareholders at the General Shareholders’ Meeting on the issues raised therein by the shareholders regarding matters within their powers. b) To propose the designation of the Auditor, as well as the terms on which the Auditor is to be hired, the scope of the Auditor’s professional mandate and, if appropriate, the revocation or non-renewal of the Auditor’s appointment. The Committee shall favor the Group’s Auditor also assuming responsibility for auditing the companies that are members of the Group. c) To review the financial statements of the Company and the Group, ensure compliance with legal requirements and the correct application of generally accepted accounting principles, as well as to report on proposals to amend accounting principles and methods suggested by management. d) To supervise internal audit services and, in particular: (i) To propose the selection, appointment and removal of the internal audit manager; (ii) To review the annual internal audit work plan and the annual activity report; (iii) To safeguard the independence and effectiveness of the internal audit function; (iv) To propose the budget for such service; (v) To receive information on its activities from time to time; and (vi) To verify that Senior Management bears in mind the conclusions and recommendations made in its reports. e) To know the financial information process and the internal control systems. In particular, the Audit and Compliance Committee shall: (i) Supervise the preparation and completeness of the financial information relating to the Company and the Group, reviewing compliance with regulatory requirements, proper establishment of the scope of consolidation and the correct application of accounting methods. (ii) Regularly review internal control and risk management systems, in order for the principal risks to be properly identified, managed and made known. f) Report, review and supervise the risk control policy established in accordance with the provisions of the Rules and Regulations of the Board of Directors. g) Act as a communication channel between the Board and the Auditor, evaluate the results of each audit and the responses of the management team to its
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recommendations and mediate in the events of disagreements between the Board and the Auditor regarding the principles and criteria to be used in the preparation of the financial statements. Specifically, it shall seek to ensure that there are no reservations or qualifications in the audit report submitted to the shareholders at the General Shareholders’ Meeting together with the financial statements ultimately prepared by the Board. h) Supervise compliance with the audit contract, seeking to have the opinion on the financial statements and the main contents of the audit report drafted clearly and accurately. i) Safeguard the independence of the Auditor, with particular attention to those circumstances and issues that might jeopardize it and to any other circumstances or issues relating to the audit process, and receive information and maintain with the Auditor the communications provided for in auditing legislation and in technical auditing standards. Specifically, verify the percentage represented by the fees paid for all items of the total revenues of the audit firm, and the seniority of the partner responsible for the audit team that provides the service to the Company. The Annual Report shall report on the fees paid to the audit firm, including information on the fees paid for professional services other than audit services. The Committee shall also ensure that the Company announces the change of Auditor publicly, together with a statement on any disagreements with the outgoing auditor and, in the event of resignation of the Auditor, it shall examine the circumstances that led to it. j) Report to the Board, prior to it adopting the respective resolutions, on the following: (i) The financial information to be made public by the Company from time to time, ensuring that it is prepared in accordance with the same principles and practices as the annual financial statements. (ii) The creation or acquisition of interests in special-purpose vehicles or in entities domiciled in countries or territories considered to be tax havens. k) Supervise compliance with the Group’s Code of Conduct in the Securities Markets, with anti - money laundering Manuals and procedures and, generally, with the Company’s governance and compliance regulations, and make the necessary proposals for improvement thereof. In particular, the Committee is charged with receiving information and, if appropriate, issuing a report on disciplinary measures imposed on members of Senior Management. l) Review compliance with actions and measures resulting from the audit reports or actions of administrative oversight and control authorities. m) Be aware of and, if appropriate, respond to the initiatives, suggestions or complaints made by the shareholders regarding the sphere of action of the Committee and submitted to it by the Office of the General Secretary of the Company. The Committee is also charged with: (i) receiving, dealing with and keeping the claims received by the Bank on issues relating to the production of financial, audit and internal control information. (ii) receiving, on a confidential and anonymous basis, any communications from Group employees expressing their concern regarding possible questionable accounting or auditing practices.
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n) Report proposed amendments of the Rules and Regulations of the Board of Directors prior to approval thereof by the Board. o) Evaluate, at least once a year, its operation and the quality of its work. p) All other responsibilities specifically provided for in the Rules and Regulations of the Board of Directors. This Registration Document has been reviewed by the Audit and Compliance Committee. 16.3.2 Appointments and Remuneration Committee. This is another specialized Committee of the Board, which lacks delegated functions. The Rules and Regulations of the Board of Directors provide that all members of this Committee are to be external directors, with a majority of independent directors. Its chairman must be an independent director, as is currently the case. The Appointments and Remuneration Committee is made up of the following members, all of them independent external directors, except for one external director who is neither independent nor proprietary: • Mr. Fernando de Asúa Álvarez, Chairman. • Mr. Manuel Soto Serrano, member. • Mr. Guillermo de la Dehesa Romero, member. • Mr. Rodrigo Echenique Gordillo, member. • Mr. Luis Ángel Rojo Duque, member. • Mr. Ignacio Benjumea Cabeza de Vaca, Secretary (not a member). The Appointments and Remuneration Committee has issued a report that is distributed together with Grupo Santander’s Annual Report and which is available on Grupo Santander’s corporate website (www.santander.com),5 providing information on the following points: i) Regulation, duties, composition and attendance of members at meetings in 2007, and operation of the Committee. ii) Report on Directors’ Remuneration Policy. iii) Activities in 2007: Changes in the composition of the Board and its Committees Annual verification of the status of Directors Participation in the Board’s self-assessment process Adapting to the Unified Code. Amendments to internal regulations Appointment and remuneration of non-director members of Senior Management New pension policy for executives of the Bank Training Liability insurance Related-party transactions
5 See Chapter 24 of this Share Registration Document.
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Institutional documentation Self-assessment iv) Evaluation by the Committee of its performance in 2007. The Appointments and Remuneration Committee has the following functions: a) Establish and review the standards to be followed in order to determine the composition of the Board of Directors and select those persons who will be proposed to serve as directors. In particular, the Appointments and Remuneration Committee: (i) Shall evaluate the competencies, knowledge and experience required of a Director; (ii) Shall specify the duties and aptitudes needed of the candidates to fill each vacancy, evaluating the time and dedication needed for them to properly carry out their commitments; (iii) Shall receive for consideration the proposals of potential candidates to fill vacancies that might be made by the Directors. b) Prepare, by following standards of objectiveness and conformance to the corporate interests, the proposals for appointment, re-election and ratification of directors provided for in Article 20, section 2 of the Rules and Regulations of the Board, as well as the proposals for appointment of the members of each of the Committees of the Board of Directors. Likewise, it shall prepare, by following the same aforementioned standards, the proposals for the appointment of positions on the Board of Directors and its Committees. c) Annually verify the classification of each director (as executive, proprietary, independent or other) for the purpose of their confirmation or review at the Annual General Meeting and in the Annual Corporate Governance Report. d) Report on proposals for appointment or withdrawal of the Secretary of the Board, prior to submission thereof to the Board. e) Report on appointments and withdrawals of the members of Senior Management. f) Propose to the Board: (i) The policy for remuneration of directors and the corresponding report, upon the terms of Article 27 of the Rules and Regulations of the Board. (ii) The policy for remuneration of the members of Senior Management. (iii) The individual remuneration of directors. (iv) The individual remuneration of the executive directors and, if applicable, external directors, for the performance of duties other than those of a mere director, and other terms of their contracts. (v) The basic terms of the contracts and remuneration of the members of Senior Management. g) Ensure compliance with the policy established by the Company for remuneration of the directors and the members of Senior Management. h) Periodically review the remuneration programs, assessing the appropriateness and yield thereof and endeavoring to ensure that the remuneration of directors
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shall conform to standards of moderation and correspondence to the earnings of the Company. i) Ensure the transparency of such remuneration and the inclusion in the Annual Report and in the annual corporate governance report of information regarding the remuneration of directors and, for such purposes, submit to the Board any and all information that may be appropriate. j) Ensure compliance by the directors with the duties prescribed in Article 30 of the Rules and Regulations of the Board, prepare the reports provided for therein and receive information, and, if applicable, prepare a report on the measures to be adopted with respect to the directors in the event of non- compliance with the above-mentioned duties or with the Groups’ Code of Conduct in the Securities Markets. k) Examine the information sent by the directors regarding their other professional obligations and assess whether such obligations might interfere with the dedication required of directors for the effective performance of their work. l) Evaluate, at least once a year, its operation and the quality of its work. m) Report on the process of evaluation of the Committee and of the members thereof. n) And others specifically provided for in the Rules and Regulations of the Board.
16.4. CORPORATE GOVERNANCE Banco Santander, S.A. complies with current Spanish corporate governance legislation. The Bank has included in its Annual Corporate Governance Report, which is available on the website of the National Securities Market Commission (www.CNMV.es), a detailed explanation regarding compliance with the corporate governance recommendations contained in the Report of the Special Working Group on Good Governance of Listed Companies of May 19, 2006 (the “Unified Code”).
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CHAPTER 17
17. EMPLOYEES 17.1 NUMBER OF EMPLOYEES The number of employees in the Group is indicated below, broken down by professional category: Average number of employees (**)
Number of persons 2007 2006 2005 The Bank: Senior executives (*) 93 81 81 Other line personnel 16,153 15,729 15,731 Clerical staff 4,147 4,231 4,595 General services personnel 42 45 49 20,435 20,086 20,456 Banesto 10,524 10,188 10,560 Rest of Spain 5,582 4,996 3,789 Abbey 15,771 17,461 19,904 Other companies 76,820 70,477 65,372 129,132 123,208 120,081
(*) Categories of Senior Vice President [Subdirector General Adjunto] and above, including Senior Management. (**) Excludes personnel assigned to discontinued operations.
At June 30, 2008, the number of employees of the Group was 131,153. This figure does not include the personnel of Banco Real or of Alliance & Leicester, which as of such date were 32,715 employees and 7,570 employees, respectively.
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The following table contains a breakdown of the Group’s employees by geographic area at the close of each period:
Number of employees(*) 2007 2006 2005 SPAIN 36,558 35,781 34,813
LATINOAMERICA 64,899 59,949 55,049 Argentina 6,621 4,963 4,395 Brazil 21,876 21,599 20,489 Chile 13,025 11,892 10,759 Colombia 1,312 1,134 1,043 Mexico 14,053 12,841 12,191 Peru 43 29 29 Puerto Rico 2,227 2,249 1,611 Uruguay 302 268 217 Venezuela 5,440 4,974 4,315
EUROPE 28,060 27,171 29,437 Czech Republic 195 179 192 Germany 1,846 1,845 1,,875 Belgium 12 11 27 Finland 29 0 0 France 32 18 17 Greece 20 0 0 Hungary 90 77 76 Ireland 4 5 5 Italy 798 780 720 Norway 330 285 269 Poland 638 588 646 Portugal 6,759 6,190 6,317 Slovakia 10 0 0 Switzerland 203 194 188 Netherlands 51 57 62 United Kingdom 17,043 16,942 19,043
UNITED STATES OF AMERICA 1,978 734 649
ASIA 17 11 11 Hong Kong 13 7 7 Japan 4 4 4
OTHER COUNTRIES 307 85 88 Bahamas 56 57 65 Other 251 28 23 Total 131,819 123,731 120,047 (*) Excluding personnel assigned to discontinued operations. The Group had an average of 2,690 temporary employees in 2007 (compared to 5,420 at December 31, 2006 and 3,087 at December 31, 2005). At June 30, 2008, the Group had 1,672 temporary employees. 17.2. STOCK AND STOCK OPTIONS The following chart summarizes the direct, indirect, and proxy holdings, as of the date of registration of this Registration Document, of the members of the Board of Directors of BANCO SANTANDER, S.A., according to the Bank’s official shareholder registry book:
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Directors %of shar Direct Indirect Proxy Total capita Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos(1) 2,196,518 27,042,993 107,949,897 137,189,408 2.445%
Mr. Fernando de Asúa Álvarez 27,093 44,500 - 71,593 0.001%
Mr. Alfredo Sáenz Abad 402,487 1,243,532 - 1,646,019 0.026%
Mr. Matías Rodríguez Inciarte(3) 643,713 65,300 61,444 770,457 0.012% Mr. Manuel Soto Serrano 45,000 235,000 - 280,000 0.004% Assicurazioni Generali S.p.A 9,805,471 62,828,343 - 72,633,814 1.136% Mr. Antonio Basagoiti García-Tuñón 640,000 - - 640,000 0.010%
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea(1) 4,991,033 4,024,306 - 9,015,339 0.000%
Mr. Javier Botín-Sanz de Sautuola y O’Shea(1)(2) 4,793,481 5,350,000 - 10,143,481 0.000%
Lord Burns (Terence) 100 27,001 - 27,101 0.000%
Mr. Guillermo de la Dehesa Romero 100 - - 100 0.000%
Mr. Rodrigo Echenique Gordillo 651,598 7,344 - 658,942 0.010%
Mr. Antonio Escámez Torres 599,508 - - 599,508 0.009%
Mr. Francisco Luzón López 793,957 - - 793,957 0.012%
Mr. Abel Matutes Juan 99,809 2,071,150 - 2,170,959 0.034%
Mr. Juan Rodríguez Inciarte 1,011,357 - - 1,011,357 0.016%
Mr. Luis Ángel Rojo Duque 1 - - 1 0.000%
Mr. Luis Alberto Salazar-Simpson Bos 131,312 4,464 - 135,776 0.002% Ms. Isabel Tocino 6,495 - - 6,495 0.000% Total 26,839,033 102,943,933 108,011,341 237,794,307 3.718%
(1) Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos has the right to vote 90,715,628 shares owned by FUNDACIÓN MARCELINO BOTÍN (1.42% of the current share capital), 8,096,742 shares owned by Mr. Jaime Botín-Sanz de Sautuola y García de los Ríos, 96,047 shares owned by Ms. Paloma O’Shea Artiñano, 9,041,480 shares owned by Mr. Emilio Botín- Sanz de Sautuola y O’Shea, 9,015,169 shares owned by Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, and 10,143,481 shares owned by Mr. D. Javier Botín-Sanz de Sautuola y O’Shea. Therefore, this table refers to the direct and indirect holdings of each of the latter two persons, who are Directors of the Entity; however, in the column indicating the percentage of share capital, these holdings are calculated along with the holdings that belong to, or are also represented by, Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos. (2) Mr. Javier Botín-Sanz de Sautuola y O’Shea has the status of proprietary Director as he represents within the Board of Directors 2.445% of the current share capital corresponding to the equity stakes of Fundación Marcelino Botín, Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, Mr. Emilio Botín-Sanz de Sautuola y O’Shea, Mr. Jaime Botín-Sanz de Sautuola y García de los Ríos, Ms. Paloma O’Shea Artiñano, and his own stake. (3) Mr. Matías Rodríguez Inciarte has the right to vote 61,444 shares owned by his two sons.
The percentage of capital owned or represented by the directors of the Bank at the ordinary General Shareholders’ Meeting held on June 21, 2008 was 33.297%. The quorum for this Meeting was 56.622% of the share capital. As of the date of registration of this Registration Document, the only options on Bank shares in force that had been granted to the members of the Bank’s Board of Directors are the ones that are part of the long-term incentive plan (“I-06”). This plan, which is linked to the achievement of a series of goals (see Chapter 17.3 of this Registration Document), was approved at the Ordinary General Shareholders’ Meeting held on June 18, 2005. The goals upon which the I-06 Plan was conditioned were met in 2007, and as of the date of this document the Plan is in the execution period. A breakdown of the Plan options granted to members of the Board of Directors and exercised during the first half of 2008 is as follows:
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Rights Exercised Incentive Plan (I-06) 1H 2008 Rights Rights as of Number Exercise as of Exercise Initial Ending Rights December 31, Price Dec. 31, Price Date of Date of Granted 2007 (Euros) 2008 (Euros) Right Right
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos 541,400 541,400 (541,400) 9.09 - - - - Mr. Alfredo Sáenz Abad 1,209,100 1,209,100 - - 1,209,100 9.09 Jan. 15, 08 Jan. 15, 09 Mr. Matías Rodríguez Inciarte 665,200 665,200 (332,600) 9.09 332,600 9.09 Jan. 15, 08 Jan. 15, 09 Ms. Ana Patricia Botín-Sanz Sautuola y O’Shea (**) 293,692 293,692 - - 293,692 9.09 Jan. 15, 08 Jan. 15, 09 Mr. Francisco Luzón López 639,400 639,400 (300,000) 9.09 339,400 9.09 Jan. 15, 08 Jan. 15, 09 Mr. Juan Rodríguez Inciarte (**) - - (419,000) 9.09 - - - - 3,348,792 3,348,792 1,593,000 - 2,174,792 9.09 (*) Approved at the General Shareholders’ Meeting of Banesto held on February 28, 2006. (**) Mr. Juan Rodríguez Iniciarte has been appointed to be a member of the Board of Directors for the first half of 2008, for which reason his rights are not included on prior dates.
All of the persons mentioned in the table above are executive directors, because no options have been granted to external or non-executive directors. At June 30, 2008, the members of Senior Management (other than Directors) held, either directly or indirectly, a total of 3,875,987 shares of the Bank (0.06% of the share capital), as shown in the following breakdown:
June 30, 2008 SHARES DIRECT INDIRECT FAMILY REPRESENTED BY SENIOR EXECUTIVE HOLDINGS HOLDINGS HOLDINGS PROXY TOTAL Mr. José Antonio Álvarez Álvarez 125,064 573 125,637 Mr. Nuno Manuel Da Silva Amado 78,328 78,328 Mr. David Arce Torres 1,090,330 1,090,330 Mr. Ignacio Benjumea Cabeza de Vaca 336,809 16,114 352,923 Mr. Juan Manuel Cendoya Méndez de Vigo 41,553 41,553 Mr. Fermín Colomés Graell6 34,921 34,921 Mr. José María Espí Martínez 293,294 1,000 294,294 Mr. Enrique García Candelas 372,602 372,602 Mr. Juan Guitard Marín 10,569 10,569 Mr. Joan David Grimà Terré 15,112 15,112 Mr. Gonzalo de las Heras Milla 8,988 8,988 Mr. Antonio Horta Osorio 274,979 274,979 Mr. Adolfo Lagos Espinosa 102,336 102,336 Mr. Jorge Maortua Ruiz-López 142,807 142,807 Mr. José Luis Gómez Alciturri 43,224 6,803 50,027 Mr. Jorge Morán Sánchez 88,649 88,649 Mr. César Ortega Esteban 44,843 44,843 Mr. Javier Peralta de las Heras 258,916 258,916 Mr. Marcial Portela Álvarez 143,953 143,953 Mr. Jose Javier Marín Romano 78,634 2,227 80,861 Mr. José Manuel Tejón Borrajo 133,698 133,698 Ms. Magdalena Sofia Salarich Fernández Mr. José María Fuster Van Bendegem 47,346 47,346 Mr. Jesús María Zabalza Lotina 70,647 11,100 568 82,315 Total 3,875,987 0.06%
6 As of the date of this document Mr. Fermín Colomés Graell has early retired. Chapter 17 – Page 4
Furthermore, on December 31, 2007, the non-director members of Senior Management held 7,235,988 options on shares of the Bank from the I-06 Plan, according to the following breakdown:
Total Name options Mr. José Antonio Álvarez Álvarez 232,000 Mr. David Arce Torres 357,800 Mr. Ignacio Benjumea Cabeza de Vaca 447,300 Mr. Juan Manuel Cendoya Méndez de Vigo 229,400 Mr. José María Espí Martínez 252,900 Mr. Enrique García Candelas 395,700 Mr. Joan David Grimà Terré 253,000 Mr. Juan Guitard Marín 229,600 Mr. Antonio Horta Osorio 659,900 Mr. Adolfo Lagos Espinosa 391,800 Mr. Jorge Maortua Ruiz-López 461,100 Mr. Jorge Morán Sánchez 217,100 Mr. Javier Peralta de las Heras 210,300 Mr. Marcial Portela Álvarez 482,100 Mr. Juan Rodríguez Inciarte 419,000 Mr. José Manuel Tejón Borrajo 424,400 Mr. Jesús María Zabalza Lotina 403,100 Mr. César Esteban Ortega Gómez 248,500 Mr. Nuno Manuel Amado da Silva 199,100 Mr. Fermín Colomés Graell7 118,200 Mr. José María Fuster Van Bendegem 100,688 Mr. Javier Marín Romano 177,800 Mr. José Luis Gómez Alciturri 126,200 Mr. Gonzalo de las Heras Milla 199,000 Total 7,235,988
Chapter 17.3 of this Registration Document contains information about the current option plans for the Bank’s employees. 17.3 DESCRIPTION OF RESOLUTIONS FOR EMPLOYEE PARTICIPATION IN CAPITAL At June 30, 2008, employees of the Bank (other than the Board of Directors) owned 19,619,722 shares, representing 0.31% of the Bank’s entire share capital on that date. a) Remuneration systems based on the delivery of shares of the Bank In addition to the extraordinary delivery of 100 shares of the Bank to each active Group employee to celebrate the Bank’s 150th anniversary, as approved at the General Shareholders’ Meeting held on June 23, 2007 (representing 0.21% of the Bank’s share capital), which delivery was completed in August 2007 through their purchase on the market (the cost of which came to EUR 179 million), in recent years the Bank has set up remuneration systems tied to the performance of the stock market price of Bank’s shares, based on the achievement of certain targets indicated below. Pursuant to the provisions of Law No. 55/1999, of December 29, which, through its additional provision seventeen, adds a new additional provision sixteen to Law No. 24/1988, of July 28, governing the Securities Market, the
7 As of the date of this document Mr. Fermín Colomés Graell has early retired. Chapter 17 – Page 5
Bank will submit, prior to the implementation or payment, a corresponding supplement to the current prospectus, or a specific new prospectus, providing information about the shares and options or payments relating to directors and executives. In 2004, a new long-term incentive plan (I-06) designed for options on the Bank’s shares linked to the achievement of two objectives: appreciation of the Bank’s share price and an increase in earnings per share, in both cases to a level greater than those of a representative sample of comparable banks. These objectives were achieved.
At December 31, 2007, a total of 2,512 of the Group’s executives were participating in the Plan, with 95,056,019 options on shares of the Bank at an exercise price of EUR 9.09. The exercise of these options would affect 1.520% of the Bank’s share capital, because the exercise of each option grants the right to acquire one share. The initial and ending dates of the plan are January 15, 2008 and January 15, 2009, respectively.
This Plan, which was approved at the General Shareholders’ Meeting held on June 18, 2005, is currently in the implementation stage. The beneficiaries of the Plan include the executive directors and Senior Management, with the number of options on shares of the Bank indicated in Chapter 17.2. The Plan contained the following requirements, which have already been met: a) appreciation in the value of the Bank’s shares exceeding the appreciation in the value of the shares of at least 20 of the 29 banks in the reference sample, based on a comparison of the weighted average of the listing prices for the first 15 trading days of January 2005 and the weighted average for the listing prices for the corresponding period in 2007; and b) increase in earnings per share of the Bank for the three-year period between 2004 and 2006 (i.e., 2004, 2005, and 2006) exceeding the increase in earnings per share of 20 of the same 29 banks in the sample. Set forth below is a breakdown as of December 31, 2007, 2006 and 2005 of the remuneration systems linked to the stock market value of the shares of the Bank based on the achievement of certain objectives:
Chapter 17 – Page 6
Euro Initial Ending Number of Exercise Year of Number of Date of Date of shares Price Grant Group Persons Right Right
Plans in effect at January 1, 2005 21,126,750 9,94
Options granted (IP 06) 99,900,000 9,09 (**) Executives 2,601 Jan. 15, 2008 Jan. 15, 2009
Options exercised (15,606,000) (9,83) Of which: Plan Four (228,000) 7,84 Young Executives Plan (329,000) 2,29 Executives Plan 2000 (12,389,000) 10,545 European Branches Plan (2,660,000) 7,60 (*)
Options cancelled or not exercised (5,520,750) -
Plans in effect at December 31, 2005 99,900,000 9,09
Options exercised - -
Options cancelled, net (Plan I-06) (3,648,610) 9,09 Executives (44) Jan. 15, 2008 Jan. 15, 2009
Plans in effect at December 31, 2006 96,251,390 9,09
Rights granted (Plan I09) 10,448,480 - Executives 5,476 June 23, 2007 July 31, 2009
Rights granted (Plan I10) 15,690,283 - Executives 5,506 June 23, 2007 July 31, 2010
Options cancelled, net (Plan I-06) (1,195,371) 9,09 Executives (45) Jan. 15, 2008 Jan. 15, 2009
Plans in effect at December 31, 2007 121,194,782 - Of which: Plan I06 95,056,019 9,09 Plan I09 (See Chapter 17.3.6) 10,448,480 -
Plan I10 (See Chapter 17.3.6) 15,690,283 -
(*) Average share price, which ranges between EUR 5.65 and EUR 10.15 per share.
(**) The exercise price of the options under Plan I-06 is EUR 9.09 per share, which corresponds to the weighted average of the daily average market price of the Bank’s shares on the Continuous Market for the first 15 trading days of January 2005. This was the standard established in the resolution approving Plan I-06, as adopted at the Meeting held on June 18, 2005. The documentation on this resolution correctly stated the method used to set the exercise price; however, due to an error, the figure of EUR 9.07 per share was mentioned instead of the correct figure of EUR 9.09 per share. In 2005, the Group designed an incentive plan called the Medium-Term Incentive Plan (“MTIP”), consisting of the delivery of shares of the Bank to Abbey executives. This plan links the actual allocation of the shares in 2008 to the achievement of Abbey’s business goals (in terms of net earnings and income). The Plan was approved at the Bank’s General Shareholders’ Meeting held on June 17, 2006. Subsequently it was deemed necessary to modify the terms of the Plan so as to reflect the effect that the sale of Abbey’s life-insurance business to Resolution had on Abbey’s income goals for 2007. The Board, after receiving a favorable report from the Appointments and Remuneration Committee, submitted the ratification of this change to the shareholders at the General Shareholders’ Meeting held on June 23, 2007, who approved it. The following chart shows the option plans for shares of the Bank originally granted by the management of Abbey to its employees (in the form of Abbey shares) and details of the MTIP plan.
Chapter 17 – Page 7
Pound(*) Initial Ending Number of Exercise Year of Number of Date of Date of shares Price Grant Group Persons Right Right
Plans in effect at January 1, 2005 17,675,567 3.58 Options exercised (17,769,216) 4.45 Of which: Executive Options (89,305) 4.43 Employee Options (2,550) 5.90 Sharesave (1,677,361) 4.45
Options cancelled or not exercised (1,783,670) -
Plans in effect at December 31, 2008 14,122,681 3.41
2,825,123 7.50 2005 and First half First half Executives 174 Options granted (MTIP) 2006 of 2008 of 2008
Options exercised (5,214,171) 3.1 Of which: Executive Options (87,659) 4.07 Employee Options 33,000) 5.90 Sharesave (5,093,512) 3.38
Options cancelled (net) or not exercised (1,379,401) -
Plans in effect at December 31, 2006 10,354,232 4.32 Of which: Executive Options 178,026 4.11 2003-2004 Executives 13 Mar 26, 2008 Mar 24, 2013 Employee Options ------Sharesave 7,638,791 3.32 1998-2004 Employees 4,512 (**) Apr 1, 2006 Sep 1, 2011 MTIP 2,537,415 9.39 2005 and Executives 170 1H 2008 1H 2008 2006
Options granted (MTIP) - - Options exercised (1,535,325) 3.81 Of which: Executive Options (33,904) 3.96 Sharesave (1,501,421) 3.81 Options cancelled (net) or not exercised (770,595) -
Plans in effect at December 31, 2008 8,048,312 5,32 Of which: Executive Options 144,122 4.15 2003-2004 Executives 4 Mar 26,2006 Mar. 24, 2013 Sharesave 5,684,340 3.18 1998-2004 Employees 2,239 (**) 01-04-2006 Sep 1, 2011 MTIP 2,219,850 10,88 2005 and Executives 157 1H 2008 1H 2008 2006
(*) The pound sterling/euro exchange rate at December 31, 2007, 2006 and 2005 was EUR 1.36360, 1.4892, and 1.4592 per pound sterling, respectively. (**) Number of accounts and/or contracts. An individual employee may hold more than one account and/or contract.
During the first half of 2008, 4,342,777 shares were exercised from the MTIP plan, which was cancelled as of June 30, 2008.
Chapter 17 – Page 8 b. Long-term Incentive Policy, and Plans constituting this Policy Within the framework of the long-term incentive policy approved by the Board of Directors after a report from the Appointments and Remuneration Committee, on June 23, 2007 the shareholders approved the launch of the first two cycles of the Performance Shares Plan (Plan de Acciones Vinculado a Objetivos) (2007-2009 period) (Plans I09 and I10), the first cycle (2008-2010 period) of the Matched Deferred Bonus Plan (Plan de Acciones Vinculado a Inversión Obligatoria), and the selective delivery of shares up to a maximum of 2,189,004 (representing 0.035% of the Bank’s share capital, as of the date of approval of the Plan), establishing a maximum total limit of 28,144,334 shares to be delivered under these programs, equal to 0.45% of the Bank’s share capital as of the date of approval of these Programs (the “Total Limit”). The shares to be delivered may be owned by the Bank or by any of its subsidiaries, be newly-issued shares, or be obtained from third parties that have signed agreements to ensure that the commitments made will be met. - First and second cycle (2007-2009) of the Performance Shares Plan (Plans I09 and I10). The rules to which the first and second cycles of this Plan are subject are as follows: i. Beneficiaries: The executive directors, the other members of Senior Management, and such other executives of Grupo Santander (excluding Banesto) as may be determined by the Board of Directors, or the Executive Committee by delegation thereof. At December 31, 2007, the total number of participants expected under the first cycle was 5,476 and under the second cycle was 5,506, although the Board of Directors, or the Executive Committee by delegation thereof, may decide upon inclusions (by promotion or inclusion within the Group) or exclusions, without changing the total maximum number of shares authorized to be delivered at any time. ii. Goals: The goals whose achievement will determine the number of shares to be delivered (the “Goals”) are linked to the following two parameters: a) Total Shareholder Return (“TSR”); and b) Growth in Earnings per Share (“EPS”). For the purposes hereof, TSR shall mean the difference (stated as a percentage ratio) between the value of an investment in ordinary shares in each of the organizations being compared at the end of the period and the value of the same investment at the beginning of the period, taking into account that, for purposes of the calculation of such value at the end of the period, the dividends or similar items received by the shareholder for such investment during the respective time period will be considered as if they had been invested in additional shares of the same type on the first date on which the dividend is due to the shareholders and at the weighted average listing price on such date. The listing prices set forth in paragraph (iii) below shall be used to determine such values at the beginning and at the end of the period. For the same purposes, EPS growth shall mean the percentage ratio between the earnings per common share as disclosed in the annual consolidated financial statements at the beginning and at the end of the comparison period, as determined in paragraph (iii) below. At the end of the respective cycle, the TSR and EPS growth of Santander and of each of the entities of the group defined below (the “Reference Group”) will be ranked in descending order. Each of the two indicators (TSR and EPS growth)
Chapter 17 – Page 9
shall separately have a 50% weighting in the determination of the percentage of shares to be delivered, on the basis of the following scale and according to Santander’s relative position within the Reference Group.
Percentage of Santander’s Percentage of Santander’s shares earned position in the shares earned position in the above the ranking of above the TSR ranking maximum growth in EPS maximum
1st through 6th 50% 1st through 6th 50%
7th 43% 7th 43%
8th 36% 8th 36%
9th 29% 9th 29%
10th 22% 10th 22%
11th 15% 11th 15%
12th or more 0% 12th or more 0%
The Reference Group will initially be composed of the following 21 entities:
Bank Country ABN AMRO Holding Netherlands Banco Itaú Brazil Bank of America United States Barclays United Kingdom BBVA Spain BNP Paribas France Citigroup United States Credit Agricole France HBOS United Kingdom HBSC Holdings United Kingdom Intesa Sanpaolo Italy JP Morgan Chase & Co. United States Lloyds TSB Group United Kingdom Mitsubishi Japan Nordea Bank Sweden Royal Bank of Canada Canada Royal Bank of Scotland Group United Kingdom Société Générale France UBS Switzerland Unicredito Italiano Italy Wells Fargo & Co. United States If any of the entities of the Reference Group is acquired by another company, is delisted or disappears, it will be removed from the Reference Group. In such case and in any other similar case, the comparison to the Reference Group will be made in such a way that, for each of the indicators considered (TSR and EPS growth), the maximum percentage of shares will be earned if Santander is included in the first quartile (including the 25th percentile) of the Reference Chapter 17 – Page 10
Group; no shares will be earned if Santander is below the mean (50th percentile) of the Reference Group; 30% of the maximum number of shares will be earned at the mean (50th percentile); and, for intermediate positions between (but not including) the median and the first quartile (not including the 25th percentile), it will be calculated by linear interpolation. iii. Duration: The first cycle (Plan I09) will cover the years 2007 and 2008. Therefore, the objectives linked to TSR will use the daily average weighted volume of the average weighted listing prices for the 15 trading sessions prior to April 1, 2007 (exclusive) (to calculate the initial value) and the 15 trading sessions prior to April 1, 2009 (exclusive) (to calculate the final value); the objectives linked to EPS growth will use the consolidated financial statements for the year ending December 31, 2006 and the consolidated financial statements for the year ending December 31, 2008. To receive shares, those qualified must continue to be actively employed by the Group, except in the event of death or disability, through June 30, 2009. Any distribution of shares will be made no later than July 31, 2009, on the date established by the Board of Directors, or the Executive Committee by delegation thereof. The second cycle (Plan I10) will cover the years 2007, 2008 and 2009. Therefore, the objectives linked to TSR will use the daily average weighted volume of the average weighted listing prices for the 15 trading sessions prior to April 1, 2007 (exclusive) (to calculate the initial value) and the 15 trading sessions prior to April 1, 2010 (exclusive) (to calculate the final value); the objectives linked to EPS growth will use the consolidated financial statements for the year ending December 31, 2006 and the consolidated financial statements for the year ending December 31, 2009. To receive shares, those qualified must continue to be actively employed by the Group, except in the event of death or disability, through June 30, 2010. Any distribution of shares will be made no later than July 31, 2010, on the date established by the Board of Directors, or the Executive Committee by delegation thereof. The shares will be delivered by the Bank or by another company within the Group, as the case may be. iv. Maximum number of shares to be delivered: Subject to the other limits set forth in this resolution, the maximum number of shares to be delivered to each beneficiary shall be the result of dividing the percentage of the beneficiary’s fixed annual compensation on the date of adoption of this resolution by the average weighted by daily volume of the daily weighted average trading prices of the Bank’s shares during the fifteen trading sessions immediately preceding May 7, 2007, rounded to two decimal places, which was EUR 13.46 per share. For executive directors, the annual fixed compensation percentage will be 47.7% for the first cycle and 71% for the second cycle, except for Ms. Ana Patricia Botín-Sanz de Sautuola y O'Shea, to whom 70% of these percentages shall apply.
Chapter 17 – Page 11
Accordingly, the maximum number of shares to be delivered to each executive Director shall be as indicated below:
Executive Directors First Cycle (I09) Second Cycle (I10)
Mr. Emilio Botín-Sanz de Sautuola 41,785 62,589 Mr. Alfredo Sáenz Abad 110,084 164,894 Mr. Matías Rodríguez Inciarte 53,160 79,627 Mr. Francisco Luzón López 44,749 67,029 Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea 27,929 41,835
Without prejudice to the Banesto shares held by Ms. Ana Patricia Botín-Sanz de Sautuola y O'Shea pursuant to the "Banesto share distribution Incentive Plan" approved by the shareholders at a General Shareholders’ Meeting of Banesto on June 27, 2007, the maximum number of shares attributable to this executive director is the number stated in the preceding table, pursuant to the resolution adopted at the General Shareholder Meeting mentioned in this paragraph. Following approval of the first cycle of the Performance Share Plan (2007 – 2009) at the General Shareholders’ Meeting of Santander held on June 23, 2007, the Board of Directors, at its meeting of January 28, 2008, approved the appointment by co-option of the executive vice president Mr. Juan Rodríguez Inciarte to the position of director at its meeting on January 28, 2008. The maximum number of shares distributable to Mr. Juan Rodríguez Inciarte was approved by the Executive Committee at its meeting on December 3, 2007, after a report issued by the Appointments and Remuneration Committee on November 26, 2007, and with the approval of the Board of Directors at its meeting on December 17, 2007, in the following amounts:
First Cycle (I09) Second Cycle (I10) Mr. Juan Rodríguez Inciarte 43,322 64,983
Shares distributed to the remaining members of Senior Management are limited to a maximum of 845,787 shares (representing 0.014% of the Bank's capital) in the first cycle and 1,268,482 shares in the second cycle, equivalent to 0.020% of the Bank's capital as of the date of approval of the Plan. – Approval of the first cycle (2008-2010) of the Matched Deferred Bonus Plan The first cycle of the Plan is subject to the following rules: i. Beneficiaries: At its meeting of January 28, 2008, the Executive Committee, by delegation from the Board of Directors, determined the 32 persons who are currently the beneficiaries of this plan and that includes the executive Directors and other members of the Bank’s Senior Management, as well as other senior- level officers of Grupo Santander (excluding Banesto). Without prejudice to the foregoing, such new participants may be added to the Plan as are appropriate as a result of promotion, joining the group or other reasons, in the opinion of the Board of Directors or the Executive Committee by delegation thereof, without modifying the other terms and conditions of the Plan.
Chapter 17 – Page 12 ii. Operation: The beneficiaries must set aside 10% of their 2007 gross annual variable remuneration (or bonus) to acquire Bank shares in the market (the “Mandatory Investment”). Pursuant to the resolution of the shareholders, the Mandatory Investment must be made prior to February 29, 2008. Retention of shares acquired by Mandatory Investment and the participant’s continued service within Grupo Santander for a period of three years from the date of the Mandatory Investment will entitle the participant to receive from the Bank or from another company of the Group, as the case may be, the same number of Santander shares as that initially purchased on a mandatory basis, i.e., at the rate of one share for each share acquired through the Mandatory Investment. iii. Term: This first cycle corresponds to 2008-2010. The delivery of shares by the Bank will be made, if appropriate, between January 1 and April 1, 2011, on the specific date to be determined by the Board of Directors, or the Executive Committee by delegation thereof, within one month of the third anniversary of the date on which the Mandatory Investment was made. The Mandatory Investment of each executive director has been the following:
Executive Directors No. of shares
Mr. Emilio Botín-Sanz de Sautuola 16,306
Mr. Alfredo Sáenz Abad 37,324
Mr. Matías Rodríguez Inciarte 20,195
Mr. Francisco Luzón López 22,214
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea 13,610
The number of shares acquired by Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea as beneficiary of this plan is in accordance with the resolutions of the shareholders acting at the General Shareholders’ Meetings of Banco Santander and Banesto on June 23, 2007 and June 27, 2007, respectively. The number of shares purchased by Mr. Juan Rodríguez Inciarte was 14,617. In order to determine the number of shares acquired by the executive directors in the execution of this Match Deferred Bonus Plan, the maximum limit of shares established by resolution twenty approved at the Bank’s General Shareholders’ Meeting of June 23, 2007 has been taken into account. As of December 31, 2007, the maximum amount to invest by the Executive Vice Presidents under the Match Deferred Bonus Plan was EUR 3.7 million. The investment was made by the Executive Vice Presidents (excluding the current executive directors) in the amount of EUR 3.5 million. -Restricted Shares Plan. For a period of 12 months from implementation thereof, commitments may be undertaken to deliver up to a maximum of 2,189,004 shares of the Bank (representing 0.035% of the Bank's current capital, as of the date of approval of the Plan) to be used selectively as a tool for retaining or hiring executives or employees of the Bank or other Group companies, other than executive directors. The Board of Directors, or the Executive Committee by delegation thereof, shall be tasked with deciding when to use
Chapter 17 – Page 13 this tool. Furthermore, it must comply with the Total Limit indicated at the beginning of this Chapter 17.3.b. Each participant must be a member of the Group for a minimum period of 3 to 4 years. Participants shall be entitled to delivery of the shares upon completion of the minimum period established in each individual case. At the end of fiscal year 2007, the Bank was not obligated to distribute any shares as set forth under this heading. In addition, the following resolutions were adopted at the General Shareholders’ Meeting held on June 21, 2008: A) Within the framework of the long-term incentive policy approved by the Board of Directors, approval of new cycles and plan for delivery of Santander shares for implementation by the Bank and companies within Grupo Santander and linked to certain requirements of permanence or changes in total shareholder return and earnings per share of the Bank (item 11.A of the agenda); and B) Approval of a savings plan for employees of Abbey National Plc and of other companies of the Group in the United Kingdom by means of options to shares of the Bank and linked to the contribution of periodic monetary amounts and certain permanency requirements (item 11.B. of the agenda). Set forth below is a description of the foregoing plans: A.1.- Third cycle of the Performance Shares Plan. The third cycle of delivery of shares linked to the achievement of goals, which are subject to the following rules: (i) Beneficiaries: The executive directors, the other members of Senior Management, and such other executives of Grupo Santander (excluding Banesto) as may be determined by the Board of Directors, or the Executive Committee by delegation thereof. The overall number of participants is expected to be approximately 6,000, although the Board of Directors, or the Executive Committee by delegation thereof, may decide on inclusions (through promotion or inclusion within the Group) or exclusions, without changing the maximum total number of shares authorized for delivery at any time.
(ii) Goals: The goals whose achievement will determine the number of shares to be delivered (the “Goals”) are linked to the following two parameters: a) Total Shareholder Return (TSR); and b) Growth in Earnings per Share (EPS). For the purposes hereof, TSR shall mean the difference (stated as a percentage ratio) between the value of an investment in common shares in each of the organizations being compared at the end of the period and the value of the same investment at the beginning of the period, taking into account that, for purposes of the calculation of such value at the end of the period, the dividends or similar items received by the shareholder for such investment during the respective time period will be considered as if they had been invested in additional shares of the same type on the first date on which the dividend is due to the shareholders and at the weighted average listing price on such date. The listing prices set forth in paragraph (iii) below shall be used to determine such values at the beginning and at the end of the period. For the same purposes, EPS growth shall mean the percentage ratio between the earnings per common share as disclosed in the annual consolidated financial statements
Chapter 17 – Page 14 at the beginning and at the end of the comparison period, as determined in paragraph (iii) below. At the end of the respective cycle, the TSR and EPS growth of Santander and of each of the entities of the group defined below (the “Reference Group”) will be ranked in descending order. Each of the two indicators (TSR and EPS growth) shall separately have a 50% weighting in the determination of the percentage of shares to be delivered, on the basis of the following scale and according to Santander’s relative position within the Reference Group.
Percentage of shares Santander’s position in Percentage of shares Santander’s position in earned above the the ranking of growth in earned above the the TSR ranking maximum EPS maximum
1st through 6th 50% 1st through 6th 50% 7th 43% 7th 43% 8th 36% 8th 36% 9th 29% 9th 29% 10th 22% 10th 22% 11th 15% 11th 15% 12th or more 0% 12th or more 0%
The Reference Group will initially be composed of the following 21 entities:
Bank Country Banco Itaú Brazil Bank of America United States Barclays United Kingdom BBVA Spain BNP Paribas France Citigroup United States Credit Agricole France Deutsche Bank Germany HBOS United Kingdom HSBC Holdings United Kingdom Intesa Sanpaolo Italy JP Morgan Chase & Co. United States Lloyds TSB Group United Kingdom Mitsubishi Japan Nordea Bank Suecia Royal Bank of Canada Canadá Royal Bank of Scotland Group United Kingdom Société Générale France UBS Switzerland Unicredito Italiano Italy Wells Fargo & Co. United States
Chapter 17 – Page 15
If any of the entities of the Reference Group is acquired by another company, is delisted or disappears, it will be removed from the Reference Group. In such case and in any other similar case, the comparison to the Reference Group will be made in such a way that, for each of the indicators considered (TSR and EPS growth), the maximum percentage of shares will be earned if Santander is included in the first quartile (including the 25th percentile) of the Reference Group; no shares will be earned if Santander is below the mean (50th percentile) of the Reference Group; 30% of the maximum number of shares will be earned at the mean (50th percentile); and, for intermediate positions between (but not including) the median and the first quartile (not including the 25th percentile), it will be calculated by linear interpolation.
(iii) Duration: This third cycle covers the years 2008, 2009 and 2010. The objectives linked to TSR will use the daily average weighted volume of the average weighted listing prices for the 15 trading sessions prior to April 1, 2008 (exclusive) (to calculate the initial value) and the 15 trading sessions prior to April 1, 2011 (exclusive) (to calculate the final value); and for purposes of the objectives linked to EPS growth, taking into account the distorting effect of the extraordinary circumstances that the international financial markets have had on the results of certain entities of the Reference Group in 2007, the consolidated financial statements for the year ending December 31, 2006 and the consolidated financial statements for the year ending December 31, 2010 will be taken into account. To receive shares, those qualified must continue to be actively employed by the Group, except in the event of death or disability, through June 30, 2011. The delivery of shares, if any, will take place no later than July 31, 2011, on the date determined by the Board of Directors, or by the Executive Committee by delegation thereof.
The shares will be delivered by the Bank or, if appropriate, by another company within the Group.
(iv) Maximum number of shares to be delivered: The maximum number of shares to be delivered to each beneficiary shall, subject to the other limits set forth in this resolution, be the result of dividing the percentage of the beneficiary’s fixed annual compensation on the date of adoption of this resolution by EUR 13.46 per share, which is the same amount provided for these purposes for the two cycles approved in 2007. In the case of executive directors, such percentage of fixed annual remuneration shall be 71%, except for Ms. Ana Patricia Botín-Sanz de Sautuola y O'Shea, to whom 70% of such percentage shall apply. Accordingly, the maximum number of shares to be delivered to each executive director shall be as indicated below:
Chapter 17 – Page 16
Executive Directors Third Cycle
Mr. Emilio Botín-Sanz de Sautuola 68,848
Mr. Alfredo Sáenz Abad 189,628
Mr. Matías Rodríguez Inciarte 87,590
Mr. Francisco Luzón López 77,083
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea 46,855
Mr. Juan Rodríguez Inciarte 50,555
Without prejudice to the Banesto shares that may correspond to Ms. Ana Patricia Botín- Sanz de Sautuola y O'Shea pursuant to the plans that may adopted at the General Shareholders’ Meetings of Banesto, the maximum number of shares referred to in the foregoing table for such executive director must be submitted for approval of the shareholders at such General Shareholders’ Meeting. A.2.- Second cycle (2009-2011) of the Match Deferred Bonus Plan. The second cycle of delivery of shares linked to the mandatory investment of variable remuneration, which is subject to the following rules: (i) Beneficiaries: The executive directors and other members of the Senior Management of the Bank, as well as the other principal executives of Grupo Santander (excluding Banesto), as determined by the Board of Directors, or the Executive Committee by delegation thereof (around 36 beneficiaries). Without prejudice to the foregoing, such new participants may be added to the Plan as are appropriate as a result of promotion, joining the group or other reasons, in the opinion of the Board of Directors or the Executive Committee by delegation thereof, without modifying the other terms and conditions of the Plan.
(ii) Operation: The beneficiaries must use 10% of their 2008 gross variable annual compensation (or bonus) to purchase Bank shares in the market (the “Mandatory Investment”). The Mandatory Investment must be made no later than February 28, 2009. The Board of Directors, or the Executive Committee by delegation thereof, may reduce such period. The holding of the shares acquired in the Mandatory Investment and permanence of the participant at Grupo Santander for a period of three years as from the date of the Mandatory Investment shall entitle the participant to receive from the Bank or from another company of the Group, as the case may be, the same number of Santander shares as that initially purchased on a mandatory basis, i.e., at the rate of one share for each share acquired in the Mandatory Investment. In the event that the sum of 10% of the annual variable compensation (bonus) for 2008 of plan beneficiaries, when invested in Bank shares, results in the Mandatory Investment of all beneficiaries exceeding the aggregate maximum number of shares set by the Board of Directors, or the Executive Committee by delegation thereof, within the Total Limit, as defined below, the
Chapter 17 – Page 17
amount to be invested by each beneficiary shall be reduced proportionately so as not to exceed such Total Limit. (iii) Duration: This second cycle comprises 2009-2011. The delivery of shares by the Bank will be made, if appropriate, between January 1 and April 1, 2012, on the specific date to be determined by the Board of Directors, or the Executive Committee by delegation thereof, within one month of the third anniversary of the date on which the Mandatory Investment was made. The Mandatory Investment by each executive director shall be the result of applying sub-paragraph (ii) above, with the following maximum limits:
Executive Directors Maximum no. of shares Mr. Emilio Botín-Sanz de Sautuola 19,968 Mr. Alfredo Sáenz Abad 47,692 Mr. Matías Rodríguez Inciarte 25,159 Mr. Francisco Luzón López 27,675 Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea 16,956 Mr. Juan Rodríguez Inciarte 14,738
The maximum number of shares for Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea shall also be subject to approval at Banesto’s General Shareholders’ Meeting.
A.3.- Maximum limit of shares in the Restricted Shares Plan. Under this plan, the delivery of up to a maximum of 1,900,000 of the Bank’s shares (representing 0.03% of the Bank’s share capital as of the date of approval of the Plan) is authorized to be used selectively as a tool for retaining or hiring executives or employees of the Bank or other Group companies, other than executive Directors. The Board of Directors, or the Executive Committee by delegation thereof, shall be tasked with deciding when to use this tool. The overall limit established in this resolution must also be observed. Each participant must be a member of the Group for a minimum period of 3 to 4 years. Participants shall be entitled to delivery of the shares upon completion of the minimum period established in each individual case. The authorization granted by the shareholders at the General Shareholders’ Meeting of June 21, 2008 may be used to assume commitments to deliver shares for 12 months from the date of the authorization. - Other rules applicable to the Plans described in sub-sections A.1., A.2. and A.3. above: The total maximum limit of shares to deliver in the application of the resolution passed at the General Shareholders’ Meeting of June 21, 2008 shall be 19,960,000, equal to 0.32% of the Bank’s share capital, as of the date of approval of these Plans (the “Total Limit”). In the event of a change in the number of shares due to a decrease or increase in the nominal value of the shares or due to a transaction having an equivalent effect, the number of shares to be delivered shall be adjusted so as to maintain the percentage of the total share capital represented by them, and the corresponding adjustments shall be made in order for the calculation of the TSR and EPS growth to be correct.
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Information from the stock exchange with the largest trading volume or, in case of doubt, from the stock exchange of the place where the registered office is located, shall be used to determine the listing price of each share. If necessary or appropriate for legal, regulatory or similar reasons, the delivery mechanisms provided for herein may be adapted in specific cases without altering the maximum number of shares linked to the plan or the basic conditions to which the delivery thereof is made contingent. Such adaptations may include the substitution of delivery of equivalent amounts in cash for the delivery of shares. The shares to be delivered may be owned by the Bank or by any of its subsidiaries, be newly-issued shares, or be obtained from third parties that have signed agreements to ensure that the commitments made will be met. B.- Savings plan for employees of Abbey National Plc and other Group companies in the United Kingdom This is a voluntary savings plan applicable by decision of Abbey National Plc to employees of Abbey National Plc, companies within its subgroup, and companies belonging to Grupo Santander in which Abbey National Plc has an interest of at least 25%. The characteristics of this plan are the following: A plan in which there is a deduction from the employee’s net salary, as chosen by the employee, of between 5 and 250 pounds Sterling monthly. Upon completion of the chosen period (3, 5 or 7 years), the employee may choose between collecting the amount contributed, without interest, or exercising options for shares of Banco Santander, S.A. in the amount saved, without interest, at a set price, in both cases also receiving from the British Inland Revenue a tax-exempt bonus (currently 4-5% annually), the amount of which may be applied by the employee to the exercise of the options granted. In case of voluntary resignation, the employee recovers the contributions to that point in time, without interest, and receives a slightly reduced bonus, but loses the right to exercise the options. The exercise price in pounds Sterling shall be the result of reducing by up to a maximum of 20% the average of the buy and sell prices at the close of trading in London 3 trading days prior to the reference date. If these listing prices are not available for any reason, such reduction shall apply to the weighted price by average trading volume on the Spanish Continuous Market 15 trading days prior to the reference date. This amount shall be converted into pounds Sterling for each day of listing using the exchange rate published by the London edition of the Financial Times on the following day. The reference day shall be fixed in the final approval of the plan by the British Inland Revenue (invitation date) and shall occur between 21 and 41 days after the publication of the consolidated results of Banco Santander, S.A. for the first half of 2008. The final exercise price was set at GBP 7.69. The employees decided upon their participation in the plan during the period between 42 and 63 days after the publication of the consolidated results of Banco Santander, S.A. for the first half of 2008. The final confirmation to the participants was on September 30, 2008. The maximum monthly savings for all of the contracts signed by each employee (whether for the plan referred to in this resolution or other future resolutions) is 250 pounds Sterling. The maximum number of shares of Banco Santander, S.A. to be delivered in this plan approved for 2008 was set at 8,200,000. Finally, approximately 40% of all eligible
Chapter 17 – Page 19 employees (6,556 employees) have participated, and the final number of options committed was 5,196,807.
Chapter 17 – Page 20
CHAPTER 18
18. MAJOR SHAREHOLDERS 18.1 SIGNIFICANT OWNERSHIP INTERESTS IN THE COMPANY’S CAPITAL The following shareholders with an ownership interest greater than 3% appeared in the Bank’s Shareholders’ Registry as of June 30, 2008: Chase Nominees Limited with 9.96%, State Street Bank & Trust with 8.89%, EC Nominees Ltd with 6.24% and Clearstream Banking with 3.4% of capital. The Bank believes that such entities hold such interests in their capacity as custodian banks/international depositaries acting on behalf of third parties, and there is no evidence of any individual interest greater than 3% in the share capital or voting rights of the Bank. Furthermore, as of the date of record of this Registration Document, the Bank does not have evidence that any other shareholder holds a number of shares that, pursuant to the provisions of Section 137 of the Business Corporations Law (regarding proportional voting), would allow it to appoint a director, which is the criterion used to determine whether a shareholder has a significant amount of influence within the Bank. In fact, in view of the current number of members of the Board of Directors (19), the percentage of the capital needed to have the right to appoint a director would be approximately 5.26%. Except for the instances described in the preceding paragraph, no shareholder holds an ownership interest that is equal to or greater than the above-mentioned approximate amount of 5.26%. 18.2 VOTING RIGHTS OF THE MAJOR SHAREHOLDERS All of the Bank’s shareholders have identical voting rights. 18.3 STATEMENT REGARDING WHETHER THE ISSUER IS UNDER CONTROL The Bank is not aware of the existence of any natural or legal person who exercises or might exercise control over the Bank, pursuant to the terms of Section 4 of Law No. 24/1988, of July 28, 1988, on the Securities Market. 18.4. EXISTENCE OF CONTROL AGREEMENTS As of the date of record of this Registration Document, the Bank is not aware of any agreement whose implementation might, at a later date, give rise to a change in control.
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CHAPTER 19
19. RELATED-PARTY TRANSACTIONS To the knowledge of the Bank, and except as indicated in the following paragraph, no member of the Board, no member of the Bank’s Senior Management, no person represented by a director or by members of the Bank’s Senior Management, no person or company of which such persons, or persons with whom they have agreed to act in concert or through third parties, are directors, members of Senior Management or significant shareholders, has made unusual or significant transactions with the Bank, as provided in Order EHA/3050/2004 of September 15 on the information on related-party transaction to be provided by issuers of securities admitted to trading on official secondary markets. The Appointments and Remuneration Committee, at its meeting of November 8, 2007, was informed pursuant to Article 33.1 of the Rules and Regulations of the Board of Directors, of the decision of Mutua Madrileña Automovilista (then a director of the company) to sell its interest in the Bank’s share capital, which at that time was 73,100,000 shares (1.17% of the share capital), at the beginning of January 2008. In order to at that time set the price of the shares, Mutua Madrileña Automovilista would sign a financial hedge product with another entity. At such meeting, the Committee also evaluated the opportunity of the Bank to sign, on market terms, two equity swap transactions in order to cover positions that would be assumed by the financial entity from which Mutua Madrileña Automovilista intended to purchase the hedge of its divestment. The total amount of such equity swap transactions was EUR 1,101,039,510, which was the result of valuing the shares at EUR 15.0621 each. Once the Committee verified that the proposed transaction respected the standards of non-discrimination among shareholders and the application of market terms, it reportedly favorably on the transaction, which was approved by the Executive Committee at a meeting held the same day. The Board, without the presence of the representative of Mutua Madrileña Automovilista, who did not attend this meeting, ratified this decision at its meeting of November 26, 2007.
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CHAPTER 20
20. FINANCIAL INFORMATION REGARDING THE ISSUER’S ASSETS AND LIABILITIES, FINANCIAL POSITION AND PROFITS AND LOSSES 20.1 HISTORICAL FINANCIAL INFORMATION 20.1.1 Basis of Presentation and Accounting Principles Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for years beginning as from January 1, 2005 in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). In order to adapt the accounting systems of Spanish financial institutions to the new regulations, the Bank of Spain issued Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats. The consolidated annual financial statements of the Group for fiscal year 2007 have been prepared by the management of the Bank (at a meeting of its Board of Directors on March 24, 2008) in accordance with the provisions of the International Financial Reporting Standards adopted by the European Union, taking into consideration Circular 4/2004 of the Bank of Spain, applying the principles of consolidation, accounting policies and measurement standards, in a manner that faithfully shows the assets and financial situation of the Group at December 31, 2007 and the results of operations, changes in recognized income and expenses, and cash flows, on a consolidated basis, during fiscal year 2007. Such consolidated annual financial statements have been prepared based on the accounting records maintained by the Bank and by each of the other entities included within the Group, and include the adjustments and reclassifications necessary to homogenize the accounting policies and measurement standards applied by the Group. At the General Shareholders’ Meeting held on June 21, 2008, the shareholders approved the consolidated annual financial statements (balance sheet, income statement, statement of changes in shareholders’ equity, statement of cash flows and notes) of the Bank and its Consolidated Group for the year ended December 31, 2007. As required by Spanish commercial legislation, for comparison purposes, the Bank presents the figures for each item in the consolidated balance sheet, the consolidated income statement, the consolidated statement of cash flows, and the statement of recognized income and expense, for fiscal year 2007 as well as for the prior fiscal year. The attached income statement for fiscal year 2006 and 2005 differs from the one approved at the Bank’s General Shareholders’ Meeting in that, as a result of Group’s sales of its equity interests (most noteworthy in 2006 and 2005 being the sale of the pension fund management business in Latin America, and, due to its importance in 2005, that of Inmobiliaria Urbis, S.A. and Abbey’s insurance business), the results from the consolidation of such companies have been reclassified for comparative purposes and in accordance with current regulations, from each of the corresponding headings in the consolidated income statement for fiscal years 2006 and 2005 to the heading “Results from Discontinued Operations” of such income statement.
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20.1.2 Accounting policies used and explanatory notes The Group’s consolidated annual financial statements have been prepared in accordance with the accounting policies and measurement standards described in Note 2 to the Annual Report for the year ended December 31, 2007 and published on the corporate website (www.santander.com)8 under “Economic and Financial Information – Annual Report”, which comply with the International Financial Reporting Standards as adopted by the European Union and with Bank of Spain’s Circular 4/2004. Such accounting policies and measurement standards are incorporated by reference to this Registration Document, as indicated under Chapter 24 of this Registration Document. 20.2. PRO-FORMA FINANCIAL INFORMATION Not applicable. 20.3 FINANCIAL STATEMENTS The audit reports have no exceptions in either the individual financial statements of the Bank or in the consolidated financial statements of the Group for the last three fiscal periods.
8 See Chapter 24 of this Registration Document.
Chapter 20 – Page 2
20.3.1 Consolidated Balance Sheet
ASSETS ( Thousands of euros) 2007 2006 (*) 2005 (*) LIABILITIES AND EQUITY 2007 2006 (*) 2005 (*) CASH AND BALANCES WITH CENTRAL BANKS 31,062,775 13,835,149 16,086,458 FINANCIAL LIABILITIES HELD FOR TRADING: 122,753,987 123,996,445 112,466,429 Deposits from credit institutions 23,254,111 39,690,713 31,962,919 FINANCIAL ASSETS HELD FOR TRADING: 158,800,435 170,422,722 154,207,859 Customer deposits 27,992,480 16,572,444 14,038,543 Loans and advances to credit institutions 12,294,559 14,627,738 10,278,858 Marketable debt securities 17,090,935 17,522,108 19,821,087 Loans and advances to customers 23,704,481 30,582,982 26,479,996 Trading derivatives 48,803,227 38,738,118 29,228,080 Debt instruments 66,330,811 76,736,992 81,741,944 Short positions 5,613,234 11,473,062 17,415,800 Other equity instruments 9,744,466 13,490,719 8,077,867 Trading derivatives 46,726,118 34,984,291 27,629,194 OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS 33,155,674 12,411,328 11,809,874 Deposits from credit institutions 12,207,579 - - OTHER FINANCIAL ASSETS AT FAIR VALUE Marketable debt securities 10,279,037 12,138,249 11,809,874 THROUGH PROFIT OR LOSS: 24,829,441 15,370,682 48,862,267 Customer deposits 10,669,058 273,079 - Loans and advances to credit institutions 6,865,073 185,485 2,428,663 Loans and advances to customers 8,021,623 7,972,544 6,431,197 FINANCIAL LIABILITIES AT FAIR VALUE Debt instruments 7,072,423 4,500,220 9,699,237 THROUGH EQUITY - - - Other equity instruments 2,870,322 2,712,433 30,303,170 FINANCIAL LIABILITIES AT AMORTIZED COST: 652,952,005 605,302,821 565,651,643 Deposits from central banks 28,748,079 16,529,557 22,431,194 AVAILABLE-FOR-SALE FINANCIAL Deposits from credit institutions 48,686,254 56,815,667 94,228,294 ASSETS: 44,348,907 38,698,299 73,944,939 Money market operations Debt instruments 34,187,077 32,727,454 68,054,021 through counterparties - - - Other equity instruments 10,161,830 5,970,845 5,890,918 Customer deposits 317,042,764 314,377,078 291,726,737 Marketable debt securities 206,264,524 174,409,033 117,209,385 LOANS AND RECEIVABLES: 579,530,145 544,048,823 459,783,749 Subordinated liabilities 35,670,179 30,422,821 28,763,456 Loans and advances to credit institutions 31,759,867 45,361,315 47,065,501 Other financial liabilities 16,540,205 12,748,665 11,292,577 Money market operations through Counterparties - 200,055 - CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST Loans and advances to customers 533,750,907 484,790,338 402,917,602 RATE RISK (516,725) - - Debt instruments 1,668,339 621,770 171,203 Other financial assets 12,351,032 13,075,345 9,629,443 HEDGING DERIVATIVES 4,134,571 3,493,849 2,310,729
HELD-TO-MATURITY INVESTMENTS - - - LIABILITIES ASSOCIATED WITH NON- CURRENT ASSETS HELD FOR SALE: 63,420 - 7,967 CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST Other liabilities 63,420 - 7,967 RATE RISK 297,131 (259,254) - LIABILITIES UNDER INSURANCE CONTRACTS 13,033,617 10,704,258 44,672,300 HEDGING DERIVATIVES 3,063,169 2,987,964 4,126,104 PROVISIONS: 16,570,899 19,226,51319,822,990 NON-CURRENT ASSETS HELD FOR SALE: 10,156,429 327,384 336,324 Provisions for pensions and similar obligations 11,819,748 14,014,305 14,172,961 Loans and advances to credit institutions 5,596 - - Provisions for contingent liabilities and commitments 636,316 598,735 487,048 Loans and advances to customers 14,499 - - Other provisions 4,114,835 4,613,473 5,162,981 Debt instruments 20,321 - - Equity instruments 9,025,936 - - TAX LIABILITIES: 6,156,365 4,539,051 3,867,795 Tangible assets 1,061,743 327,384 336,324 Current 2,412,133 761,529 1,100,567 Other assets 28,334 - - Deferred 3,744,232 3,777,522 2,767,228
INVESTMENTS: 15,689,127 5,006,109 3,031,482 ACCRUED EXPENSES AND DEFERRED INCOME 4,050,992 2,999,080 3,048,733 Associates 15,689,127 5,006,109 3,031,482 OTHER LIABILITIES: 2,479,457 3,458,7401,512,908 Other 2,479,457 3,458,740 1,512,908 INSURANCE CONTRACTS LINKED TO PENSIONS 2,525,550 2,604,535 2,676,365 EQUITY HAVING THE SUBSTANCE OF A FINANCIAL LIABILITY 522,558 668,328 1,308,847 REINSURANCE ASSETS 309,774 261,873 2,387,701 TOTAL LIABILITIES 855,356,820 786,800,413 766,480,215
TANGIBLE ASSETS: 9,459,033 10,110,996 9,993,207 MINORITY INTERESTS 2,358,269 2,220,743 2,848,223 PP&E for own use 4,287,612 5,284,177 5,204,931 Investment property 460,725 374,547 667,449 VALUATION ADJUSTMENTS: 722,036 2,870,757 3,077,096 Other assets leased out under operating lease 4,710,696 4,452,272 4,120,827 Available-for-sale financial assets 1,418,966 2,283,323 1,941,690 Memorandum item: Acquired under a finance Cash flow hedges (58,655) 49,252 70,406 lease 394,187 200,838 83,459 Hedges of net investments in foreign operations 638,474 (173,503) (384,606) Exchange differences (1,276,749) 711,685 1,449,606 INTANGIBLE ASSETS: 16,033,042 16,956,841 16,229,271 Goodwill 13,830,708 14,512,735 14,018,245 SHAREHOLDERS’ EQUITY: 54,477,846 41,980,802 36,701,380 Other intangible assets 2,202,334 2,444,106 2,211,026 Issued capital 3,127,148 3,127,148 3,127,148 Share premium 20,370,128 20,370,128 20,370,128 TAX ASSETS: 12,698,072 9,856,053 10,127,059 Reserves 16,371,430 12,289,480 8,703,789 Current 1,845,310 699,746 1,217,646 Accumulated reserves 15,475,993 11,491,670 8,100,140 Deferred 10,852,762 9,156,307 8,909,413 Reserves of entities accounted for using the equity method: 895,437 797,810 603,649 PREPAYMENTS AND ACCRUED INCOME 1,749,193 1,581,843 2,969,219 Associates 895,437 797,810 603,649 Other equity instruments: 7,086,881 62,118 77,478 Equity component of compound financial OTHER ASSETS: 2,362,748 2,062,696 4,344,910 instruments - 12,118 34,977
Chapter 20 – Page 3
Inventories 231,734 143,354 2,457,842 Other 7,086,881 50,000 42,501 Other 2,131,014 1,919,342 1,887,068 Treasury shares (192) (126,801) (53,068) TOTAL ASSETS 912,914,971 833,872,715 809,106,914 Profit attributed to the Group 9,060,258 7,595,947 6,220,104 Dividends and remuneration (1,537,807) (1,337,218) (1,744,199) CONTINGENT LIABILITIES: 76,924,835 58,769,309 48,453,575 TOTAL EQUITY 57,558,151 47,072,302 42,626,699 Financial guarantees 76,316,446 58,205,412 48,199,671 TOTAL LIABILITIES AND EQUITY 912,914,971 833,872,715 809,106,914 Assets earmarked for third-party obligations 3 4 24 Other contingent liabilities 608,386 563,893 253,880
CONTINGENT COMMITMENTS: 114,676,563 103,249,430 96,263,262 Drawable by third parties 102,215,927 91,690,396 77,678,333 Other commitments 12,460,636 11,559,034 18,584,929
(*) Presented for comparison purposes only.
The explanatory notes of the main items of the Balance Sheet are included below: I. ASSETS At December 31, 2007, Grupo Santander had total assets in the amount of EUR 912,915 million. To give an idea of the overall size of the Group, assets plus all off-balance-sheet resources amounted to EUR 1,063,892 million. Customer activity, reflected in loans and advances to customers and customer deposits, amount to EUR 565,477 million and EUR 784,995 million, respectively. Loans and advances to customers The breakdown of “Loans and advances to customers” in the consolidated balance sheets is as follows: Thousands of euros 2007 2006 2005
Financial assets held for trading 23,704,481 30,582,982 26,479,996 Other financial assets at fair value through profit or loss 8,021,623 7,972,544 6,431,197 Loans and receivables 533,750,907 484,790,338 402,917,602 Of which: Disregarding impairment losses 542,446,111 492,953,782 410,527,527 Impairment losses (8,695,204) (8,163,444) (7,609,925) 565,477,011 523,345,864 435,828,795 Loans and advances to customers disregarding impairment losses 574,172,215 531,509,308 443,438,720
The Group’s gross loans and advances to customers amounted to EUR 574,172 million, a year-on-year increase of 8.0%. By geographic distribution of the business, Continental Europe accounted for 55%, the United Kingdom for 33%, and Latin America for 12% of the Group’s total. Continental Europe reported overall growth in loans and receivables of 14%. In Spain, the Santander Branch Network increased by 11% and Banesto by 21%. Abbey decreased its balances by 3% (however, it increased by 8% in local currency). Latin America recorded growth of 14% in euro terms, or 20% in local currency, including increases of 56% in Brazil, 32% in Mexico and 13% in Chile.
Chapter 20 – Page 4
Loans and advances to customers Millions of euros 2007 2006 Variation (%) 2005
Loans and advances to public sector 5,633 5,329 5.7 5,243 Loans and advances to other resident sectors 227,512 199,994 13.8 153,727 Commercial credit 18,824 17,276 5.6 15,371 Secured loans 123,371 110,863 11.3 81,343 Other loans 85,893 89,131 19.5 72,384 Loans and advances to non-resident sector 341,027 326,187 4.5 284,468 Secured loans 199,316 191,724 4.0 174,117 Other loans 141,711 134,463 5.4 110,352 Gross loans and credits 574,172 531,509 8.0 443,439 Loan-loss allowances 8,695 8,163 6.5 7,610 Net loans and credits 565,477 523,346 8.1 435,829 Memorandum item: Doubtful loans 6,070 4,613 31.6 4,356 Public sector 1 18 (95.5) 3 Other residents 1,812 1,212 49.6 1,027 Non-resident sector 4,257 3,383 25.8 3,326
Together with the loans, the Group has assumed other non-investment risks (endorsements and letters of credit), as well as several commitments and contingencies assumed by the Group in the ordinary course of business.
Millions of euros 2007 2006 Var. (%) 2005 Financial guarantees Endorsements and other guarantees 69,797 52,697 19.09 44,251 Credit derivatives sold 708 478 165.69 180 Irrevocable letters of credit 5,811 5,029 33.51 3,767 Other financial guarantees - 1 (64.78) 2 76,316 58,205 20.76 48,200 Contingent commitments Drawable by third parties 102,216 91,690 11.47 77,678 Financial asset forward purchase commitments 1,440 1,449 (0.62) 991 Regular way financial asset purchase contracts 4,181 3,202 30.57 9,886 Securities subscribed but not paid 107 83 28.92 196 Securities placement and underwriting commitments 33 3 90.90 16 Documents delivered to clearing houses 5,988 6,013 (0.42) 6,030 Other contingent commitments 711 809 (12.11) 1,466 114,676 103,249 11.07 96,263
Chapter 20 – Page 5
The following table details loans and advances to customers by loan type and status, borrower sector and geographical area of the borrower:
Millions of euros 2007 2006 Variation (%) 2005
Loan type and status: Commercial credit 22,364 21,565 3.71 16,931 Secured loans 322,269 302,361 6.58 255,041 Reverse repurchase agreements 29,089 30,502 (4.63) 27,581 Other term loans 171,931 148,110 16.08 119,179 Financial leases 15,727 13,991 12.41 11,899 Receivable on demand 6,722 10,367 (35.16) 8,452 Impaired assets 6,070 4,613 31.58 4,356 574,172 531,509 8.03 443,439 Borrower sector: Public sector - Spain 5,633 5,329 5.70 5,243 Public sector – Other countries 2,296 4,970 (53.80) 6,608 Households 316,129 302,451 4.52 248,615 Energy 7,820 4,616 69.41 5,583 Construction 21,137 19,659 7.52 13,694 Manufacturing 31,839 28,682 11.01 25,649 Services 98,548 91,592 7.59 63,585 Other sectors 90,770 74,210 22.32 74,462 574,172 531,509 8.03 443,439 Geographical area: Spain 234,146 205,246 14.08 158,782 European Union (except Spain) 235,849 231,445 1.90 203,111 United States and Puerto Rico 32,070 31,385 2.18 25,884 Other OECD countries 6,633 6,020 10.18 3,943 Latinoamérica 60,753 54,274 11.94 49,227 Rest of the world 4,721 3,139 50.40 2,492 574,172 531,509 8.03 443,439 Interest rate formula: Fixed interest rate 228,434 178,423 28.03 143,316 Floating rate 345,738 353,086 (2.08) 300,123 574,172 531,509 8.03 443,439
As of June 30, 2008, there was a group belonging to the construction industry with which there is a concentration of risk regarding the capital of the bank that exceeds 10%, and that represents a concentration of 11.11%.
Credit Risk9
Grupo Santander ended fiscal year 2007 with a non-performing loans ratio of 0.95% and a coverage ratio of 151%. The non-performing loans ratio increased by 17 basis points and the coverage ratio decreased by 36 basis points as compared to the prior year.
Excluding mortgage guarantees, the non-performing loan ratio is 67% and the coverage ratio is 215%.
Non-performing and doubtful loans, including contingent liabilities, were EUR 6,179 million at year-end 2007. Total allowances for recognized credit losses amounted to EUR 9,302 million in December 2007, 65% of which (EUR 6,027 million) relate to general allowances, which rose by EUR 360 million during the year.
9 The Risk Management section of the Annual Report for fiscal year 2007 includes more detailed and supplemental information regarding the management of credit risk at Grupo Santander (see the corporate website www.santander.com)
Chapter 20 – Page 6
In Spain, in line with the market trend, the non-performing loans ratio finished 2007 at 0.63%, 10 basis points above the figure for the previous year. The coverage ratio for doubtful balances remained very high at 264%.
Santander Consumer Finance ended 2007 with an NPL ratio of 2.84%, a year-on- year increase of 27 basis points. The ratio of allowances recorded to non- performing loans was 96%, a reduction of 18 percentage points compared to the previous year.
In Portugal, the non-performing loans ratio stood at 1.25%, with a coverage ratio of 117%. Compared to the end of 2006, on a like-for-like basis, there was no change in the NPL ratio, whereas the coverage ratio fell by 13 percentage points.
In the United Kingdom, Abbey recorded an NPL ratio of 0.60%, identical to year- end 2006. The coverage ratio reached 66%, 20 percentage points lower than at the close of 2006, a result of the lower proportion of total loans accounted for by the personal loans portfolio.
In Latin America, the NPL ratio stood at 1.87%, up 49 basis points in the year, a result of the strategy to achieve growth in retail segments in all countries of the region. Coverage reached 134% of doubtful balances, a decline of 33 percentage points.
Credit risk management (*) Millions of euros 2007 2006 % 2005
Non-performing loans 6,179 4,608 34.1 4,342 NPL ratio (%) 0.95 0,78 0.89 Loan-loss allowances 9,302 8,627 7.8 7,902 Specific 3,275 2,960 10.6 3,177 General-purpose 6,027 5,667 6.4 4,725 NPL coverage (%) 150,55 187,23 182,02 Credit cost (%) ** 0.50 0.32 0.22
Ordinary non-performing and doubtful loans *** 4,335 3,243 33.7 3,132 NPL ratio (%) *** 0.67 0.55 0.64 NPL coverage (%) *** 214,58 266,00 252,28
(*).- Excluding country risk (**).- Net specific allowance/computable assets (***).- Excluding mortgage guarantees Note: NPL ratio: Non-performing loans / computable assets
Evolution of non-performing loans by quarter 2007 2006 2005 Millions of Euros 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Balance at beginning of period 4,608 4,936 5,354 5,738 4,342 4,370 4,489 4,647 4,115 4,427 4,328 4,375 + Net additions ( *) 1,058 1,047 1,256 1,531 509 569 718 841 496 367 442 433 - Write-offs (730) (629) (872) (1,090) (480) (450) (560) (880) (183) (466) (395) (467) Balance at period- end 4,936 5,354 5,738 6,179 4,370 4,489 4,647 4,608 4,427 4,328 4,375 4,342
Chapter 20 – Page 7
Country-risk At December 31, 2007, provisionable country-risk exposure stood at EUR 916 million, EUR 55 million less than in December 2006. On that same date, allowances amounted to EUR 124 million, compared to EUR 233.5 million the prior fiscal year. This decline was mainly due to the change of composition in the country-risk position, specifically, a reduction in risk and allowances for Argentina and Morocco (groups 5 and 3, respectively, pursuant to the country-risk categories established by the Bank of Spain).
Securitizations “Loans and advances to customers” includes, inter alia, securitized loans transferred to third parties on which the Group has retained risks, albeit partially, and which therefore, in accordance with the applicable accounting standards, cannot be derecognized. The breakdown of the securitized loans, by type of financial instrument, and of the securitized loans derecognized because the stipulated requirements were met, is shown below.
Millions of euros 2007 2006 Change 2005
Derecognized 3,742 4,901 (23.65) 6,065 Of which: mortgage-backed securities 2,479 2,981 (16.84) 2,897
Retained on the balance sheet 92,023 59,426 54.85 46,523 Of which: mortgage-backed securities 60,056 36,363 65.16 33,085 Total 95,765 64,327 48.87 52,588
Chapter 20 – Page 8
Loans and advances to credit institutions The breakdown of the balances of “Loans and advances to credit institutions” by classification, type and currency in the consolidated balance sheet is as follows: Thousands of euros 2007 2006 Var. (%) 2005
Classification: Financial assets held for trading 12,294,559 14,627,738 (15.95) 10,278,858 Other financial assets at fair value through profit or loss 6,865,073 185,485 3,601.15 2,428,663 Loans and receivables 31,759,867 45,361,315 (29.98) 47,065,501 50,919,499 60,174,538 (15.38) 59,773,022
Type: Reciprocal accounts 417,438 503,299 (17.06) 345,104 Time deposits 13,569,362 16,842,601 (19.43) 21,962,472 Reverse repurchase agreements 30,276,080 37,010,008 (18.19) 33,634,326 Other accounts 6,656,619 5,818,630 14.40 3,831,120 50,919,499 60,174,538 (15.38) 59,773,022 Currency: Euro 28,547,895 33,380,000 (14.48) 33,537,338 Pound Sterling 6,139,274 4,364,111 40.68 5,313,338 US dollars 11,486,584 16,150,735 (28.88) 16,848,462 Other currencies 4,764,233 6,292,419 (24.29) 4,109,930 Impairment losses (18,487) (12,727) 45.26 (36,046) 50,919,499 60,174,538 (15.38) 59,773,022
Debt instruments and other equity instruments: The detailed balance of debt instruments and other equity instruments is as follows: i) Debt instruments The breakdown by type of debt is as follows:
Thousands of euros 2007 2006 Var. (%) 2005
Classification: Financial assets held for trading 66,330,811 76,736,992 (13.56) 81,741,944 Other financial assets at fair value through profit or loss 7,072,423 4,500,220 57.16 9,699,237 Available-for-sale financial assets 34,187,077 32,727,454 4.46 68,054,021 Loans and receivables 1,668,339 621,770 168.32 171,203 109,258,650 114,586,436 (4.65) 159,666,405 Type: Spanish government debt securities Treasury bills 5,558,420 3,160,674 75.86 3,948,045 Government bonds 376,393 535,584 (29.72) 3,287,406 Other book-entry debt securities 9,440,746 9,080,043 3.97 12,481,210 Foreign government debt securities 21,617,457 22,250,587 (2.85) 48,120,701 Issued by financial institutions 43,443,566 56,063,543 (22.51) 61,080,306 Other fixed-income securities 28,913,821 23,586,327 22.59 30,828,737 Impairment losses (91,753) (90,322) 1.58 (80,000) Of which: on available-for-sale financial assets (91,753) (90,322) 1.58 (80,000) 109,258,650 114,586,436 (4.65) 159,666,405 Currency: Euro 55,013,063 43,708,401 25.86 79,195,677 Pound Sterling 16,164,296 22,488,577 (28.12) 32,983,211 US dollar 13,341,949 12,483,749 6.87 12,591,314 Other currencies 24,831,095 35,996,031 (31.02) 34,976,203 Impairment losses (91,753) (90,322) 1.58 (80,000) 109,258,650 114,586,436 (4.65) 159,666,405
At December 31, 2007, the nominal amount of Spanish Government debt securities earmarked towards specific obligations of the Bank or of third parties came to EUR 695 million (EUR 695 million and EUR 70 million at December 31, 2005 and 2005, respectively).
Chapter 20 – Page 9
Additionally, at December 31, 2007, other debt securities totaling EUR 16,171 million had been assigned to own obligations. Furthermore, mention should be made of the discontinuation of Abbey’s insurance business in 2006 which, before its sale, contributed approximately EUR 6,500 million at fair value through profit or loss. In 2005, the Bank purchased Spanish Government debt securities and government debt securities of EU Governments, taking advantage of market opportunities. These portfolios matured or were sold in 2006. ii) Other equity instruments The breakdown of the balances of “Other equity instruments” by classification and type, is as follows:
Thousands of euros 2007 2006 Var. (%) 2005 Classification: Financial assets held for trading 9,744,466 13,490,719 (27.77) 8,077,867 Other financial assets at fair value through profit or loss 2,870,322 2,712,433 5.82 30,303,170 Available-for-sale financial assets 10,161,830 5,970,845 70.19 5,890,918 Of which: Disregarding impairment losses 10,173,068 5,984,704 69.98 5,908,576 Impairment losses (11,238) (13,859) (18.91) (17,658) 22,776,618 22,173,997 2.72 44,271,955 Type: Shares of Spanish companies 6,375,891 5,185,206 22.96 5,707,494 Shares of foreign companies 9,787,139 11,138,458 (12.13) 8,256,086 Investment fund units and shares 4,068,215 3,410,494 19.29 18,563,343 Of which: Abbey 602,067 669,689 (10.10) 17,041,821
Pension fund units - 144,320 133,918 Other securities 2,556,611 2,309,378 10.71 11,628,772 Of which: unit linked 2,556,611 2,309,378 10.71 11,628,772
Impairment losses (11,238) (13,859) (18.91) (17,658) 22,776,618 22,173,997 2.72 44,271,955
As regards the change between 2005 and 2006, mention should be made of the sale of Abbey’s insurance business, which contributed approximately EUR 26,000 million, classified as financial assets at fair value through profit or loss.
Chapter 20 – Page 10
The changes in the balance of “Available-for-sale financial assets”, disregarding corrections for impairment losses, are as follows:
Millions of euros 2007 2006 Var. (%) 2005
Balance at beginning of year 5,985 5,909 1.29 7,850
Net additions/disposals 3,096 (1,232) (351.30) (2,984) Of which: Antena 3 Televisión. S.A. - (398) - San Paolo IMI. S.p.A. - (1,499) - Assicurazioni Generali. S.p.A. - 399 Royal Bank of Scotland Group, plc 1,368 - (2,028) Commerzbank AG - - (306) Shinsei Bank. Ltd. - - (52) Fortis SA/NV 892 - - Iberdrola. S.A. 1,503 - - BPI (229) - Intesa Sanpaolo (1,206) - -
Transfers - - 396
Valuation adjustments 1,092 1,308 (16.51) 647 Of which: San Paolo IMI. S.p.A. - 607 414 Companhia Energética de São Paulo 331 - - Bovespa Holding. S.A. 330 - - Balance at end of year 10,173 5,985 69.97 5,909
Impairment losses The following is a summary of the changes in impairment losses on these items and on “Debt Instruments” classified as “Available-for-sale financial assets”:
Thousands of euros 2007 2006 Var. (%) 2005
Balance at beginning of year 104,181 97,658 6.68 250,560 Net impairment losses for the year 6,546 (2,869) (328.16) (110,977) Of which: Impairment losses charged to income 34,341 6,737 409.74 36,156 Impairment losses reversed with a credit to income (27,795) (9,606) 189.35 (147,133)
Net changes in the scope of consolidation (6,737) - - Write-off of impaired balances against recorded (97) (4,009) (97.58) (21,471) impairment allowance Transfers between allowances (3,928) 18,349 (121.41) (26,402) Exchange differences and other items 3,026 (4,948) (161.16) 5,948 Balance at end of year 102,991 104,181 (1.14) 97,658 Of which: By geographical location of risk: Spain 57,931 52,225 10.93 31,868 Rest of Europe 6,964 3,122 123.06 2,553 Latin America 38,096 48,834 (21.99) 63,237
By type of asset covered: Debt instruments – Available-for-sale financial assets 91,753 90,322 1.58 80,000 Other equity instruments – Available-for-sale financial 11,238 13,859 (18.91) 17,658 assets
Chapter 20 – Page 11
Investments - Associates The breakdown of the balance of “Investments-Associates” by company is as follows:
Thousands of euros 2007 2006 Var. (%) 2005
RFS Holdings B.V. 11,778,624 - - CEPSA 2,548,035 2,291,599 11.19 2,619,264 Sovereign 1,026,826 2,246,824 - Attijariwafa Bank Société Anonyme 188,149 177,048 6.27 166,225 Vaporeón, S.L. 41,050 35,985 14.08 - Abbey companies 5,104 3,531 34,103 Other companies 101,339 251,122 211,890 15,689,127 5,006,109 213.40 3,031,482 Of which: Euros 14,431,945 2,544,864 467.10 2,793,030 Listed 3,763,010 4,715,471 (20.20) 2,785,489 Goodwill 8,942,799 1,502,441 664,768 Of which: RFS Holdings B.V. 7,993,875 - - CEPSA 940,199 833,241 12.84 650,949 Sovereign - 653,946 - At December 31, 2007, the unrealized gains on investments in Group associates, based on the related market values, amounted to EUR 3,771 million (EUR 2,899 million and EUR 1,056 million at December 31, 2006 and 2005, respectively). The changes in the balance of this item were as follows:
Thousands of euros 2007 2006 2005
Balance at beginning of year 5,006,109 3,031,482 3,747,564
Acquisitions and capital increases 11,773,567 2,618,196 18,470 Of which: Sovereign - 2,299,893 - RFS Holdings B.V. 11,614,871 - -
Disposals and capital reductions (27,421) (753,071) (1,168,585) Of which: Unión Fenosa - - (1,083,305) CEPSA - (711,393) -
Effect of equity accounting 441,457 426,921 619,157 Impairment losses (1,052,673) (380) - Dividends paid (147,820) (164,606) (181,179) Change in consolidation method (13,389) (84,503) (39,608) Exchange differences and other items (290,703) (67,930) 35,663 Balance at end of year 15,689,127 5,006,109 3,031,482
Impairment losses No impairment was detected with respect to investments in associates in 2005. In 2006, EUR 380 thousand were recognized in this connection. In 2007, an impairment of EUR 1,053 million was recognized on the investment in Sovereign. Of this amount, EUR 586 relate to goodwill inherent in Sovereign and EUR 104 million to exchange differences.
More significant information about the principal companies included in this chapter is set forth in Chapter 25 of this Registration Document.
Chapter 20 – Page 12
Other assets The assets not described above are cash and balances with central banks, changes in the fair value of hedged items in portfolio hedges of interest rate risk, hedging derivatives, non-current assets held for sale, insurance contracts linked to pensions, reinsurance assets, tangible and intangible assets, tax assets, prepayments and accrued income and other assets. In 2007, the main change in the other assets account occurred in “non-current assets held for sale,” which increased due to the recording of EUR 9,000 million from the interest in Antonveneta (see more information in Chapter 5, section 5.2.1 I) ABN AMRO Holding N.V. “ABN AMRO”). The main highlights in 2006 are the reduction in reinsurance assets and prepayment and accrued income, basically due to the discontinuation of Abbey’s insurance business, amounting to EUR 2,361 million in reinsurance and EUR 1,134 million in accrued expenses and deferred income. In 2005, there was also a significant reduction in non-current assets held for sale after the sale of Auna (see Chapter 5.2.1.1) and, due to the amount thereof, in cash and balances with central banks and intangible assets. Under intangible assets, the items related with Abbey, the goodwill and other intangible assets (EUR 8,900 million and EUR 1,800 million, respectively) are especially relevant.
II. LIABILITIES: Deposits from central banks and deposits from credit institutions The breakdown of the balances of these items by classification, counterparty, type and currency, is as follows: Thousands of euros 2007 2006 2005
Classification: Financial assets held for trading 23,254,111 39,690,713 31,962,919 Other financial liabilities at fair value through profit or loss 12,207,579 - - Financial liabilities at amortized cost 77,434,333 73,345,224 116,659,488 Of which: Deposits from central banks 28,748,079 16,529,557 22,431,194 Deposits from credit institutions 48,686,254 56,815,667 94,228,294 112,896,023 113,035,937 148,622,407 Type: Reciprocal accounts 562,619 411,314 190,885 Time deposits 71,226,437 63,589,635 47,224,471 Other demand accounts 2,466,370 2,225,037 7,383,695 Repurchase agreements 36,615,910 45,417,839 91,399,196 2,008,927 1,348,815 2,369,406 Central bank credit account drawdowns Other financial liabilities associated with transferred financial assets - 8,445 7,170 Hybrid financial liabilities 15,760 34,852 47,584 112,896,023 113,035,937 148,622,407 Currency: Euro 58,327,694 43,828,306 79,664,528 Pound Sterling 14,947,746 24,543,241 26,488,413 US dollar 28,930,017 27,883,219 20,307,158 Other currencies 10,690,566 16,781,171 22,162,308 112,896,023 113,035,937 148,622,407 The balance of deposits from central banks and deposits from credit institutions decreased over the last year by 0.12%, with a notable decrease of EUR 16,436.6 million in financial assets held for trading, mostly from temporary assignments of assets in pounds Sterling.
Chapter 20 – Page 13
Customer funds under management Total customer funds under management amounted to EUR 625,009 million, representing growth of 10.5%. Within customer funds under management, the balance sheet shows that deposits, excluding repos, increased 3%, 14.5% in marketable debt securities and 17.2% in subordinated liabilities. In off-balance- sheet items, investment funds decreased 0.5% and pension funds dropped 59.4% (excluding the impact of the sale of the pension fund managers in Latin America, pension funds grew 4.9%). Savings and investment insurance products rose by 41.1%. In brief, customer funds under management (on and off balance sheet) amounted to EUR 784,995 million at 2006 year-end, representing a year-on-year growth of 6%. A breakdown of the balances by geographical segment (primary segments) shows that the total customer funds under management in Continental Europe rose by 8%, with a 17% increase in on-balance-sheet funds and a 7% decrease in other managed customer funds.
In Spain, deposits in the Santander Branch Network grew by 12%, after deducting the effect of the Valores Santander issue, while the rise in deposits at Banesto was 18%, boosted largely by the increase in time deposits. Investment funds fell by 13%, influenced notably, on the one hand, by customers’ preference for time deposits in 2007 and, on the other, by the aforementioned Valores Santander issue. Nevertheless, the Group retained its leading position in investment funds in Spain, with a market share of assets under management of 22.6% (source: Inverco).
Pension funds in Spain achieved growth of 5%, with individual and associated plans increasing by this rate and occupational plans growing at 7%. The market share in individual pension funds was 15.4% (source: Inverco).
In Portugal, customer funds under management displayed a modest increase of 4% in 2007 as a result of the reconciliation of growth and the need to safeguard margins. This moderate growth, which comprised an increase in on-balance-sheet funds counterbalanced by a fall in investment funds, was affected by the reduction in balances with large enterprises.
At Abbey, customer deposits (excluding repos) slipped 3% in euro terms, impacted by the exchange rate effect. In pounds Sterling, growth in these deposits ran at 6%, while investment funds were up 34%.
The trend in customer funds under management in Latin America (down 1% in euro terms) was highly influenced, as mentioned earlier, by the fluctuations in exchange rates and the sale of the pension fund managers. On a like-for-like basis, i.e., disregarding these two impacts, total customer funds under management in the region rose by 18%.
Deposits (excluding repos) achieved double-digit growth in Colombia (up 27%), Brazil (up 22%), Argentina (up 20%) and Chile (up 16%). In Mexico growth in deposits was only 6% due to the reduced financing requirements following the repayment of the FOBAPROA promissory note.
Chapter 20 – Page 14
The region-wide increase in investment funds was 29%, including growth of 41% in Colombia, 36% in Brazil, 24% in Mexico and Chile and 10% in Argentina. All these figures exclude the exchange rate effect.
Thus, at the end of 2007, Continental Europe accounted for 48% of customer funds under management, Abbey represented 32% and Latin America the remaining 20%. These percentages are virtually the same as those for 2006 year- end: 47%, 32% and 21%, respectively.
Additionally, within its global financing strategy, in 2007 the Group launched mortgage bond (cédula hipotecaria) issues totaling EUR 6,800 million, senior debt issues for an equivalent value of EUR 23,067 million and subordinated debt issues for EUR 7,258 million (excluding intragroup transactions). Also, three preference share issues were placed for a total of USD 1,072 million.
Furthermore, in the course of 2007, senior debt issues totaling EUR 14,557 million, mortgage bond (cédula hipotecaria) issues for EUR 3,865 million and subordinated debt issues for a total equivalent value of EUR 2,340 million reached maturity (including the early redemption of preference shares for an equivalent value of EUR 444 million). Customer deposits The breakdown of the balances of “Customer deposits” by classification, geographical area and type, is as follows:
Chapter 20 – Page 15
Thousands of euros
2007 2006 Variation (%) 2005
Classification:
Financial liabilities held for trading 27,992,480 16,572,444 68.91 14,038,543 Other financial liabilities at fair value through profit or loss 10,669,058 273,079 3.806.9 - Financial liabilities at amortized cost 317,042,764 314,377,078 0.8 291,726,737 355,704,302 331,222,601 7.4 305,765,280 Geographical area: 0.0 Spain 132,008,374 120,485,991 9.6 107,117,818 European Union (excluding Spain) 134,620,750 136,730,342 (1.5) 133,274,597 United States and Puerto Rico 17,888,682 7,512,963 138.1 7,578,598 Other OECD countries 189,548 79,117 139.6 106,151 Latin America 69,361,574 64,984,913 6.7 56,395,157 Rest of the world 1,635,374 1,429,275 14.4 1,292,959 355,704,302 331,222,601 7.4 305,765,280 Type: Demand deposits Current accounts 87,136,743 89,151,030 (2.3) 80,631,188 Savings accounts 90,727,525 93,717,633 (3.2) 90,471,827 Other demand deposits 3,593,720 2,025,095 77.5 1,747,720 Time deposits Fixed-term deposits 92,673,147 86,345,788 7.3 77,166,817 Home-purchase savings accounts 296,768 324,262 (8.5) 269,706 Discount deposits 9,933,139 7,132,341 39.3 16,128,577 Funds received under financial asset transfers --- 1 Hybrid financial liabilities 8,494,773 4,994,535 70.1 4,141,071 Other financial liabilities associated with transferred financial assets - - - 20,346 Other time deposits 113,562 470,140 (75.8) 351,620 Notice deposits 283,301 45,849 517.9 33,713 Repurchase agreements 62,451,624 47,015,928 32.8 34,802,694
355,704,302 331,222,601 7.4 305,765,280
Marketable debt securities The breakdown of the balances of “Marketable debt securities” by classification and type, is as follows:
Thousands of euros 2007 2006 Variation (%) 2005
Classification: Financial assets held for trading 17,090,935 17,522,108 (2.5) 19,821,087 Financial liabilities at fair value through profit or loss 10,279,037 12,138,249 15.3 11,809,874 Financial liabilities at amortized cost 206,264,524 174,409,033 18.3 117,209,385 233,634,496 204,069,390 14.5 148,840,346 Type: Bonds and debentures outstanding 200,905,082 168,661,356 19.1 123,566,864 Notes and other securities 32,729,414 35,408,034 (7.6) 25,273,482 233,634,496 204,069,390 14.5 148,840,346
At December 31, 2007, 2006 and 2005, none of these issues was convertible into Bank shares or granted privileges or rights which make them convertible into shares under particular circumstances (except for Valores Santander, see Chapter 21.1.5).
Chapter 20 – Page 16
At December 31, 2007, asset-backed securities amounted to EUR 63,172 million. During fiscal year 2007, asset-backed securities amounting to EUR 28,520 million were issued, of which EUR 15,924 million were issued by Abbey, EUR 2,666 million by Fondo de Titulización de Activos Santander Empresas 3, EUR 2,585 million by Santander Consumer Bank AG, EUR 1,733 million by Hipototta No. 5 plc., and EUR 1,659 million by Fondo de Titulización de Activos Santander Consumer Spain Auto 07 – 1. Additionally, total mortgage bonds at December 31, 2007 amounted to EUR 45.664 million. In 2007, the Bank and Banesto issued mortgage bonds amounting to EUR 4,500 million and EUR 1,750 million, respectively. The mortgage bonds outstanding in connection with these issues totaled EUR 39,264 million at December 31, 2007. (i) Bonds and debentures outstanding The breakdown of the balance of this account by currency of issue is as follows:
December 31, 2007 Outstanding Issue Amount in Annual Millions of euros Foreign Currency Interest Currency of Issue 2007 2006 2005 (millions) Rate (%)
Euros 132,031 112,622 78,499 132,032 4.39 US dollars 38,864 30,001 20,429 57,212 5.54 Pounds Sterling 23,154 21,128 19,274 16,980 6.24 Chilean pesos 2,239 1,725 1,701 1,640,995 4.54 Other currencies 4,617 3,185 3,664 - - Balance at end of year 200,905 168,661 123,567
Chapter 20 – Page 17
The changes in “Bonds and debentures outstanding” were as follows:
Millions of euros 2007 2006 Var. (%) 2005
Balance at beginning of year 168,661 123,567 36.49 83,021 Net inclusion of entities in the Group 36 1,895 (98.10) -
Issues 122,530 76,956 59.22 52,670 Of which: Banco Santander, S.A. Non-convertible debentures February and December – floating rate - 4,374 - Mortgage bonds – fixed rate 4,500 7,500 (40.00) 7,000
Banesto- Mortgage bonds – fixed rate 1,708 3,000 (43.07) 4,000 Bonds 5,006 5,547 (9.75) 3,750
Santander International Debt, S.A., Unipersonal- Bonds – floating rate 10,059 11,709 (14.09) 10,169
Abbey- Holmes Financing Series 10 - 5,581 - Holmes Master Issuer plc 15,924 5,153 209.02 - Holmes Financing Series 9 - - 5,540 Bonds in pound sterling 26,613 6,608 302.74 3,729 Bonds in other currencies 41,122 7,284 464.55 9,156
Santander US Debt, S.A.,Unipersonal Debentures – floating rate 2,038 3,785 (46.16) 5,086
Santander Consumer Bank AG Asset-backed bonds 2,585 1,769 46.13 1,668
Banco Santander Totta, S.A.- Asset-backed bonds 890 3,808 (76.63) 736
FTA Santander Consumer Spain Auto 06- Asset-backed bonds - 1,350 -
Redemptions -85,674 -30,510 180.81 -14,269 Of which: Banco Santander, S.A. -3,987 -3,038 31.24 -1,000 Banesto -2,358 -2,037 15.76 -2,000 Santander Consumer Bank S.p.A. -26 -179 (85.47) -102 Abbey -70,535 -21,210 232.56 -7,503
Exchange differences -2,864 -1,557 83.94 958 Other changes -1,748 -1,690 3.43 1,187 Balance at end of year 200,905 168,661 19.12 123,567
Chapter 20 – Page 18
(ii) Notes and other securities These notes were basically issued by Banco Santander, S.A.; Abbey National North America LLC; Abbey National Treasury Services, plc; Abbey National, plc; Santander Central Hispano Finance (Delaware) Inc.; Banco Santander, S.A.; Institución de Banca Múltiple, Grupo Financiero Santander; Santander Consumer Finance, S.A.; Banco Santander Puerto Rico; Banesto; and CB Extrobank.
Subordinated liabilities See breakdown and changes in Chapter 10.1.
Liabilities under insurance contracts and reinsurance assets The breakdown of the balances of “Liabilities under insurance contracts” and “Reinsurance assets” in the consolidated balance sheets is as follows:
Thousands of euros 2007 2006 2005 Direct Direct Direct Insurance Insurance Insurance and Total and Total and Total Reinsurance Reinsurance (Balance Reinsurance Reinsurance (Balance Reinsurance Reinsurance (Balance Technical Provisions for: Assumed Ceded Payable) Assumed Ceded Payable) Assumed Ceded Payable)
Unearned premiums and unexpired risks 351,799 (128,663) 223,136 172,226 (78,340) 93,886 119,114 (39,376) 79,738 Life insurance: Unearned premiums and 120,747 (23,580) 97,167 119,867 (11,031) 108,836 113,381 (31,615) 81,766 unexpired risks Mathematical provisions 2,885,581 (17,727) 2,867,854 3,049,875 (10,496) 3,039,379 28,523,561 (2,200,524) 26,323,037 Claims outstanding 364,878 (29,213) 335,665 162,484 (37,362) 125,122 350,865 (15,798) 335,067 Bonuses and rebates 15,957 (13,359) 2,598 11,414 (5,399) 6,015 579,895 (5,246) 574,649 Equalization ------25 - 25 Life insurance policies where the investment risk is born by the policyholders 9,097,620 (90,395) 9,007,225 7,175,926 (118,993) 7,056,933 14,855,872 (94,732) 14,761,140 Other technical provisions 197,035 (6,837) 190,198 12,466 (252) 12,214 129,587 (410) 129,177 13,033,617 (309,774) 12,723,843 10,704,258 (261,873) 10,442,385 44,672,300 (2,387,701) 42,284,599
The drop in 2006 is mainly due to the divestment of Abbey’s insurance business (approximately EUR 34,355 million). Provisions The breakdown of the balance of “Provisions” is as follows: Thousands of euros 2007 2006 Variation 2005
Provisions for pensions and similar obligations 11,819,748 14,014,305 (15.66) 14,172,961 Provisions for contingent liabilities and commitments 636,316 598,735 6.28 487,048 Of which: country risk 48,831 57,216 14.65 11,529
Other provisions 4,114,835 4,613,473 (10.81) 5,162,981 Total provisions 16,570,899 19,226,513 (13.81) 19,822,990
Chapter 20 – Page 19
Provisions for pensions and similar obligations
The breakdown of the balance of “Provisions for pensions and similar obligations” is as follows:
Millions of euros 2007 2006 Variation (%) 2005
Provisions for post-employment plans – Spanish entities 5,723 5,647 1.35 5,657 Of which: defined benefit 5,626 5,647 (0.37) 5,657
Provisions for other similar obligations – Spanish entities 4,001 4,527 (11.62) 4,269 Of which: early retirements 3,950 4,481 (11.85) 4,215
Provisions for post-employment plans – Abbey 1,275 1,642 (22.35) 1,788
Provisions for post-employment plans and other similar obligations – other foreign subsidiaries 821 2,198 (62.65) 2,459
Provisions for pensions and similar obligations 11,820 14,014 (15.66) 14,173
Other provisions The balance of “Provisions – Other provisions”, which includes, inter alia, provisions for restructuring costs and tax and legal litigation, was 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, are based on litigation in progress.
The breakdown of the balance of “Provisions – Other provisions” is as follows:
Millions of euros 2007 2006 Var. (%) 2005
Provisions for contingencies and commitments in operating units: Recognized by Spanish companies 814 892 (8.74) 937 Of which: Bank 326 400 (18.50) 376 Banesto 197 249 (20.88) 331
Recognized by other EU companies 886 1,230 (27.97) 1,876 Of which: Abbey 584 931 (37.27) 1,458
Recognized by other companies 2,415 2,492 (3.09) 2,350 Of which: Brazil 1,989 1,795 10.81 1,318 Mexico 159 193 (17.62) 233 4,115 4,614 (10.81) 5,163 Other liabilities Liabilities not described above arise from financial liabilities held for trading, short positions, other financial liabilities, hedging derivatives, liabilities associated with non-current assets held for sale, tax liabilities, accrued expenses and deferred income, other liabilities and equity having the substance of a financial liability (see Chapter 10.1).
Chapter 20 – Page 20
20.3.2 Consolidated income statements (Debit) Credit Thousands of euros 2007 2006 (*) 2005 (*)
INTEREST AND SIMILAR INCOME 45,803,354 36,832,823 33,088,647 INTEREST EXPENSE AND SIMILAR CHARGES: (30,921,470) (24,757,027) (22,764,846) Return on equity having the substance of a financial liability (47,290) (85,229) (118,389) Other (30,874,180) (24,671,798) (22,646,457)
INCOME FROM EQUITY INSTRUMENTS 413,242 404,000 335,576 NET INTEREST INCOME 15,295,126 12,479,796 10,659,377 SHARE OF RESULTS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD: 441,457 426,921 619,157 Associates 441,457 426,921 619,157
FEE AND COMMISSION INCOME 9,479,986 8,288,580 7,153,947 FEE AND COMMISSION EXPENSE (1,439,811) (1,264,385) (1,092,751) INSURANCE ACTIVITY INCOME: 319,353 253,084 201,466 Insurance and reinsurance premium income 5,377,949 4,664,812 2,214,344 Reinsurance premiums paid (197,490) (137,129) (98,610) Claims paid and other insurance-related expenses (2,862,786) (2,049,620) (1,408,361) Reinsurance income 152,038 101,229 88,452 Net provisions for insurance contract liabilities (2,738,701) (2,948,083) (1,199,112) Financial income 597,503 840,838 735,830 Financial expense (9,160) (218,963) (131,077) GAIN/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net): 2,321,624 2,052,539 1,457,847 Financial assets held for trading 1,396,349 1,807,380 990,722 Other financial instruments at fair value through profit or loss 115,702 (119,860) 6,879 Available-for-sale financial assets 1,051,914 338,263 532,310 Loans and receivables (141,995) 78,519 70,645 Other (100,346) (51,763) (142,709) EXCHANGE DIFFERENCES (net) 650,734 96,635 76,513 GROSS OPERATING INCOME 27,068,469 22,333,170 19,075,556 SALES AND INCOME FROM THE PROVISION OF NON-FINANCIAL SERVICES 771,027 734,602 565,525 COST OF SALES (618,955) (615,689) (409,347) OTHER OPERATING INCOME 351,097 323,900 256,123 PERSONNEL EXPENSES (6,551,201) (5,967,873) (5,611,308) OTHER GENERAL ADMINISTRATIVE EXPENSES (4,467,128) (4,001,298) (3,753,100) DEPRECIATION AND AMORTIZATION: (1,267,880) (1,146,547) (1,013,943) Tangible assets (621,271) (628,537) (618,109) Intangible assets (646,609) (518,010) (395,834) OTHER OPERATING EXPENSES (469,736) (442,525) (344,829) NET OPERATING INCOME 14,815,693 11,217,740 8,764,677 IMPAIRMENT LOSSES (net): (5,078,513) (2,550,570) (1,801,934) Available-for-sale financial assets (6,546) 2,869 110,977 Loans and receivables (3,496,058) (2,483,862) (1,747,900) Non-current assets held for sale (27,299) (48,796) (10,536) Investments (363,637) (380) - Tangible assets (1,444) (6,457) (15,090) Goodwill (599,989) (12,811) - Other intangible assets (562,883) - (130,977) Other assets (20,657) (1,133) (8,408) PROVISIONS (net) (706,621) (1,079,337) (1,807,381) FINANCIAL INCOME FROM NON-FINANCIAL ACTIVITIES 4,617 7,386 2,846 FINANCIAL EXPENSES FROM NON-FINANCIAL ACTIVITIES (3,184) (5,553) (10,709) OTHER GAINS: 2,631,570 1,672,944 2,760,566 Gains on disposal of tangible assets 1,859,383 147,763 151,043 Gains on disposal of investments 17,408 273,656 1,306,357 Other 754,779 1,251,525 1,303,166 OTHER LOSSES: (488,321) (267,224) (247,168) Losses on disposal of tangible assets (55,275) (58,869) (70,424) Losses on disposal of investments (1,020) (1,695) (7,422) Other (432,026) (206,660) (169,322) PROFIT BEFORE TAX 11,175,241 8,995,386 7,660,897 INCOME TAX (2,335,686) (2,254,598) (1,241,830) PROFIT FROM CONTINUING OPERATIONS 8,839,555 6,740,788 6,419,067 PROFIT FROM DISCONTINUED OPERATIONS (net) 796,595 1,504,965 330,703 CONSOLIDATED PROFIT FOR THE YEAR 9,636,150 8,245,753 6,749,770 PROFIT ATTRIBUTED TO MINORITY INTERESTS (575,892) (649,806) (529,666) PROFIT ATTRIBUTED TO THE GROUP 9,060,258 7,595,947 6,220,104 EARNINGS PER SHARE: From continuing operations and discontinued operations Basic earnings per share (Euros) 1,4287 1,2157 0,9967 Diluted earnings per share (Euros) 1,4139 1,2091 0,9930 From continuing operations Basic earnings per share (Euros) 1,3170 1,0127 0,9599 Diluted earnings per share (Euros) 1,3033 1,0072 0,9563
(*) Included using a new presentation as discussed in Chapter 20.1. Attached only and exclusively for comparison purposes Chapter 20 – Page 21
A summary of statements of income for the three fiscal years with explanatory notes of the main changes has been included in Chapter 9.1.
20.3.3 Consolidated statement of changes in shareholders’ equity Fiscal Year Fiscal Year Fiscal Year Thousands of euros 2007 2006 (*) 2005 (*)
NET INCOME RECOGNIZED DIRECTLY IN EQUITY: (2,148,721) (206,339) 1,299,532 Available-for-sale financial assets- (864,357) 341,633 4,872 Revaluation gains/losses 825,812 1,663,713 911,814 Amounts transferred to income statement (1,583,126) (1,177,308) (883,474) Income tax (107,043) (144,772) (23,468)
Cash flow hedges- (107,907) (21,154) 72,193 Revaluation gains/losses (156,313) 9,087 83,216 Amounts transferred to income statement (14,227) - - Income tax 62,633 (30,241) (11,023)
Hedges of net investments in foreign operations- 811,977 211,103 (1,022,833) Revaluation gains/losses 811,977 211,103 (1,022,833)
Exchange differences- (1,988,434) (737,921) 2,245,300 Translation gains/losses (2,048,430) (741,085) 2,411,831 Amounts transferred to income statement 59,996 3,164 (166,531)
CONSOLIDATED PROFIT FOR THE YEAR: 9,636,150 8,245,753 6,749,770 Consolidated profit for the year 9,636,150 8,245,753 6,749,770 7,487,429 8,039,414 8,049,302 TOTAL INCOME AND EXPENSE FOR THE YEAR: Parent 6,911,537 7,389,608 7,519,636 Minority interests 575,892 649,806 529,666 TOTAL (**) 7,487,429 8,039,414 8,049,302
(*) Included using a new presentation as discussed in Chapter 20.1. Attached only and exclusively for comparison purposes
The most important changes and additional information related to the Group’s capital adequacy are included in Chapter 10.1 of this Registration Document.
Chapter 20 – Page 22
20.3.4. Cash flow statements:
Fiscal Year Fiscal Year Fiscal Year 2007 2006 (*) 2005 (*)
1. CASH FLOW FROM OPERATING ACTIVITIES Consolidated profit for the year 9,636,150 8,245,753 6,749,770
Adjustments to profit- 9,952,115 8,183,303 5,065,489 Depreciation of tangible assets 621,271 628,537 618,109 Amortization of intangible assets 646,609 518,010 395,834 Impairment losses (net) 5,702,733 2,550,570 1,801,934 Net provisions for insurance contract liabilities 2,738,701 2,948,083 1,199,112 Provisions (net) 706,621 1,079,337 1,807,381 Gains/losses on disposal of tangible assets (1,804,108) (88,894) (80,619) Gains/losses on disposal of investments (16,388) (271,961) (1,298,935) Share of results of entities accounted for using the equity method (294,809) (426,921) (619,157) Other non-monetary items (684,201) (1,008,056) - Taxes 2,335,686 2,254,598 1,241,830 Of which paid 3,181,098 949,050 1,036,379 Adjusted gains/losses 19,588,265 16,429,056 11,815,259 Net increase/decrease in operating assets: (48,589,631) (72,431,214) (142,040,315) Financial liabilities held for trading- 11,289,111 (17,673,307) (42,451,923) Loans and advances to credit institutions 2,333,179 (4,346,626) 2,599,313 Loans and advances to customers 6,878,501 (4,120,763) (8,972,411) Debt instruments 10,180,799 5,004,952 (25,872,315) Other equity instruments 3,640,211 (5,412,852) (3,658,529) Trading derivatives (11,743,579) (8,798,018) (6,547,981)
Other financial assets at fair value through profit or loss- 3,578,501 (1,385,171) (3,103,172) Loans and advances to credit institutions 6,471,028 (662,145) 4,095,407 Loans and advances to customers (49,079) (1,541,615) (1,139,646) Debt instruments (2,572,203) (1,487,469) 9,933,721 Other equity instruments (271,245) 2,306,058 (15,992,654)
Available-for-sale financial assets- (6,424,418) 35,824,761 (28,558,595) Debt instruments (1,507,435) 35,324,083 (31,237,853) Other equity instruments (4,916,983) 500,678 2,679,258
Loans and receivables- (53,673,405) (85,625,778) (67,542,207) Loans and advances to credit institutions 357,129 1,063,273 (8,087,968) Money market operations through counterparties 200,055 (200,055) 3,907,905 Loans and advances to customers (53,908,199) (82,610,198) (58,557,032) Debt instruments (1,046,569) (461,403) (171,203) Other financial assets 724,179 (3,417,395) (4,633,909)
Other operating assets (3,359,420) (3,571,719) (384,418)
Net increase/decrease in operating liabilities: 23,791,209 3,861,319 95,919,375 Financial liabilities held for trading- (9,059,282) 15,327,711 14,736,090 Deposits from credit institutions (16,436,602) 7,727,794 6,738,176 Customer deposits 11,420,036 2,533,901 (6,502,682) Marketable debt securities (8,247,997) 1,498,716 1,825,604 Trading derivatives 10,065,109 9,510,038 3,984,312 Short positions (5,859,828) (5,942,738) 8,690,680
Other financial liabilities at fair value through profit or loss- (3,021,055) (5,381,405) 555,299 Deposits from credit institutions (6,071,507) 822,550 - Customer deposits 3,050,452 282,806 - Marketable debt securities - (6,486,761) 555,299
Financial liabilities at amortized cost- 41,805,727 (4,453,117) 82,195,979 Deposits from central banks 12,218,526 (5,901,637) 14,363,334 Deposits from credit institutions 10,149,673 (36,075,478) 43,770,558 Money market operations through counterparties - - (2,499,000) Customer deposits 10,011,213 22,733,508 29,056,346 Marketable debt securities 5,619,970 13,337,020 (7,925,063) Other financial liabilities 3,806,345 1,453,470 5,429,804
Other operating liabilities (5,934,181) (1,631,870) (1,567,993) Total net cash flows from operating activities (1) (5,210,157) (52,140,839) (34,305,681) Of which: Interest and similar income collected 45,237,669 36,412,213 31,326,727 Interest and similar charges paid (29,436,256) (23,915,708) (18,819,373)
Chapter 20 – Page 23
Fiscal Year Fiscal Year Fiscal Year 2007 2006 (*) 2005 (*)
2. CASH FLOWS FROM INVESTING ACTIVITIES Investments- (26,303,306) (7,546,963) (2,465,956) Subsidiaries, jointly controlled entities and associates (12,285,132) (2,693,849) (18,479) Tangible assets (2,797,760) (3,380,790) (1,986,595) Intangible assets (1,862,422) (1,472,324) (451,089) Other financial assets (9,066,352) - - Other assets (291,640) - (9,793)
Divestments- 5,159,250 10,050,174 6,613,439 Subsidiaries, jointly controlled entities and associates 978,584 7,477,594 1,750,126 Tangible assets 3,496,430 1,957,246 2,479,579 Other financial assets - - 1,814,418 Other assets 684,236 615,334 569,316 Total net cash flows from investing activities (2) (21,144,056) 2,503,211 4,147,483
3. CASH FLOWS FROM FINANCING ACTIVITIES Acquisition of own equity instruments (**) (8,473,038) (73,733) - Disposal of own equity instruments (**) 8,599,647 - 73,432 Issuance/redemption of other equity instruments 7,024,763 (15,360) (16,089) Redemption of equity having the substance of a financial liability (94,912) (472,925)(944,968) Issuance of subordinated liabilities 8,329,817 5,896,301 2,507,872 Redemption of subordinated liabilities (2,339,981) (2,739,743)(2,410,288) Issuance of long-term liabilities 122,530,232 78,851,479 52,669,694 Redemption of other long-term liabilities (85,674,400) (30,510,388) (14,269,479) Increase/Decrease in minority interests (438,366) (124,026) 233,241 Dividends paid (3,456,732) (2,779,334) (2,208,518) Other items related to financing activities (2,253,661) (767,419)1,500,947 Total net cash flows from financing activities (3) 43,753,369 47,264,852 37,135,844
4. EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4) (171,530) 121,467 307,400
5. NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1+2+3+4) 17,227,626 (2,251,309) 7,285,046
Cash and cash equivalents at beginning of year 13,835,149 16,086,458 8,801,412 Cash and cash equivalents at end of year 31,062,775 13,835,149 16,086,458
(*) Presented for comparison purposes only. (**) The acquisitions and disposals of own equity instruments were presented at their net amount in 2006 and 2005. The acquisitions made in 2006 and 2005 amounted to EUR 5,723 million and EUR 5,073 million, respectively, and the disposals amounted to EUR 5,649 million and EUR 5,146 million, respectively.
The cash flow statements for 2007 and 2006 shows the Group’s activity during these periods. The main highlights for 2007 are the following: • Liquidity from results of operations reached EUR 19,590 million. • Such liquidity, together with the increase in deposits and short-term issuances, has financed operating activities, particularly the increase in loans and advances to customers. • Noteworthy investment activities include disbursements made during the year of EUR 20,615 million for the purchase of ABN AMRO, and have been financed by the issuance of convertible securities in the amount of EUR 7,000 million, sales of the Group’s real estate assets, and other long- term issuances.
Chapter 20 – Page 24
These are the main highlights for 2006: • The growth factor in operating activities is loans and advances to customers funded by profits (net of distribution of dividends), deposits from customers and issuance of short-term liabilities. • Additional financing of these net operating activities is covered by the issuance of other long-term liabilities since a significant amount of the growth in loans is represented by mortgages. • With respect to investment activities, the net balance reflects a cash inflow for an amount of EUR 2,449 million due to divestments in the insurance business of Abbey and Urbis mainly, higher in amount to the investments (Sovereign and Drive in terms of relevance).
20.4 AUDIT OF HISTORICAL ANNUAL FINANCIAL INFORMATION:
20.4.1 Audit opinion on the financial information. The annual financial statements and management reports, both individual and consolidated, of the Bank for fiscal years 2005, 2006 and 2007 have been audited by the external auditors DELOITTE, S.L. There were no exceptions in either the individual financial statements of the Bank or the consolidated financial statements of the Group for the last three fiscal year- ends.
Chapter 20 – Page 25
20.4.2 Other audited information. Not applicable. 20.4.3 Unaudited financial data. The financial information for fiscal years 2005 and 2006 included in this Registration Document has not been audited. Figures for 2005 and 2006 are solely and exclusively presented for comparison purposes and differ from those included in the financial statements for such years approved by the shareholders at the General Shareholders’ Meeting and set forth in the previous Registration Document, as such figures were prepared in accordance with the accounting principles then in effect. The 2007 Notes include fiscal years 2006 and 2005 for comparison purposes. Given the adjustments described in Chapter 3 of this document, such information differs from the contents of the annual financial statements for such years that were adopted at the respective General Shareholders’ Meetings. Information referring to fiscal years 2005 and 2006 included in the Notes correspond to the fiscal year ended December 31, 2007, and has been reviewed by the Audit and Compliance Committee and the Auditor. The financial information contained in section 20.6 of this Registration Document has been approved by the Board of Directors of the Bank at its meeting on October 20, 2008, after a favorable report from the Audit and Compliance Committee dated October 15, 2008. In its review, the Audit and Compliance Committee ensured that the semi-annual financial information was prepared in accordance with the same principles and practices as those used for the annual financial statements.
20.5 AGE OF THE MOST RECENT FINANCIAL INFORMATION Chapter 20.5 – Not applicable.
Chapter 20 – Page 26
20.6 INTERIM INFORMATION AND OTHER FINANCIAL INFORMATION 20.6.1. Financial Statements as of September 30, 2008 Banco Real is included using the equity method in the financial information at September 30, 2008.
Chapter 20 – Page 27
Chapter 20 – Page 28
20.6.1.1 Results at September 30, 2008:
For the nine months ended September 30, 2008, the Group’s attributable profit was EUR 6,935 million, up from EUR 6,572 million in the first nine months of 2007. The 2007 figure includes the net extraordinary capital gains and allowances (EUR 582 million) from the sale of 1.79% of Intesa Sanpaolo and of 4.67% of Banco Portugués do Investimento. Excluding them, the Group’s attributable profit was 15.8% higher year- on-year. All comments made from now on do not take these capital gains into account. Third quarter earnings per share of EUR 0.3299 brought the figure for the first nine months to EUR 1.0399 (up 8.3%) including the number of shares that the “Valores Santander” will have to be converted into. These rates of growth were achieved in an extremely complex environment, which led the Group to emphasize the focus on the management priorities already announced for 2008: management of spreads; of growth differentials between revenues and costs, with particular attention on costs; of liquidity; special attention to risks and disciplined financial and capital management. The main developments were: • Excellent performance of the most commercial revenues, which rose for the 16th straight quarter, and especially net interest income without dividends, which is offsetting the slowdown in business volumes with management of spreads. • A further lowering of growth in operating expenses: from up 10.5% in 2007 to up 1.5% in the third quarter of 2008 (up 5.7% in the first quarter and up 3.4% in the second). • Another quarterly rise in loan-loss provisions (up 67.2% in the first nine months), due to the combined impact of a faster than expected worsening of macroeconomic variables in some countries (reflected in more NPLs); growth in lending, although at a slower pace; the entry in previous quarters into segments of more profitable products, but with a greater risk premium; and the release of provisions made in the first quarter of 2007 in some units, which was not repeated in 2008. • Quality and recurrence of results, which continue to register significant rises: gross operating income (up 13.0%), net operating income (up 20.6%), profit (up 15.8%) and earnings per share (up 8.3%). This allows us to compare very favorably with our peers. • Good performance of the operating areas in Q3'08, with higher profits than in the Q2'08 and stronger growth rates. The Group's lower profit in the third quarter was due to Financial Management and Equity Stakes and reflected three factors: lower dividends (seasonal effect), reduced gains on financial transactions (loss on exchange rate position) and lower results by the equity accounted method (Sovereign). In order to appropriately interpret the Group’s results the following three aspects should be taken into account: • In line with accounting rules, the results from businesses sold in 2007 are recorded on a net basis in discontinued operations. This enables management of the recurrent businesses to be better tracked.
Chapter 20 – Page 29
• In 2008, the results include a net positive impact of EUR 451 million from the incorporation of ABN AMRO (EUR 725 million of profits, mainly from Banco Real, recorded in income accounted for by the equity method, and a financing cost after tax of EUR 274 million). • Comparing gross operating income and operating expenses with 2007 is negatively affected by the evolution of the average exchange rates of the dollar, sterling and the main Latin American currencies, except Brazil’s real, against the euro. The effect as regards the euro is -4 p.p. in the Group’s total, -15 p.p. in the UK and -3 p.p. in Latin America.
20.6.1.2 Main items in Grupo Santander’s balance sheet: Total managed funds by Grupo Santander at the end of September amounted to EUR 1,079,723 million. Of this amount, 88% (EUR 953,035 million) were on-balance sheet and the rest off-balance sheet mutual and pension funds and managed portfolios. In order to correctly interpret this information, it is necessary to take into account the perimeter impacts (incorporation in Q3'08 of the deposits of Bradford & Bingley (B&B) and the sale of pension fund management institutions in Latin America in 2007) and the exchange rate from the depreciation (end of September rates) of sterling against the euro. The impact of these factors on the changes in customer balances was 5 p.p. negative on loans and 2 p.p. also negative on customer funds. The Group’s gross lending amounted to EUR 580,913 million, 3.8% higher year-on- year (+8.4% excluding the exchange-rate effect). Lending to “other resident sectors” increased 5.0%, with secured loans up 2.9%, the rest of loans 12.0%, reflecting the good performance of balances with individual customers and SMEs, and commercial bills declined 13.9%. Loans to the non-resident sector rose 2.8%, clearly affected by exchange rates (around 8 p.p.). At the end of September 2008, Continental Europe accounted for 56% of the Group’s total lending, the UK for 31% and Latin America for 13%. With regards to liabilities, total customer funds under management amounted to EUR 781,803 million, 3% lower year-on-year, impacted by the perimeter effect and exchange rates. On balance sheet, it can be seen that deposits excluding repos increased 12%, subordinated debt 8%, while marketable securities remain virtually unchanged. Mutual funds declined 24%, pension funds 64% and investment-savings insurance increased 26%. All these percentages are affected, on the one hand, by the exchange rate impact (mainly sterling’s slide) and, on the other, the incorporation of B&B and the sale of pension fund management institutions in Latin America, as well as placement of EUR 7,000 million of “Valores Santander” recorded in shareholders’ funds and not in customer funds. On a like-for-like basis and eliminating the exchange rate impact, deposits increased 11%, pension funds declined 3% and total customer funds rose 0.2% instead of the aforementioned drop of 3%. The three main lines of the Group’s financing plans in the first nine months of 2008 were: • The Group continued to prove its capacity to obtain medium and long-term financing in a complex environment, taking advantage of the market’s windows to Chapter 20 – Page 30
issue EUR 21,404 million of senior debt and EUR 1,426 million of covered bonds. Senior and subordinated debt that matured had countervalues of EUR 21,057 million and EUR 471 million, respectively. • Securitizations of mortgage loans, consumer finance and loans to SMEs amounted to close to EUR 50,000 million. This enabled us to increase the total assets eligible for discounting in central banks. • Lastly, the Group intensified the emphasis on capturing of deposits through its retail networks. All these measures strengthened the Group’s position at a time of instability in the markets and enabled Santander to enjoy a comfortable liquidity situation. Goodwill (pertaining to the entities which are consolidated by global incorporation) was EUR 13,337 million, EUR 926 million lower year-on-year.
Chapter 20 – Page 31
On balance sheet customer funds are shown below:
Customer funds under management EUR billion
780 785 750 759 782 +0.2%*
169 160 148 143 138 -18.4%
611 625 602 616 644 +5.3%*
Sep 07 Dec 07 Mar 08 Jun 08 Sep 08
(*) W/o exchange rate impact, total: +3.4%; on-balance sheet: +9.3% Note: Adjusted with the impact of the sale of pension funds management institutions in Latin America and the placement of “Valores Santander”.
Customer funds under management. Sept. 2008 % o/ operating areas
Latin America 21%
Continental Europe 47% United Kingdom Abbey 32%
Chapter 20 – Page 32
20.6.1.3 Efficiency
Operating expenses increased 3.5% year-on-year, a much slower pace than the rise in gross operating income and again slower than in previous quarters (+1.5% Q3’08/Q3’07).
All the retail banking units in Europe and Latin America as well as the global units registered growth in costs consistent with the Group’s disciplined approach and with its ongoing business development plans, as well as meeting the efficiency objectives. The UK’s costs continued to perform well.
Chapter 20 – Page 33
20.6.1.4 Non-performing loans
The Group’s non-performing and doubtful loans continued to rise, due to the less favorable macroeconomic climate, the rise in lending in recent years, and the change of the mix (mainly in Latin America) towards more profitable products, but with a higher risk premium.
The Group’s NPL ratio was 1.63%, 74 b.p. above September 2007, comparing very well with international standards. The same can be said about coverage, which although lower than a year ago was 104%, and also compares very well with our international peers.
20.6.1.5 Computable Capital – Shareholders’ Equity:
Bank of Spain circular 3/2008 on determining and controlling minimum shareholders’ funds came into force on June 10. This completed the process of adapting the Spanish legislation to the directives on capital requirements set by the Basel Committee on Banking Supervision (BIS II), following its adoption in the EU.
The main novelties, regarding capital requirements (Pillar I), concern the possibility of using the Internal Ratings Based Approach (IRB) for calculating risk weighted exposures, as well as including operational risk in them. The aim is to make regulatory requirements more sensitive to all risks that banks face.
A supervisory review process is also established to improve internal management of risks and self-assessment of economic capital (Pillar II), as well as elements regarding information and market discipline (Pillar III).
In this context, Grupo Santander obtained authorization on June 25 from the Bank of Spain to adopt the International Ratings Based Approach (IRB) for calculating the requirements of shareholders’ funds by credit risk of Santander (parent bank), Banesto and Abbey (jointly with the UK’s Financial Services Authority).
These banks account for more than 70% of the consolidated risk exposure. Grupo Santander has made a commitment with the Bank of Spain to gradually apply over the next few years the internal models for determining shareholders’ funds by credit risk for almost all the Group’s banks. Close to 95% of exposure will be covered under IRB models. The whole process will be validated on a coordinated basis by the Bank of Chapter 20 – Page 34
Spain and the supervisors of each of the countries where the Group is present, mainly Europe and the Americas.
The new regulatory standards are already having a positive impact on Grupo Santander’s capital ratios. As a result of using the internal models, the risk weighted exposure is declining and thus the capital needs are lower. This improvement is partly offset by the greater penalization from including operational risk and the fact that the inclusion of generic provisions among Tier 2 funds is now limited to 60%.
In summary, in accordance with BIS II criteria, Grupo Santander’s shareholders’ equity amounted to EUR 53,981 million at the end of September. The surplus above the minimum requirement was EUR 16,150 million.
The BIS II ratio was 11.42%. Tier 1 stood at 7.89% and core capital was 6.31%, basically in line with the ratio at the end of June. This was due to the net between the positive effects of the generation of free capital and the negative impact from the lower value of the equities’ portfolio.
Chapter 20 – Page 35
20.6.1.6 Shares and dividends
At the end of September, the Santander share price was EUR 10.50, after dropping 10.0% during the quarter. Nevertheless, the SAN shares performed better than the Spanish and international markets over the last 12 months: it declined 23.0% compared to a fall of 24.6% in the Ibex-35, 31.0% in the DJ Stoxx 50 and 43.2% in the DJ Stoxx Banks.
The closing price of the Santander share was EUR 7.01 as of October 27, 2008, after a 33% depreciation during the month of October.
The first interim dividend of EUR 0.135234 per share charged to 2008’s profits was paid on August 1.
In addition, the Board of Directors approved the payment of the second interim dividend of the same amount (10% more than the same one in 2007) as of November 1.
20.7 DIVIDEND POLICY 20.7.1. Dividends per share Dividend policy The Bank generally pays its shareholders an annual dividend paid on a quarterly basis. The Bank paid a gross dividend per share of EUR 0.122940 charged against 2007 earnings on August 1, 2007, November 1, 2007 and February 1, 2008. On May 1, 2008, the Bank paid a gross dividend of EUR 0.281961 per share charged to 2007 earnings. Shareholder remuneration in the form of dividends charged to 2007 earnings was EUR 0.650781 per share, an increase of 25% over 2006. On August 1, 2008, the Bank paid a first dividend charged to 2008 earnings in the gross amount of EUR 0.135234 per share, and has announced a second dividend in the same amount to be paid as from November 1, 2008. BANCO SANTANDER, S.A. intends to continue with its policy to maintain a pay-out over consolidated ordinary profits of around 50%, with quarterly payment of dividends. The distribution of dividends by the Bank is contingent upon fulfillment of a number of requirements established by the BANK OF SPAIN.
Chapter 20 – Page 36
BANCO SANTANDER. S.A.
Millions of euros (*) 2007 2006 2005 Net profits (Bank) 4,070.3 3,256.2 2,605.0 Profits attributed to the Group 9,060.3 7,596.0 6,220.1 Ordinary profits attributed to the Group 8,110.5 6,582.3 5,211.8 Capital (1) 3,127.1 3,127.1 3,127.1 Number of shares (1) 6,254,296,579 6,254,296,579 6,254,296,579 Average number of shares (2) 6,341,770,785 6,248,208,440 6,240,611,051 Earnings per share (Bank) (3) 0.6418 0.5211 0.4174 Earnings per share (Group) (3) 1.4287 1.2157 0.9967 Ordinary earnings per share (Group) (3) 1.2789 1.0534 0.8351 Earnings per share (Group) (4) 1.4287 1.2145 0.9945 Stock capitalization at December 31 / P/E ratio 11.56 13.42 13.35 Pay-out (%) (5) (Group) 50.2 49.5 49.98 Dividend per share 0.6508 0.5206 0.4165
(1) Data as of the end of the year. (2) Net average of treasury shares. (3) Calculated on the average number of shares. (4) Calculated on the number of shares as of year end. (5) Dividends charged to income for the year / Ordinary profit attributable to the Group. (*) Except for the profit and the dividend per share, which are expressed in Euros. The growth of the Group in the last decade has led BANCO SANTANDER, S.A. to also act, in practice, as a holding entity of the shares of the various companies in its Group, and its results are becoming progressively less representative of the performance and earnings of the Group. Therefore, each year BANCO SANTANDER, S.A. determines the amount of the dividends to be distributed to its shareholders on the basis of the consolidated net profit, while maintaining the Group's traditionally high level of capitalization and taking into account that the transactions of the Bank and of the rest of the Group are managed on a consolidated basis (notwithstanding the allocation to each company of the related net worth effect).
20.8 LEGAL PROCEEDINGS AND ARBITRATION
Legal proceedings and arbitration A. TAX-RELATED PROCEEDINGS
As of the date of this Registration Document and during the last 12 months, the main tax disputes concerning the Group are as follows: - The “Mandado de Segurança” filed by Banco Santander Banespa, S.A. claiming its right to pay Brazilian income tax at a rate of 8%. On January 14, 2008, an unfavorable judgment was handed down by the Federal Regional Court, against which the related special and extraordinary appeal was filed at a higher court on June 9, 2008. - The “Mandado de Segurança” filed by Banco Santander Banespa, S.A. claiming its right to consider the social contribution tax on net income as deductible in the calculation of the Brazilian corporation tax. This action was declared unwarranted and an appeal was filed at the Federal Regional Court, requesting to have the claimability of the tax debt stayed and obtaining permission to deposit with the courts the amounts in question. On October 1, 2007, an unfavorable judgment was
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handed down by the Federal Regional Court which was appealed against by Banco Santander S.A. (Brazil) through a request for an amendment of judgment (“Embargos de Declaraçao”) filed on October 8, 2007. On March 6, 2008, the Court rejected this request and dismissed the subsequent appeal. On July 1, 2008, the directors of Banco Santander S.A. (Brazil) filed a special and extraordinary appeal against the judgment at a higher court. - The “Mandado de Segurança” filed by Banco Santander, S.A. and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. The “Mandado de Segurança” was declared unwarranted and an appeal was filed at the Federal Regional Court. On September 13, 2007, this Court handed down a favorable judgment. Union Federal has filed an appeal against this judgment at a higher court. - A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. The legal advisers of Abbey National Treasury Services plc considered that the grounds to contest this claim were well-founded, proof of which is that a favorable judgment was handed down at first instance in September 2006, although the judgment was appealed against by the tax authorities in January 2007. However, in December 2006 an unfavorable judgment for another taxpayer was handed down on another proceeding which might affect this case. As of the date of this Registration Document, other less significant tax disputes are in progress.
B. NON-TAX-RELATED PROCEEDINGS
As of the date of this Registration Document and during the last 12 months, the main non-tax-related proceedings concerning the Group are as follows: - Misselling: claims associated with the sale by Abbey of certain financial products to its customers. The provisions recorded by Abbey in this connection were calculated on the basis of the best estimate of the number of claims that will be received, of the percentage of claims that will be upheld and of the related amounts. - LANETRO, S.A.: claim (ordinary lawsuit no. 558/2002) filed by LANETRO, S.A. against Banco Santander, S.A. at Madrid Court of First Instance no. 34, requesting that the Bank comply with the obligation to subscribe to EUR 30.05 million of a capital increase at the plaintiff. On December 16, 2003, a judgment was handed down dismissing the plaintiff's request. The subsequent appeal filed by LANETRO was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006. The Bank has filed extraordinary appeals on grounds of procedural infringements and an extraordinary cassation appeal against the aforementioned decision. - Galesa de Promociones, S.A.: small claims proceeding at Elche Court of First Instance no. 4 (case no. 419/1994), in connection with the claim filed by Galesa de Promociones, S.A. (Galesa) requesting the Court to annul a previous legal foreclosure proceeding brought by the Bank against the plaintiff in 1992, which
Chapter 20 – Page 38 culminated in the foreclosure of certain properties that were subsequently sold by auction. The judgments handed down at first and second instance were in the Bank's favor. The cassation appeal filed by Galesa at the Supreme Court was upheld by virtue of a decision on November 24, 2004 which ordered the reversal of the legal foreclosure proceeding to before the date on which the auctions were held. On June 8, 2006, Galesa filed a claim for the enforcement of the decision handed down by the Supreme Court, requesting that the Bank be ordered to pay EUR 56 million, the estimated value of the properties, plus a further EUR 33 million for loss of profit. The Bank challenged this claim on the grounds that the Supreme Court decision could not be enforced -since no order had been pronounced against the Bank, but rather a proceeding had merely been annulled- and it also argued that the damages requested would have to be ruled upon by an express court decision, which had not been pronounced. The Elche Court of First Instance, by virtue of an order dated September 18, 2006, found in favor of the Bank, and referred the plaintiff to the appropriate ordinary proceeding for the valuation of the aforementioned damages. Galesa filed an appeal for reconsideration, which was dismissed by a resolution on November 11, 2006. Galesa lodged an appeal against this resolution at the Alicante Provincial Appellate Court. This appeal was in turn contested by the Bank and a favorable judgment was handed down. - Declaratory large claims action brought at Madrid Court of First Instance no. 19 (case no. 87/2001) in connection with a claim filed by Inversión Hogar, S.A. against the Bank. This claim sought the termination of a settlement agreement entered into between the Bank and the plaintiff on December 11, 1992. On May 19, 2006, a judgment was handed down at first instance, whereby the agreement was declared to be terminated and the Bank was ordered to pay EUR 1.8 million, plus the related legal interest since February 1997, to return a property that was given in payment under the aforementioned agreement, to pay an additional EUR 72.9 million relating to the replacement value of the assets foreclosed, and subsequently sold, by the Bank, and to pay all the related court costs. The Bank and Inversión Hogar, S.A. filed appeals against the judgment. On July 30, 2007, the Madrid Provincial Appellate Court handed down a decision upholding in full the appeal filed by the Bank, revoking the decision handed down at first instance and dismissing the appeal lodged by Inversión Hogar, S.A. Inversión Hogar, S.A. as it had announced, on completion of the clarification procedure, filed a cassation appeal against the aforementioned decision and an extraordinary appeal against procedural infringements at the Civil Chamber of the Supreme Court, which was given leave to proceed by the Madrid Provincial Appellate Court. - Complaint in an ordinary proceeding filed by Inés Arias Domínguez and a further 17 persons against Santander Investment, S.A. at Madrid Court of First Instance no. 13 (case no. 928/2007), seeking damages of approximately EUR 43 million, plus interest and costs. The plaintiffs, who are former shareholders of Yesocentro S.A. (Yesos y Prefabricados del Centro, S.A.) allege that Santander Investment, S.A. breached the advisory services agreement entered into on October 19, 1989 between the former Banco Santander de Negocios, S.A. and the plaintiffs, the purpose of which was the sale of shares owned by the plaintiffs to another company called Invercámara, S.A.
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This complaint was duly contested by Santander Investment, S.A. on November 5, 2007. The preliminary hearing was set for April 28, 2008 although it was subsequently suspended until the exception for a preliminary ruling filed by the Bank is resolved. On September 11, 2008, the Madrid Court of First Instance (Juzgado de Primera Instancia n. 13) granted the suspension of the proceeding due to the preliminary ruling. - On February 6, 2008, the Bank filed with the Spanish Arbitral Court (Secretaría de la Corte Española de Arbitraje) a request for arbirtal proceedings seeking a payment of EUR 66,418,077.27 from GAESCO BOLSA, SOCIEDAD DE VALORES, S.A. ("GAESCO"), a Spanish brokerage firm. GAESCO owes such amount to the Bank as a result of the early termination of a framework agreement for financial transactions entered by GAESCO and the Bank and of the financial transactions undertaken under such agreement. The arbitral ruling is pending. - Former Banespa employees: claim filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s by-laws in the event that the entity obtained a profit and that the distribution of this profit were approved by the Board of Directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000 in variable percentages as agreed by the Board of Directors. The aforementioned clause was eliminated from the by-laws in 2001. In September 2005 the Regional Labor Court ordered Banco Santander Banespa, S.A. to pay the half-yearly bonus and the bank lodged an appeal at the High Labor Court. A decision was handed down on June 25, 2008 which largely upheld the previous decision. The related appeals against this decision will be filed at the High Labor Court and at the Federal Supreme Court, as applicable. - Absorption of Banco Noroeste by Banco Santander Brasil: Three claims filed by minority shareholders of the former Banco Noroeste requesting, in addition to compensation for damage and losses, the annulment of the shareholders’ meeting that approved the merger between Banco Noroeste and Banco Santander Brasil, arguing that when the merger took place they should have been offered a market value that would have enabled them to decide whether or not to sell their shares at that value. In the three cases, judgments were handed down at first instance, one of which found in favor of the bank and the other two against it. In the latter two cases the shareholders’ meeting was not declared null and void but rather the Bank was ordered to pay compensation. Appeals were filed against these judgments. The Sao Paulo Court of Justice has recently handed down joint judgments on three appeals at second instance, considering that Santander should have duly prepared a valuation report using the disposal value method thereby establishing that the minority shareholders be indemnified. In the case of the shareholders that sold their shares, the Court indicated that they should receive the difference between the value at which they sold their shares (equity value) and market value (calculated as the disposal value) at that time, plus interest. In the case of the shareholders that did not sell, the Court considers that they should receive the market value at that time plus interest, less the present value of their shares. Unlike the judgments handed down at first instance, lost profit and damnum emergens were excluded and the amount of lawyers’ fees was reduced. An appeal against this judgment will be filed at higher courts. Chapter 20 – Page 40
As of the date of this Registration Document, other less significant non-tax-related proceedings are in progress. In addition, set forth below is a description of the developments during 2007 of the proceedings against Casa de Bolsa Santander, S.A. de C.V. Grupo Financiero Santander (Casa de Bolsa): In 1997, Casa de Bolsa was sued for an alleged breach of various brokerage agreements. On July 6, 1999, Civil Court number thirty-one of the Federal District handed down a judgment ordering Casa de Bolsa to return to the plaintiff 2,401,588 shares of México 1 and 11,219,730 shares of México 4 at their market value and to pay MXP 15 million, plus interest calculated at four times the average percentage borrowing cost (C.P.P.). After numerous appeals were filed concerning the method used for calculating this interest, a final judgment was handed down ruling that the interest should not be capitalized. Following such judgment, the amount owed has been paid in full, and there are currently no outstanding claims in this regard. Grupo Santander maintains provisions that it deems reasonable to cover any contingencies that might arise from these tax-related and non-tax-related proceedings.
20.9 SIGNIFICANT CHANGES IN THE BUSINESS OR FINANCIAL POSITION OF THE ISSUER From September 30, 2008 through the date of this Registration Document, there have been no events or changes that might have a material effect on the business or financial position of BANCO SANTANDER, S.A.
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CHAPTER 21
21. ADDITIONAL INFORMATION 21.1 SHARE CAPITAL 21.1.1 Issued share capital 21.1.1.1 Par value As of the date of this Registration Document, the share capital of BANCO SANTANDER, S.A. was three billion, one hundred ninety-seven million, six hundred twenty-three thousand, seven hundred and sixty-one euros and fifty euro cents (3,197,623,761.50) and was fully subscribed and paid up. 21.1.1.2 Classes and series of shares As of the date of this Registration Document, the number of shares into which the capital is divided was six billion, three hundred, ninety-five million, two hundred forty-seven thousand, five hundred and twenty-three (6,395,247,523) shares, each having a par value of fifty euro cents (EUR 0.50) each, of the same class and a single series, and fully subscribed and paid up. All of the shares carry the same political and financial rights. The shares are represented by book-entries and SOCIEDAD DE GESTIÓN DE LOS SISTEMAS DE REGISTRO, COMPENSACIÓN Y LIQUIDACIÓN DE VALORES, S.A.U. (Iberclear), with offices at Pedro Teixeira 8, Madrid, is the company in charge of maintaining the share registry. 21.1.2 Shares not representing capital There are no shares which do not represent capital. 21.1.3 Number, book value and par value of shares held by the issuer or its affiliates The percentage of Bank shares held by consolidated companies was less than 0.01% at December 31, 2007, and was 0.12% (0.15% including derivatives) and 0.08% at December 31, 2006 and 2005, respectively. The changes in treasury shares from December 31, 2005 to December 31, 2007 were as follows: Number of shares Average Price Balance at 12.31.2005 4,800,711 + Purchases for the period 477,666,317 11.98 - Sales for the period (474,988,191) 11.90 Balance at 12.31.2006 7,478,837 + Purchases for the period 611,138,.902 13.86 - Sales for the period (618,404,917) 13.86 Balance at 12.31.2007 212,822
The effect on income generated by transactions with shares issued by the Bank (EUR 5 million (gain) in 2007, EUR 10 million (gain) in 2006 and EUR 26 million (gain) in 2005) was recognized in equity.
Chapter 21 – Page 1
At December 31, 2007, the composition of treasury shares was: Number of shares Banco Español de Crédito, S.A. 212,822 Total 212,822
At June 30, 2008, the Group’s companies held a total of 4,046,530 shares of the Bank in their respective portfolios, equivalent to 0.124% of the share capital. The changes in treasury shares from December 31, 2007 to June 30, 2008 were: Number of shares Average Price Balance as of 12.31.2007 212,822 - Purchases for the period 355,021,016 12.52 - Sales for the period (351,187,308) 12.49 Balance as of 06.30.2008 4,046,530
The effect on income generated by the transactions with shares issued by the Bank in the amount of EUR 5 million (loss) was recognized in equity. At June 30, 2008, the composition of treasury shares was: Number of shares Santander Investment Securities Inc. 14,807 Banco Español de Crédito, S.A. 81,723 Pereda Gestión 3,950,000 Total 4,046,530
21.1.4 Convertible and/or exchangeable debentures Currently, BANCO SANTANDER, S.A. and its Group companies have not issued debentures that are convertible into and/or exchangeable for shares of BANCO SANTANDER, S.A. and/or warrants, except for the Valores Santander (see Chapters 10.1.a) and 21.1.5 of this document). 21.1.5 Rights and obligations with respect to authorized but unissued capital or regarding decisions about capital increases Additional authorized capital amounts to EUR 1,563,574,144.5, in accordance with the resolution adopted at the extraordinary General Shareholders’ Meeting held on July 27, 2007. The period that directors have to execute and implement capital increases up to this limit expires on July 27, 2010. The resolution authorizes the Board to exclude preemptive rights in whole or in part, upon the terms of Section 159.2 of the Business Corporations Law. As part of the financing required to acquire ABN AMRO, it was expected that the Board of Directors, in exercise of the powers granted by the shareholders at the Meeting of July 27, 2007, would approve a capital increase with preemptive rights for up to the amount of EUR 4,000 million (for more information, see Chapter 5.2.2). As a consequence of the sale of Banca Antonveneta, the Bank informed, by means of a material fact dated November 8, 2007, that it would not carry out the aforementioned capital increase for up to EUR 4,000 million. As of the date of this Registration Document, the above-mentioned authorization to increase share capital granted at the extraordinary General Shareholders’ Meeting of July 27, 2007 has been used to adopt a resolution to increase capital in
Chapter 21 – Page 2 the amount of EUR 140,449,438 to partially pay for the exchange of the “Valores Santander” mentioned below when such exchange takes place. The increase will not be implemented until the exchange of the “Valores Santander” takes place. In addition, also motivated by the acquisition of ABN AMRO, the shareholders at the same extraordinary General Shareholders’ Meeting resolved to issue debentures mandatorily convertible into Bank shares. Such debentures were subscribed by a wholly-owned subsidiary of the Bank, which, in turn, issued Valores Santander that were placed among the Bank’s customers. As of the date of this Registration Document, there are Valores Santander outstanding for an aggregate nominal value of EUR 7,000 million. Such securities may be voluntarily exchanged for Bank shares on October 4, 2008, 2009, 2010 and 2011 and mandatorily on October 4, 2012. The reference price of the Bank shares for purposes of the conversion has been set at EUR 16.04 per share, and the conversion rate is 311.76 shares for each debenture. For further information about the resolutions adopted at the above-mentioned extraordinary General Shareholders’ Meeting, see the material fact filed with the National Securities Market Commission on July 27, 2007, registration number 82.594. Additionally, at the ordinary General Shareholders’ Meeting held on June 21, 2008 the shareholders resolved to increase capital by a nominal amount of EUR 375 million, delegating on the Board of Directors broad powers so that, within a period of one year from the date of such Meeting, the Board may set the date and conditions for such increase. If the Board of Directors does not exercise the delegated powers within the period provided by the shareholders at the General Shareholders’ Meeting, the delegation of authority shall expire. The capital increase has not been implemented as of the date of this Registration Document. Within the framework of the transaction for the acquisition of Alliance & Leicester (for more information, see Chapter 5.2.2.), the shareholders acting at the extraordinary General Shareholders’ Meeting held on September 22, 2008 resolved to increase the Bank’s share capital by a nominal amount of EUR 71,688,495, through the issuance and flotation of 143,376,990 ordinary shares with a par value of fifty euro cents (EUR 0.5) each, of the same class and series as those currently outstanding and represented by book entries. The capital increase was implemented on October 10, 2008, for a nominal amount of EUR 70,475,472 through the issuance of 140,950,944 shares having a par value of EUR 0.50 each, with a share premium of EUR 10.73 per share. The consideration for such capital increase consists of 422,852,832 shares of Alliance & Leicester plc, having a par value of 0.50 pound sterling each, representing all of its issued ordinary share capital. Finally, Banco Santander expects to implement a capital increase with the issuance of approximately 147 million new shares for the acquisition of Sovereign (see Chapter 5.2.2 – Principal ongoing investments).
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21.1.6 Information regarding the share capital of any Group member subject to an option There is no share capital of any Group company subject to an option or in respect of which it has been resolved to conditionally or unconditionally subject it to an option, except as provided in Chapters 17.2 and 17.3. 21.1.7 Share capital history There were no changes to the share capital of the Bank during fiscal year 2005. There were no changes to the share capital of the Bank during fiscal year 2006. There were no changes to the share capital of the Bank during fiscal year 2007.
Data in euros 3,127,148,289.50 Balance at December 31, 2005 Euros 3,127,148,289.50 Balance at December 31, 2006 Euros 3,127,148,289.50 Balance at December 31, 2007 Euros
On October 10, 2008 Banco Santander increased its capital by a nominal amount of EUR 70,475,472 through the issuance of 140,950,944 ordinary shares having a par value of fifty euro cents (EUR 0.50) each. As of the date of registration of this Registration Document, the amount of the Bank’s share capital is EUR 3,197,623,761.50.
21.2 BYLAWS AND NOTARIAL INSTRUMENT OF INCORPORATION The shareholders acting at the General Shareholders’ Meeting held on June 21, 2008 approved new Bylaws and repealed those theretofore in effect. The new Bylaws, were registered with the Commercial Registry of Cantabria on August 11, 2008. The amendment of the Bylaws pursued three basic purposes: (i) To set out in the Bylaws the basic principles that inform the most recent corporate governance recommendations for listed companies and, particularly, those of the Unified Good Governance Code published by the National Securities Market Commission as Annex I to the Report of the special working group on good governance at listed companies on May 19, 2006 and approved by resolution of the Board of the National Securities Market Commission on May 22, 2006, a large number of which were already included in the Rules and Regulations of the Board of Directors and in the Rules and Regulations for the General Shareholders’ Meeting and were a customary practice at the Bank; (ii) To include in the Bylaws certain instruments that are necessary to give the Bank a more flexible organization and management, with a view to facilitating operations that may be potentially interesting and to incorporating the latest technological developments; and (iii) To update and technically improve the text of the current Bylaws, supplementing and clarifying regulations on certain matters. Posted on the Group’s website (www.santander.com) since the date of the announcement of the call to the last Meeting is the Report prepared by the directors in Chapter 21 – Page 4 compliance with the provisions of Section 144.1 a) of the Business Corporations Law, containing the rationale for the proposed amendment of the Bylaws of Banco Santander, S.A.; attached as annexes to such Report are the text of the current Bylaws of the Bank, the text of the prior Bylaws, and a comparative table with a match between corresponding provisions. The text of sections 1 and 2 of Article 5 of the Bylaws were subsequently amended with respect to share capital. The current text of such sections is contained in the notarial instrument authorized on October 10, 2008, providing for a capital increase in order to accommodate the exchange of shares for the acquisition of Alliance & Leicester, which document was recorded at the Commercial Registry in book 926, folio 184, page S- 1960, entry 1653. 21.2.1 Purposes and aims of the Bank The Bank’s corporate purpose is described in Article 2 of the Bylaws, which provides as follows: “1. The corporate purpose of the Company consists of:
a) The conduct of activities and operations and the provision of services of any kind which are typical of the banking business in general and which are permitted under current law.
b) The acquisition, possession, enjoyment and disposition of all types of securities.
2. The activities that make up the corporate purpose may be carried out totally or partially in an indirect manner, in any of the manners permitted by Law and, in particular, through the ownership of shares or the holding of interests in companies whose purpose is identical, similar, incidental or supplemental to such activities.”
The Bank’s Bylaws are available to the public and may be examined at the Bank’s registered office, located in the city of Santander, at Paseo de Pereda, números 9 al 12, 10 on the Group’s website (www.santander.com) and at the NATIONAL SECURITIES MARKET COMMISSION.
21.2.2 Description of bylaw provisions relating to the members of the management decision-making body The operation and composition of the Board of Directors of BANCO SANTANDER, S.A. and its Committees is regulated by Articles 37 through 54 of the Bylaws and by the Rules and Regulations of the Board of Directors. The provisions governing the operation of the Executive Committee, Risk Committee, Audit and Compliance Committee and Appointments and Remuneration Committee are contained both in the Bylaws and in the Rules and Regulations of the Board. Therefore, there are no specific regulations of the Committees of the Board. Below is a brief description of the main content of the provisions of the Bylaws and the Rules and Regulations of the Board that regulate such bodies.
10 See Chapter 24 of this Registration Document. Chapter 21 – Page 5
Functions, composition and responsibilities The core of the Board of Directors’ mission is the supervision of the Group, with day-to-day management thereof being delegated to the appropriate executive bodies and to the various management teams. The Rules and Regulations of the Board (Article 3) reserve to the Board, without the power of delegation, the approval of the general policies and strategies and, in particular, of the strategic plans, management goals and annual budget, the corporate governance policy, the corporate social responsibility policy and the dividend and treasury stock policy, the general risk management policy and the policies for the provision of information to and for communication with the shareholders, the markets and the public opinion. In addition, the Board reserves for itself, also without the power of delegation, the acquisition and disposition of substantial assets and major corporate transactions, the establishment of the compensation to which each director is entitled, as well as the approval of the contracts governing the discharge by directors of duties other than those of a mere director, including executive duties, and the compensation to which they are entitled for the performance thereof, the appointment, compensation and, if applicable, removal of the members of the Senior Management, as well as the definition of the basic terms of their contracts, and the creation or acquisition of shareholdings in special purpose entities or entities registered in countries or territories that are considered to be tax havens. The Executive Committee may, on an emergency basis, adopt decisions in connection with the matters referred to in this paragraph, subject to subsequent ratification thereof by the Board of Directors. As provided by Article 41 of the Bylaws, the maximum number of directors is 22, and the minimum is 14. The Bank’s Board is currently made up of 19 directors. In exercising its powers to make proposals at the General Shareholders’ Meeting and to designate directors by co-option to fill vacancies, the Board of Directors shall endeavor to ensure that the external or non-executive directors represent a wide majority over the executive directors and that the former include a reasonable number of independent directors. In all events, the Board of Directors shall endeavor to ensure that the number of independent directors represents at least one-third of all directors. The following shall be considered executive directors: the Chairman, the Chief Executive Officer(s), and all other directors who perform management duties within the Bank or the Group and do not limit their activity to the duties of supervision and collective decision-making falling upon the directors, including, in all events, those directors who, through the delegation of their powers, stable proxy-granting, or a contractual, employment or services relationship with the Bank other than that inherent in their mere capacity as directors, have any decision-making capacity in connection with any part of the business of the Bank or the Group. External or non-executive directors who hold or represent shareholdings equal to or greater than 1% shall be considered proprietary directors. External or non-executive directors who have been appointed based on their personal or professional status and who perform duties not conditioned by relationships with the company, or with the significant shareholders or management thereof shall be considered independent directors. In no event may there be a classification as independent directors of those who: Chapter 21 – Page 6 a) Have been employees or executive directors of the Group’s companies, except after the passage of 3 or 5 years, respectively, since the cessation of such relationship. b) Receive from the Company, or from another Group company, any amount or benefit for something other than director compensation, unless it is immaterial. For purposes of the provisions of this Chapter, neither dividends nor pension supplements that a director receives by reason of the director’s prior professional or employment relationship shall be taken into account, provided that such supplements are unconditional and therefore, the Company paying them may not suspend, modify or revoke the accrual thereof without breaching its obligations. c) Are, or have been during the preceding 3 years, a partner of the external auditor or the party responsible for auditing the Company or any other Group company during such period. d) Are executive directors or senior managers of another company in which an executive director or senior manager of the Company is an external director. e) Maintain, or have maintained during the last year, a significant business relationship with the Company or with any Group company, whether in their own name or as a significant shareholder, director or senior manager of an entity that maintains or has maintained such relationship. Business relationships shall be considered the relationships of a provider of goods or services, including financial, advisory or consulting services. f) Are significant shareholders, executive directors or senior managers of an entity that receives, or has received during the preceding 3 years, significant donations from the Company or the Group. Those who are merely members of the board of a foundation that receives donations shall not be considered included in this letter. g) Are spouses, persons connected by a similar relationship of affection, or relatives up to the second degree of an executive director or senior manager of the Company. h) Have not been proposed, whether for appointment or for renewal, by the Appointments and Remuneration Committee. i) Are, as regards a significant shareholder or shareholder represented on the Board, in one of the circumstances set forth in letters a), e), f) or g) above. In the event of a kinship relationship set forth in letter g), the limitation shall apply not only with respect to the shareholder, but also with respect to the related proprietary directors thereof in the affiliate company.
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The Board shall specify the condition of each director at the General Shareholders’ Meeting wherein the appointment thereof is to be made or ratified. Furthermore, such condition shall be reviewed on an annual basis by the Board of Directors, after verification by the Appointments and Remuneration Committee, and disclosed in the Annual Corporate Governance Report. In compliance with Article 5.5 of the Rules and Regulations of the Board, the Appointments and Remuneration Committee verified the condition of each Director at its meeting of March 12, 2008. Its proposal was submitted to the Board of Directors, which approved it at its meeting of March 24, 2008. The current Bylaws of the Bank (Article 55) provide that the term of office of directors is five years. Outgoing Directors may be re-elected. All vacancies on the Board of Directors which occur for whatever reason during the period of time for which the directors were appointed may be filled by shareholders on an interim basis, upon resolution made by the Board of Directors, until the shareholders acting at the next General Shareholders’ Meeting confirm or revoke such appointment. In the first- mentioned case, the director so designated shall cease to hold office on the date on which his predecessor would have done so. A person is eligible to hold office as director without the need that such person be a shareholder, and a director holding office as such may hold any other position or perform any other duties at the Bank. The directors shall be liable to the Bank, to the shareholders, and to the Bank’s creditors for any damages they may cause by acts or omissions contrary to Law or to the Bylaws or by any acts or omissions contrary to the duties inherent in the exercise of their office. The Board of Directors shall appoint from among its members a chairman (who shall be considered as the most senior executive in the Bank and shall therefore be vested with powers delegated to him by the Board of Directors) and also one or more vice chairmen; any such vice chairmen shall be consecutively numbered. The chairman and the vice chairman or vice chairmen shall be appointed to hold office for an indefinite period. As provided by Law, the appointment of the chairman shall require the favorable vote of two-thirds of the directors. The Board of Directors may delegate powers to one or more of its members, whom the Board of Directors may or may not call chief executive officers. Any permanent delegation of powers of the Board of Directors and the designation of the director(s) to whom delegated powers are granted shall require the favorable vote of not less than two-thirds of the members of the Board. The chief executive officer, acting under the control of the Board of Directors and the chairman, shall take care of the development of the business and of the highest executive duties in the Bank. Meetings and calls to meeting The Board of Directors shall meet whenever the chairman so decides, either at his own initiative or at the request of at least three directors. Meetings of the Board may be attended by any person invited by the chairman. The Board may also act without a meeting, in writing, provided no director is opposed to doing so. In order for there to be a valid quorum of the Board of Directors, more than half the directors must be present or represented. The
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directors shall endeavor to ensure that absences are reduced to cases of absolute necessity. When directors cannot attend personally, they may grant a proxy to any other director, for each meeting and in writing, in order that the latter shall represent them at the meeting for all purposes. A director may hold more than one proxy. The proxy shall be granted with instructions. Majority required for the adoption of resolutions Resolutions shall be adopted by the absolute majority of directors present at the meeting, unless the Law or the Bylaws require a supermajority. The chairman shall have the tie-breaking vote. Directors affected by proposals for appointment or re-election to or withdrawal from office shall abstain from attending and participating in the debate and voting of the Board of Directors or of the Committees thereof that deal with such matters. Delegation of powers Article 50.1 of the Bank’s Bylaws provides that, without prejudice to such powers as may be delegated individually to the chairman or any other director and to the power of the board of directors to establish committees for each specific area of business, the board of directors shall establish an Executive Committee, to which general decision-making powers shall be delegated, and a Risk Committee, to which powers shall be delegated primarily in connection with risks. Recordation of resolutions All resolutions adopted by the Board of Directors shall be recorded in minutes contained in a special book, authorized under the signature of the chairman and the secretary. The duties of secretary shall be performed by the general secretary of the Bank, who may be replaced by the assistant secretary, and who need not be directors to perform such duties. Compensation11 The current Bylaws of the Bank describe the systems for director compensation in Article 58. Section 1 of such Article 58 provides that a director is entitled to compensation for holding office as such, and section 2 provides that such compensation shall be paid as a share in profits, as a bylaw-mandated compensation, with two components: (a) an annual amount and (b) attendance fees. In addition, such section 2 provides that the specific amount payable for the above-mentioned items to each of the directors shall be determined by the Board of Directors, taking into consideration the positions held on the board and the directors’ membership in and attendance at the meetings of the various committees, and that the aggregate amount of such compensation shall be equal to one percent of the profit of the Company for the fiscal year, provided, however, that the Board may reduce such percentage in those years in which it so deems justified. Independently of the compensation in the form of a share in profits and the collection of attendance fees, the directors shall also be entitled to any other compensation that, following a proposal made by the Appointments and Remuneration Committee and upon resolution by the Board of Directors, may be
11 See Chapter 15.1 of this Registration Document for more information on the compensation for members of the Board of Directors.
Chapter 21 – Page 9 considered appropriate in consideration for the performance of other duties at the Bank, whether they are the duties of an executive director or otherwise, other than the duties of supervision and collective decision-making that they discharge in their capacity as members of the Board. Following a resolution adopted by the shareholders at the General Shareholders’ Meeting in such manner as provided by law, the directors may also receive compensation in the form of shares or options thereon, or by any other compensation system which references share value. Article 28.3 of the Rules and Regulations of the Board provides that only executive directors may be beneficiaries of compensation systems consisting of the delivery of shares or of rights thereto.12 Relations with the shareholders and with institutional investors The Board of Directors shall foster communication between the Bank and its shareholders, for which purpose the Board shall promote the holding of meetings for the provision of information on the progress of the Bank and its Group to shareholders residing in the most significant locations of Spain and other countries. In no event shall such meetings with shareholders entail the provision to them of any information that might place them in a privileged or advantageous position vis-à-vis the other shareholders. The Board of Directors shall also establish appropriate mechanisms for the regular exchange of information with institutional investors that are holders of shares of the Bank, provided, however, that in no event shall such exchange entail the provision to them of any information that might place them in a privileged or advantageous position vis-à-vis the other shareholders. Relations with the markets The Board of Directors shall immediately inform the public regarding: (i) all material facts that might materially influence the stock exchange price of the Bank shares, (ii) all significant changes in the shareholding structure of the Bank, (iii) all substantial amendments to the rules of governance of the Bank, (iv) all related- party transactions of particular importance made with the members of the Board, and (v) all treasury stock transactions of particular importance. The Board of Directors shall prepare and make public, on an annual basis, a corporate governance report, pursuant to the provisions of Law. Committees of the Board of Directors13
(a) Executive Committee
The Executive Committee shall consist of a minimum of five and a maximum of twelve directors. The chairman of the Board of Directors shall also be the chairman of the Executive Committee.
Any permanent delegation of powers to the Executive Committee and all resolutions adopted for the appointment of its members shall require the favorable vote of not less than two-thirds of the members of the Board of Directors.
12 See Chapter 17.2 of this Registration Document. 13 Chapter 14.1.3 of this Registration Document contains additional information regarding the Executive Committee and the Risk Committee. Chapter 16.3 of this Registration Document contains additional information regarding the Audit and Compliance Committee and the Appointments and Remuneration Committee. Chapter 21 – Page 10
The permanent delegation of powers by the Board of Directors to the Executive Committee shall include all of the powers of the Board, except for those which cannot legally be delegated or which may not be delegated pursuant to the provisions of the Bylaws or of the Rules and Regulations of the Board.
The Executive Committee shall meet as many times as it is called to meeting by its chairman or by the vice chairman replacing him.
The Executive Committee shall report to the Board of Directors on the affairs discussed and the decisions made at its meetings and shall make available to the members of the Board a copy of the minutes of such meetings.
(b) Risk Committee The Risk Committee is composed of a minimum of four members and a maximum of six, and has delegated powers primarily in the area of risks. The Risk Committee has the delegated powers specifically set forth in the resolution on delegation, and assumes the following responsibilities generally: a) To propose to the Board the Group’s risk policy, which must particularly identify: (i) the various types of risk (operational, technological, financial, legal and reputational, among others) that the Bank faces, including contingent and other off- balance sheet losses among financial and economic risks; (ii) the information and internal control systems that will be used to control and manage such risks; (iii) the setting of the risk level that the Bank deems acceptable; (iv) the planned measures to mitigate the impact of identified risks, in the event that they materialize. b) To systematically review exposure to principal customers, economic sectors of activity, geographic areas and risk types. c) To be aware of and to authorize, if appropriate, management tools, improvement initiatives, advancement of projects and any other relevant activity relating to the control of risks, specifically including the nature and behavior of internal risk models as well as the results of internal validation thereof. d) To assess and monitor the statements made by supervisory authorities in the exercise of their duties. e) To ensure that the activities of the Group are consistent with the previously decided risk tolerance level and to delegate to lower-level Committees or executives the powers to assume risks. f) To decide about transactions that go beyond the powers delegated to lower decision-making bodies, as well as the global limits of pre-classification in favor of economic groups or with respect to exposures by classes of risks. For more information on the Risk Committee, see Chapter 14.1.3 of this document. (c) Audit and Compliance Committee An Audit and Compliance Committee is established within the Board of Directors. Such Committee shall be composed of a minimum of three directors and a maximum of seven, who shall be appointed by the Board of Directors and all of whom shall be external or non-executive, with independent directors having majority representation. Members of the Audit and Compliance Committee shall be appointed by the Board
Chapter 21 – Page 11 of Directors bearing in mind the directors’ accounting, audit or risk management knowledge, qualifications and experience. The Audit and Compliance Committee shall in any event be chaired by an independent director with accounting, audit or risk management knowledge and experience. The Chairman of the Audit and Compliance Committee shall be elected by the Board of Directors from among the non-executive directors and shall be replaced every four years. The Chairman may be re-elected after one year has elapsed since he ceased to hold office. The duties of the Audit and Compliance Committee are described in Chapter 16.3.1. The Audit and Compliance Committee shall meet as many times as it is called by resolution of the Committee itself or its chairman and at least four times per year. Any member of the Bank’s management team or personnel required to do so must attend meetings of the Committee and offer their cooperation and access to all information in their possession. The auditor may also be required to attend such meetings. One of the meetings of the Audit and Compliance Committee must be devoted to assessing the efficiency of, and compliance by the Bank with, the rules and procedures of governance, and to preparing the information to be approved by the Board of Directors and to be included as part of the annual public documents. The Audit and Compliance Committee shall be considered duly established upon the presence, in person or by proxy, of at least one-half of its members; it shall adopt its resolutions by the majority vote of the members present in person or by proxy, and its Chairman shall have the tie-breaking vote. (d) Appointments and Remuneration Committee The Appointments and Remuneration Committee shall be composed of a minimum of three and a maximum of seven directors, all of whom shall be external or non-executive, with independent directors having majority representation. In all events, it shall be presided over by an independent director. The members of the Appointments and Remuneration Committee shall be appointed by the Board of Directors, taking into account the directors’ knowledge, aptitudes and experience and the responsibilities of the Committee. The Appointments and Remuneration Committee shall meet as many times as it is called to meeting by resolution of the Committee itself or of its Chairman and, at least, four times a year. Meetings of the Committee may be attended by any person, whether or not belonging to the Company, as may be deemed appropriate. Except in those cases specifically requiring a larger majority, resolutions shall be adopted by absolute majority of the Directors present in person and by proxy. Its duties are described in Chapter 16.3.2. (e) International Committee and Technology, Productivity and Quality Committee. The general secretary of the Bank shall also be the secretary of all the Committees of the Board of Directors.
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21.2.3 Description of the rights, preferences and restrictions relating to each class of shares As set forth above (see Chapter 21.1.1.1), as of the date of this Registration Document, the share capital of the Bank is EUR 3,197,623,761.50 and is fully subscribed and paid up. As of the date hereof, the share capital is divided into 6,395,247,523 shares, with a par value of EUR 0.50 each, all of them being of the same class and a single series and fully subscribed and paid up. All of the shares carry the same political and financial rights.
21.2.4 Description of the procedure for changes to the rights of shareholders The Bank’s Bylaws do not include a change in the share capital among the cases that are subject to more stringent requirements than those prescribed by law, and therefore, the requirements established by Section 103 of the current Restated Text of the Business Corporations Law shall apply.
21.2.5 Description of the procedure to call general shareholders’ meetings General Shareholders’ Meetings may be ordinary or extraordinary and must be called by the Board of Directors. The ordinary General Shareholders’ Meeting of the Bank, which shall be previously called for such purpose, must be held within the first six months of each fiscal year in order for the shareholders to review corporate management, approve financial statements from the prior fiscal year, if appropriate, and resolve upon the allocation of profits or losses from such fiscal year, as well as to approve, if appropriate, the consolidated financial statements, without prejudice to their power to debate and decide any other matter included in the agenda. Any General Shareholders’ Meeting not provided for in the preceding paragraph shall be deemed an extraordinary General Shareholders’ Meeting and may be called: (i) when the Board of Directors deems it advisable in the best interest of the Bank, and (ii) when so requested by shareholders holding at least 5% of the share capital of the Bank. If the ordinary General Shareholders’ Meeting is not called within the statutory time period, it may be called, at the request of the shareholders and upon notice thereof being given to the directors, by a judge of the place where the registered office is located, who shall also designate the person who is to preside over such Meeting. Notice of all types of Meetings shall be given by means of a public announcement in the Official Bulletin of the Commercial Registry and in one of the local newspapers having the largest circulation in the province where the registered office of the Bank is located, at least one month prior to the date set for the Meeting. As provided in the Rules and Regulations for the General Shareholders’ Meeting, the text of all resolutions proposed by the Board of Directors with respect to the agenda items shall be available on the Bank’s website (www.santander.com) beginning on the date of the publication of the call to the General Shareholders’ Meeting, unless the proposals are not required to be made available to the shareholders since the date of the call to meeting and the Board of Directors deems that there are justified grounds for not doing so. In addition, beginning on
Chapter 21 – Page 13 the date of the announcement of the call to meeting, such information as is deemed appropriate to facilitate the attendance of the shareholders at the General Shareholders’ Meeting and their participation therein shall also be contained in the Bank’s website, including: (i) a form of attendance card and, if appropriate, of all other documents that must be used to grant proxies; (ii) information on where the Meeting will be held; (iii) description of the mechanisms for granting proxies and distance voting; and (iv) information, if appropriate, on systems that facilitate listening in on the Meeting (e.g., means for simultaneous interpretation). The most recent ordinary General Shareholders’ Meeting of the Bank took place on June 21, 2008, and the most recent extraordinary General Shareholders’ Meeting was held on September 22, 2008. As of the date of this document, no General Shareholders’ Meeting has been called that is yet to be held. Shareholders who, pursuant to the provisions of Law and the Bylaws, hold any number of shares registered in their name in the corresponding book-entry registries at least five days prior to the day on which the General Shareholders’ Meeting is to be held and are current on the payment of capital calls, are entitled to attend. Article 27 of the Bylaws provides that all shareholders having the right to attend the meeting may be represented at a general shareholders’ meeting by giving their proxy to another person, even if such person is not a shareholder, and that the proxy shall be granted in writing or by electronic means. The Meeting held on June 18, 2005 marked the first time that the shareholders of the Bank had the possibility of attending from a distance and of exercising their rights by means of data transmission. At such Meeting, the shareholders voted separately on the proposals for ratification of Directors appointed by co-option to fill vacancies and the proposals for re-election of Directors. Moreover, beginning on the date of publication of the call to such Meeting, the professional profiles of the candidates nominated for appointment were disseminated through the Group’s website. At the Meetings held on June 17, 2006, June 23, 2007 and June 21, 2008, the shareholders voted separately on the appointment, ratification and re-election of the candidates for a Director position as well as on the proposed amendments of the Bylaws and of the Rules and Regulations for the Meeting. Finally, at the Meeting held on June 17, 2006 and at the Meetings held thereafter, the shareholders also had the possibility of attending from a distance and of exercising their rights by means of data transmission (the Internet). This measure adds to other measures implemented at previous Meetings in order to permit prior proxy-granting and voting by the aforementioned means of data transmission, all as a part of an ongoing effort aimed at facilitating and promoting the informed participation of the shareholders in the Meeting. In order to attend a General Shareholders’ Meeting, the corresponding name- bearing attendance card must be used. Pursuant to Spanish law, the General Shareholders’ Meeting shall be validly established on first call when the shareholders present in person or by proxy hold at least 25% of the issued capital carrying voting rights. On second call, the Meeting may be validly established regardless of the capital in attendance. Notwithstanding the foregoing, the attendance of shareholders present in person or by proxy that hold at least 50% of the issued capital carrying voting rights shall be
Chapter 21 – Page 14 required on first call for the shareholders to validly adopt resolutions on the following matters at an ordinary or extraordinary general shareholders’ meeting: i) the issuance of debentures; ii) a capital increase or reduction; iii) the transformation, merger or split-off of BANCO SANTANDER, S.A.; iv) any other amendment of its Bylaws; and v) the dissolution of BANCO SANTANDER, S.A. On second call, it shall be sufficient for 25% of the above-mentioned capital to be in attendance. However, when shareholders representing less than 50% of the issued capital carrying voting rights are in attendance, the resolutions mentioned under items (i) through (v) above may be validly adopted only with the favorable vote of two-thirds of the capital present or represented at the Meeting. Each Bank share gives its holder one vote. The holders of any number of shares who are current on the payment of capital calls may attend the General Shareholders’ Meeting. Notwithstanding the foregoing, if a shareholder has not paid the capital calls within the deadline set by the Bylaws or decided by the Board of Directors of the Bank, such shareholder may not exercise the right to vote. In addition, the amount of such shareholder’s shares shall be deducted from the share capital for the purposes of calculating the quorum. Non-voting shares shall have this right in the instances contemplated in the Business Corporations Law. In general, the resolutions adopted at a General Shareholders’ Meeting bind all of the shareholders (including those absent and dissenting). However, in the instances provided by Spanish law, shareholders that have voted against certain resolutions or have not attended the Meeting are entitled to have their shares acquired by the Bank at prices determined in accordance with pre-established formulas. The Bank shares held by the Bank, as well as those held by its subsidiaries, shall be included in the capital for the purposes of calculating the amounts required for the establishment of the Meeting and for the adoption of resolutions thereat, but the political rights attaching to such shares shall not be exercised by the Bank or its subsidiaries, as the case may be. Resolutions at a General Shareholders’ Meeting shall be adopted by a majority of the votes present or validly represented at the Meeting. 21.2.6 Description of bylaw provisions regarding control of the Bank The Bylaws do not contain any provisions the effect of which is to delay, defer or prevent a change of control of the issuer. 21.2.7 Description of bylaw provisions regarding the ownership threshold Without prejudice to the disclosure and reporting requirements established by Royal Decree 1362/2007, of October 19, on the disclosure of significant interests in listed companies, neither the Bylaws nor the Rules and Regulations for the Meeting of BANCO SANTANDER, S.A. contain any provisions governing the ownership threshold above which shareholders’ equity interests must be disclosed.
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21.2.8 Requirements established for changes in capital There are no bylaw provisions establishing more stringent requirements than those prescribed by law for the purposes of changes in the Bank’s share capital.
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CHAPTER 22
22 SIGNIFICANT CONTRACTS 22.1 Summary of each significant contract, other than contracts made in the ordinary course of business, to which the issuer or any member of the group is a party, entered into in the two years immediately prior to publication of the registration document In the two years immediately prior to the date of this Registration Document, the Bank has not entered into any contracts other than those made in the ordinary course of business, that are significant to the Group as a whole, except as mentioned in Chapter 5.2.1. under ABN AMRO HOLDING N.V. (“ABN AMRO”) and in Chapter 5.2.2. under ACQUISITION OF 75.65% OF SOVEREIGN BANCORP. Moreover, the acquisition of Alliance & Leicester was carried out by means of a scheme of arrangement. For additional information, see RECOMMENDED ACQUISITION OF ALLIANCE & LEICESTER in Chapter 5.2.2. 22.2 Summary of any other contract (other than a contract made in the ordinary course of business) entered into by any member of the group that includes a clause whereunder any member of the group has an obligation or right that is relevant for the group through the date of the registration document. There are no such contracts as of the date of this Registration Document.
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. CHAPTER 23
23. THIRD-PARTY INFORMATION, EXPERTS’ STATEMENTS AND STATEMENTS OF INTEREST 23.1. DATA RELATING TO THE INDEPENDENT EXPERT’S REPORT. This Chapter is not applicable.
23.2 THIRD-PARTY INFORMATION. Not applicable.
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CHAPTER 24
24. DOCUMENTS SUBMITTED The Bylaws of Banco Santander, S.A. are available to the public and may be examined during the effective period of the Registration Document at the registered office of the Bank, in the city of Santander, Paseo de Pereda, numbers 9 through 12, on the Group’s website (www.santander.com) and at the National Securities Market Commission. The notarial instrument of incorporation of the Bank may be examined at the Commercial Registry of Cantabria. The Bank’s individual and consolidated annual financial statements and management reports for fiscal years 2005, 2006 and 2007, as well as the audit reports for such years may be viewed on the Group’s website (www.santander.com) during the effective period of the Registration Document and have been deposited with the National Securities Market Commission.
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CHAPTER 25
SHAREHOLDING INFORMATION Below is a list, at June 30, 2008, of the most significant affiliated, jointly-controlled and listed entities in which the Group owns an interest of more than 3%, with their corporate name, registered office, business, percentage interest (direct and indirect) and principal balance sheet indicators (data as of December 31, 2007). Affiliated entities are those entities over which the Bank is in a position to exercise significant influence but not control or joint control (generally, an interest in excess of 20%) and which are valued by the equity method. Jointly-controlled entities are entities that are jointly controlled by two or more unrelated entities or that operate or hold assets such that any strategic financial or operational decision that affects them requires the unanimous consent of all participants. They are consolidated on a proportional basis.
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Listed companies in which the Group holds an interest of more than 3%(b), affiliates of Grupo Santander and jointly-controlled entities.
% Ownership by Millions of uros Bank Capital Registered % of Voting Net Company Direct Indirect Line of Business Assets and Office Rights (a) Results Reserves
Accordfin España, E.F.C., S.A. Spain 0.00% 49.00% 49.00% FINANCE 437 21 5 Affirmative Insurance Holdings Inc. (b) United States 0.00% 5.61% - INSURANCE 613 141 7 Alcaidesa Inmobiliaria, S.A. Spain 0.00% 44.60% 44.60% REAL ESTATE 106 68 -1 Allfunds Bank, S.A. Spain 0.00% 50.00% 50.00% BANKING 134 55 23 Americredit Corp. (consolidado) United States 0.00% 4.38% 4.38% FINANCE 12,099 1,165 245 Attijari International Bank Société Anonymé Morocco 50.00% 0.00% 50.00% BANKING 315 4 1 Attijariwafa Bank Société Anonyme (consolidado) (b) Morocco 0.00% 14.55% 14.55% BANKING 14,818 1,112 188 Autopistas del Sol, S.A. (b) Argentina 0.00% 14.17% 14.17% ROAD CONCESSON 325 77 -9 Banco Internacional da Guiné-Bissau, S.A. (d) Guinea Bissau 0.00% 48.86% 49.00% BANKING 12 -30 -1 Bolsas y Mercados Españoles, Sociedad Holding de Spain 1.22% 6.69% 8.07% FINANCIAL SERVICES 5,176 378 201 Mercados y Sistemas Financieros, S.A. (consolidated) Companhia Energética de São Paulo Brazil 0.00% 7.42% 7.57% ENERGY 7,567 3,908 69 Compañía Concesionaria del Túnel de Soller, S.A. Spain 0.00% 29.17% 32.70% CONSTRUCTION 67 17 1 Compañía Española de Petróleos, S.A. (consolidated) Spain 28.71% 2.93% 31.64% OIL REFINING 9,441 4,517 765 Compañía Española de Seguros de Crédito a la Spain 13.95% 6.41% 21.08% CREDIT INSURANCE 999 165 15 Exportación, S.A., Compañía de Seguros y Reaseguros Consorcio Credicard, C.A. Venezuela 0.00% 32.80% 33.33% CARDS 84 11 10 Ensafeca Holding Empresarial, S.L. Spain 0.00% 31.82% 31.82% SECURITIES INVESTMENT 24 23 1 France Telecom España, S.A. Spain 0.00% 5.01% 5.01% TELECOMUNICACIONES 9,231 4,510 -1,586 Friedrichstrasse, S.L. Spain 0.00% 45.00% 45.00% REAL ESTATE 44 44 0 Grupo Ferrovial, S.A. (consolidado) Spain 2.36% 0.71% 3.15% CONSTRUCTION 51,587 6,010 838 Grupo Financiero Galicia, S.A. (consolidated) Argentina 0.00% 6.67% 3.50% BANKING 4,890 345 10 Hispasat, S.A. (consolidado) Spain 0.00% 5.61% 17.64% TELECOMUNICACIONES 622 242 36 Imperial Holding S.C.A. Luxembourg 0.00% 36.67% 36.67% SECURITIES INVESTMENT 184 38 0 Kepler Weber S.A. (b) Brazil 0.00% 5.57% 5.68% STORAGE SYSTEMS 122 70 -4 Konecta Bto, S.L. Spain 0.00% 44.25% 44.25% TELECOMMUNICATIONS 20 19 1 Norchem Participações e Consultoria S.A. Brazil 0.00% 49.04% 50.00% SECURITIES COMPANY 23 16 3 Petroquímica União, S.A. (consolidated) Brazil 0.00% 9.89% 10.08% CHEMICALS 879 271 66 Prodesur Mediterráneo, S.L. Spain 0.00% 44.60% 50.00% REAL ESTATE 78 22 -2 Proinsur Mediterráneo, S.L. Spain 0.00% 44.60% 50.00% REAL ESTATE 82 28 -1 Real Estate Investment Society España, S.A. Spain 31.80% 0.00% 31.80% REAL ESTATE 100 100 0 Servicio Pan Americano de Protección, S.A. de C.V. Mexico 0.00% 15.78% 21.05% SECURITY 145 84 -5 Shinsei Bank, Ltd. (consolidado) (e) Japan 0.00% 4.23% 4.23% BANKING 69,882 5,488 364 Sovereign Bancorp, Inc. (consolidado) (b) United States 24.43% 0.00% 24.43% BANKING 57,568 5,666 -917 Teka Industrial, S.A. (consolidado) Spain 0.00% 10.00% 10.00% HOUSEHOLD APPLIANCES 839 256 57 Transolver Finance EFC, S.A. Spain 0.00% 50.00% 50.00% LEASING 224 29 1 Unión de Créditos Inmobiliarios, S.A., EFC Spain 0.00% 50.00% 50.00% MORTGAGE LOANS 3,020 161 48 (a) Pursuant to Section 3 of Royal Decree 1815/1991, of December 20, approving the regulations for the preparation of annual financial statements, in order to determine voting rights, the voting rights relating to subsidiaries or to other parties acting in their own name but on behalf of Group companies were added to the voting rights directly held by the controlling company. Accordingly, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies. (b) Information at December 31, 2007, last approved financial statements. (b) Excluding the Group companies listed in Exhibit I. (d) Information at April 30, 2002, last approved financial statements. (e) Asset information at March 31, 2008, date of close of fiscal year for this entity. This annex contains the same information as the equivalent in the annual financial statements of the Bank and of the Group, for the fiscal period ended December 31, 2007, including the percentage ownership interests, except that: 1. Companies included are those acquired during the first half of fiscal year 2008, with information on share capital, reserves and net results at December 31, 2007, as well as those incorporated during the same period. 2. Those entities that have been removed due to sale, liquidation, dissolution, etc. during the first half of fiscal year 2008 have been removed.
3. Corporate names that have changed during the first half of fiscal year 2008 have been modified; in this case, for greater clarity, the former name has been indicated for each of them.
4. Notes (b) y (e) are changed for those appearing hereby.
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In Madrid, on October 29, 2008 BANCO SANTANDER, S.A. By:
______Ignacio Benjumea Cabeza de Vaca