Cubierta falsa ingles 11/5/05 16:09 Página 2 Annual Report 2004 Cubierta falsa ingles 11/5/05 16:09 Página 3 “The“The year year 2004 2004 was wasan excellent an excellent one one for Grupofor Grupo Santander. Santander. All business All business areas areas performedperformed well welland, and, from from a strategic a strategic standpoint,standpoint, we successfully we successfully acquired acquired Abbey,Abbey, the UK’s the UK’s sixth sixth largest largest bank, bank, makingmaking Santander Santander one oneof the of world’sthe world’s 10 largest10 largest banks banks by market by market capitalisation”.capitalisation”. “Furthermore,“Furthermore, few fewbanks banks in the in worldthe world havehave Santander’s Santander’s level level of geographic of geographic diversity.diversity. We have We have 63 million 63 million customers customers in thein mostthe most dynamic dynamic and andattractive attractive countriescountries in Europe in Europe and andLatin Latin America, America, areasareas that thatconstitute constitute a potential a potential market market of 800of 800million million people”. people”. Emilio EmilioBotín Botín ChairmanChairman Cubierta falsa ingles 11/5/05 16:09 Página 4 Annual Report 2004 Key Group figures Balance Sheet and Income Statement Excluding Abbey Millon euros 2004 2004 2003 Var. (%) 2002 Total managed funds 715,392.5 504,704.8 460,693.5 9.55* 417,546.0 Net loans 335,207.7 198,510.7 172,504.0 15.08* 162,973.0 Total customer funds 538,041.7 365,604.5 323,900.8 12.88* 304,893.0 Net operating income 6,545.2 5,720.7 14.41 5,565.8 Net attributable income (cash-basis**) 3,600.7 3,133.3 14.92 2,902.9 Net attributable income 3,135.6 2,610.8 20.10 2,247.2 Ratios Excluding Abbey % 2004 2004 2003 2002 Efficiency*** 47.44 49.34 52.28 ROA 1.02 0.95 0.81 ROE 15.98 14.48 12.42 ROE (cash-basis**) 18.35 17.37 16.04 BIS ratio 13.01 12.43 12.64 Non-performing loans (NPLs) 1.05 1.27 1.55 1.89 NPL coverage 184.61 207.96 165.19 139.94 The share and capitalisation 2004 2003 Var. (%) 2002 Number of shares (million) 6,254 4,768 31.16 4,768 Share price (euros) 9.13 9.39 (2.77) 6.54 Market capitalisation (million euros) 57,101.7 44,775.3 27.53 31,185.4 Net attributable income per share (cash-basis**) (euros) 0.7243 0.6571 10.22 0.6139 Net attributable income per share (euros) 0.6307 0.5475 15.19 0.4753 Dividend per share (euros) 0.3332 0.3029 10.00 0.2885 PER (share price/net attributable income) 14.48 17.15 13.76 Other figures 2004 2003 2002 Number of shareholders 2,685,317 1,075,733 1,092,193 Number of employees 126,488 103,038 104,178 Spain 33,353 34,968 35,887 Other countries 93,135 68,070 68,291 Number of branches 9,973 9,199 9,281 Spain 4,384 4,369 4,314 Other countries 5,589 4,830 4,967 (*) Change over 2004 excluding Abbey. (**) Before amortisation of ordinary goodwill. (***) Personnel and general expenses/Net operating revenue. Cubierta falsa ingles 11/5/05 16:09 Página 5 Annual Report 2004 Key Group figures Net attributable income Net attributable income per share (EPS) Million euros Euros 3,136 0.6307 2,611 2,486 0.5369 0.5447 0.5475 2,258 2,247 0.4753 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Efficiency ROE % % 17.6 56.1 16.0 54.0 52.3 14.5 49.3 13.9 12.4 47.4 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Total managed funds BIS ratio Billion euros 715 % 13.0 505 12.6 461 12.0 12.4 453 438 10.9 418 2000 2001 2002 2003 2004* 2004 2000 2001 2002 2003 2004 Non-performing loans (NPLs) NPL coverage % % 208 185 165 2.3 1.9 1.9 143 140 1.5 1.3 123 1.0 2000 2001 2002 2003 2004* 2004 2000 2001 2002 2003 2004* 2004 * Excluding Abbey 1 Index Letters 1-9.qxd 11/5/05 15:57 Página 1 Annual Report 2004 1 Contents Letter from the Chairman 3 Letter from the Chief Executive Officer 7 Grupo Santander in 2004 10 The Group's history and profile 10 The Santander model 13 Our businesses 18 The acquisition of Abbey 25 Corporate Governance 29 Corporate Social Responsibility 32 Risk Management 35 The Santander share 37 Santander Group City 41 Our customers and employees 43 Report on Corporate Governance 46 I. Corporate governance in Grupo Santander 47 II. Ownership structure 48 III. Administrative structure 51 IV. Related-party transactions, intra-group operations and conflicts of interest 64 V. Shareholders' Meeting 66 VI. Information and transparency, relations with the auditing firm, the website and other information 70 Financial Report 73 Consolidated Financial Report 74 Report by Business Areas 93 Financial Management 122 Risk Management 124 Organisation of the risk function 125 Analysis of the global risk profile 127 Credit risk 128 Market risk 144 Operational risk 154 Reputational risk 159 Auditor's Report and Annual Consolidated Accounts 161 Auditor's Report 162 Annual Accounts 164 Management Report 226 Balance Sheet and Income Statement 234 Appendices 240 Compliance 241 Prevention of Money-Laundering 241 Chronology 244 Milestones 1994 - 2004 246 Financial Statements of the Group's main entities 248 General Information 252 1 Index Letters 1-9.qxd 11/5/05 15:57 Página 2 Annual Report 2004 2 Mr. Luqman Arnold, CEO of Abbey, and Mr. Emilio Botín, Chairman of Grupo Santander London July 26, 2004 Presentation to analysts of the takeover bid for Abbey 1 Index Letters 1-9.qxd 11/5/05 15:57 Página 3 Annual Report 2004 3 Letter from the Chairman Grupo Santander's 2004 net attributable income was EUR 3,136 million, 20.1% higher than in 2003 The total dividend charged to the year's earnings, which the Board will propose to the Shareholders' Meeting, is EUR 0.3332 per share, 10% more than the previous year's. will receive the third and fourth In Portugal, Santander Totta is meeting dividends. This entails allocating close its profitability goals thanks to its to EUR 250 million more to dividends. business drive and effective control of The pay-out is 51.5%. costs. For the first time, Santander The year 2004 was an excellent one Totta was the second-ranked privately- for Grupo Santander. All business We operate in the most dynamic owned bank in terms of profits. areas performed well and, from a markets in Europe and Latin America, strategic standpoint, we successfully and in all of them we have great In the rest of Europe, we continued to acquired Abbey, the UK's sixth largest growth prospects. expand our consumer finance bank, which made Santander one of business, with acquisitions in Poland the world's 10 largest banks by A large European bank and Norway. We are the leading bank market capitalisation. in Continental Europe in this segment We are Europe's largest bank, with by profits, and the third largest in The Group generated net attributable 5,900 branches in 15 countries. In terms of assets. We have been income of EUR 3,136 million, 20.1% Spain, the Santander Central Hispano conducting consumer banking in more than in 2003, reflecting strong branch network is the leader, driven Europe for 15 years. We know the increases in business activity. Lending by its dynamism and innovation. market well and have developed a rose 18% and customer funds grew Banesto, which has an innovative, very profitable and efficient business 13%. Extraordinary income was solid and efficient banking model, is model. allocated to a fund for early retirements taking market share in lending, year and to amortisation of goodwill. after year, from commercial and We will continue to grow in Europe. savings banks. The Santander and We believe in an integrated, open and The total dividend charged to 2004 Banesto networks together have a competitive Europe, all of which is earnings, which the Board will market share, measured against all vital for the future development of propose to the Shareholders' Meeting, banks, of 17.7% in lending and our companies. One of the great amounts to EUR 0.3332 per share, banking system funds. In private challenges of the European Union is 10% more than in 2003. The holders banking, Banif strengthened its to establish a banking and financial of the new shares issued in November leadership with growth of 22% in its market that is a real single market, 2004 in exchange for Abbey's shares client base last year. without any barriers. 1 Index Letters 1-9.qxd 11/5/05 15:57 Página 4 Annual Report 2004 4 Letter from the Chairman The acquisition of Abbey The business drive in Brazil, Mexico creating value and the share rose 17.7% and Chile remained strong. Lending between its low in August and the end The acquisition of Abbey will grew by an average of 25% in these of the year. profoundly transform our Group's countries. There was also growth in profile. It puts us in one of the world's cards, foreign trade and mutual funds Many investors had to readjust their most profitable and attractive and insurance businesses, where we portfolios because of this operation, and markets, diversifies our risk and gives launched regional projects.