Company Quick10K Filing
Banco Santander
20-F 2020-12-31 Filed 2021-02-26
20-F 2019-12-31 Filed 2020-03-10
20-F 2019-12-31 Filed 2020-03-06
20-F 2019-12-31 Filed 2020-03-24
20-F 2018-12-31 Filed 2019-03-26
20-F 2017-12-31 Filed 2018-03-28
20-F 2016-12-31 Filed 2017-03-31
20-F 2015-12-31 Filed 2016-04-21
20-F 2014-12-31 Filed 2015-04-29
20-F 2013-12-31 Filed 2014-04-29
20-F 2012-12-31 Filed 2013-04-24
20-F 2011-12-31 Filed 2012-04-27
20-F 2010-12-31 Filed 2011-06-06
20-F 2009-12-31 Filed 2010-06-10

SAN 20F Annual Report

Part III Item 17. Financial Statements 326 Item 18. Financial Statements 326 Item 19. Exhibits 327
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Risk
Part 1. Corporate Principles of Risk Management, Control and Risk Appetite
Part 2. Corporate Governance of The Risk Function
Part 3. Integrated Risk Control and Internal Risk Validation
Part 4. Clusters of Risk
Part 5. Credit Risk
Part 6. Market Risk
Part 7. Liquidity and Funding Risk
Part 8. Operational Risk
Part 9. Compliance and Reputational Risk
Part 10. Capital
Item 12. Description of Securities Other Than Equity Securities.
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemption From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Changes in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 3 Provides Information on The Most Significant Acquisitions and Disposals in 2013, 2012 and 2011.
Note 51 Contains A Detail of The Residual Maturity Periods of Loans and Receivables and of The Related Average Interest Rates.
Note 29 Contains A Detail of The Valuation Adjustments Recognized in Equity on Available-For-Sale Financial Assets.
Note 29 Contains A Detail of The Valuation Adjustments Recognized in Equity on Available-For-Sale Financial Assets, and Also The Related Impairment Losses.
Note 51 Contains A Detail of The Residual Maturity Periods of Loans and Receivables and of The Related Average Interest Rates.
Note 54 Shows The Group's Total Exposure, By Origin of The Issuer.
Note 54 Contains Information Relating To The Restructured/Refinanced Loan Book.
Note 36 Contains A Description of The Group's Main Hedges.
Note 51 Contains A Detail of The Residual Maturity Periods of Financial Liabilities At Amortized Cost and of The Related Average Interest Rates.
Note 51 Contains A Detail of The Residual Maturity Periods of Subordinated Liabilities At Each Year-End and of The Related Average Interest Rates in Each Year.
Note 51 Contains A Detail of The Residual Maturity Periods of Other Financial Liabilities At Each Year-End.
EX-1.1 d712704dex11.htm
EX-1.2 d712704dex12.htm
EX-12.1 d712704dex121.htm
EX-12.2 d712704dex122.htm
EX-12.3 d712704dex123.htm
EX-13.1 d712704dex131.htm
EX-15.1 d712704dex151.htm

Banco Santander Earnings 2013-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d712704d20f.htm FORM 20-F FORM 20-F
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                      to                     

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number 001-12518

 

 

BANCO SANTANDER, S.A.

(Exact name of Registrant as specified in its charter)

 

 

Kingdom of Spain

(Jurisdiction of incorporation)

Ciudad Grupo Santander

28660 Boadilla del Monte (Madrid), Spain

(address of principal executive offices)

José Antonio Álvarez

Banco Santander, S.A.

Ciudad Grupo Santander

28660 Boadilla del Monte

Madrid, Spain

Tel: +34 91 289 32 80

Fax: +34 91 257 12 82

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered, pursuant to Section 12(b) of the Act

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing the right to receive one Share of Capital Stock of Banco Santander, S.A., par value euro 0.50 each   New York Stock Exchange
Shares of Capital Stock of Banco Santander, S.A., par value euro 0.50 each   New York Stock Exchange *
Guarantee of Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal, Series 1, 4, 5, 6, 10 and 11   New York Stock Exchange **

 

* Banco Santander Shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.
** The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal (a wholly owned subsidiary of Banco Santander, S.A.)

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None.

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act

None.

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP  ¨

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

   Other  ¨

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report. 11,561,067,147 shares

 

 

 


Table of Contents

BANCO SANTANDER, S.A.

 

 

TABLE OF CONTENTS

 

         Page  

Presentation of Financial and Other Information

     5   

Cautionary Statement Regarding Forward-Looking Statements

     6   
PART I     
ITEM 1.  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     8   
ITEM 2.  

OFFER STATISTICS AND EXPECTED TIMETABLE

     8   
ITEM 3.  

KEY INFORMATION

     8   
 

A. Selected financial data

     8   
 

B. Capitalization and indebtedness

     15   
 

C. Reasons for the offer and use of proceeds

     15   
 

D. Risk factors

     15   
ITEM 4.  

INFORMATION ON THE COMPANY

     34   
 

A. History and development of the company

     34   
 

B. Business overview

     49   
 

C. Organizational structure

     122   
 

D. Property, plant and equipment

     122   
ITEM 4A.  

UNRESOLVED STAFF COMMENTS

     122   
ITEM 5.  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     123   
 

A. Operating results

     132   
 

B. Liquidity and capital resources

     164   
 

C. Research and development, patents and licenses, etc.

     165   
 

D. Trend information

     165   
 

E. Off-balance sheet arrangements

     167   
 

F. Tabular disclosure of contractual obligations

     168   
 

G. Other disclosures

     169   
ITEM 6.  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     171   
 

A. Directors and senior management

     171   
 

B. Compensation

     179   
 

C. Board practices

     192   
 

D. Employees

     198   
 

E. Share ownership

     200   
ITEM 7.  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     201   
 

A. Major shareholders

     201   
 

B. Related party transactions

     202   
 

C. Interests of experts and counsel

     203   
ITEM 8.  

FINANCIAL INFORMATION

     203   
 

A. Consolidated statements and other financial information

     203   
 

B. Significant Changes

     212   


Table of Contents
ITEM 9.  

THE OFFER AND LISTING

     212   
 

A. Offer and listing details

     212   
 

B. Plan of distribution

     214   
 

C. Markets

     214   
 

D. Selling shareholders

     219   
 

E. Dilution

     219   
 

F. Expense of the issue

     219   
ITEM 10.  

ADDITIONAL INFORMATION

     219   
 

A. Share capital

     219   
 

B. Memorandum and articles of association

     219   
 

C. Material contracts

     229   
 

D. Exchange controls

     229   
 

E. Taxation

     229   
 

F. Dividends and paying agents

     234   
 

G. Statement by experts

     234   
 

H. Documents on display

     234   
 

I. Subsidiary information

     234   
ITEM 11.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK

     235   
 

Introduction

     235   
 

Part 1. Corporate principles of risk management, control and risk appetite

     235   
 

Part 2. Corporate governance of the risks function

     240   
 

Part 3. Integrated risk control and internal risk validation

     241   
 

Part 4. Cluster of risk

     242   
 

Part 5. Credit risk

     243   
 

Part 6. Market risk

     264   
 

Part 7. Liquidity and funding risk

     294   
 

Part 8. Operational risk

     300   
 

Part 9. Compliance and reputational risk

     305   
 

Part 10. Capital

     312   
ITEM 12.  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     317   
 

A. Debt Securities

     317   
 

B. Warrants and Rights

     317   
 

C. Other Securities

     317   
 

D. American Depositary Shares

     317   
PART II     
ITEM 13.  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     319   
ITEM 14.  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     319   
ITEM 15.  

CONTROLS AND PROCEDURES

     319   
ITEM 16  

[Reserved].

  
 

A. Audit committee financial expert

     322   
 

B. Code of Ethics

     322   
 

C. Principal Accountant Fees and Services

     323   
 

D. Exemptions from the Listing Standards for Audit Committees

     323   
 

E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     324   
 

F. Changes in Registrant’s Certifying Accountant

     324   
 

G. Corporate Governance

     324   
 

H. Mine Safety Disclosure

     326   


Table of Contents
PART III     
ITEM 17.  

FINANCIAL STATEMENTS

     326   
ITEM 18.  

FINANCIAL STATEMENTS

     326   
ITEM 19.  

EXHIBITS

     327   


Table of Contents

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Accounting Principles

Under Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). The Bank of Spain Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) requires Spanish credit institutions to adapt their accounting systems to the principles derived from the adoption by the European Union of International Financial Reporting Standards. Therefore, Grupo Santander (“the Group” or “Santander”) is required to prepare its consolidated financial statements for the year ended December 31, 2013 in conformity with the EU-IFRS and Bank of Spain’s Circular 4/2004. Differences between EU-IFRS, Bank of Spain’s Circular 4/2004 and International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS-IASB) are not material. Therefore, we assert that the financial information contained in this annual report on Form 20-F complies with IFRS-IASB.

We have formatted our financial information according to the classification format for banks used in Spain. We have not reclassified the line items to comply with Article 9 of Regulation S-X (see Note 55 of our consolidated financial statements). Article 9 is a regulation of the US Securities and Exchange Commission that contains formatting requirements for bank holding company financial statements.

Our auditors, Deloitte, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the three years ended December 31, 2013, 2012 and 2011 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2013, 2012 and 2011 report prepared by Deloitte, S.L.

General Information

Our consolidated financial statements are in Euros, which are denoted “euro”, “euros”, “EUR” or “€” throughout this annual report. Also, throughout this annual report, when we refer to:

 

  “dollars”, “US$” or “$”, we mean United States dollars;

 

  “pounds” or “£”, we mean United Kingdom pounds; and

 

  “one billion”, we mean 1 billion.

When we refer to “average balances” for a particular period, we mean the average of the month-end balances for that period, unless otherwise noted. We do not believe that monthly averages present trends that are materially different from trends that daily averages would show. In calculating our interest income, we include any interest payments we received on non-accruing loans if they were received in the period when due. We have not reflected consolidation adjustments in any financial information about our subsidiaries or other business units.

When we refer to “loans”, we mean loans, leases, discounted bills and accounts receivable, unless otherwise noted. The loan to value “LTV” ratios disclosed in this report refer to LTV ratios upon origination unless otherwise noted. Additionally, if a loan is approaching a doubtful status, we update the appraisals which are then used to estimate allowances for loan losses.

When we refer to “impaired balances” or “non-performing balances”, we mean impaired or non-performing loans and contingent liabilities (“NPL”), securities and other assets to collect.

When we refer to “allowances for credit losses”, we mean the specific allowances for credit losses, and unless otherwise noted, the collectively assessed allowance for credit losses and any allowances for country-risk. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Allowances for Credit Losses and Country-Risk Requirements”.

Where a translation of foreign exchange is given for any financial data, we use the exchange rates of the relevant period (as of the end of such period for balance sheet data and the average exchange rate of such period for income statement data) as published by the European Central Bank, unless otherwise noted.

 

5


Table of Contents

Management makes use of certain financial measures in local currency to help in the assessment of on-going operating performance. These non-GAAP financial measures include the results of operations of our subsidiary banks located outside the eurozone, excluding the impact of foreign exchange. We analyze these banks’ performance on a local currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on the results of operations, we believe that evaluating their performance on a local currency basis provides an additional and meaningful assessment of performance to both management and the company’s investors. For a discussion of the accounting principles used in translation of foreign currency-denominated assets and liabilities to euros, see Note 2(a) of our consolidated financial statements.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains statements that constitute “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, information regarding:

 

    exposure to various types of market risks;

 

    management strategy;

 

    capital expenditures;

 

    earnings and other targets; and

 

    asset portfolios.

Forward-looking statements may be identified by words such as “expect,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “VaR,” “RORAC,” “target,” “goal,” “objective,” “estimate,” “future” and similar expressions. We include forward-looking statements in the “Operating and Financial Review and Prospects,” “Information on the Company,” and “Quantitative and Qualitative Disclosures About Risks” sections. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements.

 

6


Table of Contents

You should understand that the following important factors, in addition to those discussed in “Key Information—Risk Factors”, “Operating and Financial Review and Prospects,” “Information on the Company” and elsewhere in this annual report, could affect our future results and could cause those results or other outcomes to differ materially from those anticipated in any forward-looking statement:

 

Economic and Industry Conditions

 

  exposure to various types of market risks, principally including interest rate risk, foreign exchange rate risk and equity price risk;

 

  general economic or industry conditions in Spain, the U.K., the U.S., other European countries, Brazil, other Latin American countries and the other areas in which we have significant business activities or investments;

 

  a default on, or a ratings downgrade of, the sovereign debt of Spain, and the other countries where we operate;

 

  a worsening of the economic environment in the U.K., other European countries, Brazil, other Latin American countries, and the U.S., and an increase of the volatility in the capital markets;

 

  a further deterioration of the Spanish economy;

 

  a widening of Spain’s “risk premium”, or the spread between the yields on Spanish government securities and comparable German government securities;

 

  the effects of a continued decline in real estate prices, particularly in Spain, the U.K. and the U.S.;

 

  monetary and interest rate policies of the European Central Bank and various central banks;

 

  inflation or deflation;

 

  the effects of non-linear market behavior that cannot be captured by linear statistical models, such as the VaR model we use;

 

  changes in competition and pricing environments;

 

  the inability to hedge some risks economically;

 

  the adequacy of loss reserves;

 

  acquisitions or restructurings of businesses that may not perform in accordance with our expectations;

 

  changes in demographics, consumer spending, investment or saving habits; and

 

  changes in competition and pricing environments as a result of the progressive adoption of the internet for conducting financial services and/or other factors.

Political and Governmental Factors

 

  political stability in Spain, the United Kingdom, other European countries, Latin America and the U.S.;

 

  changes in Spanish, U.K., E.U., Latin American, U.S. or other jurisdictions’ laws, regulations or taxes, including changes in regulatory capital and liquidity requirements; and

 

  increased regulation in light of the global financial crisis.

Transaction and Commercial Factors

 

  damage to our reputation;

 

  our ability to integrate successfully our acquisitions and the challenges inherent in diverting management’s focus and resources from other strategic opportunities and from operational matters while we integrate these acquisitions; and

 

  the outcome of our negotiations with business partners and governments.

Operating Factors

 

  potential losses associated with an increase in the level of substandard loans or non-performance by counterparties to other types of financial instruments;

 

  technical difficulties and the development and use of new technologies by us and our competitors;

 

  changes in the Group’s ability to access liquidity and funding on acceptable terms, including as a result of changes in our credit spreads or a downgrade in our credit ratings or those of our more significant subsidiaries;

 

  the Group’s exposure to operational losses (e.g., failed internal or external processes, people and systems);

 

  the occurrence of force majeure, such as natural disasters, that impact our operations or impair the asset quality of our loan portfolio; and

 

  the impact of changes in the composition of our balance sheet on future net interest income.
 

 

The forward-looking statements contained in this report speak only as of the date of this report. We do not undertake to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.

 

7


Table of Contents

PART I

Item 1. Identity of Directors, Senior Management and Advisers

A. Directors and Senior Management

Not applicable.

B. Advisers

Not applicable.

C. Auditors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

A. Offer Statistics

Not applicable.

B. Method and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected financial data

Selected Consolidated Financial Information

We have selected the following financial information from our consolidated financial statements. You should read this information in connection with, and it is qualified in its entirety by reference to, our consolidated financial statements.

In the F-pages of this annual report on Form 20-F, the audited financial statements for the years 2013, 2012 and 2011 are presented. The audited financial statements for 2010 and 2009 are not included in this document, but they can be found in our previous annual reports on Form 20-F.

In August 2013, we filed with the SEC a Form 6-K in which we recasted our audited financial statements included in our annual report on Form 20-F for the fiscal year ended December 31, 2012, as filed with the SEC on April 24, 2013 (the “2012 Form 20-F”) to reflect the change in International Accounting Standard 19 (“IAS 19”). IAS 19 requires that for periods beginning on or after January 1, 2013 actuarial gains and losses be immediately recognized against shareholders’ equity, without the possibility for deferred recognition through the income statement, as it was done in 2012 and prior periods. In addition, that 6-K recasted disclosures in the 2012 Form 20-F to give retroactive effect to the application of IAS 19 and to certain changes to our reporting methods in 2013, including the following:

 

    As a result of the envisaged disposal of the Santander UK card business that was formerly owned by General Electric (“GE”), its results have been eliminated from the various lines of the income statement and recorded, net, in profit from discontinued operations.

 

8


Table of Contents
    As a result of business restructuring and other adjustments, segment information has been modified as follows (see Note 52 to our consolidated financial statements):

 

    Spain was incorporated as a unit under the Continental Europe segment, including the branch networks of Santander, Banesto and Banif (merged in 2013), Global Wholesale Banking, Asset Management and Insurance and the Spain ALCO portfolio.

 

    Spain’s run-off real estate became a unit within Continental Europe. This unit includes:

 

    loans from customers whose activity is mainly real estate development, which have a specially allocated management department in the Group;

 

    equity stakes in real estate companies; and

 

    foreclosed assets.

 

    Liquidity cost changed from applying rates to loans and deposits operations to applying the cost of Banco Santander senior debt to the difference between loans and deposits.

The impact of the change in IAS 19 as of December 31, 2012, 2011 and 2010 is as follows:

 

     Millions of euros  
     2012     2011     2010  

Deferred tax assets

     1,185        694        378   

Other assets

     (1,213     (1,211     (922
  

 

 

   

 

 

   

 

 

 

Assets

     (28     (517     (544
  

 

 

   

 

 

   

 

 

 

Deferred tax liabilities

     254        208        199   

Provisions for pensions and similar obligations

     (3,276     (1,737     (1,072
  

 

 

   

 

 

   

 

 

 

Liabilities

     (3,022     (1,529     (873
  

 

 

   

 

 

   

 

 

 

Valuation adjustment

     2,884        1,933        1,412   

Non-controlling interests

     262        91        39   
  

 

 

   

 

 

   

 

 

 

Equity

     3,146        2,024        1,451   
  

 

 

   

 

 

   

 

 

 

Provisions (net)

     (138     26        (49

Income tax

     43        (5     16   
  

 

 

   

 

 

   

 

 

 

Consolidated profit for the year

     (95     21        (33
  

 

 

   

 

 

   

 

 

 

Of which:

      

Profit attributable to the Parent

     (90     21        (31
  

 

 

   

 

 

   

 

 

 

Profit attributable to non-controlling interest

     (5     —          (2
  

 

 

   

 

 

   

 

 

 

The other adjustments described above did not have a material impact on our financial statements.

 

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Table of Contents

The following selected financial information includes the IAS 19 adjustments for 2012, 2011, 2010 and 2009 while the impacts of the envisaged disposal of the Santander UK card business is only included in the 2012, 2011 and 2010 data.

Under IFRS-IASB, revenues and expenses of discontinued businesses (mainly, Santander UK card business that was formerly owned by GE) must be reclassified from each income statement line item to “Profit from discontinued operations”. Revenues and expenses from prior years are also required to be reclassified for comparison purposes to present the same businesses as discontinued operations. This change in presentation does not affect “Consolidated profit for the year” (see Note 37 to our consolidated financial statements). The impact of Santander UK card business reclassification in the balance sheets as of December 31, 2012, 2011 and 2010 is as follows:

 

     Millions of euros  
     2012     2011     2010  

Loans and receivables - Loans and advances to customers

     (1,370     (1,559     (1,649

Non-current assets held for sale

     1,370        1,559        1,649   
  

 

 

   

 

 

   

 

 

 

Assets

     —          —          —     
  

 

 

   

 

 

   

 

 

 

The income statement for the year ended December 31, 2013 includes the results from Kredyt Bank S.A. after the merger in early 2013 of the subsidiaries in Poland of Banco Santander, S.A. and KBC Bank NV (BZ WBK S.A. and Kredyt Bank S.A.). In addition, the income statement for the year ended December, 31, 2011 reflects the impact of the consolidation of Bank Zachodni WBK, S.A. and the income statement for the year ended December, 31, 2009 reflects the impact of the consolidation of Banco Real, Alliance & Leicester, Bradford & Bingley’s branch network and retail deposits, Sovereign (Santander Bank) and other consumer businesses.

 

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     Year ended December 31,  
     2013     2012     2011     2010     2009  
     (in millions of euros, except percentages and per share data)  

Interest and similar income

     51,447        58,791        60,618        52,637        53,173   

Interest expense and similar charges

     (25,512     (28,868     (30,024     (23,672     (26,874

Interest income / (charges)

     25,935        29,923        30,594        28,965        26,299   

Income from equity instruments

     378        423        394        362        436   

Income from companies accounted for using the equity method

     500        427        57        17        (1

Fee and commission income

     12,473        12,732        12,640        11,559        10,726   

Fee and commission expense

     (2,712     (2,471     (2,232     (1,899     (1,646

Gains/losses on financial assets and liabilities (net)

     3,234        3,329        2,838        2,166        3,802   

Exchange differences (net)

     160        (189     (522     441        444   

Other operating income

     5,903        6,693        8,050        8,190        7,929   

Other operating expenses

     (6,194     (6,583     (8,029     (8,089     (7,785

Total income

     39,677        44,284        43,790        41,712        40,204   

Administrative expenses

     (17,452     (17,801     (17,644     (16,073     (14,825

Personnel expenses

     (10,069     (10,306     (10,305     (9,296     (8,451

Other general administrative expenses

     (7,383     (7,495     (7,339     (6,777     (6,374

Depreciation and amortization

     (2,391     (2,183     (2,098     (1,937     (1,596

Provisions (net)

     (2,182     (1,478     (2,616     (1,067     (1,747

Impairment losses on financial assets (net)

     (11,227     (18,880     (11,794     (10,400     (11,578

Impairment losses on other assets (net)

     (503     (508     (1,517     (286     (165

Gains/(losses) on disposal of assets not classified as non-current assets held for sale

     2,152        906        1,846        351        1,565   

Gains/(losses) on non-current assets held for sale not classified as discontinued operations

     (422     (757     (2,109     (290     (1,225

Operating profit/(loss) before tax

     7,652        3,583        7,858        12,010        10,633   

Income tax

     (2,113     (590     (1,755     (2,910     (1,222

Profit from continuing operations

     5,539        2,993        6,103        9,100        9,411   

Profit/(loss) from discontinued operations (net)

     (15     70        15        35        31   

Consolidated profit for the year

     5,524        3,063        6,118        9,135        9,442   

Profit attributable to the Parent

     4,370        2,295        5,330        8,212        8,970   

Profit attributable to non-controlling interest

     1,154        768        788        923        472   

Per share information:

          

Average number of shares (thousands) (1)

     10,836,111        9,766,689        8,892,033        8,686,522        8,554,224   

Basic earnings per share (euros)

     0.40        0.23        0.60        0.94        1.05   

Basic earnings per share continuing operation (euros)

     0.40        0.22        0.60        0.94        1.04   

Diluted earnings per share (euros)

     0.40        0.23        0.60        0.94        1.04   

Diluted earnings per share continuing operation (euros)

     0.40        0.22        0.60        0.94        1.04   

Remuneration paid (euros) (2)

     0.60        0.60        0.60        0.60        0.60   

Remuneration paid (US$) (2)

     0.83        0.79        0.78        0.80        0.86   

 

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     Year ended December 31,  
     2013     2012     2011     2010     2009  
     (in millions of euros, except percentages and per share data)  

Total assets

     1,115,638        1,269,600        1,251,009        1,216,956        1,110,399   

Loans and advances to credit institutions (net) (3)

     74,964        73,900        51,726        79,855        79,837   

Loans and advances to customers (net) (3)

     668,856        719,112        748,541        722,504        682,551   

Investment securities (net) (4)

     142,234        152,066        154,015        174,258        173,990   

Investments: Associates and joint venture

     5,536        4,454        4,155        273        164   

Contingent liabilities

     41,049        45,033        48,042        59,795        59,256   

Liabilities

          

Deposits from central banks and credit institutions (5)

     109,397        152,966        143,138        140,112        142,091   

Customer deposits (5)

     607,837        626,639        632,533        616,376        506,975   

Debt securities (5)

     175,477        205,969        197,372        192,873        211,963   

Capitalization

          

Guaranteed subordinated debt excluding preferred securities and preferred shares (6)

     4,603        5,207        6,619        10,934        13,867   

Other subordinated debt

     7,483        8,291        10,477        12,189        15,193   

Preferred securities (6)

     3,652        4,319        5,447        6,917        7,315   

Preferred shares (6)

     401        421        449        435        430   

Non-controlling interest (including net income of the period)

     9,314        9,415        6,354        5,860        5,165   

Stockholders’ equity (7)

     70,588        71,860        74,460        73,637        67,276   

Total capitalization

     96,041        99,514        103,806        109,971        109,245   

Stockholders’ equity per average share (7)

     6.51        7.36        8.37        8.48        7.86   

Stockholders’ equity per share at the year-end (7)

     6.23        6.96        8.36        8.84        8.18   

Other managed funds

          

Mutual funds

     93,304        89,176        102,611        113,510        105,216   

Pension funds

     10,879        10,076        9,645        10,965        11,310   

Managed portfolio

     20,987        18,889        19,200        20,314        18,364   

Total other managed funds (8)

     125,170        118,141        131,456        144,789        134,890   

Consolidated ratios

          

Profitability ratios:

          

Net yield (9)

     2.31     2.51     2.72     2.66     2.62

Return on average total assets (ROA)

     0.45     0.24     0.50     0.77     0.86

Return on average stockholders’ equity (ROE)

     6.10     2.91     7.12     11.75     14.37

Capital ratio:

          

Average stockholders’ equity to average total assets

     5.90     5.65     5.88     5.87     5.68

Ratio of earnings to fixed charges (10)

          

Excluding interest on deposits

     1.72     1.27     1.62     2.27     2.02

Including interest on deposits

     1.30     1.11     1.26     1.52     1.41

Credit quality data

          

Loans and advances to customers

          

Allowances for impaired balances including country risk and excluding contingent liabilities as a percentage of total gross loans

     3.59     3.41     2.45     2.63     2.55

Impaired balances as a percentage of total gross loans (11)

     5.81     4.74     4.07     3.76     3.43

Allowances for impaired balances as a percentage of impaired balances (11)

     61.76     72.01     60.17     69.99     74.32

Net loan charge-offs as a percentage of total gross loans

     1.38     1.36     1.39     1.31     1.27

Ratios adding contingent liabilities to loans and advances to customers and excluding country risk (*)

          

Allowances for impaired balances (**) as a percentage of total loans and contingent liabilities

     3.48     3.29     2.38     2.56     2.44

Impaired balances as a percentage of total loans and contingent liabilities (**) (11)

     5.64     4.54     3.90     3.54     3.24

Allowances for impaired balances as a percentage of impaired balances (**)(11)

     61.65     72.41     61.02     72.17     75.33

Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities

     1.29     1.28     1.29     1.21     1.17

 

(*) We disclose these ratios because our credit risk exposure comprises loans and advances to customers as well as contingent liabilities, all of which are subject to impairment and, therefore, allowances are taken in respect thereof.

 

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(**) Impaired or non-performing loans and contingent liabilities, securities and other assets to collect.

 

(1) Average number of shares has been calculated on the basis of the weighted average number of shares outstanding in the relevant year, net of treasury stock.
(2) The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a new remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the dividends in cash or new shares. The remuneration per share for 2009, 2010, 2011 and 2012 disclosed above, €0.60, is calculated assuming that the four dividends for these years were paid in cash. In 2013, assuming the same criteria, the remuneration per share will be €0.60.
(3) Equals the sum of the amounts included under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss” and “Loans and receivables” as stated in our consolidated financial statements.
(4) Equals the amounts included as “Debt instruments” and “Equity instruments” under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss”, “Available-for-sale financial assets” and “Loans and receivables” as stated in our consolidated financial statements.
(5) Equals the sum of the amounts included under the headings “Financial liabilities held for trading”, “Other financial liabilities at fair value through profit or loss” and “Financial liabilities at amortized cost” included in Notes 20, 21 and 22 to our consolidated financial statements.
(6) In our consolidated financial statements, preferred securities and preferred shares are included under “Subordinated liabilities”.
(7) Equals the sum of the amounts included at the end of each year as “Own funds” and “Valuation adjustments” as stated in our consolidated financial statements. We have deducted the book value of treasury stock from stockholders’ equity.
(8) At December 31, 2013 we held a 50% ownership interest in Santander Asset Management (SAM) and controlled this company jointly with Warburg Pincus and General Atlantic. Funds under “Other managed funds” are mostly managed by SAM.
(9) Net yield is the total of net interest income (including dividends on equity securities) divided by average earning assets. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Earning Assets—Yield Spread”.
(10) For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of pre-tax income from continuing operations before adjustment for income or loss from equity investees plus fixed charges. Fixed charges consist of total interest expense (including or excluding interest on deposits as appropriate) and the interest expense portion of rental expense.
(11) Impaired loans reflect Bank of Spain classifications. These classifications differ from the classifications applied by U.S. banks in reporting loans as non-accrual, past due, restructured and potential problem loans. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Bank of Spain’s Classification Requirements”.

 

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Set forth below is a table showing our allowances for impaired balances broken down by various categories as disclosed and discussed throughout this annual report on Form 20-F:

 

     IFRS-IASB  
     Year Ended December 31,  
     2013      2012      2011      2010      2009  
     (in millions of euros)  

Allowances refers to:

  

Allowances for impaired balances (*) (excluding country risk)

     25,681         26,112         19,531         20,553         18,497   

Less: Allowances for contingent liabilities and commitments (excluding country risk)

     688         614         648         1,011         623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowances for Balances of Loans (excluding country risk):

     24,993         25,497         18,883         19,541         17,874   

Allowances relating to country risk and other

     154         98         210         121         192   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowances for impaired balances (excluding contingent liabilities)

     25,147         25,595         19,093         19,662         18,066   

Of which:

              

Allowances for Loans and receivables:

     24,959         25,467         18,858         19,544         17,899   

Allowances for Customers

     24,903         25,422         18,806         19,502         17,873   

Allowances for Credit institutions and other financial assets

     37         30         36         17         26   

Allowances for Debt Instruments

     19         15         16         25         —     

Allowances for Debt Instruments available for sale

     188         129         235         119         167   

 

(*) Impaired or non-performing loans and contingent liabilities, securities and other assets to collect.

Exchange Rates

The exchange rates shown below are those published by the European Central Bank (“ECB”), and are based on the daily consultation procedures between central banks within and outside the European System of Central Banks, which normally takes place at 14:15 p.m. CET time.

 

     Rate During Period  
Calendar Period    Period End
($)
     Average Rate
($)
 

2009

     1.44         1.39   

2010

     1.34         1.33   

2011

     1.29         1.39   

2012

     1.32         1.28   

2013

     1.38         1.33   

 

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     Rate During Period  
Last six months    High $      Low $  

2013

     

October

     1.38         1.35   

November

     1.36         1.34   

December

     1.38         1.35   

2014

     

January

     1.37         1.35   

February

     1.38         1.35   

March

     1.39         1.37   

April (through April 28)

     1.39         1.37   

On April 28, 2014, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.39.

For a discussion of the accounting principles used in translation of foreign currency-denominated assets and liabilities to euros, see Note 2 (a) to our consolidated financial statements.

B. Capitalization and indebtedness.

Not Applicable.

C. Reasons for the offer and use of proceeds.

Not Applicable.

D. Risk factors.

Macro-Economic Risks

Because our loan portfolio is concentrated in Continental Europe, the United Kingdom and Latin America, adverse changes affecting the economies of Continental Europe, the United Kingdom or certain Latin American countries could adversely affect our financial condition.

Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom and Latin America. At December 31, 2013, Continental Europe accounted for 40% of our total loan portfolio (Spain accounted for 24% of our total loan portfolio), while the United Kingdom (where the loan portfolio consists primarily of residential mortgages) and Latin America accounted for 35% and 20%, respectively. Accordingly, the recoverability of these loan portfolios in particular, and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Continental Europe (in particular, Spain), the United Kingdom and Latin America. A return to recessionary conditions in the economies of Continental Europe (in particular, Spain), in the United Kingdom or the Latin American countries in which we operate, would likely have a significant adverse impact on our loan portfolio and, as a result, on our financial condition, cash flows and results of operations. See “Item 4. Information on the Company—B. Business Overview”.

We are vulnerable to disruptions and volatility in the global financial markets.

In the past six years, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency on interbank lending rates. Global economic conditions deteriorated significantly between 2007 and 2009, and many of the countries in which we operate fell into recession and some countries have only recently begun to recover and this recovery may not be sustainable. Many major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies experienced, and some continue to experience, significant difficulties. Around the world, there have also been runs on deposits at several financial institutions, numerous institutions have sought additional capital or have been assisted by governments, and many lenders and institutional investors have reduced or ceased providing funding to borrowers (including to other financial institutions).

 

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In particular, we face, among others, the following risks related to the economic downturn:

 

    Increased regulation of our industry. Compliance with such regulation will increase our costs and may affect the pricing for our products and services and limit our ability to pursue business opportunities.

 

    Reduced demand for our products and services.

 

    Inability of our borrowers to timely or fully comply with their existing obligations.

 

    The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan loss allowances.

 

    The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.

 

    Any worsening of global economic conditions may delay the recovery of the international financial industry and impact our financial condition and results of operations.

 

    Macroeconomic shocks may negatively impact the household income of our retail customers and may adversely affect the recoverability of our retail loans, resulting in increased loan losses.

Despite recent improvements in certain segments of the global economy, uncertainty remains concerning the future economic environment. There can be no assurance that economic conditions in these segments will continue to improve or that the global economic condition as a whole will improve significantly. Such economic uncertainty could have a negative impact on our business and results of operations. Investors remain cautious and the downgrade of the sovereign debt of France, for example, has induced greater volatility in the capital markets. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

Increased disruption and volatility in the global financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

If all or some of the foregoing risks were to materialize, this could have a material adverse effect on us.

We may suffer adverse effects as a result of the ongoing economic and sovereign debt tensions in the eurozone.

Our results of operations are materially affected by conditions in the capital markets and the economy generally in the eurozone, which, although improving recently, continue to show signs of fragility and volatility and in some cases only sporadic access to capital markets. Interest rate differentials among eurozone countries are affecting government finance and borrowing rates in those economies.

The European Central Bank (the “ECB”) and European Council took actions in 2012 and 2013 to aim to reduce the risk of contagion throughout and beyond the eurozone. These included the creation of the Open Market Transaction facility of the ECB and the decision by eurozone governments to create a banking union. A significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by nations that are under financial pressure. Should any of those nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized, resulting in the further spread of the ongoing economic crisis.

The continued high cost of capital for some European governments has impacted the wholesale markets and there has been a consequent increase in the cost of retail funding, with greater competition in a savings market that is growing slowly by historical standards. In the absence of a permanent resolution of the eurozone crisis, conditions could deteriorate.

We have direct and indirect exposure to financial and economic conditions throughout the eurozone economies. A deterioration of the economic and financial environment could have a material adverse impact on the whole financial sector, creating new challenges in sovereign and corporate lending and resulting in significant disruptions in financial activities at both the market and retail levels. This could materially and adversely affect our operating results, financial position and prospects.

 

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Exposure to sovereign debt could have a material adverse effect on us.

Like many other banks, we invest in debt securities of governments in the geographies in which we operate, including debt securities of the countries that have been most affected by the deterioration in economic conditions, such as Spain, Portugal, Italy and Ireland. Although doubts remain about the solvency of certain countries, the implementation of new regulations by the European Banking Authority may have reduced the risk associated with the sovereign debt of such countries. A failure by any such government to make timely payments under the terms of these securities, or a significant decrease in their market value, could have a material adverse effect on us.

Our growth, asset quality and profitability in Latin America may be adversely affected by volatile macroeconomic and political conditions.

The economies of some of the Latin American countries where we operate experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend.

Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in these Latin American regions could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in these Latin American regions.

In addition, our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies.

No assurance can be given that our growth, asset quality and profitability will not be affected by volatile macroeconomic and political conditions.

Risks Relating to Our Business

Legal, Regulatory and Compliance Risks

We are exposed to risk of loss from legal and regulatory proceedings.

We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory environment in the jurisdictions in which we operate reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.

We are from time to time subject to certain claims and parties to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.

We are subject to substantial regulation which could adversely affect our business and operations.

As a financial institution, we are subject to extensive regulation, which materially affects our businesses. For example, we are subject to capital adequacy requirements which, among other things, require us to maintain minimum ratios of regulatory capital to risk-weighted assets. Any failure by us to comply with capital adequacy requirements may result in administrative actions or sanctions which may affect our ability to fulfill our obligations.

 

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Statutes, regulations and policies to which we are subject, in particular those relating to the banking sector and financial institutions, may be changed at any time. For example, in response to the recent financial crisis, regulators world-wide have imposed, and may continue to impose, more stringent capital adequacy requirements, including increasing the minimum regulatory capital requirements imposed on us. Regulators world-wide have also produced a range of proposals for future legislative and regulatory changes which could force us to comply with certain operational restrictions or take steps to raise further capital, or could increase our expenses, or otherwise adversely affect our operating results, financial condition and prospects. The interpretation and the application by regulators of the laws and regulations to which we are subject may also change from time to time. Any legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not adversely affect us.

Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, it may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations.

Extensive legislation affecting the financial services industry has recently been adopted in regions that directly or indirectly affect our business, including Spain, the United States, the European Union, Latin America and other jurisdictions, and regulations are in the process of being implemented.

The European Union has created a European Systemic Risk Board to monitor financial stability and has implemented rules with the recommendations to increase capital requirements for certain trading instruments or exposures and to impose compensation limits on certain employees located in affected countries. In addition, the European Union Commission is considering a wide array of other initiatives, including new legislation that will affect derivatives trading, impose surcharges on “globally” systemically important firms and possibly impose new levies on bank balance sheets.

In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) reached agreement on comprehensive changes to the capital adequacy framework, known as Basel III. A revised version of Basel III was published in June 2011. Basel III is intended to raise the resilience of the banking sector by increasing both the quality and quantity of the regulatory capital base and enhancing the risk coverage of the capital framework. Among other things, Basel III introduces new eligibility criteria for Common Equity Tier 1, Additional Tier 1 and Tier 2 capital instruments that are intended to raise the quality of regulatory capital, and increases the amount of regulatory capital that institutions are required to hold. Basel III also requires institutions to maintain a capital conservation buffer above the minimum capital ratios in order to avoid certain capital distribution constraints. The capital conservation buffer, to be comprised of Common Equity Tier 1 capital, would result in an effective Common Equity Tier 1 capital requirement of 7 percent of risk-weighted assets. In addition, Basel III directs national regulators to require certain institutions to maintain a counter-cyclical capital buffer during periods of excessive credit growth. Basel III introduces a leverage ratio for institutions as a backstop measure, to be applied from 2018 alongside current risk-based regulatory capital requirements. The changes in Basel III are intended to be phased in gradually between January 2013 and January 2022. The implementation of Basel III in the European Union is being performed through the Capital Requirements Directive IV (“CRD IV”) & Capital Requirements Regulation (“CRR”) legislative package. CRD IV was published in the Official Journal on June 27, 2013 entered into force in July 2013 (being CRR applicable from January 2014), with particular requirements being phased in over a period of time, to be effective by 2019, although requirements relating to certain deductions from Common Equity Tier 1 could be delayed until 2024. CRD IV substantially reflects the Basel III capital and liquidity standards and facilitates the applicable implementation timeframes. However, certain issues continue to remain under discussion and certain details remain to be clarified in further binding technical standards to be issued by the European Banking Authority.

In addition to the changes to the capital adequacy framework published in December 2010 and June 2011 described above, the Basel Committee also published its global quantitative liquidity framework, comprising the Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) metrics, with objectives to (1) promote the short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to survive a significant stress scenario; and (2) promote resilience over a longer time horizon by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The LCR has been subsequently revised by the Basel Committee in January 2013 which amended the definition of high-quality liquid assets and agreed a revised timetable for phase-in of the standard from 2015 to 2019, as well as making some technical changes to some of the stress scenario assumptions. As with the Basel Committee’s proposed changes to the capital adequacy framework, the Basel III liquidity standards are being implemented within the European Union through the CRD IV legislative package. In January 2014 the Basel Committee published amendments to the Leverage Ratio and technical revisions to the NSFR ratio, confirming that it remains the intention that the latter ratio, including any future revisions, will become a minimum standard by January 1, 2018. Also, in January 2014, the Basel Committee proposed uniform disclosure standards related to the LCR and issued a new modification to the ratio, which should be adopted by banks from January 1, 2015.

 

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As a Spanish financial institution, the Bank is subject to CRD IV, through which the European Union has implemented the Basel III capital standards and which are in the process of being phased in until January 1, 2019. The CRR is applicable from January 1, 2014 and the CRD IV Directive has already been partially implemented in Spain as of January 1, 2014 by RD-L 14/2013. This Royal Decree-Law has repealed, with effect from January 1, 2014, any Spanish regulatory provisions that may be incompatible with CRR.

In addition to RD-L 14/2013, the Bank of Spain approved on January 31, 2014 its new Circular 2/2014, which derogates its previous Circular 7/2012, and makes certain regulatory determinations contained in CRR pursuant to the delegation contained in RD-L 14/2013, including, relevant rules concerning the applicable transitional regime on capital requirements and the treatment of deductions.

Despite the CRD IV/Basel III framework setting minimum transnational levels of regulatory capital and a measured phase-in, many national authorities have started a race to the top for capital by adopting requirements and interpretation calendars that are more stringent than Basel III’s.

For example, in the last three years the Bank of Spain and the European Banking Authority (the EBA) have imposed new capital requirements in advance of the entering into force of CRD IV. These measures have included Bank of Spain Circular 3/2008 (Circular 3/2008) of May 22, on the calculation and control of minimum capital requirements, which was amended by Bank of Spain Circular 4/2011 (Circular 4/2011) and implements Capital Requirements Directive III in Spain. In addition, some of the requirements of Basel III were already implemented by the Spanish Government in 2011 with Royal Decree-Law 2/2011 (RD-L 2/2011) of February 18 (as amended by Law 9/2012) which established a new minimum requirement in terms of capital on risk-weighted assets (Capital Principal) and required such capital to be greater than 9 per cent from January 1, 2013. RD-L 14/2013 specifically repealed, with effect from January 1, 2014, Title I of Royal Decree-Law 2/2011, which imposed the minimum Capital Principal requirement for credit institutions. Notwithstanding such repeal, as part of the assessment of additional capital requirements that could be required of credit institutions, the Bank of Spain has been given powers to stop or restrict, until December 31, 2014, any distributions of Tier 1 Capital which would have been caught by the minimum Capital Principal requirements stipulated in RD-L 2/2011, provided such distributions, accumulated over the year ended December 31, 2014, exceed in absolute terms the minimum Capital Principal legally required as at December 31, 2013 and further risk non-compliance with additional capital requirements that could be required by the Bank of Spain.

Furthermore, following an evaluation of the capital levels of 71 financial institutions throughout Europe (including the Bank) based on data available as of September 30, 2011, the EBA issued a recommendation on December 8, 2011 pursuant to which, on an exceptional and temporary basis, financial institutions based in the EU should reach a new minimum Core Tier 1 ratio (9 per cent.) by June 30, 2012. This recommendation has been replaced by the EBA recommendation of July 22, 2013 on the preservation of Core Tier 1 capital during the transition to CRD IV. This new recommendation provides for the maintenance of a nominal floor of capital denominated in the relevant reporting currency of Core Tier 1 capital corresponding to the amount of capital needed as at June 30, 2012 to meet the requirements of the above recommendation of December 8, 2011. Competent authorities may waive this requirement for institutions which maintain a minimum of 7 per cent of common equity Tier 1 capital under CRD IV rules applied after the transitional period.

In addition, in order to complete the implementation of CRD IV initiated by RD-L 14/2013, the Spanish Ministry of Economy and Competitiveness has prepared and recently published a draft of a new comprehensive law on the supervision and solvency of financial institutions (the Supervision and Solvency Law), that has been already approved by the Spanish Council of Ministers and is being reviewed in order to be approved by the Spanish Parliament.

There can be no assurance that the implementation of these new standards will not adversely affect the Bank’s ability to pay dividends or require it to issue additional securities that qualify as regulatory capital, to liquidate assets, to curtail business or to take any other actions, any of which may have adverse effects on the Bank’s business, financial condition and results of operations. Furthermore, increased capital requirements may negatively affect the Bank’s return on equity and other financial performance indicators.

 

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Finally, in February 2014 the IMF recommended that the Bank of Spain limit the amount of dividends payable in cash in 2014 by Spanish banking institutions to 25% of such bank’s attributable profits. The Bank of Spain has given this recommendation to the Spanish banking institutions.

Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. However, in response to the global financial crisis, a number of changes to the regulatory capital framework have been adopted or continue to be considered. As these and other changes are implemented or future changes are considered or adopted that limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms, we may experience a material adverse effect on our financial condition and regulatory capital position.

In September 2011, the European Commission (the “Commission”) tabled a proposal for a common system of financial transactions taxes (“FTT”). Despite intense discussions on this proposal there was no unanimity amongst the 27 Member States. Eleven Member States (“participating Member States”) requested enhanced cooperation on a FTT based upon the Commission’s original proposal. The Commission presented a decision to this effect which was adopted by the EU’s Council of Finance Ministers at its committee meeting on January 22, 2013. The proposal of Directive was published on February 14, 2013, under which participating Member States may charge a FTT on all financial transactions where (i) at least one party to the transaction is established in the territory of a participating Member State and a financial institution established in the territory of a participating Member State is a party to the transaction acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction or (ii) a financial institution is a party to a transaction with a financial instrument issued within the territory of a participating Member Estate. We are still assessing the proposals currently under discussion to determine the likely impact on Banco Santander and its affiliates.

The Spanish Government approved on February 3, 2012 the Royal Decree-Law 2/2012 and Law 8/2012, of October 20, 2012, on the clean-up of the financial sector (replacing Royal Decree-Law 18/2012, of May 11, 2012), through which the following actions were performed:

 

    Review of the minimum provisioning percentages to be taken into consideration in the estimate of the impairment losses relating to financing granted to the property sector in Spain and to the foreclosed assets and assets received in payment of debt arising from financing granted to that sector, as a result of the impairment of these assets.

 

    Increase in the level of minimum capital requirements of Spanish credit institutions on the basis of the assets relating to the property sector in Spain presented on the balance sheet of each entity at December 31, 2012.

The Spanish Government also approved Law 9/2012, of November 14, 2012 which established a new regime on restructuring and resolution of credit institutions and a statutory loss absorbency regime applicable within the framework of restructuring and resolution processes, both based on the legislative proposal for a directive providing for the establishment of an European Union wide framework for the recovery and resolution of credit institutions and investment firms, the first draft of which (and the draft upon which Law 9/2012 was based) was published by the European Commission on June 6, 2012.

In June 2012, a number of agreements were reached to reinforce the monetary union, including the definition of a broad roadmap towards a single banking and fiscal union. While support for a banking union in Europe is strong and significant advances have been made in terms of the development of a single-rule book through CRD IV, there is ongoing debate on the extent and pace of integration. On September 13, 2012, the European Parliament approved a proposal for the creation of the Single Supervisory Mechanism, so that 128 of the largest EU banks (including the Bank) will come under the ECB direct oversight from November 2014. The ECB comprehensive assessment includes a supervisory risk assessment, an asset quality review and a stress test to be conducted by national supervisors and the ECB in coordination with the EBA before the ECB becomes the single European bank supervisor in November 2014. The assessment is an important step in preparing the single supervisory mechanism and, more generally, towards bringing about greater transparency of the banks’ balance sheets and consistency of supervisory practices in Europe. The assessment started in November 2013 and will take 12 months to complete, ending in October 2014. The comprehensive assessment consists of three closely interlinked components:

 

    a supervisory risk assessment – to review, quantitatively and qualitatively, key risks, including liquidity, leverage and funding;

 

    an asset quality review (AQR) – to enhance the transparency of bank exposures by reviewing the quality of banks’ assets, including the adequacy of asset and collateral valuation and related provisions;

 

    a stress test – to examine the resilience of banks’ balance sheets to stress scenarios.

 

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The assessment will be based on a capital benchmark of 8% Common Equity Tier 1, drawing on the definition of the Capital Requirements Directive IV/Capital Requirements Regulation, including transitional arrangements, for both the AQR and the baseline stress test scenario.

Other open issues include the representation and voting power of non-eurozone countries, the accountability of the ECB to European institutions as part of the Single Supervision Mechanism, the final status of the EBA, the development of a new bank resolution regime and the creation of a common deposit-guarantee scheme. In particular, the Bank Recovery and Resolution Directive (BRRD) and the Deposit Guarantee Schemes Directive were submitted to the European Parliament in June 2013. They have been approved by the European Parliament on April 15, 2014 and approval by the European Council is expected in May 2014 for its official publication. The BRRD is expected to enter into force in 2015, but the bail-in tool will only be operational from 2016. The final regulation on direct recapitalization by the European Stability Mechanism is still pending. European leaders have also supported the reinforcement of the fiscal union but continue negotiating on how to achieve it.

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its future capacity as the Bank’s main supervisory authority may have a material impact on the Bank’s business, financial condition and results of operations.

On January 29, 2014, the European Commission, taking into account the October 2002 report by the High Level Expert Group chaired by Erkki Likannen on the reform of the structure of the EU Banking Sector, proposed new rules to prevent the largest and most complex EU banks with significant trading activities (including us) from engaging in the activity of proprietary trading in financial instruments and commodities. The new proposed regulation would also grant supervisors the power and, in certain instances, the obligation to require the transfer of other high-risk trading activities (such as market-making, complex derivatives and securitization operations) to separate legal trading entities within their group (“subsidiarisation”). Notwithstanding this, banks would have the possibility of not separating activities if they can show to the satisfaction of their supervisor that the risks generated are mitigated by other means. The proposal would also provide rules on the economic, legal, governance, and operational links between the separated trading entity and the rest of the banking group. Furthermore, the proposal is also aimed at increasing transparency of certain transactions in the shadow banking sector.

The European Parliament approved the following dossiers in April 2014 to develop a European Banking Union:

 

    The proposal for the BRRD is expected to be approved by ECOFIN in May 2014 for its official publication. The BRRD is the single rulebook for the resolution of banks and large investment firms in all EU Member States. It harmonizes and upgrades the tools for dealing with bank crises across the EU. Banks will be required to prepare recovery plans to overcome financial distress, while authorities will lay out plans to resolve failed banks in a way which preserves their most critical functions and avoids taxpayer-funded bailouts. Authorities are granted a set of powers to intervene in the operations of banks to help prevent failure. If they do face failure, authorities are equipped with comprehensive powers and tools to restructure them, allocating losses to shareholders and creditors following a clearly defined hierarchy.

 

    The agreement with the EU Council on the Single Resolution Mechanism (SRM) is expected to be approved by the Parliament in July or September 2014. The agreement includes the creation of a Single Resolution Fund (SRF) which will be fully endowed in a maximum of eight years. It is expected that the agreement between governments will be signed in May 2014 and approved by national parliaments by year end. The SRM will complement the Single Supervisory Mechanism (SSM) and will ensure that, if a bank subject to the SSM faces serious difficulties, its resolution can be managed efficiently with minimal costs to taxpayers and the real economy. The SRM will apply to all banks in the Euro Area and other Member States that choose to participate. The division of powers between the Single Resolution Board and national resolution authorities broadly follows the division of supervisory powers between the ECB and national supervisors in the context of the Single Supervisory Mechanism.

The Single Resolution Fund will be financed with contributions from all banks in the participating Member States. It will be administrated by the Board. The Fund has a target level, to be reached over eight years, of €55 billion and can borrow from the markets by order of the Board. During the transition, the Fund will be divided among national compartments whose resources will be progressively mutualized, starting with 40% of funds in the first year. The Fund and decision-making on its use is regulated by the SRM Regulation, while the transfer of contributions raised nationally towards the Single Fund and the mutualization of the national compartments is set out in an inter-governmental agreement established among the participating Member States.

 

    The proposal for recast Directive on Deposit Guarantee Schemes (DGS) ensures that depositors will continue to benefit from a guaranteed coverage of €100,000 in case of bankruptcy backed by funds to be collected in advance from the banking sector. In principle, the target level for ex ante funds of DGS is 0.8% of covered deposits (i.e. about € 55billion) to be collected from banks over a 10-year period. Repayment deadlines will be gradually reduced from the current 20 working days to 7 working days in 2024. The new Directive will require that better information be provided to depositors to ensure that they are aware of how their deposits are protected by the guarantee schemes.

Regulations adopted on structural measures to improve the resilience of EU credit institutions may have a material impact on the Bank’s business, financial condition and results of operations. These regulations, if adopted, may also cause the Group to invest significant management attention and resources to make any necessary changes.

In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which was adopted in 2010 will continue to result in significant structural reforms affecting the financial services industry. This legislation provides for, among other things, the establishment of a Consumer Financial Protection Bureau with broad authority to regulate the credit, savings, payment and other consumer financial products and services that we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the over-the-counter derivatives market, prohibitions on engagement in certain proprietary trading activities and restrictions on ownership of, investment in or sponsorship of hedge funds and private equity funds, restrictions on the interchange fees earned through debit card transactions, and a requirement that bank regulators phase out the treatment of trust preferred capital instruments as Tier 1 capital for regulatory capital purposes.

With respect to OTC derivatives, the Dodd-Frank Act provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the CFTC or the SEC, or both, and are or will be subject to new capital, margin, business conduct, recordkeeping, clearing, execution, reporting and other requirements. Banco Santander, S.A. and Abbey National Treasury Services plc became provisionally registered as swap dealers with the CFTC on July 8, 2013 and November 4, 2013, respectively. In addition, we may register one more subsidiary as swap dealer with the CFTC.

In July 2013, the U.S. bank regulators issued the U.S. Basel III final rules implementing the Basel III capital framework for U.S. banks and bank holding companies and other U.S. capital reform. Certain aspects of the U.S. Basel III final rules, such as new minimum capital ratios and a revised methodology for calculating risk-weighted assets, will become effective on January 1, 2015. Other aspects of the U.S. Basel III final rules, such as the capital conservation buffer and the new regulatory deductions from and adjustments to capital, will be phased in over several years beginning on January 1, 2015.

In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and other U.S. regulators issued for public comment in October 2013 a proposed rule that would introduce a quantitative liquidity coverage ratio requirement on certain large banks and bank holding companies. The proposed liquidity coverage ratio is broadly consistent with the Basel Committee’s revised Basel III liquidity rules, but is more stringent in several important respects. The Federal Reserve has also stated that it intends, through future rulemakings, to apply the Basel III liquidity coverage ratio and net stable funding ratio to the U.S. operations of some or all large foreign banking organizations (“FBOs”).

 

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In February 2014, the Federal Reserve approved a final rule to enhance its supervision and regulation of the U.S. operations of FBOs such as us. Under the Federal Reserve’s rule, FBOs with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies (“Large FBOs”), will be required to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that will hold substantially all of the FBO’s U.S. bank and nonbank subsidiaries, such as Santander Bank, N.A. An IHC will be subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. Under the final rule, a Large FBO that is subject to the IHC requirement may request permission from the Federal Reserve to establish multiple IHCs or use an alternative organizational structure. The final rule also permits the Federal Reserve to apply the IHC requirement in a manner that takes into account the separate operations of multiple foreign banks that are owned by a single Large FBO. Although U.S. branches and agencies of a Large FBO will not be required to be held beneath an IHC, such branches and agencies will be subject to liquidity, and, in certain circumstances, asset maintenance requirements. Large FBOs generally will be required to establish IHCs and comply with the enhanced prudential standards beginning July 1, 2016. An IHC’s compliance with applicable U.S. leverage ratio requirements is generally delayed until January 1, 2018. FBOs that have $50 billion or more in non-branch/agency U.S. assets as of June 30, 2014 will be required to submit an implementation plan by January 1, 2015 on how the FBO will comply with the IHC requirement. Enhanced prudential standards will apply to our top-tier U.S.-based bank holding companies beginning on January 1, 2015 until we form or designate an IHC and the IHC becomes subject to corresponding enhanced prudential standards. The Federal Reserve has stated that it will issue, at a later date, final rules to implement certain other enhanced prudential standards under the Dodd-Frank Act for large bank holding companies and large FBOs, including single counterparty credit limits and an early remediation framework.

Within the Dodd-Frank Act, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in certain covered funds, in each case subject to certain limited exceptions. The Volcker Rule became effective on July 21, 2012 and on December 10, 2013, U.S. regulators issued final rules implementing the Volcker Rule. The final rules also limit the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships. The final rules contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained. The final rules implementing the Volcker Rule extended the period for all banking entities to conform to the Volcker Rule and implement a compliance program until July 21, 2015, and additional extensions are possible. Banking entities must bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period. We are assessing how the final rules implementing the Volcker Rule will affect our businesses and are developing and implementing plans to bring affected businesses into compliance.

Furthermore, Title I of the Dodd-Frank Act and the implementing regulations issued by the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) require each bank holding company with assets of $50 billion or more, including us, to prepare and submit annually a plan for the orderly resolution of our subsidiaries and operations that are domiciled in the United States in the event of future material financial distress or failure. The plan must include information on resolution strategy, major counterparties and interdependencies, among other things, and requires substantial effort, time and cost. We submitted our U.S. resolution plan in December 2013. The resolution plan is subject to review by the Federal Reserve Board and the FDIC.

Each of these aspects of the Dodd-Frank Act, as well as others, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the Dodd-Frank Act, including the Volcker Rule, poses to us is not yet known, however, such risks could be material and we could be materially and adversely affected by them.

These and any additional legislative or regulatory actions in Spain, the European Union, the United States, the U.K., Latin America or other countries, and any required changes to our business operations resulting from such legislation and regulations, could result in reduced capital availability, significant loss of revenue, limit our ability to continue organic growth (including increased lending), pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or regulations would not have an adverse effect on our business, results of operations or financial condition in the future.

We may also face increased compliance costs. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, we may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have material adverse effect on our business and results of operations.

 

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We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with applicable anti-money laundering, anti-terrorism and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to the applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems and sophisticated monitoring and compliance personnel and have become the subject of enhanced government supervision.

While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, such policies and procedures may not completely eliminate instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the power and authority to impose fines and other penalties on us, including the revocation of licenses. In addition, our business and reputation could suffer if customers use our banking network for money laundering or illegal or improper purposes.

In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for money laundering (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering, then our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “black lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the tax jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business.

Financial Reporting and Control Risks

Changes in accounting standards could impact reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provision for liabilities.

 

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The valuation of financial instruments measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove to be inaccurate.

If the judgment, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities. We are subject to the income tax laws of Spain and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material effect on our results of operations.

Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.

Disclosure controls and procedures over financial reporting are designed to reasonably assure that information required to be disclosed by the company in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

These disclosure controls and procedures have inherent limitations which include the possibility that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by any unauthorized override of the controls. Consequently, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.

Liquidity and Financing Risks

Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate completely these risks. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, has affected and may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations as well as limit growth possibilities.

Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us.

Our cost of obtaining funding is directly related to prevailing market interest rates and to our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding (whether directly or indirectly).

 

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We rely, and will continue to rely, primarily on commercial deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy, in general, and the financial services industry in particular, and the availability and extent of deposit guarantees, as well as competition between banks for deposits. Any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on appropriate terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.

We anticipate that our customers will continue, in the near future, to make short-term deposits (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of this funding source could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

We cannot assure you that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Spanish sovereign debt. If Spain’s sovereign debt is downgraded, our credit rating would also likely be downgraded by an equivalent amount.

Any downgrade in our debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts, we may be required to maintain a minimum credit rating or terminate such contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

Banco Santander, S.A.’s long-term debt is currently rated investment grade by the major rating agencies—Baa1 by Moody’s Investors Service España, S.A., BBB by Standard & Poor’s Ratings Services and BBB+ by Fitch Ratings Ltd.— all of which have stable outlook. During 2012, following downgrades of Spanish sovereign debt, all three agencies downgraded Banco Santander, S.A.’s rating together with that of the other main Spanish banks, due to the weaker-than-previously-anticipated macroeconomic and financial environment in Spain with dimming growth prospects in the near term, depressed real estate market activity and heightened turbulence in the capital markets. In the fourth quarter of 2013 and first quarter of 2014 the three agencies revised our outlook from negative to stable reflecting the gradual improvement of the Spanish economy and the view that any further weakening of our credit profile was unlikely to be significant. In March 2014, Moody’s Investors Service upgraded our rating from Baa2 to Baa1 following the upgrade of Spain’s sovereign debt rating announced on February 21 along with the change of the outlook on Spain’s rating to positive from stable.

Santander UK’s long-term debt is currently rated investment grade by the major rating agencies: A2 with negative outlook by Moody’s Investors Service, A with negative outlook by Standard & Poor’s Ratings Services and A with stable outlook by Fitch Ratings. All three agencies revised Santander UK’s ratings during 2012 following the downgrades of the Spanish sovereign debt and remained unchanged in 2013. Negative outlooks by Moody’s and Standard & Poor’s reflect the negative trend that they see for the U.K. banking industry.

We conduct substantially all of our material derivative activities through Banco Santander, S.A. and Santander UK. We estimate that as of December 31, 2013, if all the rating agencies were to downgrade Banco Santander, S.A.’s long-term senior debt ratings by one notch we would be required to post up to €3 million in additional collateral pursuant to derivative and other financial contracts. A hypothetical two notch downgrade would result in a requirement to post up to €14 million in additional collateral. We estimate that as of December 31, 2013, if all the rating agencies were to downgrade Santander UK’s long-term credit ratings by one notch, and thereby trigger a short-term credit rating downgrade, this could result in contractual outflows from Santander UK’s total liquid assets of £7.6 billion of cash and additional collateral that Santander UK would be required to post under the terms of secured funding and derivatives contracts. A hypothetical two notch downgrade would result in an additional contractual outflow of £1.9 billion of cash and collateral under secured funding and derivatives contracts.

 

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While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although, unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on Banco Santander, S.A., and/or its subsidiaries.

In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.

In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain the current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase our cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

Risk Management

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.

Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could have a material adverse effect on our operating results, financial condition and prospects.

As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating to a customer or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating system.

In addition, we have been trying to refine our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect these risks before they occur, or due to limited tools available to us, our employees may not be able to effectively implement them, which may increase our credit risk. Failure to effectively implement, consistently follow or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.

 

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Credit Risks

If we are unable to effectively control the level of non-performing or poor credit quality loans in the future, or if our loan loss reserves are insufficient to cover future loan losses, this could have a material adverse effect on us.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past and can continue to negatively impact our results of operations. We cannot assure you that we will be able to effectively control the level of the impaired loans in our total loan portfolio. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Continental Europe, the United Kingdom, Latin America, the United States or global economic conditions, impact of political events, events affecting certain industries or events affecting financial markets and global economies.

Our current loan loss reserves may not be adequate to cover any increase in the amount of non-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. Our loan loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the recent global financial crisis has demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and we cannot assure you that our loan loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, including the increase in lending to individuals and small and medium enterprises, the volume increase in the credit card portfolio and the introduction of new products, or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our loan loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

Mortgage loans are one of our principal assets, comprising 53% of our loan portfolio as of December 31, 2013. As a result, we are exposed to developments in housing markets, especially in Spain and the United Kingdom. In addition, we have exposure to a number of large real estate developers in Spain. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Spain as a vacation destination and historically low interest rates in the eurozone. The United Kingdom also experienced an increase in housing and mortgage demand driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. During late 2007, the housing market began to adjust in Spain and the United Kingdom as a result of excess supply (particularly in Spain) and higher interest rates. Since 2008, as economic growth stalled in Spain and the United Kingdom, persistent housing oversupply, decreased housing demand, rising unemployment, subdued earnings growth, greater pressure on disposable income, a decline in the availability of mortgage finance and the continued effect of global market volatility have caused home prices to decline, while mortgage delinquencies increased. As a result of these and other factors, our NPL ratio increased from 0.94% at December 31, 2007, to 2.02% at December 31, 2008, to 3.24% at December 31, 2009, to 3.55% at December 31, 2010, to 3.89% at December 31, 2011 and to 4.54% at December 31, 2012. At December 31, 2013, our NPL ratio was 5.64%. These trends, especially higher unemployment rates coupled with declining real estate prices, could have a material adverse impact on our mortgage payment delinquency rates, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on us.

 

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The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting Europe, the United States and Latin American countries. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.

We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

Market Risks

Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rate, exchange rate or equity price. Changes in interest rates affect the following areas, among others, of our business:

 

    net interest income;

 

    the volume of loans originated;

 

    the market value of our securities holdings;

 

    gains from sales of loans and securities; and

 

    gains and losses from derivatives.

Variations in short-term interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. When interest rates rise, we may be required to pay higher interest on our floating-rate borrowings while interest earned on our fixed-rate assets does not rise as quickly, which could cause profits to grow at a reduced rate or decline in some parts of our portfolio. Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors.

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities.

 

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If interest rates decrease, although this is likely to reduce our funding costs, it is likely to compress our net interest margins, as well as adversely impact our income from investments in securities and loans with similar maturities, which could have a negative effect on us. In addition, we may also experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

The market value of a security with a fixed interest rate generally decreases when prevailing interest rates rise, which may have an adverse effect on our earnings and financial condition. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure. The market value of an obligation with a floating interest rate can be adversely affected when interest rates increase, due to a lag in the implementation of repricing terms or an inability to refinance at lower rates.

We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.

We are also exposed to equity price risk in connection with our trading investments in equity securities. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in entities in this sector and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income or the market value of our assets and liabilities could be materially adversely affected.

Market conditions have resulted and could result in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

In the past six years, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads. We have material exposures to securities, loans and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.

In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to market, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.

We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).

Market practices and documentation for derivative transactions in the countries where we operate differ from each other. In addition, the execution and performance of these transactions depends on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, to a great extent, on our information technology systems. This factor further increases the risks associated with these transactions and could have a material adverse effect on us.

 

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General Business and Industry Risks

The financial problems faced by our customers could adversely affect us.

Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

Changes in our pension liabilities and obligations could have a material adverse effect on us.

We provide retirement benefits for many of our former and current employees through a number of defined benefit pension plans. We calculate the amount of our defined benefit obligations using actuarial techniques and assumptions, including mortality rates, the rate of increase of salaries, discount rates, inflation, the expected rate of return on plan assets, or others. These calculations are based on IFRS and on those other requirements defined by the local supervisors. Given the nature of these obligations, changes in the assumptions that support valuations, including market conditions, can result in actuarial losses which would in turn impact the financial condition of our pension funds. Because pension obligations are generally long term obligations, fluctuations in interest rates have a material impact on the projected costs of our defined benefit obligations and therefore on the amount of pension expense that we accrue.

Any increase in the current size of the deficit in our defined benefit pension plans, due to reduction in the value of the pension fund assets (depending on the performance of financial markets) or an increase in the pension fund liabilities due to changes in mortality assumptions, the rate of increase of salaries, discount rate assumptions, inflation, the expected rate of return on plan assets, or other factors, could result in our having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of our business and reduce our capital resources. While we can control a number of the above factors, there are some over which we have no or limited control. Increases in our pension liabilities and obligations could have a material adverse effect on our business, financial condition and results of operations.

We depend in part upon dividends and other funds from subsidiaries.

Some of our operations are conducted through our financial services subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and to pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent upon our subsidiaries’ earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. Additionally, our right to receive any assets of any of our subsidiaries as an equity holder of such subsidiaries, upon their liquidation or reorganization, will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.

Increased competition and industry consolidation may adversely affect our results of operations.

We face substantial competition in all parts of our business, including in originating loans and in attracting deposits. The competition in originating loans comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.

In addition, there has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations. We also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

Increasing competition could require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.

In addition, if our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

 

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Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

The success of our operations and our profitability depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

As we expand the range of our products and services, some of which may be at an early stage of development in the markets of certain regions where we operate, we will be exposed to new and potentially increasingly complex risks and development expenses. Our employees and risk management systems, as well as our experience and that of our partners may not be sufficient or adequate to enable us to properly handle or manage such risks. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

Further, our customers may issue complaints and seek redress if they consider that they have suffered loss from our products and services, for example, as a result of any alleged mis-selling or incorrect application of the terms and conditions of a particular product. This could in turn subject us to risks of potential legal action by our customers and intervention by our regulators. We have in the past experienced losses due to claims of mis-selling in the U.K., Spain and other jurisdictions and may do so in the future. For further detail on our legal and regulatory risk exposures, please see the Risk Factor entitled “We are exposed to risk of loss from legal and regulatory proceedings.”

If we are unable to manage the growth of our operations this could have an adverse impact on our profitability.

We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims. We can give no assurances that our expectations with regards to integration and synergies will materialize. We also cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

 

    manage efficiently the operations and employees of expanding businesses;

 

    maintain or grow our existing customer base;

 

    assess the value, strengths and weaknesses of investment or acquisition candidates;

 

    finance strategic investments or acquisitions;

 

    fully integrate strategic investments, or newly-established entities or acquisitions in line with its strategy;

 

    align our current information technology systems adequately with those of an enlarged group;

 

    apply our risk management policy effectively to an enlarged group; and

 

    manage a growing number of entities without over-committing management or losing key personnel.

Any failure to manage growth effectively, including relating to any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operating results, financial condition and prospects.

 

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We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.

We rely on third parties for important products and services.

Third party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting such parties. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business. Replacing these third party vendors could also entail significant delays and expense.

Damage to our reputation could cause harm to our business prospects.

Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees. Damage to our reputation can therefore cause significant harm to its business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties. Further, negative publicity regarding us, whether or not true, may result in harm to our prospects.

Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.

We could suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interest has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

We engage in transactions with our subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.

We and our affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

Spanish law provides for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions.

We are likely to continue to engage in transactions with our affiliates. Future conflicts of interests between us and any of affiliates, or among our affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.

 

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Technology Risks

Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure you that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Risks relating to data collection, processing and storage systems are inherent in our business.

Our businesses depend on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent against cyber-attacks, we routinely exchange personal, confidential and proprietary information by electronic means, and we may be the target of attempted cyber-attacks. If we cannot maintain an effective data collection, management and processing system, we may be materially and adversely affected.

We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm. There can be no assurance that we will not suffer material losses from operational risk in the future, including relating to cyber-attacks or other such security breaches. Further, as cyber-attacks continue to evolve, we may incur significant costs in its attempt to modify or enhance our protective measures or investigate or remediate any vulnerabilities.

Failure to protect personal information could adversely affect us.

We manage and hold confidential personal information of customers in the conduct of our banking operations. Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our operating results, financial condition and prospects.

Foreign Private Issuer and Other Risks

Our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the United States.

Issuers of securities in Spain are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in other countries, including the United States. In particular, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with IFRS, which differs from US GAAP in a number of respects. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.

 

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Investors may find it difficult to enforce civil liabilities against us or our directors and officers.

Our directors and officers reside outside of the United States. In addition, all or a substantial portion of our assets and their assets are located outside of the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADSs, none of our directors or officers has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.

Additionally, investors may experience difficulty in Spain enforcing foreign judgments obtained against us and our executive officers and directors, including in any action based on civil liabilities under the U.S. federal securities laws. Based on the opinion of Spanish counsel, there is doubt as to the enforceability against such persons in Spain, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.

Our corporate affairs are governed by our Bylaws and Spanish corporate law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Spain. Under Spanish corporate law, you may have fewer and less well-defined rights to protect your interests than under the laws of other jurisdictions outside Spain.

Although Spanish corporate law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in Spain, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the shares underlying ADSs.

ADS holders may be subject to additional risks related to holding ADSs rather than shares.

Because ADS holders do not hold their shares directly, they are subject to the following additional risks, among others:

 

    as an ADS holder, we may not treat you as one of our direct shareholders and you may not be able to exercise shareholder rights;

 

    we and the depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs; and

 

    the depositary may take or be required to take actions under the Deposit Agreement that may have adverse consequences for some ADS holders in their particular circumstances.

Item 4. Information on the Company

A. History and development of the company

Introduction

Banco Santander, S.A. (“Santander”, the “Bank”, the “Parent” or the “Parent bank”) is the Parent bank of Grupo Santander. It was established on March 21, 1857 and incorporated in its present form by a public deed executed in Santander, Spain, on January 14, 1875.

On January 15, 1999, the boards of directors of Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. agreed to merge Banco Central Hispanoamericano, S.A. into Banco Santander, S.A., and to change Banco Santander’s name to Banco Santander Central Hispano, S.A. The shareholders of Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. approved the merger on March 6, 1999, at their respective general meetings. The merger and the name change were registered with the Mercantile Registry of Santander, Spain, by the filing of a merger deed. Effective April 17, 1999, Banco Central Hispanoamericano, S.A. shares were extinguished by operation of law and Banco Central Hispanoamericano, S.A. shareholders received new Banco Santander shares at a ratio of three shares of Banco Santander, S.A. for every five shares of Banco Central Hispanoamericano, S.A. formerly held. On the same day, Banco Santander, S.A. changed its legal name to Banco Santander Central Hispano, S.A.

The general shareholders’ meeting held on June 23, 2007 approved the proposal to change the name of the Bank to Banco Santander, S.A.

 

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The general shareholders’ meeting held on March 22, 2013 approved the merger by absorption of Banco Español de Crédito, S.A. (Banesto) and Banco Banif, S.A.

We are incorporated under, and governed by the laws of the Kingdom of Spain. We conduct business under the commercial name “Santander”. Our corporate offices are located in Ciudad Grupo Santander, Avda. de Cantabria s/n, 28660 Boadilla del Monte (Madrid), Spain. Telephone: (011) 34-91-259-6520.

Principal Capital Expenditures and Divestitures

Acquisitions, Dispositions, Reorganizations

Our principal acquisitions and dispositions in 2013, 2012 and 2011 were as follows:

Invitation to tender American Securities for purchase

On March 6, 2013, we announced an invitation to all holders of callable subordinated notes series 22 issued by Santander Issuances, S.A. Unipersonal (the American Securities) to tender such Securities for purchase (the American Invitation). The American Securities are listed in the London Stock Exchange. The total principal amount of the American Securities comprising the American Invitation amounts to approximately US$ 257.5 million.

Banco Santander announced on March 14, 2013 the final aggregate principal amount accepted for purchase (US$ 26.6 million) and the final purchase prices as a consequence of the tender offers.

The invitation was undertaken as a part of the Group’s active management of liabilities and capital, and focused on core capital generation as well as the optimization of the future interest expense.

Invitation to tender European Securities for purchase

On March 6, 2013, we announced an invitation to all holders of certain securities issued by Santander Issuances, S.A. Unipersonal and Santander Perpetual, S.A. Unipersonal (the European Securities) to tender such securities for purchase (the European Invitation). The European Securities are subordinated and perpetual bonds listed in the Luxembourg Stock Exchange, corresponding to 15 different series. The total principal amount of the series comprising the Invitation amounts to approximately €6,575 million and GBP 2,243 million.

Banco Santander announced on March 14, 2013 the final aggregate principal amount accepted for purchase (€140.2 million and GBP 178.9 million) and the final purchase prices as a consequence of the European Invitation.

The European Invitation was undertaken as a part of the Group’s active management of liabilities and capital, and focused on core capital generation as well as the optimization of the future interest expense. The invitation was also designed to provide liquidity in the market and to offer the holders of the European Securities the possibility to exit their investment in the European Securities.

Santander sells 5.2% of its Polish unit as KBC places its 16.2% in the market

On March 18, 2013, KBC Bank NV (“KBC”) and Banco Santander announced a secondary offering of up to 19,978,913 shares in Bank Zachodni WBK S.A. (“BZ WBK”) by way of a fully marketed follow-on offering (the “WBK Offering”). Through the WBK Offering, KBC would sell 15,125,964 shares (constituting 16.17% of BZ WBK shares outstanding at that date) and Santander was expected to sell not less than 195,216 but up to 4,852,949 shares (constituting between 0.21% and 5.19% of BZ WBK shares outstanding at that date).

KBC and Banco Santander, as selling shareholders, granted the underwriters a reverse greenshoe option in relation to up to 10% of the final Offering size which was not used. KBC and Santander each committed to be locked-up for a period of 90 days, and BZ WBK for a period of 180 days, following the closing of the WBK Offering.

The WBK Offering was made to eligible institutional investors and within an indicative price range of PLN240 to PLN270. The final sale price was determined through a bookbuilding process that began on March 18, 2013, and ended on March 21, 2013.

 

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On March 22, 2013, Banco Santander, S.A. and KBC completed the placement of all the shares owned by KBC and 5.2% of the share capital of Bank Zachodni WBK S.A. held by the Group in the market for €285 million, which gave rise to an increase of €292 million in Non-controlling interests.

Following these transactions, we hold 70% of the share capital of Bank Zachodni WBK S.A. and the remaining 30% is held by non-controlling interests.

Agreement with Warburg Pincus and General Atlantic

On May 30, 2013, we announced that we had entered into an agreement with subsidiaries of Warburg Pincus and General Atlantic to foster the global development of our asset management unit, Santander Asset Management (SAM). Pursuant to the terms and conditions of the agreement, Warburg Pincus and General Atlantic together own 50% of the holding company which comprises the eleven management companies we have, mainly in Europe and Latin America, while the other 50% are held by us.

The purpose of the alliance is to enable SAM to improve its ability to compete with the large independent international asset management companies, since the businesses to be strengthened include asset management in the global institutional market, with the additional advantage of having knowledge and experience in those markets in which we are present. The agreement also envisages the distribution of products managed by SAM in the countries in which we have a commercial network for a period of ten years, renewable for five additional two-year periods, for which we will receive commissions at market rates, thus benefiting from broadening the range of products and services we offer our customers. SAM also distributes its products and services internationally, outside our commercial network.

Since the aforementioned asset management companies belonged to different Group companies, prior to the completion of the transaction a corporate restructuring took place whereby each of the asset management companies was sold, by its shareholders, for its fair value, to SAM Investment Holdings Limited (SAM), a holding company created by us. The aggregate value of the asset management companies was approximately €1.7 billion.

Subsequently, in December 2013, once the required authorizations had been obtained from the various regulators, the agreement was executed through the acquisition of a 50% ownership interest in SAM’s share capital by Sherbrooke Acquisition Corp SPC (an investee of Warburg Pincus and General Atlantic) for €449 million. At that date, SAM had financing from third parties for €845 million. The agreement includes deferred contingent amounts payable and receivable for the Group based on the achievement of the business plan targets over the coming five years.

Also, we entered into a shareholders’ agreement with these shareholders regulating, inter alia, the taking of strategic, financial, operational and other significant decisions regarding the ordinary management of SAM on a joint basis. Certain restrictions on the transferability of the shares were also agreed, and a commitment was made by the two parties to retain the restrictions for at least 18 months. Lastly, Sherbrooke Acquisition Corp SPC will be entitled to sell to the Group its ownership interest in the share capital of SAM at market value on the fifth and seventh anniversaries of the transaction, unless a public offering of SAM shares has taken place prior to those dates.

Following these transactions, at year-end we held a 50% ownership interest in SAM and controlled this company jointly with the aforementioned shareholders.

As a result of the aforementioned transaction, we recognized a gain of €1,372 million in the consolidated income statement for 2013, of which €671 million related to the fair value of the 50% ownership interest retained by us.

Banco Santander (Brasil) optimized its equity structure

On September 29, 2013, we announced that our subsidiary Banco Santander (Brasil) S.A. will optimize its equity structure by replacing common equity (Core Tier I) in an amount of Brazilian Reais 6 billion (amount which will be distributed pro rata among its shareholders) with newly-issued instruments of an equivalent amount qualifying as Additional Tier I and Tier II capital, and which will be offered to Banco Santander (Brasil) S.A.’s shareholders.

In January 2014 we subscribed a percentage of the newly issued instruments in proportion to our shareholding in Banco Santander (Brasil) S.A. (approximately 75%), as well as those not subscribed by the other shareholders of Banco Santander (Brasil) S.A.

 

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The new structure improves Banco Santander (Brasil) S.A.’s regulatory capital composition, by increasing the return on equity (ROE) while maintaining the total amount of regulatory capital and capital ratios (BIS II ratio of approximately 21.5% and fully loaded BIS III ratio of approximately 18.9%) above the other retail banks in Brazil.

Acquisition of a 51% interest in Financiera El Corte Inglés, E.F.C., S.A.

On October 7, 2013, we announced that Santander Consumer Finance, S.A. (“Santander Consumer”) had reached a strategic agreement with El Corte Inglés, S.A. (“El Corte Inglés”) in consumer finance and client financing which includes the acquisition from El Corte Inglés of a 51% interest in Financiera El Corte Inglés, E.F.C., S.A. (“Financiera El Corte Inglés”). El Corte Inglés will retain the remaining 49%. The transaction was closed in the first quarter of 2014.

Financiera El Corte Inglés is a consumer finance business that provides financing for the acquisition of all sorts of goods and services of the entities of the El Corte Inglés group. The El Corte Inglés group is a leading retailer in Spain and the largest department store business in the country.

The transaction values Financiera El Corte Inglés at €415 million. Prior to closing El Corte Inglés received a special dividend of approximately €140 million. Thus, Santander Consumer paid a price of approximately €140 million for the 51% stake of Financiera El Corte Inglés.

Financiera El Corte Inglés has a seven member Board, of which Santander Consumer has appointed four members and El Corte Inglés the remaining three.

Agreement with Apollo

On November 21, 2013, we announced that we had reached a preliminary agreement with Apollo European Principal Finance Fund II, a fund managed by subsidiaries of Apollo Global Management, LLC (“Apollo”), for the sale of the platform for managing the loan recovery activities of Banco Santander, S.A. in Spain and for managing and marketing the properties relating to this activity.

Following this transaction, we will retain the property assets and credit portfolio on our balance sheet, while management of these assets will be carried out from the platform owned by Apollo.

On January 3, 2014, we announced that we had sold to Altamira Asset Management Holdings, S.L., an investee of Apollo European Principal Finance Fund II, 85% of the share capital of Altamira Asset Management, S.L., our company that manages debt recovery services before the initiation of court action in Spain and the sale or lease of foreclosed property assets relating to this business, for €664 million.

Cooperation agreement with Bank of Shanghai and purchase of an 8% stake

On December 10, 2013 we announced that we reached a cooperation agreement with Bank of Shanghai (“BoS”) to buy an 8% equity stake in BoS. The transaction, which is subject to approval from the China Banking Regulatory Commission, will make Santander the second-largest shareholder in BoS and its strategic international partner. The transaction is expected to be completed in the first half of 2014. The cost of the investment, including the purchase of HSBC Ltd.’s stake and the cooperation agreement with Bank of Shanghai, is estimated at approximately €470 million. The transaction will have an impact of approximately 1 basis point on the Santander Group’s capital.

Under the terms of the agreement, Santander will provide BoS with a permanent team of professionals, who will contribute Santander’s knowledge and experience in risk management and commercial and retail banking. The two will develop joint wholesale banking activities.

Transfer of interest in Banco Santander (Brasil), S.A.

In January and March 2012 the Group transferred shares representing 4.41% and 0.77%, respectively, of the capital stock of Banco Santander (Brasil), S.A. to two leading international financial institutions. These institutions undertook to deliver these shares to the holders of bonds issued by Banco Santander in October 2010 which were exchangeable for Banco Santander (Brasil), S.A. shares upon maturity, in accordance with their terms.

 

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Santander and KBC agree to merge Bank Zachodni WBK and Kredyt Bank in Poland

On February 28, 2012, we announced that Banco Santander, S.A. and KBC had entered into an investment agreement to combine their Polish banking subsidiaries, BZ WBK and Kredyt Bank S.A. (‘Kredyt Bank’).

The transaction entailed a share capital increase in BZ WBK, where the newly issued shares in BZ WBK were offered and rendered to KBC and the other shareholders of Kredyt Bank in exchange for their shares in Kredyt Bank. Under the agreements BZ WBK would merge with Kredyt Bank at the ratio of 6.96 BZ WBK shares for every 100 Kredyt Bank shares. At market prices as of the date of the announcement, the transaction valued Kredyt Bank at PLN 15.75 a share and BZ WBK at PLN 226.4 a share. The combined bank’s total pro forma value would be PLN 20.8 billion (€5 billion). Both Bank Zachodni WBK and Kredyt Bank were listed on the Warsaw Stock Exchange. The merged bank would continue to be listed on the Warsaw Stock Exchange.

In 2013, following obtainment of the authorization from the Polish financial regulator (KNF), the aforementioned transaction was carried out. As a result, we controlled approximately 75.2% of the post-merger entity and KBC controlled approximately 16.2%, with the remaining 8.6% being owned by non-controlling interests.

Under the investment agreement, Santander also committed to acquire 100% of Zagiel, the consumer finance arm of KBC in Poland. In 2013 Zagiel was integrated into Santander Consumer Finance.

Valores Santander

On March 30, 2012, we informed that the Ordinary General Shareholders’ Meeting held that day had resolved to grant the holders of Valores Santander an option to convert their securities on four occasions before October 4, 2012, the mandatory conversion date for the outstanding Valores Santander. As a result on June 7, 2012, July 5, 2012, August 7, 2012 and September 6, 2012 we issued 73,927,779, 193,095,393, 37,833,193 and 14,333,873 new shares related to the conversion requests of 195,923, 511,769, 98,092 and 37,160 Valores Santander, respectively.

In October 2007, a total of 1,400,000 Valores Santander were issued. On October 2008, 2009, 2010 and 2011, and on June, July, August and September 2012 a total to 880,700 Valores Santander were voluntarily converted. On October 4, 2012, the mandatory conversion of the remaining 519,300 Valores Santander took place, representing 37.1% of the original issuance.

Invitation to tender certain securitization bonds for cash

On April 16, 2012, we announced an invitation to all holders of certain securities (the Securities) to tender such Securities for purchase by Banco Santander for cash (the Invitation). The Securities are fixed rate securities (securitization bonds) listed on the AIAF Fixed Rate Market which correspond to 33 different series issued by specific securitization funds managed by Santander de Titulización, S.G.F.T., S.A. series with an aggregate outstanding principal amount of €6 billion.

The rationale for the Invitation was to effectively manage the Group’s outstanding liabilities and to strengthen our balance sheet. The Invitation was also designed to provide liquidity to Security holders.

On April 25, 2012 we announced the aggregate outstanding principal amount of each of the Securities accepted for purchase, which for senior securities amounted to €388,537,762.18 and for mezzanine securities €61,703,163.58.

Sale of our Colombian unit to the Chilean group Corpbanca

In December 2011, we entered into an agreement with the Chilean group Corpbanca to sell our shareholding in Banco Santander Colombia S.A. and our other business subsidiaries in this country (Santander Investment Valores Colombia S.A., Comisionista de Bolsa Comercial, Santander Investment Colombia S.A., Santander Investment Trust Colombia S.A., Sociedad Fiduciaria y Agencia de Seguros Santander, Ltda.).

Following receipt of the regulatory authorizations from the competent authorities and the delisting of the shares of Banco Santander Colombia S.A., in the second quarter of 2012 we sold our shareholding in Banco Santander Colombia S.A. and our other business subsidiaries in Colombia to the Corpbanca Group for a total of $1,229 million (€983 million), giving rise to a gain of €619 million, which was recognized under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in our 2012 consolidated income statement.

 

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Agreement with Abbey Life Assurance

On July 19, 2012, we reached an agreement with Abbey Life Assurance Ltd, a subsidiary of Deutsche Bank AG, under which Abbey Life Assurance Ltd reinsured 100% of the individual life risk portfolio of the insurance companies of Banco Santander in Spain and Portugal.

This reinsurance transaction enabled us to monetize our life risk insurance portfolio. This transaction gave rise to income of €435 million recognized under Other operating income - Income from insurance and reinsurance contracts issued in the consolidated income statement (€308 million net of tax).

The policies ceded to Abbey Life Assurance Ltd consist of the portfolio as of June 30, 2012. This reinsurance agreement does not involve any changes for our customers as services will continue to be provided by Santander’s insurance companies. Our branches in Spain and Portugal will continue to offer products designed by our insurance companies as the agreement reached with Abbey Life Assurance Ltd does not involve any commitment on future distribution and is limited to the portfolio existing at June 30, 2012.

Placement of shares of Grupo Financiero Santander, S.A.B. de C.V. on the secondary market

On August 16, 2012, we announced our intention to register with both the Mexican Comisión Nacional de Banca y Valores (National Commission of Banking and Securities) and the U.S. Securities & Exchange Commission the registration statements for the placement of shares of Grupo Financiero Santander, S.A.B. de C.V. on the secondary market. The selling institutions would be Banco Santander, S.A. and its subsidiary Santusa Holding, S.L.

On September 26, 2012, we announced that the price of the offering of shares of Grupo Financiero Santander Mexico was set at 31.25 Mexican pesos ($2.437) per share, valuing Santander Mexico at €12,730 million ($16,538 million), making it the 82nd largest bank in the world by market capitalization.

The total volume of the offering represented 24.9% of the share capital of Santander Mexico after the exercise of the green shoe option. The value of the transaction was €3,178 million, making it the largest equity offering in Latin America in 2012 and one of the largest in the world.

The gains obtained by Banco Santander in this transaction were fully allocated to reserves, in line with accounting requirements, as Banco Santander will continue to maintain control over its Mexican subsidiary.

Of the total shares sold, 81% were placed in the United States and elsewhere outside Mexico and 19% in Mexico. The American Depositary Shares of Santander Mexico commenced trading on the New York Stock Exchange on September 26, 2012. The shares of Santander Mexico continue to trade on the Mexican Stock Exchange.

The IPO of our unit in Mexico was an important step in our strategy of having market listings for all of our significant subsidiaries.

Invitation to tender offer

On August 22, 2012, the Bank and Santander Financial Exchanges Limited (each an Offeror and, jointly, the Offerors) invited holders of 21 specific series of subordinated debt and preferred securities to sell them to the Offerors. The aggregate principal amount of the securities traded in euros and sterling amounted to €7,201 million and £3,373 million, respectively.

The rationale for the invitation was to effectively manage the Group’s outstanding liabilities and to strengthen our balance sheet. The invitation was also designed to provide liquidity to security holders.

On August 31, 2012, the Offerors announced that the holders had accepted to sell an aggregate principal amount of €755 million for the securities traded in euros and £311 million for the securities traded in sterling.

Termination of the agreement to purchase Royal Bank of Scotland branch offices

On October 15, 2012, we announced that the agreement for the sale by The Royal Bank of Scotland (“RBS”) to Santander UK of approximately 300 branches of RBS in England and Wales and NatWest in Scotland (the “Business”) would not be completed in view of the foreseeable lack of satisfaction of the conditions precedent by the agreed final deadline of February 2013.

 

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Santander and Elavon agreement

On October 19, 2012, we announced that we had reached an agreement with Elavon Financial Services Limited (“Elavon”) to jointly operate in Spain a payment services business for credit and debit cards through merchants’ point of sale terminals.

The transaction involves the incorporation of a joint venture company whose share capital will be held 51% by Elavon and 49% by the Bank, and to which Santander Group will transfer its aforementioned payment services business in Spain (excluding that of Banesto).

The agreement valued the transferred business at €165.8 million and generated a capital gain of approximately €87 million after tax.

As of March 31, 2013, all the necessary authorizations had been obtained. The transaction was closed in April 2013.

Mergers by absorption of Banesto and Banco Banif

On December 17, 2012, we announced that we had resolved to approve the plan for the merger by absorption of Banesto and Banco Banif, S.A. as part of the restructuring of the Spanish financial sector. These transactions are part of a commercial integration which brought Banesto and Banif under the Santander brand.

At their respective board of directors meetings held on January 9, 2013, the directors of the Bank and Banesto approved the common draft terms of the merger by absorption of Banesto into the Bank with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to the Bank, which were acquired, by universal succession, the rights and obligations of the absorbed entity. As a result of the merger, the shareholders of Banesto, other than the Bank, received in exchange shares of the Bank.

January 1, 2013 was established as the date from which the transactions of Banesto shall be considered to have been performed for accounting purposes for the account of the Bank.

On March 22, 2013 and March 21, 2013, the general shareholders meetings of the Bank and Banesto, respectively, approved the terms of the merger.

On April 29, 2013, pursuant to the provisions of the terms of the merger and to the resolutions of the general shareholders’ meetings of both companies, the regime and procedure for the exchange of Banesto shares for shares of Banco Santander was made public. Banco Santander covered the exchange of Banesto shares with shares held as treasury stock based on the exchange ratio of 0.633 shares of Banco Santander, each with a nominal value of €0.50, for each share of Banesto, each with a nominal value of €0.79, without provision for any supplemental cash remuneration.

On May 3, 2013, the merger was registered with the Commercial Registry of Cantabria and the dissolution of Banesto was completed.

The directors of Banco Banif, S.A., at its board of directors meeting held on January 28, 2013, and the directors of Banco Santander, S.A., at its board of directors meeting held on that same day, approved the common drafts terms of the merger by absorption of Banco Banif, S.A. into Banco Santander, S.A. with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to Banco Santander, S.A., which acquired, by universal succession, the rights and obligations of the absorbed entity.

January 1, 2013 was established as the date from which the transactions of Banif shall be considered to have been performed for accounting purposes for the account of the Bank.

On May 7, 2013, the merger was registered with the Commercial Registry of Cantabria and the dissolution of Banco Banif, S.A. was completed.

 

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Insurance business in Spain

On December 20, 2012, we announced that we had reached an agreement with Aegon. In this regard, we created two insurance companies, one for life insurance and the other for general insurance, in which Aegon would acquire ownership interests of 51%, and management responsibility would be shared by Aegon and the Group. We would hold 49% of the share capital of the companies and we would enter into a distribution agreement for the sale of insurance products in Spain through the commercial networks for a period of 25 years. The agreement would not affect savings, health and vehicle insurance, which would continue to be owned and managed by Santander.

In June 2013, after obtaining the relevant authorizations from the Directorate-General of Insurance and Pension Funds and from the European competition authorities, Aegon acquired a 51% ownership interest in the two insurance companies created by the Group for these purposes, one for life insurance and the other for general insurance (currently Aegon Santander Vida Seguros y Reaseguros, S.A. and Aegon Santander Generales Seguros y Reaseguros, S.A.), for which it paid €220 million, thereby gaining joint control together with the Group over the aforementioned companies. The agreement also includes payments to Aegon that are deferred over two years and amounts receivable for the Group that are deferred over five years, depending on the business plan.

The aforementioned agreement includes the execution of a distribution agreement for the sale of insurance products in Spain for 25 years through commercial networks, for which the Group will receive commissions at market rates.

This transaction gave rise to a gain of €385 million recognized under Gains (losses) on disposal of assets not classified as non-current assets held for sale (€270 million net of tax), of which €186 million related to the fair value recognition of the 49% ownership interest retained by the Group.

Acquisition of the Polish institution Bank Zachodni WBK

On September 10, 2010, we announced that we had reached an agreement with Allied Irish Banks (“AIB”) to acquire 70.36% of the Polish institution Bank Zachodni WBK (“BZ WBK”) for an amount of approximately €2.938 billion in cash. On February 7, 2011, we announced that we had launched a tender offer in Poland (the “Tender Offer”) for 100% of the share capital of BZ WBK in accordance with applicable Polish law and regulation. The Tender Offer forms part of the agreement of Banco Santander with AIB for the acquisition of AIB’s stake in BZ WBK announced in September 10, 2010.

Under the Tender Offer, Banco Santander offered PLN 226.89 in cash per share (approximately €58.74) resulting in a total maximum consideration of PLN 16,580,216,589.57 (approximately €4,293.4 million) for the total share capital of BZ WBK.

The Tender Offer was made in Poland subject to Polish law and subject to the terms and conditions included in the Tender Offer document (dokument wezwania) submitted to the Polish securities regulator - Polish Financial Supervision Commission (Komisja Nadzoru Finansowego) and the Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.). The consummation of the Tender Offer was subject to the satisfaction of the conditions indicated in the Tender Offer document, including the acceptance of the tender offer by holders of more than 70% of the outstanding shares of BZ WBK and the approval by the Polish regulatory authorities of the acquisition by Grupo Santander of BZ WBK.

The acceptance period of the tender offer commenced on February 24, 2011 and ended on March 25, 2011.

69,912,653 BZ WBK shares were tendered, representing 95.67% of BZ WBK’s capital. Since the Tender Offer was made at a cash price of PLN 226.89 per share (approximately €57.05), the purchase of the shares tendered in the offer resulted in a payment of PLN 15,862.48 million (approximately €3,987 million).

Since the 70% acceptance threshold (which was a condition of the Tender Offer) was exceeded and all the remaining conditions, including the obtaining of the appropriate regulatory authorizations, were met, the tender offer was settled and the transfer of the shares was made on April 1, 2011.

Additionally, on April 1, 2011, we acquired AIB’s 50% stake in BZ WBK Asset Management for €174 million in cash. Subsequently, based on the terms and conditions of the takeover bid, certain non-controlling shareholders of BZ WBK opted to sell their shares. As a result, the Group acquired 421,859 additional shares for €24 million.

Finally, in May and June 2011, we acquired and aggregate of 113,336 additional BZ WBK shares. As of December 31, 2011, the Group held a total of 70,334,512 shares of Bank Zachodni WBK S.A. (96.25%).

 

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Sales of 1.9% and 7.8% of Banco Santander Chile

On February 17, 2011, we announced that we had sold shares representing 1.9% of the share capital of Banco Santander Chile, for a total consideration of US$291 million. This transaction generated a capital gain for Banco Santander of approximately €110 million, entirely accounted for as reserves. Following the transaction, we held a 75% stake in the share capital of Banco Santander Chile.

On November 22, 2011, we announced the launch of a public secondary offering of approximately 14,741.6 million shares of common stock of Banco Santander Chile, representing 7.8% of the company’s share capital.

On December 7, 2011, we announced that we had successfully completed the offering. As a result, 7.82% of the capital of such bank was sold at a price of 33 Chilean pesos per share and US$66.88 per ADR. The placement amounted to US$950 million, with a positive impact on the core capital of the Group of 11 basis points. Following the transaction, we held 67% of the share capital of Banco Santander Chile.

Agreement with Zurich Financial Services Group

On February 22, 2011, we signed a Memorandum of Understanding with insurer Zurich Financial Services Group (“Zurich”) to form a strategic alliance to strengthen insurance distribution in five key Latin American markets: Brazil, Chile, Mexico, Argentina and Uruguay.

Once the required authorizations from the various regulators were obtained, in the fourth quarter of 2011 Zurich acquired, for €1,044 million 51% of the share capital of ZS Insurance América, S.L. (holding company for the Group’s insurance businesses in Latin America), thereby gaining control over this company, and it has taken over management of the companies concerned. The agreement also provides for deferred payments based on the achievement of the business plan targets over the coming 25 years.

Following this transaction Santander retained 49% of the share capital of the holding company and entered into a distribution agreement for the sale of insurance products in each of the relevant countries for 25 years.

As a result of the aforementioned transaction, the Group recognized a gain of €641 million (net of the related tax effect) under Gains (losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2011, of which €233 million related to the measurement at fair value of the 49% ownership interest retained in this company.

Santander Banif Inmobiliario

On December 3, 2010, exclusively for commercial reasons, we decided to contribute resources to the Santander Banif Inmobiliario, FII property investment fund (the “Fund”) through the subscription of new units and the granting of a two-year liquidity guarantee in order to meet any outstanding redemption claims by the unit holders of the Fund and to avoid winding up the Fund. We offered the unit holders of the Fund the opportunity to submit new requests for the total or partial redemption of their units or for the total or partial revocation of any redemption requests that they had previously submitted. Any such requests were required to be submitted before February 16, 2011.

Redemptions from the Fund, managed by Santander Real Estate, S.G.I.I.C. S.A., had been suspended for a period of two years in February 2009, in accordance with the request filed with the Spanish National Securities Market Commission (CNMV), due to the lack of sufficient liquidity to meet the redemptions requested at that date.

On March 1, 2011, we paid the full amount of the redemptions requested by the Fund’s unit holders, which amounted to €2,326 million (93.01% of the Fund’s net assets), through the subscription of the related units by us at their redemption value at February 28, 2011.

Following the aforementioned acquisition, we owned 95.54% of the Fund. The suspension of redemptions was lifted from said date and the Fund is operating normally.

 

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Metrovacesa, S.A. (“Metrovacesa”)

On March 17, 2011, Banco de Sabadell, S.A., Caja de Ahorros y Monte de Piedad de Madrid (now Bankia, S.A.), Banco Bilbao Vizcaya Argentaria, S.A., Banco Popular Español, S.A., Banco Santander, S.A. and Banco Español de Crédito, S.A., holders in aggregate of shares representing 65.52% of Metrovacesa’s share capital (of which a 23.63% stake was held by the Group), entered into a capitalization and voting agreement relating to Metrovacesa (which was subject to certain conditions precedent, including the implementation by Metrovacesa of a capital increase through cash contributions and the conversion of debt into equity referred to below) whereby said credit entities collectively undertook to capitalize approximately €1,360 million credits to Metrovacesa, the Group’s share of which was €492 million.

On June 28, 2011, Metrovacesa’s shareholders approved the aforementioned capital increase for a par value of €1,949 million, subject to certain conditions precedent including the CNMV releasing the Group from the obligation to launch a mandatory takeover bid for the entire share capital of Metrovacesa as a result of the increase of the Group’s holding in the share capital of Metrovacesa above 30% of the company’s voting rights. This release was granted by the CNMV on July 6, 2011. On August 1, 2011, and following the execution of the abovementioned capital increase of Metrovacesa, Banco Santander, S.A. and the individuals and legal entities whose voting rights are attributed to the Bank pursuant to the assumptions provided in article 5 of Royal Decree 1066/2007, of July 27, governing the legal framework for public take-over bids of securities, held 344,530,740 shares in Metrovacesa, representing 34.88% of the company’s voting rights.

On December 19, 2012, the creditor entities that took part in the aforementioned debt restructuring agreement announced that they had reached an agreement to promote the delisting of the shares of Metrovacesa, S.A. and they voted in favor of this at the general meeting held for this purpose on January 29, 2013. Following the approval of the delisting and the public takeover offer by the shareholders at the Metrovacesa, S.A. general meeting, the entities prepared a delisting public takeover offer aimed at the Metrovacesa, S.A. shareholders that did not enter into the agreement, at €2.28 per share. Our share of the delisting public takeover offer was 45.56% and, as a result, following 97.29% acceptance of the public takeover offer, we acquired an additional 1.953% of Metrovacesa, S.A. for which we paid €44 million. Following this transaction, at December 31, 2013, we held an ownership interest of 36.82% in the share capital of Metrovacesa, S.A.

New partners for Santander Consumer USA

On October 21, 2011 we announced that Santander Holdings USA, Inc. (“SHUSA”) and Santander Consumer USA Inc. (“SCUSA”), a majority-owned subsidiary of SHUSA, entered into an investment agreement with Sponsor Auto Finance Holdings Series LP, a Delaware limited partnership (“Auto Finance Holdings”). Auto Finance Holdings is jointly owned by investment funds affiliated with each of Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P. (collectively, the “New Investors”), as well as DFS Sponsor Investments LLC, a Delaware limited liability company affiliated with Thomas G. Dundon, the Chief Executive Officer of SCUSA and a Director of SHUSA, and Jason Kulas, Chief Financial Officer of SCUSA. As previously reported on October 20, 2011, SCUSA also entered into an investment agreement with DDFS LLC (“DDFS”), a Delaware limited liability company affiliated with Thomas G. Dundon.

On December 31, 2011, Auto Finance Holdings and DDFS completed their investments in SCUSA. SCUSA increased its share capital on that date through the issuance of shares to Auto Finance Holdings for an aggregate consideration of $1.0 billion and to DDFS for an aggregate consideration of $158.2 million.

The transaction valued SCUSA at $4 billion. Upon its completion, Banco Santander, S.A. realized a capital gain of €872 million under Gains (losses) on disposal of assets not classified as non-current assets held for sale, of which €649 million related to the measurement at fair value of the 65% ownership interest retained in SCUSA. The fair value of SCUSA was determined using comparable market data, recent transactions and discounted cash flow analyses, taking into account contingent payments.

As a result of these transactions, SHUSA, the New Investors (indirectly through Auto Finance Holdings) and Mr. Dundon (indirectly through DDFS and DFS Sponsor Investments LLC) owned approximately 65%, 24% and 11% of the common stock of SCUSA, respectively. Also on December 31, 2011, SHUSA, SCUSA, Auto Finance Holdings, DDFS, Thomas G. Dundon and Banco Santander, S.A. entered into a shareholders’ agreement (the “Shareholders’ Agreement”). The Shareholders’ Agreement provides each of SHUSA, DDFS and Auto Finance Holdings with certain board representation, governance, registration and other rights with respect to their ownership interests in SCUSA. Subject to the terms and conditions of the Shareholders’ Agreement, SHUSA, Auto Finance Holdings and DDFS jointly manage SCUSA and share control over it.

 

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Pursuant to the Shareholders’ Agreement, depending on SCUSA’s performance during 2014 and 2015, if SCUSA exceeds certain performance targets, SCUSA may be required to pay up to $595.0 million in favor of SHUSA. If SCUSA does not meet such performance targets during 2014 and 2015, SCUSA may be required to make a payment to Auto Finance Holdings of up to the same amount.

The Shareholders’ Agreement also provides that each of Auto Finance Holdings and DDFS will have the right to sell, and SHUSA will be required to purchase, their respective shares of SCUSA common stock, at its then fair market value, and Auto Finance Holdings and DDFS, if applicable, will receive the payment referred to above at that time (i) at the fourth, fifth and seventh anniversaries of the closing of the investments, unless an initial public offering of SCUSA common stock has been previously consummated or (ii) in the event there is a deadlock with respect to certain specified matters which require the approval of the board of directors or shareholders of SCUSA. See “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events — Santander Consumer USA successfully completed its initial public offering”

Offer to exchange subordinated debt instruments for non-subordinated debt instruments

On November 15, 2011, we announced an offer (“the Offer”) to holders of certain securities (the “Existing Securities”), to exchange Existing Securities for new securities to be issued (the “New Securities”).

The Existing Securities constituted eight series of subordinated debt instruments issued by Santander Issuances, S.A.U., which are listed on the Luxembourg Stock Exchange.

The New Securities are senior debt instruments denominated in pounds sterling and euros with a maturity date of December 1, 2015. The New Securities trade on the Luxembourg Stock Exchange.

We used funds pursuant to the Offer from our ordinary available liquidity to comply with our payment obligations pursuant to the Offer.

The Offer allows managing more effectively the Group’s outstanding liabilities, taking into consideration prevailing market conditions.

The final nominal amount and interest rate of the New Securities are set forth below:

 

    €1,116,200,000 3.381% senior notes due December 1, 2015.

 

    GBP 189,800,000 3.160% senior notes due December 1, 2015.

The Offer generated gross capital gains of approximately €144 million, included in the 2011 accounts.

Offer to repurchase preferred securities and subscribe Banco Santander shares

On December 2, 2011, we announced an offer (the “Repurchase Offer”) to repurchase Series X Preferred Securities issued by Santander Finance Capital, S.A.U. in June 2009 and guaranteed by the Bank (the “Series X Preferred Securities”) and a simultaneous public offer to subscribe for newly-issued shares of Banco Santander (the “New Shares”), on the terms set out below. We refer to the Repurchase Offer and the issuance of New Shares as the “Capital Increase.”

In order to participate in the Repurchase Offer, holders of Series X Preferred Securities were required to irrevocably subscribe the number of New Shares which corresponded to the repurchase price of their Series X Preferred Securities. The New Shares were offered solely to the abovementioned holders of Series X Preferred Securities who accepted the Repurchase Offer.

The issue price of the New Shares (nominal plus premium) equaled the arithmetic mean of the average weighted prices of Banco Santander shares on the Spanish stock exchanges during the Acceptance Period. Consequently, the number of New Shares to be subscribed by each holder of Series X Preferred Securities who accepted the Repurchase Offer was the result of dividing the nominal value of the preferred securities (€25.00) by the issue price of the New Shares.

On December 28, 2011, we announced that during the acceptance period, the holders of 77,743,969 preferred securities, representing 98.88% of the preference shares outstanding, had accepted the repurchase offer.

 

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The holders of these preferred securities subscribed 341,802,171 shares under the Capital Increase. Consequently, the total amount (nominal plus premium) subscribed was €1,943,599,225, and the nominal value of the Capital Increase was €170,901,085.50. The New Shares represented 3.84% of the share capital of Banco Santander following the Capital Increase.

On December 30, 2011, Banco Santander acquired the Series X Preferred Securities and the new shares subscribed by the holders of those preferred securities were paid up.

The new shareholders were, as of December 30, 2011, entitled to all of the rights pertaining to the shares of Banco Santander and, in particular, have the right to participate in the Santander Dividendo Elección program.

The Capital Increase resulted in a raise in core capital of 34 basis points.

Capital requirements

On December 8, 2011, the European Banking Authority (“EBA”) published aggregate figures relating to capital requirements of a temporary and extraordinary nature applicable to financial institutions, calculated on the basis of data as of September 30, 2011.

According to the updated calculations, the additional capital required for Grupo Santander amounted to €15,302 million versus the €14,971 million published by the EBA on October 26, 2011, which was based on estimated figures for September 30, 2011. This amount was reached as follows: (i) €6,829 million of Valores Santander, which have to be converted into shares before October 2012; (ii) €1,943 million through the exchange of preferred shares for ordinary new shares; (iii) €1,660 million through the application of the Santander Dividendo Elección program (scrip dividend) at the time of the final dividend corresponding to fiscal year 2011; and (iv) €4,890 million through organic capital generation and the transfer of certain stakes, mainly in Chile and Brazil.

Capital Increases

As of December 31, 2011, our capital had increased by 579,921,105 shares, or 6.96% of our total capital as of December 31, 2010, to 8,909,043,203 shares as a result of the following transactions:

 

    Valores Santander: On October 6, 2011, 1,223,457 new shares were issued in exchange for 3,458 Valores Santander.

 

    Scrip Dividend: On February 1, 2011, we issued 111,152,906 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 1.33% of our share capital. The amount of the capital increase was €55,576,453. Additionally, on November 2, 2011, the Bank issued 125,742,571 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 1.49% of our share capital. The amount of the capital increase was €62,871,285.50.

 

    Repurchase of Series X Preferred Securities and subscription of Banco Santander shares: On December 28, 2011, we announced that the holders of 77,743,969 preference shares had accepted the Repurchase Offer. On December 30, 2011, the holders of these preference shares subscribed 341,802,171 shares. Consequently, the total amount (nominal plus premium) subscribed was €1,944 million and the nominal value was €170.9 million. The New Shares represent 3.84% of our share capital after the Capital Increase.

As of December 31, 2012, our capital had increased by 1,412,136,547 shares, or 15.85% of our total capital as of December 31, 2011, to 10,321,179,750 shares as a result of the following transactions:

 

    Valores Santander: On March 30, 2012, we informed that the Ordinary General Shareholders’ Meeting held that day had resolved to grant the holders of Valores Santander an option to convert their securities on four occasions before October 4, 2012, the mandatory conversion date for the outstanding Valores Santander. As a result on June 7, 2012, July 5, 2012, August 7, 2012, September 6, 2012 and October 9, 2012 we issued 73,927,779, 193,095,393, 37,833,193, 14,333,873 and 200,311,513 new shares related to the conversion requests of 195,923, 511,769, 98,092, 37,160 and 519,300 Valores Santander, respectively.

 

    Scrip Dividend: On January 31, 2012, May 2, 2012, July 30, 2012 and November 2, 2012, we issued 167,810,197 shares, 284,326,000 shares, 218,391,102 shares and 222,107,497 shares (1.88%, 3.13%, 2.27%, and 2.20% of the share capital, respectively), giving rise to capital increases of €83,905,098.50, €142,163,000, €109,195,551 and €111,053,748.50, respectively.

 

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As of December 31, 2013, our capital had increased by 1,012,240,738 shares, or 9.81% of our total capital as of December 31, 2012, to 11,333,420,488 shares as a result of the following transactions:

 

    Scrip Dividend: On January 30, 2013, April 30, 2013, July 31, 2013 and October 31, 2013, we issued 217,503,395 shares, 270,917,436 shares, 282,509,392 shares and 241,310,515 shares (2.06%, 2.51%, 2.55%, and 2.13% of the share capital, respectively), giving rise to capital increases of €108,751,697.50, €135,458,718, €141,254,696 and €120,655,257.50, respectively.

Other Material Events

Royal Decree-Law 2/2012 and Royal Decree-Law 18/2012

In 2012, the Spanish Government implemented a series of structural reforms including measures aimed at cleaning up the balance sheets of Spanish credit institutions affected by the impairment of their assets relating to the real estate sector.

Among the main actions carried out were the approval on February 3, 2012 of Royal Decree-Law 2/2012 and on May 18, 2012 of Royal Decree-Law 18/2012 on the clean-up of the financial sector, through which a review of the minimum provisioning percentages to be taken into consideration in the estimation of the impairment losses relating to financing granted to the real estate sector in Spain and to the foreclosed assets and assets received in payment of debt arising from financing granted to that sector was carried out. Spanish credit institutions were required to comply with the provisions of these regulations by December 31, 2012.

These requirements gave rise to new provisions in addition to those arising from the application of the minimum percentages established hitherto by the Bank of Spain amounting to approximately €6.8 billion, of which €1.8 billion were covered in 2011 as a result of the estimate of the impairment losses on the aforementioned assets and the recognition of the corresponding provisions. At the end of 2012, the Group had fully covered all the required provisions.

With respect to the recognition of the impact of those Royal Decree-Laws on our IFRS-IASB consolidated financial statements for 2012, we continued to apply our procedure with regard to Spanish regulatory requirements related to the loan provision and to the valuation of foreclosed assets, i.e. we compared the amount of the provisions for loans and foreclosed assets to be recognized at year end calculated pursuant to IFRSs (obtained from internal models for credit loss provisions and from external valuations and other evidence for foreclosed assets and assets received in payment of loans) with the amount of the provisions required by the Spanish regulatory requirements including Royal Decree-Laws in order to ascertain whether the difference between the two amounts was not material in relation to our consolidated financial statements as a whole and, accordingly, did not require any adjustment to be made for the preparation of the consolidated financial statements under IFRS-IASB.

The difference between loan loss provisions and provisions for foreclosed assets calculated using internal models and external valuations and those calculated under Spanish regulatory requirements was not material as of December 31, 2012.

Financial assistance to recapitalize the Spanish Banking Sector

1. Assessment of balance sheets

In 2012, in order to strengthen the credibility and confidence of the banks, an expert and independent assessment was conducted on all loans granted to the private resident sector, both to households (including mortgages) as well as to SMEs and all other non-financial companies.

This exercise was carried out on the 14 largest banks (90% of assets), and in two phases.

 

    First phase. A top-down analysis by the consultancies Oliver Wyman and Roland Berger assessed the whole sector’s capacity of resistance in 2012-14 under two scenarios in order to determine the systemwide capital needs. In an extremely adverse scenario, which is defined as being highly unlikely (less than 1% probability) and is tougher than any of the other stress tests carried out in Europe so far, the results showed that, in the worst case, capital requirements would range from €51 billion to €62 billion.

 

    Second phase. A bottom-up analysis. This consisted of analyzing one by one the portfolios of these banks in order to classify provision and measure their credit risks. The results of these audits were used to construct a wider exercise in which, on the basis of the specific data of each bank and applying a stress test, the individual capital needs were calculated under a baseline and an adverse scenario.

 

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The second phase was carried out by Oliver Wyman with the participation of the four main auditing firms in Spain (Deloitte, PwC, Ernst & Young and KPMG), six Spanish and international real estate assessment companies and a project manager, the Boston Consulting Group, which helped the Bank of Spain coordinate the exercise.

The adverse scenario (probability of less than 1%) was based on a 6.5% shrinkage in GDP between 2012 and 2014, a further rise in unemployment (to 27.2% in 2014) and a big fall in real estate prices.

The non-payment probability was multiplied by three in the case of the portfolios of companies and real estate developers (27% and 87%, respectively). In mortgages to individual borrowers, it was multiplied by five, to 15%, and in foreclosures an expected loss of 64% was considered.

The results of the bottom-up analysis for the banking system, for a three year period (2012-2014) were total systemwide losses on the credit portfolio (operations in Spain) of €270 billion in the adverse scenario (€183.3 billion in the baseline).

In comparing these losses with the system’s absorption capacity (provisions already made, pre-provision profit, the impact of the protection frameworks, the excess of capital versus the capital required in the adverse scenario), the system’s additional capital needs were estimated to amount to €57.3 billion in the adverse scenario (€53.7 billion after the tax effect) and €24 billion in the baseline scenario (€25.9 billion after the tax effect).

The main results from the analysis were the following:

 

    Seven banking groups, which accounted for 62% of the credit portfolio analyzed had no capital needs (Group 0). Among those banks is Grupo Santander.

 

    The four groups in which the FROB (Fund for the Orderly Restructuring of the Banking Sector) had a holding (Group 1) accounted for 86% of the sector’s capital needs.

 

    The rest of banks with capital needs, after presenting their recapitalization plans, formed Group 2 if they needed state aid and Group 3 if they obtained the funds by themselves.

In the adverse scenario, it was estimated that Banco Santander would be able to raise its capital ratio (from 9.7% to 10.8%) and to have a significant capital surplus (€25.3 billion in 2014).

2. Loan request to European authorities.

On June 9, 2012, the Spanish Government announced that it intended to request a special loan from the European authorities that would be used exclusively to recapitalize the more vulnerable Spanish financial institutions, most of which were former savings banks.

The financial assistance was formally requested on June 25, 2012 and approved on July 20, 2012. The basic conditions are as follows:

 

    Financial conditions: €100 billion credit line to the FROB with the guarantee of the Spanish state, an average maturity of 12.5 years, in preferential conditions and without having preference status over other debts.

 

    Other conditions: (i) individual assistance for banks that require recapitalization with public funds, that have a restructuring plan within the state’s rules and that segregate their problematic assets; (ii) for each single entity the minimum core capital ratio is 9%.

3. Creation of the Spanish Bank Restructuring Asset Management Company (“Sareb”).

The creation of Sareb is intended to increase confidence in the Spanish banking system, which could lead to a lower cost of funding and better ratings.

Its objective is to manage and sell in an orderly way the loans and real estate assets placed in it from banks in Groups 1 and 2 over no more than 15 years.

 

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In December 2012 we, together with other Spanish financial institutions, entered into an agreement to invest in Sareb whereby we undertook to invest of up to €840 million (25% in capital and 75% in subordinated debt), and at December 31, 2012, we had purchased €164 million of capital and €490 million of subordinated debt. Our equity stake is around 17% with two representatives on the board of directors.

In February 2013, following the review of the own funds that Sareb required, the aforementioned undertaking was reduced to €806 million, and the Group disbursed the remaining €44 million of capital and €108 million of subordinated debt.

4. Recapitalization and restructuring of the banks that needed state aid.

Following the review and approval of the recapitalization and restructuring plans of banks in need of capital (according to the Oliver Wyman report) by the Spanish and European authorities, the state aid that would be provided to each bank was determined. No state aid was determined to be necessary for Grupo Santander.

The capital to be injected by FROB into Group 1 banks amounted to €36,968 million. In December 2012, this amount was transferred from the European Stability Mechanism to FROB, together with €2.5 billion for FROB’s contribution to Sareb, which recapitalized these banks before the end of the year.

In the case of the four banks that comprise Group 2, FROB injected €1,865 million of capital. Two banks (in Group 3) in need of capital but which showed a capacity to cover their needs themselves did not receive state aid.

The total state aid for banks in need was €38,833 million, significantly below the €54 billion identified by Oliver Wyman for these banks. This lower amount was due to the losses assumed by hybrid instruments, the transfer of assets to Sareb and capital gains realized by the relevant banks.

The recapitalization of the financial sector enabled banks in need of capital to meet their targeted capital ratios.

In addition, and according to the aforementioned Memorandum of Understanding, a profound restructuring was underway in the eight banks receiving state aid, which must reduce their balance sheets before 2017.

The European Commission believes that these business reduction plans, which involve closures of branches and shedding of employees, strengthen the long-term viability of all these banks.

Recent Events

Scrip dividends

At its meeting of January 13, 2014, the Bank’s executive committee resolved to apply the Santander Dividendo Elección scrip dividend scheme on the dates on which the third interim dividend is traditionally paid, whereby the shareholders were offered the option of receiving an amount equivalent to said dividend, the gross amount of which was €0.152 per share, in shares or cash.

On January 30, 2014 we announced that the holders of 86.37% of the free allotment rights chose to receive new shares. Thus, the definitive number of ordinary shares of €0.5 of face value issued in the free-of charge capital increase was 227,646,659, corresponding to 2.01% of the share capital, and the amount of the capital increase was €113,823,329.50. The value of the remuneration corresponding to the holders of free allotment rights who have requested new shares amounts to €1,487,898,563.22. The shareholders holding the remaining 13.63% of the free allotment rights accepted the irrevocable undertaking to acquire free allotment rights assumed by Banco Santander. Consequently, Banco Santander acquired 1,544,614,122 rights for a total gross consideration of €234,781,346.54. Banco Santander waived the free allotment rights so acquired.

On April 10, 2014 we announced the information in connection with the flexible remuneration program Santander Dividendo Elección (scrip dividend scheme) to be applied to the final 2013 dividend. The shareholders were offered the option of receiving an amount equivalent to said dividend, the gross amount of which was €0.149 per share, in shares or cash.

 

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Santander Consumer USA successfully completed its initial public offering

On January 23, 2014, the public offering of shares of Santander Consumer USA Holdings Inc. (SCUSA) was completed and SCUSA’s shares were admitted to trading on the New York Stock Exchange. The placement represented 21.6% of SCUSA’s share capital, of which 4% related to the holding sold by the Group. Following this sale, we hold 60.7% of the share capital of SCUSA. Both Sponsor Auto Finance Holdings Series LP (Sponsor Holdings) -an investee of funds controlled by Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P.- and DDFS LLC (DDFS) - a company controlled by Thomas G. Dundon, the Chief Executive Officer of SCUSA- also reduced their holdings.

Since the ownership interests of the former shareholders were reduced to below certain percentages, the prevailing shareholder agreement was terminated, pursuant to the terms and conditions established in said agreement. This termination has included, inter alia, the cancellation of the contingent payment to be made by SCUSA on the basis of its results in 2014 and 2015. It has also entailed the termination of the agreements whereby, SCUSA was controlled jointly by all the above and, as a result, it has begun to be controlled by us on the basis of the percentage held in its share capital.

Issuance of contingent perpetual preferred convertible securities

On March 5, 2014, we announced that the Executive Committee had resolved to carry out an issue of contingent perpetual preferred securities convertible into newly issued ordinary shares of the Bank (“PCCS”), excluding pre-emptive subscription rights and for a nominal value of up to €1.5 billion (the “Issue”). The Issue was carried out through an accelerated bookbuilding process and was targeted only at qualified investors.

The PCCS were issued at par and the interest thereon, the payment of which is subject to certain conditions and is at the discretion of the Bank, was set at 6.25% per annum for the first five years. After that, it will be reviewed by applying a margin of 541 basis points on the five-year Mid-Swap Rate.

On March 25, 2014, Bank of Spain qualified the PCCS as additional tier 1 under the new European rules on capital requirements set by European Regulation 575/2013. The PCCS are perpetual although they may be called under certain circumstances and would be converted into newly issued ordinary shares of Banco Santander if the common equity Tier 1 ratio of the Bank or its consolidated group, calculated in accordance with European Regulation 575/2013, were to fall below 5.125%. At present, the PCCS are traded on the Global Exchange Market of the Irish Stock Exchange.

Agreement for the acquisition of Getnet

On April 7, 2014, we announced the agreement reached for the acquisition, through Banco Santander (Brasil) S.A.’s investee company Santander Getnet Serviços para Meios de Pagamento Socidade Anónima, of 100% of the company Getnet Tecnologia Em Captura e Processamento de Transações H.U.A.H. (“Getnet”) for an amount of 1,104 million reais (approximately €353 million). Following the acquisition, Banco Santander (Brasil) S.A. will hold indirectly an 88.5% stake in Getnet. The transaction will have no significant impact on Grupo Santander’s shareholders’ equity.

Getnet specializes in the development and management of technological solutions and services for businesses with electronic transactions. The transaction gives continuity to the growth strategy in the acquiring business. Santander Getnet Serviços para Meios de Pagamento Socidade Anónima is a payment service provider company in which Santander Brasil and Getnet presently hold 50% each.

It is expected that the transaction (which is subject to regulatory authorization) will be concluded during the second half of 2014.

Offer to acquire 25% of Santander’s Brazilian subsidiary

On April 29, 2014 we have announced that Banco Santander’s board of directors has resolved to make an offer to acquire all shares of Banco Santander Brasil not already held by Grupo Santander, representing approximately 25% of Santander Brasil’s share capital. The transaction would be paid for with up to 665 million shares of Banco Santander (parent company), equivalent to The offer will be subject to customary conditions for this type of transaction, including the granting of the relevant regulatory authorizations and approval at Santander Brasil €4,686 million.

Santander Brazil would remain listed on the Sao Paulo stock exchange and Banco Santander’s shares (parent company) would be listed on that market as well.

The offer will be subject to customary conditions for this type of transaction, including the granting of the relevant regulatory authorizations and approval at Santander Brasil’s and Banco Santander’s general shareholders’ meeting.

B. Business overview

At December 31, 2013, we had a market capitalization of €73.7 billion, stockholders’ equity of €70.6 billion and total assets of €1,115.6 billion. We had an additional €125.2 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2013, we had 58,383 employees and 6,160 branch offices in Continental Europe, 25,368 employees and 1,157 branches in the United Kingdom, 87,069 employees and 5,904 branches in Latin America, 9,741 employees and 706 branches in the United States and 2,397 employees in Corporate Activities (for a full breakdown of employees by country, see Item 6 of Part I, “Directors, Senior Management and Employees—D. Employees” herein).

We are a financial group operating principally in Spain, the United Kingdom, other European countries, Brazil and other Latin American countries and the United States, offering a wide range of financial products.

 

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In Latin America, we have majority shareholdings in banks in Argentina, Brazil, Chile, Mexico, Peru, Puerto Rico and Uruguay.

Grupo Santander maintains the general criteria used in our 2012 Form 20-F, with the following exceptions:

1) In the Group’s financial statements

 

    The change in International Accounting Standards 19 (IAS 19) requires that for periods beginning on or after January 1, 2013 actuarial gains and losses are immediately recognized against shareholders’ equity, without the possibility for deferred recognition through the income statement, as was done in the 2012 20-F and prior periods.

 

    As a result of the envisaged disposal of the Santander UK card business formerly owned by GE, its results have been eliminated from the various lines of the income statement and recorded, net, in profit from discontinued operations.

2) In businesses

 

    Spain was incorporated as a unit under the Continental Europe segment, including the branch networks of Santander, Banesto and Banif (merged in 2013), Global Wholesale Banking, Asset Management and Insurance and the Spain ALCO portfolio.

 

    Spain’s run-off real estate became a unit within Continental Europe. This unit includes: loans from customers whose activity is mainly real estate development, which have a specially allocated management department in the Group; equity stakes in real estate companies and foreclosed assets.

3) Other adjustments

 

    The annual adjustment was made to the Global Customer Relationship Model and resulted in a net increase of 60 new clients.

 

    The wholesale businesses in Poland and Banesto, previously in retail banking, were incorporated to Global Wholesale Banking.

 

    Corporate Activities was redefined due to funding allocation and transfer of real estate assets and their costs (already mentioned), as well as other reallocations of costs among units.

The financial statements of each business area have been drawn up by aggregating the Group’s basic operating units. The information relates to both the accounting data of the companies in each area as well as that provided by the management information systems. In all cases, the same general principles as those used in the Group are applied.

In accordance with the criteria established by IFRS-IASB, the structure of our operating business areas has been segmented into two levels:

First (or geographic) level. The activity of our operating units is segmented by geographical areas. This coincides with our first level of management and reflects our positioning in the world’s main currency areas.

The reported segments are:

 

    Continental Europe. This covers all retail banking business, wholesale banking and asset management and insurance conducted in this region. This segment includes the following units: Spain, Portugal, Poland, Santander Consumer Finance (which includes the consumer business in Europe, including that of Spain, Portugal and Poland) and Spain’s run-off real estate.

 

    United Kingdom. This includes retail and wholesale banking, asset management and insurance conducted by the various units and branches of the Group in the country.

 

    Latin America. This embraces all the Group’s financial activities conducted via its subsidiary banks and subsidiaries. It also includes the specialized units of Santander Private Banking, as an independent and globally managed unit, and the Bank’s New York branch’s business.

 

    United States. Includes the businesses of Santander Bank and Santander Consumer USA (accounted by the equity method).

 

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Second (or business) level. This segments the activity of our operating units by type of business. The reported segments are:

 

    Retail Banking. This area covers all customer banking businesses, including private banking (except those of Corporate Banking, managed through the Global Customer Relationship Model). Also included in this business area are the results of the hedging positions taken in each country within the scope of the relevant ALCO portfolio.

 

    Global Wholesale Banking. This business reflects the revenues from global corporate banking, investment banking and markets worldwide including all treasuries managed globally, both trading and distribution to customers (after the appropriate distribution with Retail Banking customers), as well as equities business.

 

    Asset Management and Insurance. This includes our units that design and manage mutual and pension funds and insurance. The Group uses and remunerates the distribution networks for marketing these products through cost- and profit-sharing arrangements. This means that the segment’s profit/loss on this business is the gross income net of the cost of distribution which is the remuneration paid to the network.

 

    Spain’s run-off real estate. This unit includes loans to customers in Spain whose activity is mainly real estate development, equity stakes in real estate companies and foreclosed assets.

In addition to these operating units, which cover everything by geographic area and business, we continue to maintain a separate Corporate Activities area. This area incorporates the centralized activities relating to equity stakes in financial companies, financial management of the structural exchange rate position and of the Parent bank’s structural interest rate risk, as well as management of liquidity and of stockholders’ equity through issues and securitizations. As the Group’s holding entity, it manages all capital and reserves and allocations of capital and liquidity. It also incorporates the goodwill’s impairment but not the costs related to the Group’s central services except for corporate and institutional expenses related to the Group’s functioning.

For purposes of our financial statements and this annual report on Form 20-F, we have calculated the results of operations of the various units of the Group listed below using these criteria. As a result, the data set forth herein may not coincide with the data published independently by each unit individually.

First level (or geographic):

Continental Europe

Continental Europe includes all activities carried out in this region: retail banking, global wholesale banking, asset management and insurance, as well as Spain’s run-off real estate. During 2013, there were four main units within this area: Spain, Portugal, Poland and Santander Consumer Finance.

Continental Europe is the largest business area of Grupo Santander by assets. At the end of 2013, it accounted for 38.0% of total customer funds under management, 39.9% of total loans to customers and 18.0% of profit attributed to the Parent bank’s total operating areas.

The area had 6,160 branches and 58,383 employees (direct and assigned) at the end of 2013.

In 2013, this segment obtained attributable profit of €1,127 million, an increase of €3,872 million after the heavy impairment losses of Spain’s real estate portfolio in run-off accounted for in 2012. Return on equity (“ROE”) stood at 3.8%.

Spain

Our retail banking activity in Spain was carried out mainly through the branch networks of Santander, with support from an increasing number of automated cash dispensers, savings books updaters, telephone banking services, electronic and internet banking.

In order to consolidate the Group’s leadership in Spain and increase profitability and efficiency, Santander merged its two large retail networks (Santander and Banesto) and its private bank (Banif) in 2013. See “A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.

 

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The integration of these units is progressing on schedule, and is even ahead of the initial forecasts in some areas. The process of branch concentration and optimization began in July 2013, together with optimization of staff. This part of the integration is running ahead of schedule and has begun to realize some of the projected cost synergies.

At the end of 2013, we had 4,067 branches and a total of 27,406 employees (direct and assigned), of which 2 were hired on a temporary basis.

In 2013, profit attributable to the Parent bank in Spain was €478 million, 44.6% less than in 2012, while the ROE was 4.0% (as compared to 6.3% in 2012). This decrease was mainly due to a 15.4% reduction in net interest income which reflects the decrease in volumes and the repricing of mortgages. The decrease in the cost of new deposits has not yet been passed on to all of the stock.

The units in Spain did business in 2013 in a complicated environment, although there were signs of improvement in the second half of the year when GDP ended eight quarters of falls (+0.1% in the third quarter and +0.3% in the fourth quarter of 2013). There was a marked improvement in financial conditions with a sharp decrease in the sovereign debt risk premium and the banking system gained in soundness with stronger solvency and liquidity ratios.

Nevertheless, the banking system continued to be affected by the process of business and household deleveraging, by interest rates at all-time lows (with the ECB main reference rate at 0.5%), and a non-performing ratio that was still rising.

In 2013, Spain’s lending decreased by 10.5%, customer funds under management fell by 2.2% with deposits decreasing 3.3%, marketable debt securities diminishing 65.7%, mutual funds growing by 28.7% and pension funds increasing by 8.0%. The activity reflected the priority in the last quarters of 2013 of reducing the cost of deposits and developing a policy to retain customers via mutual funds and savings-insurance products.

The non-performing loans (“NPL”) ratio was 7.49% compared to 3.84% at December 2012. This rise was due to several components: (i) the impact of deleveraging on the loan portfolio, including the cancellation of the public sector financing pursuant to a government program to pay suppliers’ pending invoices, and (ii) some deterioration in the loan portfolio, mainly in the companies segment and real estate mortgages to individuals. The coverage level decreased to 44.0% as compared to 50.0% at the end of 2012.

Portugal

Our main Portuguese retail and investment banking operations are conducted by Banco Santander Totta, S.A. (“Santander Totta”).

At the end of 2013, Portugal had 640 branches and 5,635 employees (direct and assigned), of which 53 employees were temporary.

In 2013, profit attributable to the Parent bank was €114 million, a 6.3% decrease from 2012, as a result of a higher tax charge. Nevertheless, pretax profits increased by 18.5% mainly due to a 51% drop in provisions after the large amount provisioned in the first quarter of 2012.

Santander Totta’s strategy remained focused on increasing linkage and improving the transaction levels of customers and defending spreads on deposits and loans. Management of bad loans also remained a strategic priority.

Lending continued to decline, although at a more moderate rate (-1% in the fourth quarter of 2013 and -5% for the whole year). At the end of 2013, customer funds under management declined 4.4% with deposits at €24,191 million, 1% more than a year earlier (-4% excluding repos), marketable debt securities diminishing 33.3%, mutual funds decreasing 32.0% and pension funds increasing 7.8%.

Santander Totta’s NPL ratio was 8.12% at December 31, 2013, up from 6.56% at December 31, 2012 because of the difficult macroeconomic environment. The ROE was 4.5%, as compared to 4.8% in 2012.

Poland

On April 1, 2011, we completed the acquisition of 96% of BZ WBK along with the 50% of BZ WBK Asset Management. The BZ WBK Group is now integrated into Grupo Santander, consolidating its results and business as of the second quarter of 2011. In February 2012, Banco Santander, S.A. and KBC Bank NV (KBC) reached an investment agreement for the merger of their subsidiaries in Poland, BZ WBK S.A. and Kredyt Bank S.A., which was put into effect in early 2013, after the necessary approval was received from the Polish financial supervisor (KNF).

 

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On 22 March 2013, Banco Santander, S.A. and KBC completed the placement of all the shares owned by KBC and 5.2% of the share capital of Bank Zachodni WBK S.A. held by the Group in the market for €285 million, which gave rise to an increase of €292 million in Non-controlling interests.

The merger of BZ WBK and Kredyt Bank is one of the main focuses of management. The process is proceeding faster than envisaged, with a very effective cost management made possible by the efficiency measures taken and the implementation of the integration plan. All branches already have the same IT systems and display the same brand. This rebranding was aided by a marketing campaign across the country.

In two years, Santander has become the third largest bank in Poland in terms of loans and deposits (market shares of 7.4% and 8.4%, respectively). At the end of 2013, this unit had 12,363 employees (direct and assigned), of which 1,104 employees were temporary, and 830 branches.

In 2013, attributable profit was €334 million, 1.5% higher than 2012 impacted by the integration of Kredyt Bank and higher minority interests. Profit before minority interests was €447 million (+31.3%), with growth of more than 30% throughout the income statement. On a like-for-like basis (eliminating the perimeter effect of the integration of Kredyt Bank) and in local criteria, net profit was 3.9% higher.

Due to the integration of Kredyt Bank, customer loans increased 66.6% and customer funds under management grew by 56.3% with a 65.0% increase in deposits. The NPL ratio increased 3.12 percentage points to 7.84% also due to the integration of Kredyt Bank which had higher levels of non-performing loans. The ROE stood at 17.7% a 1.2 percentage points decrease from 18.9% in 2012.

Santander Consumer Finance

Our consumer financing activities are conducted through our subsidiary Santander Consumer Finance (SCF) and its group of companies. Most of the activity of SCF relates to auto financing, personal loans, credit cards, insurance and customer deposits. These consumer financing activities are mainly focused on Germany, Spain, Italy, Norway, Poland, Finland and Sweden. SCF also conducts business in Portugal, Austria and the Netherlands, among others.

At the end of 2013, this unit had 613 branches and 11,695 employees (direct and assigned), of which 1,446 employees were temporary.

In 2013, this unit generated €794 million in profit attributable to the Parent bank, a 9.6% increase from 2012, while the ROE reached 7.3% (as compared to 6.7% in 2012). The increase in profit attributable to the Parent bank is mainly explained by a 25% decrease in loan-loss provisions, which declined every quarter, bringing the cost of credit to the lowest level of the current economic cycle. This fall was mainly due to a decrease in NPL net entrees and a decline in the coverage ratio from 109.5% in 2012 to 105.3% in 2013.

Customer loans decreased by 1.2%, and customer funds under management increased by 8.8% mainly due to a 70.6% increase in marketable debt securities partially offset by a 3.2% decrease in customer deposits. The NPL ratio of 4.01% was in line with the figures in 2012 at 3.90% due to the previously mentioned decrease in customer loans and a 1.6% increase in NPL.

Spain real-estate run off

In order to enhance efficiency and specialization in the management of potentially problematic properties in Spain, we have reorganized the management of these assets under a unit that is separate from the units in which such assets were originated.

This unit focuses on: (i) managing real estate clients with whom the Groups holds potentially problematic exposures in order to reduce their exposure, and (ii) property and land management, which includes the sale of existing properties and, in certain cases, real estate development and subsequent marketing and sale.

At the end of 2013, this unit had 629 employees.

In 2013, this unit had €635 million of losses attributable to the Parent bank as compared to €4,768 million losses in 2012. The strong impairment losses accounted for during 2012, due to the deterioration of the real estate portfolio, stabilized in 2013.

 

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